Trade Liberalization Enhances Economic Growth: New Evidence

A new paper from the FUCAPE Business School in Brazil, authored by Brazilian economist Bruno Funchal and Jadir Soares Junior, find that reductions of barriers to trade in the computer technology sector affected the Brazilian labor market. Specifically, they use the end of the “Informatics Law” in 1992 as the non-tariff barrier to trade of analysis. For eight years the “Informatics Law” imposed a limit on access by foreign companies to the manufacture of small computers and provided various support mechanisms for strictly nationally controlled companies.

Using data from the Annual Social Information Report and the Brazilian Occupational Classification, the authors compare the change in the demand for either “routine” or “non-routine” tasks before and after the repeal of the “Informatics Law” to the percentage of workers using computers in 2002 using a panel regression with fixed effects. The idea is that the liberalization of the technology market in Brazil led to a rise in the demand for workers doing non-routine tasks (considered complementary to computers) and a fall in the demand for workers doing routine tasks (considered a substitute to computers).

The authors find that industries and occupations intensive in computer use displayed greater shifts toward non-routine and away from routine tasks. These results were robust to the consideration of tariff liberalization of the Brazilian market in the early 1990s, the higher proportion of women in the workforce and the increase in the average level of education obtained by Brazilian workers. Essentially, the end of non-tariff barriers for computer technology (by the repeal of the "Informatics Law") produced a huge change in the demand for different skills in the Brazilian labor market. The dissemination of computers increased the demand for skilled workers, but decreased the demand for unskilled workers.

The policy implications of this are hard to over-emphasize: understanding the potential gains from technology liberalization in the labor market will help to maximize possible productivity gains by orienting strategies to invest in skills that are complementary to technology dissemination. In particular, for developing countries, it is crucial to understand how the labor market is affected by changes in trade orientation in order to adequately train the labor force. But most importantly, if developing countries want to grow their own technological sectors, the best way to do it is through liberalizing their barriers to trade so that their domestic firms can attract the most skilled workers.