T Liberalization and Tech Efficiency BD Hossain

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Trade Liberalisation and Technical Efficiency: Evidence
from Bangladesh Manufacturing Industries
MA Hossain; ND Karunaratne
Online Publication Date: 01 February 2004

To cite this Article: Hossain, MA and Karunaratne, ND (2004) 'Trade Liberalisation
and Technical Efficiency: Evidence from Bangladesh Manufacturing Industries',
Journal of Development Studies, 40:3, 87 — 114
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Trade Liberalisation and Technical Efficiency:
Evidence from Bangladesh Manufacturing
Downloaded By: [Hiroshima University] At: 03:36 20 June 2008
Industries
M.A. HOSSAIN and N.D. KARUNARAT NE
The paper investigates the effects 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.
I. INTRODUCTION
The notion of efficiency lies at the core of economics, and an improvement

in technical efficiency is considered as an important source of growth of
output [Leibenstein, 1966]. The degree of efficiency determines whether a
firm might survive or stagnate and fail over time [Jovanovic, 1982]. The
degree of efficiency in turn depends on a host of factors such as the amount
The Journal of Development Studies, Vol.40, No.3, February 2004, pp.87–114

ISSN 0022-0388 print
DOI: 10.1080/0022038042000213210 © 2004 Taylor & Francis Ltd.
88 THE J OURNAL OF D E V E L O P ME N T ST U D I E S
and quality of physical and human capital, technological know-how,

experience, managerial skills, market structure, and the degree of
competition, among others. Likewise, changes in government policies such

as the demand management policies, deregulation, trade, and industrial
policies can also affect the technical efficiencies of the firms or industries.
The present study concerns the empirical assessment of the impact of the
trade policy reforms, represented by export orientation and capital
deepening, on the technical (in)efficiencies of 25 three-digit manufacturing
industries of Bangladesh in a panel-data stochastic frontier modelling
framework covering the period 1978–94. Empirical modelling of the
stochastic frontier production function based on a single cross-section
requires strong explicit assumptions, such as the exponential and the
positive half normal, about the distribution of the statistical noise and the
inefficiency variable terms. These assumptions are not necessary in the case
of panel data modelling. Schmidt and Sickles (1984) point out three major
advantages regarding the use of panel data in the context of frontier
production analysis. First, the panel data approach provides consistent
estimation of the parameters without any particular assumptions about the
distributional specification for the efficiency disturbance. Second, the
assumption that inefficiency and the factor input levels are independent can
be relaxed. And, finally, panel data models can distinguish the technical
inefficiency component of the disturbance from the statistical noise
component at the individual unit more accurately than a single cross-
section. Further, unlike a single cross section, panel data models provide
consistent estimates of the individual technical inefficiencies [Jondrow et
al., 1982; Kalirajan and Flinn, 1983].1
The efficiency estimates in the present study are based on the application
of the combined stochastic frontier and inefficiency models as suggested by
Battese and Coelli [1995]. Apart from looking at the direction of change in
technical inefficiency as a function of export orientation and capital
deepening, among others, the study compares the changes in the mean
technical efficiency for the manufacturing sector as a whole as well as the
individual industries on a year-to-year basis. The estimates of the yearly
technical efficiency of the individual industries provide a basis for
comparing the technical efficiency gains (losses) of the more export-
oriented industries with those of the less export-oriented ones and, for that
matter, the relative efficiency gains (losses) of import substituting industries
to export promoting industries. Finally, we construct three sub-panels
distinguishing the pre-liberalisation (1978–82), the transition (1983–91)
and the post-liberalisation (1992–4) periods of the external trade regime of
Bangladesh, and thus compare the overall mean technical efficiency
between these periods.
LIBERALISATION AND EFFICIENCY I N BANGLADESH 89
Empirical studies on the effects of trade liberalisation on technical
efficiency provide mixed results. Generally speaking, the literature on trade
liberalisation and efficiency is yet to flourish. It is the dearth of empirical

studies, particularly on Bangladesh, that remains the principal motivating
factor behind the present study. Turning to Bangladesh, the few studies on
the issue indicate very little or no impact on technical efficiency or total
factor productivity over time and/or due to trade liberalisation [Krishna and
Sahota, 1991; Salim, 1999]. However, for reasons explained in the next
section, the findings of these studies may not be interpreted as consequences
of trade liberalisation. These studies focused on the four-digit level
industries, thereby estimating the technical efficiency of the individual
firms. Micro-level observations are preferable to meso (three-digit
industries) or macro (two-digit industries) level data from the theoretical
point of view as the former avoid the problems of aggregation and
heterogeneity. While the problems of heterogeneity and aggregations are
quite serious at the two-digit level, they are much less stringent at the three-
digit level [Meeusen and van den Broeck, 1977] and, therefore, results based
on the three-digit industries may provide useful policy implications
notwithstanding the fact that the micro-level data remain the superior
alternative.2 In terms of coverage, the study includes all the major industries
except the petroleum refining due to data limitations. Coupled with a
relatively long panel, the wider coverage of the study constitutes another
compelling reason for the use of the three-digit level data in this case as a
time series database for the four-digit level industries is hard to construct on
a consistent basis. It is expected that the wider coverage of the industries
should provide better estimates of the overall efficiency than the estimates
based on select industries.
The rest of the paper is organised as follows: Section II provides a brief
analysis of the theory on trade reform and economic efficiency, and
describes the findings of some of the empirical works to date. Section III
describes the data and the variables used in the study. Section IV sets out the
suggested econometric model. Section V analyses the empirical results.
Finally, Section VI provides the summary and concluding remarks.
I I . THEORY AND EVIDENCE
The implications of a liberal trade regime for growth, total factor

productivity, and economic efficiency are derived from the neo-classical
economic theory, particularly the neo-classical trade theory. The
arguments also draw support from the political economy perspectives on
protection as well as the recent theories of growth known as the
endogenous growth theories. The neo-classical case for trade
liberalisation is based on the perceived benefits from the division of

labour, widening of the markets, and comparative advantage. The neo-
classical economists view international markets not to differ

