Abstract:
The empirical trade literature examining the effect of tariff reductions on
productivity commonly proxies the former with Nominal Tariff Rates (NTR)
and estimates the latter as the production function residual. In the context of
the South African trade reform experience we examine the different channels
by which tariff cuts affect productivity growth. Using industry level data for
the manufacturing sector and covering the reform period from 1994 to 2004,
we disentangle the differential effect of increased foreign competition, proxied
by reductions in NTR, and that of the imported technology, proxied by the reductions
in Input Tariff Rates (ITR), on productivity growth. Our measure of
efficiency growth controls for the effect of tariff reductions on markups. The results
suggest that the efficiency difference between foreign and domestic inputs
have the major effect on productivity gains. Declines in ITR significantly raise
productivity growth compared to an insignificant effect for NTR. Additionally,
we find that higher protection rates are associated with higher markups, albeit
this finding is not robust across all specifications.
