Liberalization, productivity, and competition

The empirical evidence linking economic reform in developing countries with gains in productivity and efficiency is both limited and inconclusive. Using large firm-level data collected by the Reserve Bank of India, this book examines the impact of reform on productivity and competition for the Indian manufacturing sector in the eighties.

Relying on econometric estimates of pre- and post-reform productivity growth, the study finds evidence of significantly higher productivity growth rates after the mid-eighties both at the aggregate and two-digit sector levels.

The author seeks corroborating evidence by developing a framework that enables him to simultaneously estimate economies of scale, a measure of optimal labour utilization and the mark-up of price over marginal cost as an indicator of competitiveness. Though he finds evidence of better labour utilization, there is no indication of reduced market power or any significant departure from constant returns to scale in the post-reform period.

He concludes that even the limited reforms of the eighties led to productivity gains which were achieved largely through better resource use.