fundamentally from the domestic markets. Therefore, the usual
implications of a perfectly competitive market also apply to international
trade, which would ensure efficiency in the allocation of resources
[Corden, 1974; Krugman, 1986]. The neo-classical theory rejects
protection as a viable alternative on grounds of adverse intra-industry
effects due to imperfect competition. First, barriers to entry and absence
of foreign competition allow domestic producers to acquire monopoly
power and enjoy supernormal profits thereby failing to achieve economic
efficiency. Secondly, in a monopolistically competitive market,
restrictions on trade may attract a large number of small producers who
operate under increasing cost conditions and thus become inefficient.
These two intra-industry effects are considered as more important sources
of welfare loss compared to the conventional comparative advantage
effects [Tybout, de Melo and Corbo, 1991]. From a political economy
standpoint, protection leads to a huge waste of resources by triggering
directly unproductive and profit-seeking (DUP) activities [Bhagwati,
1988; Krueger, 1974]. The new growth theories uphold trade liberalisation
by contending that technological change is endogenous rather than being
exogenous as postulated in the Solow-type neo-classical growth theory
[Romer, 1990; Aghion and Howitt, 1992, 1998]. International trade leads
to a faster diffusion of technology, and hence, higher productivity growth.
Technology is embodied in intermediate goods. New intermediate goods,
if different from or better than the existing ones, will enhance the
productivity of the importing country provided they are exported to other
countries [Grossman and Helpman, 1991; Keller, 2000]. There are also
the spillover effects due to ‘learning-by-doing’ gains and better
management practices triggered by the new technology leading the firms
towards the best-practice technology [Krugman, 1987; Lucas, 1988;
Young, 1991].
Early empirical evidence shows almost no significant positive
relationship between trade liberalisation and technical efficiency [Bhagwati,
1988; Pack, 1988; Rodrick, 1988]. For Chile, Tybout, de Melo and Corbo
[1991] find only a small improvement in the overall productivity growth of
the manufacturing sector across the restricted and the liberalised trade
regimes. In a recent cross-country study, Miller and Upadhyay [2000],
however, show that both openness and outward-orientation have positive
and significant impact on total factor productivity. Similarly, in a panel data
modelling, Karunaratne [2001] finds the Australian manufacturing sector to
have experienced a reduction in technical inefficiency over time.
The Bangladesh Context
Bangladesh adopted a gradualist approach in its transition towards outward
orientation. Since its emergence as an independent country in 1971,

Bangladesh followed an extremely inward-looking development strategy
until the early part of the 1980s. The country launched the outward-oriented
strategy in 1982 by initiating the implementation of the structural
adjustment programmes as per the World Bank and the IMF directives. This
was followed by second and third round changes in 1985/86 and 1991
respectively. The industrial and trade policy changes lie at the heart of the
structural adjustment programmes in Bangladesh. The first phase, known as
the New Industrial Policy (NIP), focused on export diversification and
import liberalisation through a system of export performance benefits and
duty drawbacks on inputs. The second and the third round measures were
aimed at further streamlining of the trade policy regime as export, import,
and exchange rate policies all underwent substantial overhauling. Continual
devaluation and full convertibility of the domestic currency in the current
account helped reduce the anti-export bias over time [Hossain and
Karunaratne, 2002]. The provision for unrestricted and duty-free access to
imported inputs, tax rebates on export incomes and concessionary duties on
imported capital machinery have provided further incentives for exports.
The import policy regime has been liberalised through successive
reductions in tariff rates and phasing out of the quantitative restrictions.
Thus, Bangladesh provides an excellent case for carrying out a direct
analysis of the effects of trade reforms on the basis of ‘before’ and ‘after’
comparisons. More importantly, the regular surveys of the manufacturing
industries provide a consistent set of data to the end, the lack of which has
often been the source of unreliable and misleading empirical results
[Tybout, de Melo and Corbo, 1991].
Empirical research on the issue so far has been very scanty. Krishna and
Sahota [1991] estimate total factor productivity and technical efficiency for
30 four-digit manufacturing industries using panel data for the period
1974/75–1983/84. The findings, based on the ordinary least squares method
with the production technology defined as either Cobb-Douglas or Translog,
suggest no substantial improvement in either total factor productivity or
technical efficiency over time. However, as mentioned earlier, the results
may not be interpreted as sequels to trade liberalisation for at least two
reasons. First, the study covers the period until 1983/84, while
microeconomic reforms in Bangladesh got underway only in 1982.
Second, ordinary least squares are not an appropriate option to dealing with
the case at hand. Salim [1999], on the other hand, estimates productive
capacity realisation and total factor productivity for three key
manufacturing industries – food processing, textiles, and chemicals – for
three different years (1981, 1987 and 1991) by using four-digit firm level
data. Assuming the Cobb-Douglas production technology as the appropriate
description of the data set and applying the corrected least squares (COLS)
regression, Salim finds both productive capacity realisation and total factor
productivity to have improved over time, and that openness was a
significant determinant of capacity realisation for the food processing
industry and a sub sector of the textile industry – jute. However, an
improvement in capacity realisation and/or total factor productivity per se
does not imply an improvement in technical efficiency. The present study
thus represents the first attempt of its kind in the context of the Bangladesh
manufacturing sector.
I I I . DATA AND THE DEFINITIONS OF THE VARI A BLES
The data used in this study are compiled from two main official sources of
the Government of Bangladesh, namely, the Bangladesh Statistical
Yearbook (various issues) and the Report on Census of Manufacturing
Industries of Bangladesh known as CMI (various issues). The CMI data are
based on the yearly census conducted across private and public enterprises
employing 10 or more people. Both the sources routinely publish data
according to the International Standard Industrial Classification (ISIC).
Table A1 in the Appendix presents the descriptions of the 25 industries
chosen for this study. The CMI data are available for the period 1974–96
except 1995 as no survey was undertaken for the financial year 1994–5. On
the other hand, a consistent database for all the 25 industries considered in
this study are available only from 1978. The study, therefore, chooses the
sample period 1978–94.
The variables used for the empirical analysis are defined as follows.
Output is represented by the gross value added rather than gross output.
One important reason for the preference of value added over gross output is
that it allows comparisons between firms, which may be heterogeneous in
raw material use [Griliches and Ringstad, 1971]. The use of gross output
necessitates the inclusion of raw material as an input variable in the model,
which might obscure the role of physical and human capital in productivity
growth. Secondly, unlike gross output, the value added accounts for the
differences and changes in the quality of inputs [Salim and Kalirajan,
1999]. While net value added might be more appropriate than gross value
added, the CMI estimates of the former are likely to be flawed because of
the arbitrary nature of deductions from gross output [Salim, 1999].
Capital is defined as the gross fixed assets representing the aggregate
book values of land, buildings, machinery, tools, transport, and office
equipment. In empirical analysis, capital is often represented by the
replacement cost of existing machinery and equipment. In the present case,
we follow the argument of Salim and Kalirajan [1999] justifying the use of
fixed capital assets for Bangladesh on the ground that in a country like
Bangladesh, ‘…capital stock is more often used at approximately constant
levels of efficiency for a period far beyond the accounting life measured by
normal depreciation until it is eventually discarded or sold for scrap’ [Salim
and Kalirajan, 1999: 363]. Labour is defined as the number of employees.
Empirical studies have alternatively used the number of employees and the
number of man-hours for labour inputs. It is, however, highly debatable as
to which measure performs better in empirical research.3 The sources of the
data this study utilises measure labour inputs in terms of production and
non-production workers. Thus labour is represented by the sum total of
production and non-production workers.
Capital deepening is defined as the ratio of capital to labour and is used
as a proxy for import liberalisation. From the theoretical point view, this can
be considered reasonable as reductions in tariff rates and quantitative
restrictions may lead to an increase in imported capital. It may be pointed
out here that reductions in tariff rates and quantitative restrictions have
constituted an important element in the consolidation and restructuring of
the Bangladesh import regime.
Export orientation is defined as the ratio of annual export to output of
each industry. Since the CMI does not record the share of export of the
individual firms surveyed, this study uses the ratio of the overall exports of
a three-digit industry to the respective level of output. The export figures are
constructed from the relevant four-digit level entries within each three-digit
level industry. The latter can be justified as a proxy for the former since the
CMI covers more than 60 per cent of total manufacturing establishments.
Other variables considered in the study are the proportion of non-production
workers in total employment, and intermediate inputs, the latter being
defined as gross output less gross value added.
The output variable is deflated by the wholesale price index of industrial
products, capital is deflated by the wholesale price index of manufacturing
that excludes fuel and lighting, and intermediate inputs is deflated by the
wholesale price index of raw materials. All the variables are expressed in
1990 prices.
Before we conclude this section, a word on the limitations of the CMI
data. The reliability of the CMI data in general is questionable as they suffer
from various problems such as the under coverage, under-reporting or
misreporting, and measurement errors. While the problems of random errors
in data observation, especially of the dependent variable can be taken care
of by applying appropriate econometric technique such as the stochastic
frontier production function approach [Caves and Barton 1990], the
problems of under coverage and under-reporting may seriously affect the

