Gradual Trade Liberalization and Firm Performance in Ethiopia

Abstract

We use firm-level data for the Ethiopian manufacturing sector matched with commodity- level data on tariffs to examine the effect of trade liberalization on firm performance during the 1997-2005 period. We find relatively large positive effects of tariff reductions on total factor productivity, a result that is robust to treating tariffs as endogenous, and to various generalizations of the baseline model. This affects is primarily driven by mechanisms operating at high tariff level, suggesting that excessive tariff levels may be particularly distortionary. We find some evidence that the reduction of tariffs has resulted in smaller and more capital-intensive domestic firms. We note that these effects are consistent with the hypothesis that the trade liberalization has increased competition in the domestic market. We find no significant effect of the trade liberalization on entry or exit rates.

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