Domestic Distortions and Gains from Trade: Evidence from Dismantling India’s Import License Raj
Ananya KotiaLondon School of Economics
Abstract: How do pro-competitive effects of trade liberalization interact with domestic distortions? On one hand, trade may reduce misallocation as productive firms expand/enter at the expense of unproductive firms. In the presence of domestic distortions, however, these reallocation and selection channels may be driven by political connections or unequal access to credit rather than productivity alone, thereby exacerbating misallocation and attenuating gains from trade. Thus, whether opening to trade can improve allocative efficiency in an economy that suffers domestic distortions is ultimately an empirical question. In this project, I exploit a previously unstudied, externally imposed, unilateral, and staggered liberalization of import quotas on 3,000 8-digit final consumer goods by India in 1997-2001 to provide novel evidence on the causal link between trade and misallocation.