estimated results especially with aggregated panel data. First, CMI does not
report information on all the firms or enterprises registered or operating in

the economy. Second, in most cases, the number of firms covered and
lumped into the three-digit industries varies over time. And, third, perhaps
most importantly, the same firms are not reported each year. All this may
leave comparisons across aggregated industries and through time
misleading. Assuming that the cross sections of the firms in terms of size are
appropriately represented through simple random sampling, the present
study chooses to use the average figures, that is, the value of the variable per
reporting firm.
I V. EMP IRICAL TECHNIQUE
Following the pioneering work of Farrell [1957], the literature on technical

efficiency measures provides a wide variety of models, parametric or non-
parametric, to predict technical efficiency at the firm or industry level. The
core empirical techniques include: (1) the deterministic frontier production
function including the Data Envelopment Analysis (DEA); (2) the
stochastic frontier production function approach (SFA); the stochastic
varying coefficients frontier approach (SVFA); and (4) the Bayesian
approach. Of course, each of the techniques has its variants. However, no
single technique or model can claim absolute superiority over the others.4 In
practice, technical efficiency is generally measured by using either the Data
Envelopment Analysis (DEA) or the Stochastic Frontier Production
Function Approach (SFA). As mentioned earlier, both the models have
advantages and disadvantages.5 Some of the weaknesses are common to
both the models while others are model-specific. However, SFA outscores
DEA on two very important grounds. Unlike DEA, SFA accounts for noise.
The presence of a noise such as the measurement error and other random
factors such as weather, strikes etc., may affect the placement of the DEA
frontier more than the SFA. By including a random error term in the model
in addition to the inefficiency effect, the SFA ‘accounts for the presence of
measurement error in output or the combined effects of unspecified
explanatory variables in the production function’ [Coelli, Rao and Battese,
1998: 198]. Secondly, SFA can be used to conduct a list of hypotheses
concerning the existence of inefficiency, the structure of the production
technology as well as the distributional form of the inefficiency effects. The
country concerned here represents a case where the data are likely to be
highly influenced by measurement errors. This is even more likely with
survey-based data, as in the present case, that are compiled on the basis of
the information supplied by the respondent firms or industries.
As to the practical applications, the use of the DEA has been limited
mostly to the non-profit service sectors where random influences are not an
important issue and where firms do not have a well-defined optimisation

problem such as the profit maximisation or cost minimisation. Conversely,
the SFA has been extensively applied in the fields of agriculture, education,
manufacturing, health, banking services, businesses and other areas. Some
of the applications of SFA to manufacturing include: Pitt and Lee [1981],
Page [1984], Little, Mazumdar and Page [1987], Tybout et al. [1991],
Haddad and Harrison [1993], Hill and Kalirajan [1993], Brada et al.
[1997], Lundvall and Battese [2000] and Karunaratne [2001].
As mentioned before, this study applies the combined inefficiency-
stochastic frontier model as suggested in Battese and Coelli [1995], where the
inefficiency effects are specified as functions of other variables. The model
thus avoids the problems associated with the two-stage estimation procedures
such as Pitt and Lee [1981] and Kalirajan [1981]. At the same time, it allows
the separate estimates of the technical efficiency changes and technical change
over time. The model is also suitable for testing various hypotheses concerning
the distributions of the inefficiency effects, the structure of the production
technology as well as the technical change. Assuming that the database from
the Bangladesh manufacturing sector can be described by a Translog
production technology, we specify the following stochastic frontier model:
Yit ¼ b0 þ bK Kit þ bL Lit þ bT Tit þ bKK ðKit Þ2 þ bLL ðLit Þ2 þ bTT ðTit Þ2
(1)
þbKL ðKit :Lit Þ þ bKT ðKit :Tit Þ þ bLT ðLit :Tit Þ þ vit uit ;
where:
Yit = the natural logarithm of value added for the i-th industry in the t-th year
of observation;
Kit = the natural logarithm of capital for the i-th industry in the t-th year of
observation;
Lit = the natural logarithm of labour for the i-th industry in the t-th year of
observation;
T = time;
vit = random variables assumed to be iid with mean zero and variance s2v .
uit = non-negative random variables assumed to be independently
distributed with mean, µit, and variance, σ2, where
mit ¼ d0 þ d1 INPit þ d2 KDit þ d3 XORit þ d4 NPLit þ d5 ðINPit Þ2 þ d6 ðKDit Þ2 (2)

2 2
þd7 ðXORit Þ þ d8 ðNPLit Þ þ d9 ðINPit :KDit Þ þ d10 ðINPit :XORit Þ þ d11 ðINPit :NPLit Þ
X
30
þd12 ðKDit :XORit Þ þ d13 ðKDit :NPLit Þ þ d14 ðXORit :NPLit Þ þ dj Djit ;
j¼15
where:
INPit = the natural logarithm of intermediate inputs for the i-th industry in
the t-th year of observation;

