DISCUSSION PAPER SERIES NO. 2005-24
The paper studies the impact of trade liberalization on competition and productivity. Competition is the main channel through which trade liberalization affects economic performance. Competition fosters innovation and technology adoption which leads to increases in competitiveness and growth that will have large consequences for poverty and inequality. To realize these expected effects, it is important that firms change their behavior and adjust to the new market environment. The success of reforms depends to a great extent on the capacity of firms to exploit the new competitive conditions in the market and on their ability to take advantage of the opportunities offered to them. Firms, however, will not venture into the unknown and uncertain. They will only take advantage of the new market opportunities if the government program for implementing policy reforms is a credible one. Policy reversals, delays in timetable, and inconsistent decision-making may undermine the success of liberalization. Hence, the overall environment for market transactions is also an essential ingredient. Therefore, the strength of competition is a function not only of the behavior of firms but also of the external environment within which they compete. This includes the state of transport and communications, framework of laws and regulations, effectiveness of the financial system in matching investment resources with entrepreneurial opportunities, as well as information available to consumers. The experience of the Philippine manufacturing sector shows that which despite liberalization, competition and productivity growth have remained weak due to inadequate physical and institutional infrastructure.