In the fourth online Applied Development Economics (ADE) seminar hosted by the Lahore School of Economics on 28 th July 2020, Dr. Gonzalo Varela (Senior Economist in the Macroeconomics, Trade and Investment Global Practice of the World Bank) presented his work (joint with Dr. Stefania Lovo, Lecturer in Economics at the University of Reading) on the impact of global integration reforms on firm productivity in Pakistan. His talk was centred around understanding the extent to which integration in the global marketplace explains productivity patterns amongst Pakistani firms. In their work, the authors focus on distortions upstream in terms of both merchandise and services inputs: tariffs (goods) and FDI (goods and services) and import duty exemptions.
Dr. Varela showed that productivity has been stagnant and aggregate gains have been mostly driven by reallocation of resources between firms i.e. through more productive firms gaining market share, while within-firm productivity has not grown since 2015. Duty/tariff exemptions mainly benefit large exporters; their survey revealed that 75% of exemptions were claimed by the largest 100 exporters. This is because the process of claiming an exemption is long (60% of the surveyed firms reported that the claim procedure takes between 60 days to a year) and tedious (the procedure requires anywhere between 12 to 20 documents) with a large fixed cost component, making average cost of claiming decline in firm size. He went on to show that internationally linked (i.e. foreign-owned and exporting) firms perform better than domestic-owned or domestic-oriented firms. This suggests that foreign investors cherry pick most productive firms, potentially explaining why foreign firms perform better over time and that exporting firms learn by exporting which helps them improve their performance.
Lastly, Dr. Varela discussed findings on the following questions: what do tariffs do with imports of intermediates? Who gains with input tariff reductions? What underlies the positive effect of upstream services FDI on downstream TFP. On the first, Dr. Varela showed that lower tariffs are associated with an increase in the volume of imported intermediate inputs as well as an increase in the number of imported varieties. On the second and third, Dr. Verala showed that integration with the global marketplace of upstream sectors – both for goods and services – has led to increased productivity in downstream sectors mainly for non-exporters, and relatively smaller exporters and upstream FDI in services encourages investments in intangible assets.