KDit = capital deepening defined as the natural logarithm of capital-labour
ratio for the i-th industry in the t-th year of observation;
XORit = export orientation defined as the natural logarithm of the ratio of the
i-th industry’s export over output in the t-th year of observation;
NPLit = the natural logarithm of the ratio of non-productive labour to total
employment for the i-th industry in the t-th year of observation; and
Dj = time-specific dummies for the year 1979 through 1994.
The inclusion of time as an explanatory variable in equation (1) allows

possible shifts of the production frontier over time. However, the
parameters of the input variables are assumed to be time-invariant and
constant over industries. The error terms, vit and uit, capture the deviations
from the production frontier. The first accounts for the statistical noise in
outputs while the second accounts for technical inefficiency in production.
The four industry-specific variables included in the inefficiency model are
intermediate inputs, capital deepening, export orientation, and the
proportion of non-production workers to total employment as specified
above. The inclusion of the interaction variables involving the industry-
specific variables allows for the U-shaped and joint relationships among
these variables and the inefficiency effects.
The coefficients of the intermediate inputs measure the impact of size or
scale of operation on inefficiency. Empirical studies to date alternatively
used value added, sales proceeds, employment, or fixed assets as a proxy for
the size variable. One argument for the use of intermediate inputs as a proxy
for size is that this variable is more highly correlated with output than labour
and capital [Lundvall and Battese, 2000]. Though the quality of labour is
ignored, the capital-labour ratio remains the most commonly used measure
of capital deepening or capital intensity. Intermediate inputs, capital
deepening, and export orientation are all expected to have negative
coefficients in order for them to be interpreted as inefficiency-reducing
instruments. The sign of the coefficient of the proportion of non-production
labours in total employment is, however, indeterminate. Some argue that the
non-productive workers such as the managers, the labour relations and
R&D personnel, and the engineers may contribute to the effective
acquisition and combination of the productive resources [Campbell, 1984],
thereby help reduce inefficiency. Others argue that a rise in the ratio of non-
production workers inflicts rigidities in the production process that may
slow down the speed of adjustment to changes in demand and hence
contribute to inefficiency.
Other variables that might be relevant to the present context but were not
considered are: effective rate of assistance and effective rate of protection
both representing trade liberalisation. Unfortunately, neither of these

variables can be meaningfully constructed for the three-digit industries from
the available database.
V. EMPIRICAL RESULTS
Parameters Estimates and Hypotheses Testing

The estimates of the parameters of the frontier model and the inefficiency
model as defined by equations (1) and (2) respectively are based on the
maximum-likelihood method as suggested in Battese and Coelli [1993].
The estimation is done in the computer package FRONTIER 4.1 [Coelli,
1996]. The estimated parameters are presented in Table A26 of the
Appendix. Since the results are based on the Translog production function,
the individual coefficients in the frontier model cannot be directly
interpreted as elasticities since the elasticities of output with respect to the
inputs depend on the levels of the explanatory variables as well as the
subsets of the parameters.
As to the inefficiency model, larger industries appear to have smaller
values of the inefficiency effects as indicated by the negative and
statistically significant coefficients of INPt and INPt2 and (INPt. KDt).
Capital deepening has negative coefficients involving the variable KDt2 and
all the three interaction variables. All the other coefficients, except (KDt.
XORt), are statistically significant implying that more capital-intensive
industries have smaller inefficiency effects. If reductions in tariffs and
quantitative restrictions contribute to greater acquisition of capital, the
results can be interpreted as due to trade liberalisation. Export orientation,
the key variable representing trade liberalisation, has negative and
statistically significant coefficients for the variables XORt and (INPt. XORt)
and negative but not statistically significant coefficients for XORt2 and
(KDt. XORt). This tends to imply that the more export-oriented industries
have lower inefficiency effects and, for that matter, greater efficiencies.
However, when combined with the proportion of non-production labour to
total employment, exportation orientation appears to have adversely
affected the efficiencies of the more export-oriented industries and/or the
industries with higher proportion of non-productive workers. The
coefficients of the variables NPLt2 and (KDt. NPLt) are indicative of a
greater positive contribution to the reduction of inefficiencies of the
industries with the higher proportion of non-production labour to total
employment. As to the time effects, most of the time dummies have
negative signs, with a sum total of (-)0.77, indicating a reduction in
inefficiency over time. But only the dummies for the years 1983 and 1989
through 1994 have coefficients that are significant at 10 per cent level or
less. It follows from above that not all the individual parameters estimates
in the inefficiency model are statistically significant. But a decision to drop
a particular explanatory variable from the model must be based on tests of
hypotheses involving sets of parameters. Table 1 below presents the results
of hypotheses tests concerning some of the parameters as well as the
functional form of the production technology, the distributional form of the
inefficiency effects, and the technical change on the basis of the generalised
likelihood-ratio statistics.
To begin with, the null hypothesis that the Cobb-Douglas production
frontier is an adequate representation of the data is rejected at the 5 per cent
level of significance given the assumption of the Translog stochastic
production frontier, which implies that input and substitution elasticities
TAB L E 1
G E N E R A L I S E D L I KE L I HOOD RAT I O T E S T S OF N U LL H Y PO TH ESES FO R
PARAMETERS IN THE STOCHASTIC FRONTIER PRODUCTION FUNCTION FOR
THE BANGLADESH MANUFACTURING
Null hypothesis, H0 Likelihood-ratio Critical 2value

test statistic ( χ α ,df ) Decision
βKK=βLL=βTT= βKL =βKT=βLT = 0 45.74* χ2.05, 6 = 12.59 reject H0

(Cobb-Douglas function)
γ = δ0 = δ1 = …=δ30 = 0 244.49* χ2.05, 31 = 44.41 reject H0
(no inefficiency effects)
βKT = βLT = 0 2.98 χ2.05, 2 = 5.99 cannot reject H0
(there is no technical change
βT = βTT = βKT = βLT = 0 8.54 χ2.05, 4 = 9.49 cannot reject H0
(there is neutral technical change)
δ1 =δ5= δ9 =δ10 = δ11 = 0 133.74* χ2.05, 5 = 11.07 reject H0
(no size effects)
δ2 =δ6= δ9 =δ12 = δ13 = 0 22.20* χ2.05, 5 = 11.07 reject H0
(no capital deepening effects)
δ3 =δ7= δ10 =δ12 = δ14 = 0 46.28* χ2.05, 5 = 11.07 reject H0
(no export-orientation effects)
δ4 =δ8= δ11 =δ13 = δ14 = 0 49.82* χ2.05, 5 = 11.07 reject H0
(no NPL effects)
δ2=δ3=δ6 =δ7 =δ9 =δ10 =δ12 =δ13=δ14 =0 43.88* χ2.05, 9 = 16.92 reject H0
(no capital deepening and
export orientation effects)
δ15 = δ16 = …=δ30 = 0 33.10* χ2.05, 16 = 26.30 reject H0
(no time effects)
Notes: Critical values for the tests of hypotheses, excepting γ = 0, are obtained from the
appropriate chi-square distribution. The critical value for testing the null hypothesis of γ
= 0 is taken from Kodde and Palm, 1986.
* indicates that the value of the generalised likelihood-ratio statistic exceeds the critical
value at 5 per cent level of significance.
vary across industries. Similarly, the null hypothesis of no technical
efficiency effects is rejected, although the value of γ is relatively low (0.25)
meaning that technical inefficiency of production is associated with a small

proportion of total variability. Nonetheless, the rejection of the hypothesis
confirms that given the Translog stochastic frontier model, the average
response function or OLS that assumes all the firms to be fully technically
efficient is not an adequate representation of the data. The null hypothesis
of no (Hicks’ neutral) technical change cannot be rejected at the 5 per cent
level of significance meaning that there has been no shift in the isoquants
through time (without a change in the shape of the isoquants). Similarly, the
hypothesis of neutral technical change cannot be rejected at the 5 per cent
level of significance. However, the null hypothesis is rejected at the 10 per
cent level indicating shifts in the isoquants through time and in favour of
certain input.
The null hypotheses of no size effects, no capital deepening effects, no
export orientation effects, no proportion of non-productive workers to total
employment effects and no time specific effects are all rejected at the 5 per
cent level of significance. Similarly, the combined null hypothesis of no
capital deepening and exported orientation effects is rejected at the 5 per
cent significance level. On the basis of the results of the hypotheses testing,
we take the frontier model suggested in (1) and (2) and, therefore, the results
that follow as representative of the database used in this study.
A Test for Heterogeneity Among the Industries

