October 17, 2002
Trade liberalization is given credit for productivity gains throughout the past half-century. Simply put, industries in countries that trade improve.
A new study analyzes the effects of free trade on Australia from 1968 to 1995, breaking productivity gains into two components, technology efficiency and technological progress. Technological progress measured the usage of new technology, while technology efficiency measured the productivity due to improving older technology.
In the 1970s, Australia opened its manufacturing industry to freer trade and reduced government supports. Technological progress improved tremendously, especially in the capital-intensive industries:
- The annual average technological progress for the transport equipment industry grew from 0.76 percent in 1969 to 1974 to 3.67 percent in 1990 to 1995.
- The annual average technological progress for the structural metal industries grew from 0.57 percent to 3.47 percent over the same time period.
- Other manufacturing industries grew from 0.69 percent to 3.32 percent.
In contrast, technological efficiency fell:
- Annual average technical efficiency for the transport equipment industry fell from 0.11 percent in 1969 to 1974 to -1.52 percent in 1990 to 1995.
- It fell from 0.07 percent to -1.36 percent in the structural metal industry over the same time period.
- For other manufacturing industries, it fell from 0.08 percent to -1.45 percent.
Researchers argue that technological progress increased from the 1970s onward because Australia had a relatively undeveloped manufacturing sector. Thus, there was a large potential to implement newer technologies. However, they believe that in the long run technological progress will decline due to the limited possibilities of obtaining newer and more advanced technology. Moreover, trade liberalization does not seem a sufficient incentive for training and improving the quality of the labor force.
Source: Renuka Mahadevan, "Trade Liberalization and Productivity Growth in Australian Manufacturing Industries," Atlantic Economic Journal, June 2002, Vol. 30, No. 2.
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