WORLD BANK Public Disclosure Authorized THE ECONOMIC REVIEW Volume 6 May 1992 Number 2 Public Disclosure Authorized Linking Trade and Productivity: New Research Directions James R. Tybout Transportation Policy and Panterritorial Pricing in Africa Mark Gersovitz The Economics of Farm Fragmentation: Evidence from Ghana and Rwanda Benoit Blarel, Peter Hazell, Frank Place, and John Quiggin Project Evaluation and Uncertainty in Practice: Public Disclosure Authorized A Statistical Analysis of Rate-of-Return Divergences of 1,015 World Bank Projects Gerhard Pohl and Dubravko Mihaljek The Business Cycle Associated with Exchange Rate-Based Stabilizations Miguel A. Kiguel and Nissan Liviatan A Framework for Evaluating the Impact of Pricing Policies for Cocoa and Coffee in C6te d'Ivoire Pravin K. Trivedi and Takamasa Akiyama The Short- and Long-Run Effects of Fiscal Policy Edward F. Buffie Public Disclosure Authorized THE WORLD BANK ECONOMIC REVIEW EDITOR Ravi Kanbur CONSULTING EDITOR Sandra Gain EDITORIAL BOARD Kaushik Basu, University of Delhi John Holsen Guillermo Calvo, International Monetary Fund Gregory K. Ingram Alberto Giovannini, Columbia University Ravi Kanbur Mark R. Rosenzweig, University of Pennsylvania Mieko Nishimizu Joseph Stiglitz, Stanford University Jacques van der Gaag Sweder van Wiinbergen The World Bank Economic Review is a professional journal for the dissemination of World Bank-sponsored research that informs policy analyses and choices. It is directed to an interna- tional readership among economists and social scientists in government, business, and interna- tional agencies, as well as in universities and development research institutions. The Review emphasizes policy relevance and operational aspects of economics, rather than primarily theoreti- cal and methodological issues. It is intended for readers familiar with economic theory and analysis but not necessarily proficient in advanced mathematical or econometric techniques. Arti- cles will illustrate how professional research can shed light on policy choices. Inconsistency with Bank policy will not be grounds for rejection of an article. Articles will be drawn primarily from work conducted by World Bank staff and consultants. Before being accepted for publication by the Editorial Board, all articles are reviewed by two referees who are not members of the Bank's staff; articles must also be recommended by at least one external member of the Editorial Board. The Review may on occasion publish articles on specified topics by non-Bank contributors. Any reader interested in preparing such an article is invited to submit a proposal of not more than two pages in length to the Editor. The views and interpretations in articles published are those of the authors and do not neces- sarily represent the views and policies of the World Bank or of its executive directors or the countries they represent. When maps are used, the designations employed are solely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the World Bank or its affiliates concerning the legal status of any country, territory, city, or area, or concerning the delimitations of its boundaries or national affiliation. Comments or brief notes responding to Review articles are welcome and will be considered for publication to the extent that space permits. Please direct all editorial correspondence to the Editor, The World Bank Economic Review, The World Bank, Washington, D.C. 20433, U.S.A. The World Bank Economic Review is published three times a year (January, May, and Septem- ber) by the World Bank. The annual subscription fee is US$25 for individuals and $45 for institutions. Single copies may be purchased at $10.95. Subscription orders should be sent to: World Bank Publications, Box 7247-8619, Philadelphia, PA 19170-8619 U.S.A. Subscriptions to The World Bank Economic Review are available without charge to readers with mailing addresses in developing countries and in socialist economies in transition. Written request is required every three years to renew such subscriptions. © 1992 The International Bank for Reconstruction and Development I THE WORLD BANK All rights reserved Manufactured in the United States of America ISSN 0258-6770 Material in this journal is copyrighted. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the intended reproduction is for noncom- mercial purposes, without asking a fee. Permission to make photocopies is granted through the Copyright Clearance Center, 27 Congress Street, Salem, MA 01970 U.S.A. This journal is indexed regularly in Current Contents/Social & Behavioral Sciences, Index to International Statistics, Journal of Economic Literature, Public Affairs Information Service, and Social Sciences Citation Index6. THE WORLD BANK ECONOMIC REVIEW Volume 6 May 1992 Number 2 Linking Trade and Productivity: New Research 189 Directions James R. Tybout Transportation Policy and Panterritorial Pricing 213 in Africa Mark Gersovitz The Economics of Farm Fragmentation: 233 Evidence from Ghana and Rwanda Benoit Blarel, Peter Hazell, Frank Place, and John Quiggin Project Evaluation and Uncertainty in Practice: 255 A Statistical Analysis of Rate-of-Return Divergences of 1,015 World Bank Projects Gerhard Pohl and Dubravko Mihaljek The Business Cycle Associated with Exchange Rate- 279 Based Stabilizations Miguel A. Kiguel and Nissan Liviatan A Framework for Evaluating the Impact of Pricing 307 Policies for Cocoa and Coffee in Cote d'Ivoire Pravin K. Trivedi and Takamasa Akiyama The Short- and Long-Run Effects of Fiscal Policy 331 Edward F. Buffie THE WORLD BANK ECONOMIC REVIEW, VOL. 6, NO. 2 189-211 Linking Trade and Productivity: New Research Directions James R. Tybout It is a mistake to think of productivity growth as an orderly shift in the production function of the representative plant. Gradual processes of technological diffusion or the displacement of inefficient plants with efficient ones are what matter. Trade orientation may affect these processes through many channels. Exposure to increased foreign competition is found to be associated with improvements in the average level of techni- cal efficiency, reductions in the cross-plant dispersion in technical efficiency, and reduc- tions in plant size. However, preliminary work suggests no clear link between trade policies and patterns of entry and exit. This article brings together diverse literatures on the measurement of produc- tivity and its relation to trade regime, focusing on recently developed techniques and their application. Section I briefly reviews the theoretical arguments linking trade policy and productivity. Empirical work at the sector and macro level is discussed in section II, and plant level empirical work is discussed in section III. Applications of the different approaches are reported for a sample of semi- industrial countries that have recently been analyzed in the World Bank research project "Industrial Competition, Productivity, and Their Relation to Trade Re- gimes," hereafter the ICPT project. I. THE THEORY OF PRODUCTIVITY GROWTH AND ITS LINK TO TRADE In trade models that presume perfect competition, "opening up" generally improves the allocation of factors across sectors and thereby induces a one-time increase in the value of domestic production. However, liberalization does not reduce the volume of inputs needed to produce a given bundle of outputs. Thus, although many economists believe that there are important links between trade James R. Tybout is with the Department of Economics, Georgetown University.This article was prepared under funding for the WorldBank research project "Industrial Competition, ProductiveEffi- ciency,and Their Relation to Trade Regimes;' RPO 674-46. The author has benefited from the comments of Bela Balassa, Ricardo Caballero, Ann Harrison, Jaime de Melo, Mark Roberts, and two anonymous referees. © 1992 The International Bank for Reconstructionand Development/THEWORLD BANK 189 190 THE WORLD BANK ECONOMIC REVIEW, VOL. 6, NO. 2 regimes and factor productivity, they have had to look elsewhere for formal models that support their priors. Linking Trade Regimes and Productivity Levels To development economists, perhaps the best-known argument linking trade regimes and productivity is that the returns to entrepreneurial effort increase with exposure to foreign competition (Corden 1974; Martin and Page 1983).1 Unfortunately, formal representations of this argument reveal its fragility. To hold, the entrepreneurial labor supply curve must be upward sloping in the relevant range, and changes in work incentives must go in the same direction for both export-oriented and import-substituting producers (Corden 1974; Rodrik 1988). Arguments based on increasing returns are also common in the development literature. Nishimizu and Page (1991, p. 253) summarize the logic as it has often appeared: "The existence of economies of scale . implies that a widening of the market through trade should lead to reductions in real production costs. In the context of an output-oriented development strategy, this argument is usually cast in terms of the benefits of increased demand through export expan- sion . ." As with entrepreneurial effort arguments, however, analytical scru- tiny has shown that scale economies can cut both ways (Krugman 1986; Rodrik 1992; Roberts and Tybout 1991). When domestic firms enjoy market power, extra competition from foreign producers can force producers to expand