Targeted Trade-Related Policies and Manufacturing Firm Productivity in Eastern Europe and Central Asia: Effect of Corruption

In recent years, there have been several successful examples of government-initiated trade-related policies aimed at developing industries that constitute a country's comparative advantage. By implementing industry-specific, trade-related targeted reforms (i.e. reducing tariffs for imported equipment, thereby facilitating technology adaptation, providing access to expert consultants to help firms adhere to global standards, and simplifying customs procedures), the respective governments helped firms in nascent industries grow and become more productive. The purpose of this paper is to contribute to the ongoing debate on government intervention (Lin and Chang 2009) and whether such intervention should be targeted to certain industries or not. Using a sample of 588 manufacturing firms in Eastern Europe and Central Asia (ECA), we find that targeted, trade-related, government policies have a limited impact on the firm total factor productivity. Contrary to the views of proponents of targeted policies, there is a "threshold of economic, legal, and political development," below which targeted policies do not work in the ECA region and are impacted by existence and effectiveness of corruption.