Linking Trade Liberalization with Total Factor Productivity: The Case of Ethiopia.

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Supporters of openness, argues that trade liberalization increases productivity through increasing the access to advanced technologies in the form of knowledge and capital. whereas opponents of free trade, argues that it reduces the total factor productivity of a country through exposing domestic economy to stiff competition of foreign industries. to this effect this paper is intended to show the possible outcome of the foreign trade reform measures of the current Ethiopian govemment to the country's total jactor productivity level using a time series data covering from 1971/72 to 2004/05.The cobb-douglas production function, which explains output as a junction of labor, capital and productivity is adopted. Moreover, war and weather are incorporated as dummy variables in the estimable model of the paper. the analysis makes use of Johansen maximum likelihood estimation procedure. In this co integration analysis, two variables (Le. student index and exchange rate gap) with the exception of capital stock per labor are found to be statistically significant each with a positive sign in explaining the total jactor productivity of the country. Whereas, capital shows insignificant and negative effect on the dependent variable. The result of the paper support the current trade liberalization measures of the govemment because the reform measures have positively implying the total factor productivity of the country. through applying the vector error correction model (VECM), it has been found that capital per labor, human capital and weather are significant in explaining productivity per labor in the short run where as openness and war are insignificant in explaining the dependent variable.



Liberalization, Total