As pointed out before, the pooling of aggregate data for the three-digit
industries may not be appropriate because of the existence of heterogeneity
among such broad categories of industries. In the presence of heterogeneity,
a common production technology (such as the translog production function)
may not be an adequate representation of the data. In order to check if a
common production technology is appropriate for all the 25 industries
considered in the present case, we carry out a likelihood ratio test by
specifying and estimating a Cobb-Douglas frontier production function
along with an inefficiency model for each of the industries separately as
follows:7
Ytj ¼ b0 þ bK Ktj þ bL Ltj þ bT Tj þ vtj utj (3)

2
mtj ¼ d0 þ d1 INPtj þ d2 KDtj þ d3 XORtj þ d4 NPLtj þ d5 ðINPit Þ (4)
where the subscript j denotes the j-th industry. The variables and the random
terms have the same explanations as in equations (1) and (2). The choice of
the Cobb-Douglas production technology as well as fewer inefficiency

variables is based on the fact that a translog production technology and/or
the inclusion of more inefficiency variables is impracticable given the

sample size (of 17). We then specify and estimate the same model for the
entire panel and construct the following likelihood ratio test:
X25
LR ¼ 2ðLLFH0 LLFH1 Þ ¼ 2ðLLFP LLFj Þ; (5)
j¼1
which has a χ2 distribution with 264 (=11 x 24) degrees of freedom. The
likelihood ratio (LR) statistic is calculated to be 106.18 which is far less
than the χ 2critical (= 302.90) at the 5 per cent level of significance. Thus, the
null hypothesis of the same frontier models for all the individual industries
cannot be rejected. The results, therefore, justify the specification of the
translog frontier model as a common production technology for the pooled
data.
Technical Efficiency Estimates

The computer program FRONTIER 4.1 provides the individual estimates of
technical efficiency for each industry category on a yearly basis as well as
the overall mean efficiency. The individual estimates can be used to
calculate yearly average estimates of technical efficiency for the
manufacturing sector as a whole. We calculate both the simple and weighted
average as well the median estimates, which are presented in Table A3 in the
Appendix labelled TE1 and TE2 and Median respectively.8 The table also
presents the technical efficiency estimates of the individual industries. Both
the simple and weighted average estimates of technical efficiency show
steady upward movement over time. For example, in 1978 TE1 was about
0.34, which rose to about 0.54 in 1987 and to 0.68 in 1994. The
corresponding figures for TE2 are approximately 0.38, 0.58 and 0.75
respectively. However, the median efficiency estimates show a mixed
pattern until 1987 and in general indicate lower technical efficiency than the
other two measures. The median efficiency registers a sharp rise in 1988
(0.58 against about 0.41 for the year 1987) and thereafter shows an
increasing tendency. Nonetheless, the general impression remains that the
overall technical efficiency seems to have increased overtime. The scenario
is visualised in Figure 1 below.
Turning to the individual industries, 13 out of the 25, that is, 52 per cent
of the industries have experienced significant improvements in technical
efficiencies. These industries are: tobacco manufacturing, ready-made
garments, leather and leather products, wood and cork products, furniture,
paper and paper products, printing and publishing, industrial chemicals,
F I GURE 1
TECHNICAL E FFICIENCY OF BANGLADESH MANUFACTURING, 1978–94
( BAS E D ON T HE F UL L PA NE L E S T IMATIO N )
Note: TE1 and TE2 denote respectively simple and weighted average estimates.
plastic and plastic products, pottery and chinaware, fabricated metals,

electrical machinery, and transport equipment. Of these, the readymade
garment industry gained the most. Nine of the industries, namely, food
processing, textiles manufacturing, leather footwear, drugs and
pharmaceuticals, other chemicals, rubber and rubber products, non-metallic
mineral products, iron and steel, and non-electrical machinery have gained
marginally. Of these industries, food processing, textiles manufacturing,
drugs and pharmaceuticals, and other chemicals maintained high levels of
efficiencies throughout the sample period. Of the other three industries,
beverages have experienced deterioration in technical efficiency while
ginning and pressing, and non-electrical machinery maintain more or less
stable levels of efficiencies.
Over the years, textiles manufacturing, food processing including tea,
leather and leather products, non-metallic mineral products, and chemical
and chemical products and, since the mid-1980s, readymade garments
remained the most export-oriented industries of Bangladesh. As can be seen
from Table A3, these industries either operate at high levels of technical
efficiencies or have experienced substantial increases thereof. However,
some of the import-substituting industries, e.g., tobacco manufacturing,
paper and paper products, wood and cork products, pottery and chinaware,
electrical machinery, transport equipment, and iron and steel all gained over
time in terms of technical efficiency. This implies that the benefits of trade
liberalisation were not confined only to the export-oriented industries rather
they spread across the board. At the same time, it must also be noted that in
general the import-substituting industries operate at lower levels of
efficiencies.
An Alternative Assessment
The main focus of this study is to examine if trade liberalisation enhanced
the technical efficiencies of the Bangladesh manufacturing industries. As
mentioned earlier, one way to assess the effects of trade liberalisation on
technical efficiency is to compare the estimates of technical efficiency on a
‘before and after’ basis for the manufacturing sector as a whole and/or the
individual industries. Now that the Bangladesh trade policy regime has gone
through three clearly distinct phases, namely, the pre-liberalisation period,
the transition period, and the post-transition period, it is worthwhile to
compare the changes in technical efficiency across these time periods. As
presented in columns [2]–[4] of Table 2 below, the (simple) average overall
technical efficiency is 0.414 for the period 1978–82, 0.572 for the period
1983–91 and about 0.700 for the period 1992–4. The corresponding
weighted average estimates are 0.478, 0.635 and 0.744 respectively. The
median estimates for the three phases are respectively 0.420, 0.550 and
0.686. Thus, there is a clear indication of an improvement in technical
efficiency of the Bangladesh manufacturing sector through phases of the
external trade policy regime.
In order to examine further the validity of the claim above, we provide
an alternative assessment of the same by constructing three separate sub-
panels for the three phases of the Bangladesh international trade regime,
namely 1978–82 (pre-liberalisation period), 1983–91 (transition period) and
TAB L E 2
AVERAGE TECHNICAL E FFICIENCY OF THE BANGLADESH MANUFACTURING
S E C TO R ACROS S P HAS E S OF T HE T RADE PO LIC Y REG IME
Technical efficiencies based on

Full panel estimation Sub-panels estimation
Simple Weighted Simple Weighted

Period average average Median average average Median
1978–82 0.414 0.478 0.420 0.392 0.571 0.280

1983–91 0.572 0.635 0.550 0.531 0.615 0.480
1992–94 0.700 0.744 0.686 0.554 0.669 0.540
1983–94 0.607 0.663 0.606 0.537 0.629 0.490
Overall 0.548 0.608 0.536 0.494 0.612 0.430
Source: author’s calculations from the estimated results.

