Economia colombiana

DOCUMENTO CEDE 2003-23 ISSN 1657-5191 (Edición Electrónica) AGOSTO DE 2003

CEDE PRODUCTIVITY DYNAMICS OF THE COLOMBIAN MANUFACTURING SECTOR
MARCELA MELÉNDEZ*, KATJA SEIM**, PABLO MEDINA*** Abstract This paper analyzes the effects on Colombian manufacturing productivity of tax and foreign trade policy changes during the 1990s. Our results indicate that between 1977 and 1999, aggregatemanufacturing productivity largely stagnates and even declines in some of the larger industries. There is little entry and exit of plants or reallocation of labor. The productivity stagnation can be explained by this lack of liquidation of unproductive plants combined with slow technological advance. Dynamics vary significantly across sub-sectors, however, and our findings attribute this variationprimarily to within-sector output reallocation. The importance of industrial policy is large. Sector-level productivity declines coincide with protectionist policies in the form of import tariffs or beneficial tax treatments, while higher productivity levels are correlated with sectors’ increasing foreign exposure. Our finding of small productivity effects of preferential treatments further points to theinsignificant role played by output reallocation across plants in stimulating productivity growth. Key words: Productivity dynamics, manufacturing sector, preferential treatments, tax exemptions. JEL Classification: C14, C23, D24, F13, H3, L6.

Corresponding author. Department of Economics-CEDE, Universidad de los Andes, Calle 19 No. 1-37 Este, Office C202, Bogotá, Colombia, phone: (571)339-4949 ext. 2473, email: mmelende@uniandes.edu.co. ** Graduate School of Business, Stanford University, Stanford, CA *** Assistant researcher, CEDE-Universidad de los Andes, Bogotá-Colombia We have received helpful feedback from Ana Fernandes, John Haltiwanger, Maurice Kugler, Mauricio Cárdenas, Juan José Echavarría, and the participants of the IADB “Market Institutions, Labor Market Dynamics, Growthand Productivity” program workshops. We are grateful to the Colombian Statistics Office DANE and the Colombian Ministry of Finance for providing the data for this study.

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Introduction

The 1990s have seen the liberalization of foreign trade in a large number of countries, including most Latin American countries. These liberalization programs provide ideal settings forassessing the impact of such policy reforms on industry productivity to answer the question of whether – and if so why – openness to trade leads to productivity growth.1 The theoretical literature suggests several avenues through which trade liberalization may affect productivity. Increased access to imported materials and equipment may allow firms to raise efficiency through technological improvements.The removal of barriers to trade may furthermore increase product market competition due to the market interaction of domestic products with foreign imports. Increased competition could affect firms’ productivity in two ways. On the one hand, competition may spur firm innovation to enable domestic producers to compete on equal grounds with potentially higher-quality or cheaper imports. Increasedcompetition could also lead to a reallocation of output from less to more productive firms by forcing the least productive firms to exit the industry.

The first two channels lead to productivity growth by affecting technological change, in the form of technological progress, learning by doing, or product and process innovation. Technological progress raises firm productivity indiscriminately and,consequently, industry-level productivity increases. The last channel leads to industrylevel productivity increases without intra-firm efficiency increases, but through a selection effect that allows more productive firms to survive and grow in open markets, while the less productive firms contract. Regardless of channel, though, not only is industry productivity affected, there are also...