The effects of trade reforms on scale and technical efficiency : new evidence from Chile

This paper shows how the industrial structure and performance changed after Chile's dramatic trade liberalization. A comparison of the 1967 and 1979 censuses shows little improvement in productivity overall, but these figures don't separate the effects of trade liberalization from the effects of recession, high interest rates, and real appreciation. To isolate the effects of trade liberalization, the authors compared industries in which protection was significantly reduced with industries in which it was not. It was found that of the industries for which protection was lifted, the smallest plants tended to expand output more. Cross-plant estimates of returns to scale dropped significantly. These findings are consistent with the view that exposure to foreign competition forces suboptimally small producers toward minimally efficient scale. Also, production levels became higher and more uniform across plants in those industries undergoing dramatic reductions in protection. Taken together, these results support the received wisdom that increased exposure to trade improves competition within an industry.