1992–4 (post-liberalisation period). We then specify a combined frontier
production function and inefficiency model similar to equations (1) and (2)
in Section IV for each sub-panel. The parameters estimates and the overall
mean efficiencies for the sub-panels are presented in Table A4 in the
Appendix. Looking at the inefficiency model in each sub-panel, it appears
that all the four industry-specific variables either in levels or in squares or
in combination with another variable have contributed to the reduction in
technical inefficiencies. It would be interesting to compare the mean and
individual technical efficiencies based on the sub-panels estimation with
those based on the full panel estimation. The summary statistics are
presented in the last three columns of Table 2. The simple average technical
efficiencies for the three periods are 0.392, 0.531 and 0.554 in ascending
order of the sub-panels. Although, these figures do not exactly match with
the corresponding estimates based on the full panel estimation, they clearly
complement the latter in terms of the direction of changes in technical
efficiencies. Similar observations hold for the weighted average and the
median technical efficiency estimates.
Figure 2 presents the yearly estimates of the simple average, weighted
average and the median estimates of the overall technical efficiencies
obtained from the sub-panels estimation. The simple average (TE1) and the
median estimates show a clear upward tendency throughout the sample
period resembling the pattern of the full panel estimation (as in Figure 1).
F I GURE 2
TECHNICAL E FFICIENCY OF BANGLADESH MANUFACTURING, 1978–94
(BASED ON THE SUB - PA NE L S E S T IMATIO N )
However, the weighted average technical efficiency (TE2) increases until

1982, shows a mixed pattern between 1982 and 1988 and registers a sharp
rise thereafter while the full panel estimates show an upward tendency over
the entire sample period.
With few exceptions, as presented in Table A5 in the Appendix, the
technical efficiencies of the individual industries based on the sub-panels
compare quite well in terms of the direction of changes with those based on
the full panel estimation. Of the exceptional cases, the most contrasting
results are obtained for the non-metallic mineral products with the full panel
estimation showing more or less a downward tendency while the sub-panels
estimation showing a clear upward movement. Other exceptions include: (a)
beverages (falling throughout and quite sharply after 1984 as opposed to
rising (until 1980) and then falling steadily in the full panel estimation); (b)
leather and leather products (more or less constant throughout the sample
period as opposed to an increasing tendency, especially after 1985, in the
full panel estimation); and (c) iron and steel basic industries (high and
steady throughout as opposed to relatively low technical efficiencies in the
first two years with full panel estimation).
Further Hypotheses Testing

We test the following null hypotheses with respect to the three sub-panels:
(a) the assumption of a common production technology (translog, in this

case) is appropriate for each of the sub-panels;
(b) Cobb-Douglas production technology as opposed to the translog
production technology is the appropriate description of the data for
each sub-panel; and
(c) no inefficiency effects in each of the sub-panels.
Based on the likelihood function statistics presented in Tables A2 and A4,

a likelihood ratio test similar to equation (5) above produces a test statistic
of (-2{-295.52-[-64.09-144.68-55.39]}) = 62.72. The value of the χ2critical is
higher than the calculated value for degrees of freedom 50 and above at a
level of significance of 5 per cent or less, which suggests that the null
hypothesis (a) cannot be rejected. Since the number of parameters estimated
in the full panel and the sub-panels are not identical (because of the
inclusion of the time dummies), for a better comparison we re-estimate the
full panel and the sub-panels with identical number of parameters by
dropping the time dummies from the inefficiency models. This exercise
produces a test statistic of (-2{-313.52-[-71.89-159.24-61.47]}) = 41.84,
which is less the χ2critical = 67.50 for 50 (=2 x 25) degrees of freedom at the
5 per cent level of significance. Thus, the assumption of a common translog
production technology for the sub-panels cannot be rejected. Hypothesis (b)
is rejected for all the sub-panels on the basis of the likelihood ratio test. The
test statistics are respectively 41.94, 51.56 and 17.48 for the three sub-
panels, which are to be compared with the χ2critical = 12.59. Similarly, the
null hypothesis of no inefficiency effects (γ = 0) is also rejected for each
sub-panel. As presented in Table A4, the LR test statistics of the one sided
error for the three sub-panels are 153.22, 125.90 and 125.24 respectively
while the corresponding values of the χ2critical at the 5 per cent level of
significance are respectively 29.545, 41.977 and 26.983 (from Kodde and
Palm [1986]).
VI. CONCLUSION
This study has undertaken a panel data approach to measure the technical
efficiency of the Bangladesh manufacturing sector as a whole and the
individual technical efficiencies of the majority of the three-digit level
industries. The main objective has been to check if the manufacturing sector
as well as its constituent meso level industries have benefited from
microeconomic reforms in the Bangladesh external trade sector that took
place between 1982 and 1991. The findings of the study can be summarised
as follows. First, alternative measures of the overall technical efficiency
based on the full panel estimation show a rising tendency over time, which
also have support from the overall technical efficiency estimates based on
the three sub-panels representing different phases of the Bangladesh
external trade regime. This is complemented by the technical efficiency
estimates of the individual industries under alternative schemes. Second,
export orientation and capital deepening, both representing trade
liberalisation, appear to be associated with reductions in technical
inefficiencies. The same also applies to the other two industry-specific
variables – intermediate inputs, and proportion of non-production workers
to total employment. Third, with reference to the full panel estimation, most
of the industries (22 out of a total of 25) have experienced rises in technical
efficiencies over time either significantly or marginally. Fourth, majority of
the export-oriented industries have either maintained a high degree of
technical efficiency or gained over time. Fifth, some of the import-
substituting industries also significantly benefited from the trade policy
shift, although import-substituting industries in general have lower
technical efficiencies. Thus, if inter-temporal increases in technical
efficiencies are described as due to trade liberalisation, arguably, the
benefits of trade liberalisation have spread across the board. Sixth, the study
finds no (Hick’s) neutral technical change to have occurred in the
production technology of the Bangladesh manufacturing sector over time.

