توسعه از طریق اصلاحات هم افزایی

For many less developed countries production of high quality output is a precondition for firms to become exporters. Institutional deficiencies that raise costs of high quality production therefore limit the positive impact that trade facilitation can have on income. Consequently, institutional reforms that reduce costs of high quality production and trade reform have synergistic effects. In contrast, institutional reforms that reduce costs of low quality production (e.g., reforms that disproportionately benefit small businesses) interfere with the impact of trade reform. We obtain these results in a heterogeneous firm model that displays standard “industry rationalization” responses to reduced trade costs.

Liberalization of international trade was the centerpiece of the package of economic reforms undertaken by many less developed countries (LDCs) in the 1980s and 1990s. To date, the results of those reforms have been considered disappointing in terms of generating higher and more rapid growth of incomes in most of the reformers (Easterly, 2001). A consensus has now emerged that a “second generation” of “institutional” reforms is necessary for the earlier reforms to have their expected impact, but as yet there is no consensus on how these institutions interact with trade liberalization or which should have priority for reform. Chang et al. (2005) survey this literature and provide evidence from cross-country regressions that the interactions of trade openness with a number of different measures of infrastructure and institutions are positively associated with economic growth. Freund and Bolaky (2008) find that trade does not increase income in economies that are heavily regulated, as measured using the Doing Business database. This paper seeks to connect this literature to a parallel micro-level literature that examines the impact of exporting at the firm level and has, in its own way, also yielded disappointing results. The starting point for this literature was a well-established positive correlation between export market participation and firm productivity (and other “good” firm attributes, especially size). It was hoped that this correlation resulted from technology transfer or “learning by exporting.” Beginning with Clerides et al. (1998), however, most panel econometric studies have found that exporting does not increase firm productivity. Instead, firms that are already more productive self-select into exporting, yielding the observed cross-sectional correlation.1 Does this mean that, for LDCs, the export market is no different from any other market? No, because success in the developed country export market in particular requires products of higher quality than those demanded in the domestic market. This is the message of studies at the firm level, including Brooks, 2006 and Verhoogen, 2008, and of studies of bilateral trade, such as Hallak (2006). It follows that we can expect little impact from reducing the anti-export bias of the economy if few firms are capable of producing goods of high (export) quality.2 This brings us back to the issue of institutional reform. Dixit (2004, Chapter 3) has shown how, in the area of contract enforcement, informal “institutions” (reputation) become inadequate once the economy grows beyond a certain size or complexity, after which formal-legal methods of contract enforcement are needed. It is not hard to see how his insight can be applied to the distinction between high and low quality production. High quality production, especially for export, requires that certain standards be met, e.g., for pesticide residues in processed food or metal composition for medical instruments. High quality producers depend on their suppliers in order to meet these standards. They must be confident that they can reject sub-standard shipments from their suppliers without interminable court battles, or else they may have to integrate backwards — a significant barrier to entry.3 Other institutional deficiencies can also pose barriers to entry for high quality producers, especially insofar as they tend to be larger than low quality producers. Bhidé (2004) notes that poor record-keeping means that land parcels in Bangalore, India often lack clean titles, potentially a much greater obstacle to a high quality producer looking for a large, greenfield site for its plant. Laeven and Woodruff (2007) use data from a survey of lawyers in Mexico to show that firms are larger in states where the quality of the legal system is higher. In contrast, governments and international development organizations have placed a great deal of emphasis on interventions that benefit small- and medium-sized enterprises (SMEs), which tend not to be export-oriented and probably tend to produce relatively low quality output. These include institutional and regulatory reforms that reduce distortions and programs that probably add to them, for example by providing technology and marketing support that amount to disguised subsidies (see, e.g., Beyene, 2002). Most prominent among the reforms are those that lead to relaxation of credit constraints for SMEs. These become better able to draw entrepreneurial talent from larger, export-oriented, high quality production firms.4 My analysis can be seen as aiding the choice between different reforms that alleviate distortions, in the spirit of Hausmann et al. (2008). They write (p. 324), “Policies that work wonders in some places may have weak, unintended, or negative effects in others. … this calls for an approach to reform that is much more contingent on the economic environment…. This understanding can then be used to derive policy priorities accordingly, in a way that uses efficiently the scarce political capital of reformers.” My results will show the benefit, when engaged in trade reform, of prioritizing institutional reforms that reduce distortions that harm firms producing export-quality goods over reforms that reduce distortions that harm firms producing low quality goods for the domestic market. Because the tradeoffs involved in the supply of these institutional reforms are indeed more a matter of allocating “political capital” than budgetary resources, they cannot be modeled straightforwardly. I thus follow Hausmann et al. and do not model reform supply, instead concentrating on the impacts of reform implementation. My argument for synergy (interference) with trade reform of institutional/regulatory reform that supports high (low) quality production does not apply when a country is an exporter of manufactures in general, both low and high quality. It applies best to countries whose producers of low quality goods compete with imports from countries with still lower unskilled wages such as China and India, but whose consumers are still not rich enough to provide a large market for high quality goods. As is noted in Lederman et al. (2009, p. xxii), “Given the rise of China and India, some countries can no longer count on progressing to a higher growth path by exporting manufactured products that are intensive in unskilled, low-cost labor.” These are countries whose relatively abundant natural resources keep unskilled wages high. It has often been argued that free trade fails these countries because it allows natural resources to pull labor out of manufacturing, the sector in which employment is alleged to generate positive externalities (see Meier and Rauch, 2005, pp. 140–143 for a survey of this and other “Dutch disease” arguments). My reasoning involves no externalities. Instead, trade reform fails to deliver as large a positive impact as expected because of a mismatch between the level of institutional development and comparative advantage in export of high quality manufactures, generated by relatively high unskilled wages and low demand for high quality goods. In the next two sections of this paper I develop a model that clarifies both the nature of synergy and interference between institutional and trade reforms and the conditions under which they obtain, while at the same time capturing the main features of the firm-level trade literature: self-selection of the most productive and largest firms into export-oriented, high quality production; vertical differentiation of demand into low quality, domestic and high quality, (primarily) foreign; and industry “rationalization” effects from trade reform.5 In Section 4 I extend the model to cover foreign direct investment. Conclusions are in Section 5.

