Trade liberalization and industrial development in Latin America

This paper examines the expected theoretical effects of trade liberalization on the efficiency of manufacturing industry. It concludes that positive static efficiency effects (X-efficiency and allocative efficiency) cannot be taken for granted, especially if imperfect competition dominates domestic production or trade. If there are positive allocative efficiency effects, they are larger for small countries than for large countries, but adjustment costs are also larger. However, countries that do not have an industrial base yet, will not experience dynamic efficiency effects. For these countries there may be a trade-off between static and dynamic efficiency. Long-run development of these countries will be hampered even more if the domestic trade sector is characterized by imperfect competition. In the second part, the available evidence for Latin America is reviewed. The results confirm many of the theoretical expectations.

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