However, the findings are suggestive of (a non-neutral) technical change to
have occurred in the manufacturing industries. Finally, the study rejects the
Cobb Douglas production technology as an adequate description of the
database used given the assumption of the Translog production technology.
The importance of the trade variables, especially export orientation, in
the reduction of technical inefficiency suggests that improvement in
technical efficiency of the Bangladesh manufacturing sector may be
attributed to the competitive push that trade liberalisation inflicted to the
domestic industries. First, industries with higher export orientation are
exposed to greater international competition than industries with lower
export orientation and/or the import substituting industries. International
competitiveness help reduce ‘X-inefficiency’ of the export industries by
forcing them to utilise a higher proportion of their productive capacities
and/or adopt new technologies [Nishimizu and Robinson, 1984]. In the
context of Bangladesh, Salim [1999] finds openness as an important
determinant of capacity realisation for some of the key manufacturing
industries. These results are very well complemented by the present study.
Second, as mentioned in Section II, the new growth theories emphasize that
trade openness provides the domestic producers access to imported capital
embodying new technologies, which in turn enhance capacity utilisation
and technological progress [Grossman and Helpman, 1991]. The
significance of capital deepening as a determinant of technical efficiency
and the indication of a possible (non-neutral) technical change in the present
case implicate an improvement in capacity utilisation as well as the
occurrence of technological progress in the Bangladesh manufacturing
sector. The importance of the proportion of non-production workers in total
employment, which emphasizes the role of human capital, also points to the
competitive push argument. As pointed out earlier, non-production workers
help reduce inefficiency by greater acquisition of new technologies and
combining the productive resources more effectively. Several empirical
studies indicate that various measures of the real effective exchange rate of
the Bangladesh currency have undergone depreciation over time. As a
result, the anti-export bias has also shown a downward tendency through
time [Rahman, 1995; Hossain and Karunaratne, 2002]. This forms another
dimension of international competitiveness facing the Bangladesh export
industries. As such, it is reasonable to conclude that competitive push has
played an important role in enhancing the technical efficiency of the
Bangladesh manufacturing sector.
NOTES
1. For an elaborated discussion, see Kalirajan and Shand [1999].

2. The presence of heterogeneity may render the pooling of the aggregative data and, therefore,
the assumption of a single production frontier inappropriate for purposes of estimating
technical efficiencies. In the present case, as presented in Section V, the results based on a
generalised likelihood ratio test suggests that a common production technology can indeed
be applied to the pooled data used in this study.
3. Denison [1961] finds better results by including man-hours worked in the production
function while Apsden [1990] argues that hours worked may be subject to sampling error as
they are affected by holidays, strikes as well as the lack of a standard unit of measurement.
4. This study avoids the description of these alternative techniques since they are well
documented in existing literature ( see, for examples, Bauer [1990] and Kalirajan and Shand
[1999].
5. For a detailed list of the relative weaknesses of the two models, see Coelli, Rao and Battese
[1998].
6. The table also presents the estimated results based on the Cobb-Douglas production function.
7. The authors gratefully acknowledge the suggestion made by an anonymous reviewer of this
journal on this procedure, and to Professor Tim Coelli for the clarification on the hypothesis
testing.
8. As Coelli, Rao and Battese [1998] point out, the simple average or arithmetic mean may not
be the best estimator if the firms in the sample have significant size differences and/or if the
sample is not constructed by simple random sampling. This study uses the amount of
intermediate inputs used as weights.
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APPENDIX
TABL E A1
D E S C R I P T I O N O F T HE T HRE E - DI GI T L E VE L I NDUS TRIES A C C O R D IN G TO ISTC
Industry Code Description
311 & 312 Food processing

313 Beverages
314 Tobacco manufacturing
321 & 322 Textiles manufacturing
323 Finished garments
324 Leather & leather products
325 Leather footwear
326 Ginning, pressing & baling of fibres
331 Wood & cork products
332 Furniture & fixtures
341 Paper & paper products
342 Printing & publishing
351 Drugs & pharmaceuticals
352 Industrial chemicals
353 Other chemicals
356 Rubber & rubber products
357 Plastic products
361 Pottery & chinaware
362 Glass & glass products
369 Non-metallic mineral products
371 & 372 Iron & steel basic industries
381 & 382 Fabricated metal products
383 Non-electrical machinery
384 Electrical machinery
385 Transport equipment
Source: Bangladesh Statistical Yearbook, 1997.

TABL E A2
M A X I M U M L I K E L I HOOD E S T I MAT E S F OR PARAMETER S O F TR A N SLO G (TL)
STOCHASTIC FRONTIER PRODUCTION FUNCTIONS FOR THE BANGLADESH
MANUFACTURING SECTOR (BASED ON THE F ULL PA NEL ESTIMATIO N )
Variable description Parameter Coefficient S.E. Asymptotic

