How did Targeted Government Trade Policies Impact the Productivity of Manufacturing Firms in Eastern Europe and Central Asia between 1995 and 2009?

Abstract

This study investigates whether trade-related, targeted, government policies had an impact on the total factor productivity (TFP) of manufacturing firms in Eastern Europe and Central Asia (ECA region) between 1995 and 2009. It does so by looking at how different types of primarily industry-specific trade policies (or their combinations) impacted firm productivity and subsequent economic growth. It also examines how industry-specific trade policies impacted firm-level productivity depending on various investment climate characteristics, such as corruption, access to finance, physical infrastructure, and innovation.

The dependent variable is firm total factor productivity (TFP), calculated using the Levinsohn-Petrin approach. As an alternative measure of firm productivity, this study uses labor productivity. Similar to Bastos and Nazir (2004), this research utilizes the Principal Component Analysis to group the investment climate indicators.

This study finds that, in most instances (10 out of 14 times), targeted policies do not show a significant impact on manufacturing firms' TFP. In addition, the study finds that corruption plays a significant role in determining the level of TFP in countries with targeted policies. When looking at firms across all industries in the ECA region countries, the study finds a positive correlation between higher corruption and higher TFP, i.e., providing support for the "greasing the wheels" hypothesis. It suggests that in the ECA region countries with higher levels of corruption and higher barriers to trade, firms are characterized by higher TFP. On the other hand, among the benchmark countries, as expected, corruption has a negative impact on firm TFP. When looking at firms in the top four export industries in the ECA region, corruption is found to have a hindering effect on firm TFP (i.e., increased corruption lowers firm TFP). In a way, the firms in the top four export industries in the ECA region are mimicking the behavior of firms in high-income OECD (Organization for Economic Co-operation and Development) benchmark countries. The study concludes that there is a "threshold of economic, legal, and political development," below which targeted policies do not work in the ECA region, and are impacted by existence and effectiveness of corruption.