Trade liberalisation and technical efficiency: Evidence from Bangladesh manufacturing industries

The paper investigates the affects of trade liberalisation on the technical efficiency of the Bangladesh manufacturing sector by estimating a combined stochastic frontier-inefficiency model using panel data for the period 1978-94 for 25 three-digit level industries. The results show that the overall technical efficiency of the manufacturing sector as well as the technical efficiencies of the majority of the individual industries has increased over time. The findings also clearly suggest that trade liberalisation, proxied by export orientation and capital deepening, has had significant impact on the reduction of the overall technical inefficiency. Similarly, the scale of operation and the proportion of non-production labour in total employment appear as important determinants of technical inefficiency. The evidence also indicates that both export-promoting and import-substituting industries have experienced rises in technical efficiencies over time. Besides, the results are suggestive of neutral technical change, although (at the 5 per cent level of significance) the empirical results indicate that there was no technical change in the manufacturing industries. Finally, the joint test based on the likelihood ratio (LR) test rejects the Cobb-Douglas production technology as description of the database given the specification of the translog production technology.