Openness to Import and Productivity

Abstract

This article tests the effect of change in the degree of openness to import of goods and services on a country’s productivity. The idea is that by driving resources to industries in which the country has a comparative advantage, imports contribute to increased productivity in the economy. Countries from three distinct regions (OECD, Latin America and Asia), separately and together, were used to test this proposition. A feasible generalized least square estimation method is applied to determine the effect of the capital to labor ratio, openness to imports and real gross domestic product on labor productivity. A panel vector error correction model as proposed by Pesaran et al. (1999) is also performed in order to determine any causal relationship. The effect of imports on labor productivity is found to be positive and significant for the 1990–2011 period under study, strengthening the case for free trade and leading to important policy implications.