I have argued that for many natural resource abundant countries, trade reform fails to deliver as large a positive impact on aggregate consumption as expected because of a mismatch between the level of institutional development and comparative advantage in export of high quality manufactures, the latter generated by relatively high unskilled wages and low demand for high quality goods. Institutional reform that reduces the fixed or variable costs of high quality production tends to enhance the impact of trade reform for these countries, whereas institutional reform that reduces fixed or variable costs of low quality production tends to reduce its impact. My results can be seen as another argument for making reform priorities dependent on the economic environment, as in Hausmann et al. (2008): when engaged in trade reform, institutional/regulatory reforms that reduce distortions that harm firms producing export-quality goods should take priority over reforms that reduce distortions that harm firms producing low quality goods for the domestic market. In my model trade reform reduces the cost of importing intermediate and final goods. The intermediate goods effect is proportional to the volume of high quality output (which uses imported intermediates), so reforms that increase high quality production will enhance this effect, and the final goods effect is proportional to the volume of imports of the low quality good, so reforms that increase consumption or reduce production of low quality manufactures will enhance this effect. My synergy results were that institutional reform that reduces the variable costs of high quality production increases both the intermediate and final goods effects of trade reform, and institutional reform that reduces the fixed costs of high quality production must at least increase the intermediate or final goods effect. On the other hand, institutional reform that reduces the variable costs of low quality production must interfere with the impact of trade reform through the final goods effect and possibly also through the intermediate goods effect, and institutional reform that reduces the fixed costs of low quality production reduces both effects if it increases the skilled wage, with ambiguous impacts otherwise. The presence of foreign subsidiaries interferes with the impact of trade reform through the intermediate goods effect (by displacing domestic high quality production) and leaves the change in the impact through the final goods effect ambiguous, but also raises the possibility that trade reform will redistribute income from foreign entrepreneurs to domestic workers. These level effects of the interaction between trade and institutional reforms were analyzed in a heterogeneous firm model that displays standard “industry rationalization” responses to trade reform. Future research could consider growth effects of the interaction between these reforms. In particular, there is evidence of a positive association between trade reforms and output growth in manufacturing sectors in which a country is a net exporter and that rely more intensively on imported intermediates (Tressel, 2008). This suggests that the same association could hold within sectors comparing high to low quality producers, so that institutional reform that benefits the former could have growth synergies with trade reform through the channel of imported intermediates.