in natural logs t-statistic
Frontier function
constant β0 5.27 0.99 5.31*
Kt: capital βK 1.39 0.29 4.73*
Lt: labour βL -0.85 0.32 2.68*
Tt: time βT 0.0087 0.0056 1.56
Kt2 βKK 0.031 0.026 1.19
Lt2 βLL 0.2047 0.0402 5.09*
Tt2 βTT 0.0039 0.0121 0.33
(Kt) x (Lt) βKL -0.130 0.046 2.81*
(Kt) x (Tt) βKT 0.013 0.015 0.86
(Lt) x (Tt) βLT 0.0049 0.0141 0.35
Inefficiency model
constant δ0 3.08 0.99 3.09*
INPt δ1 -0.68 0.26 2.57*
KDt δ2 0.091 0.364 0.25
XORt δ3 -0.57 0.31 1.81**
NPLt δ4 0.15 0.45 0.32
INPt2 δ5 -0.044 0.023 1.95**
KDtv δ6 -0.094 0.055 1.71**
XORt2 δ7 -0.050 0.043 1.17
NPLt2 δ8 -0.220 0.076 2.88*
(INPt) x (KDt) δ9 -0.150 0.056 2.65*
(INPt) x (XORt) δ10 0.035 0.033 1.07
(INPt) x (NPLt) δ11 0.010 0.064 0.14
(KDt) x (XORt) δ12 -0.101 0.064 1.57
(KDt) x (NPLt) δ13 -0.31 0.11 2.88*
(XORt) x (NPLt) δ14 0.274 0.10 2.66*
X30
Dj’s(time dummies) dt § -1.11 not available not available
t¼15
Variance parameters
δs2 = δ2 + δv2 0.25 0.03 8.74*
γ = δv / (δ2 + δv2) 0.20 0.10 1.96**
Log-likelihood -295.52
LR-test of the one-sided error*** 244.49*
Mean TE 0.548
Notes: S.E. = standard error. Standard errors are rounded to two-significant digits after the
decimal point; *significant at 5 per cent level or less; **significant at 10 per cent level or less;
*** tests the null hypothesis of no inefficiency effects ( =0); § the time dummies for the years
1983 and 1989 to 1994 are found significant at 10 per cent level or less.
TABLE A 3
TECHNICAL E FFICIENCY E STIMATES OF VARIOUS THREE-DIGIT MANUFACTURING INDUSTRIES OF BANGLADESH, 1978–1994
112
(BASED ON THE FULL PANEL E STIMAT ION)
Industry
Code/year 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
311+312 0.87 0.89 0.89 0.91 0.93 0.92 0.95 0.93 0.92 0.94 0.95 0.97 0.98 0.97 0.97 0.97 0.97
313 0.58 0.72 0.82 0.57 0.42 0.47 0.45 0.29 0.26 0.31 0.26 0.37 0.26 0.22 0.35 0.39 0.36
314 0.65 0.79 0.85 0.71 0.83 0.80 0.85 0.82 0.85 0.93 0.87 0.90 0.92 0.93 0.93 0.96 0.93
321+322 0.92 0.92 0.93 0.93 0.93 0.93 0.95 0.95 0.94 0.94 0.95 0.96 0.96 0.96 0.97 0.96 0.97
323 0.10 0.17 0.11 0.07 0.15 0.25 0.36 0.30 0.29 0.36 0.67 0.94 0.94 0.95 0.95 0.96 0.95
324 0.49 0.68 0.54 0.57 0.54 0.50 0.76 0.64 0.67 0.75 0.78 0.92 0.91 0.89 0.90 0.92 0.90
325 0.21 0.38 0.20 0.15 0.24 0.53 0.37 0.38 0.41 0.40 0.37 0.64 0.90 0.49 0.51 0.59 0.30
326 0.41 0.38 0.43 0.54 0.39 0.34 0.52 0.63 0.56 0.58 0.58 0.62 0.65 0.57 0.55 0.64 0.56
331 0.13 0.11 0.14 0.17 0.14 0.16 0.44 0.27 0.28 0.31 0.33 0.32 0.55 0.46 0.47 0.49 0.45
THE J OURNAL OF D E V E L O P ME N T ST U D I E S
332 0.08 0.13 0.12 0.17 0.19 0.52 0.25 0.31 0.30 0.29 0.32 0.46 0.23 0.27 0.27 0.45 0.37
341 0.28 0.35 0.37 0.47 0.49 0.47 0.71 0.64 0.67 0.56 0.76 0.90 0.90 0.91 0.92 0.89 0.92
342 0.18 0.20 0.22 0.28 0.28 0.35 0.33 0.34 0.34 0.36 0.38 0.61 0.65 0.53 0.71 0.86 0.72
351 0.75 0.77 0.87 0.93 0.92 0.87 0.94 0.93 0.92 0.83 0.86 0.94 0.92 0.93 0.93 0.95 0.93
352 0.29 0.42 0.42 0.49 0.52 0.53 0.78 0.65 0.83 0.85 0.77 0.90 0.92 0.92 0.91 0.90 0.91
353 0.56 0.64 0.66 0.75 0.79 0.64 0.83 0.82 0.77 0.76 0.78 0.86 0.85 0.82 0.86 0.90 0.86
356 0.16 0.17 0.20 0.22 0.25 0.14 0.17 0.16 0.16 0.18 0.20 0.34 0.46 0.30 0.54 0.56 0.43
357 0.06 0.08 0.08 0.10 0.11 0.11 0.13 0.19 0.26 0.29 0.32 0.40 0.62 0.41 0.55 0.64 0.49
361 0.08 0.12 0.12 0.13 0.14 0.13 0.18 0.18 0.17 0.21 0.24 0.36 0.35 0.35 0.35 0.35 0.42
362 0.12 0.13 0.16 0.16 0.21 0.24 0.27 0.25 0.20 0.18 0.18 0.18 0.23 0.23 0.27 0.30 0.27
369 0.23 0.26 0.32 0.47 0.42 0.40 0.46 0.43 0.41 0.32 0.34 0.51 0.51 0.43 0.52 0.55 0.52
371+372 0.41 0.68 0.70 0.90 0.91 0.81 0.93 0.83 0.80 0.83 0.83 0.95 0.94 0.93 0.95 0.95 0.95
381+382 0.23 0.26 0.31 0.36 0.31 0.31 0.38 0.36 0.34 0.37 0.40 0.71 0.89 0.93 0.91 0.86 0.88
383 0.12 0.17 0.19 0.25 0.26 0.26 0.38 0.33 0.31 0.32 0.32 0.30 0.31 0.28 0.30 0.46 0.30
384 0.32 0.40 0.35 0.39 0.39 0.42 0.60 0.61 0.72 0.78 0.81 0.87 0.89 0.85 0.76 0.80 0.75
385 0.31 0.30 0.51 0.63 0.47 0.41 0.77 0.67 0.63 0.75 0.66 0.69 0.89 0.82 0.81 0.91 0.83
TE1 0.342 0.405 0.420 0.453 0.449 0.460 0.550 0.517 0.522 0.536 0.557 0.665 0.689 0.654 0.686 0.731 0.682
S.D. 0.25 0.27 0.28 0.28 0.28 0.25 0.28 0.26 0.27 0.27 0.26 0.28 0.27 0.28 0.25 0.24 0.25
TE2 0.379 0.490 0.489 0.519 0.510 0.506 0.618 0.560 0.578 0.581 0.588 0.760 0.770 0.757 0.747 0.739 0.747
Median 0.282 0.351 0.356 0.468 0.392 0.422 0.459 0.435 0.413 0.405 0.580 0.711 0.846 0.824 0.766 0.861 0.754
Note: TE1 and TE2 represent respectively the simple and the weighted average of the efficiency estimates for the manufacturing sector
as a whole and S.D stands for the standard deviation from the mean value (TE1).
TABL E A4
M A X I M U M L I K E L I HOOD E S T I MAT E S ( ML E ) F OR PARA METER S O F TR A N SLO G
(T L ) S TO C H A S T I C F RONT I E R P RODUCT I ON F UNCT IO N S FO R TH E SU B -PA N ELS
1978–1982, 1983–1991 AND 1992–1994
Variable
description Sub-Panel t Sub-Panel t Sub-Panel t
in natural logs Parameter 1978–82 statistic 1983–91 statistic 1992–94 statistic
Frontier function
constant β0 2.01 1.04 6.85 4.74* 7.28 5.47*
Kt: capital βK 3.72 6.51* 1.57 3.29* 1.51 4.22*
Lt: labour βL -1.89 3.82* -1.39 3.06* -1.58 3.82*
Tt: time βT 0.01 0.35 0.02 0.48 0.02 1.61
Kt2 βKK 0.10 1.09 -0.04 1.34 0.07 3.25*
Lt2 βLL 0.39 3.54* 0.11 2.16* 0.23 6.04*
Tt2 βTT -0.01 0.23 0.00 0.31 -0.00 0.49
(Kt) x (Lt) βKL -0.66 2.68* -0.06 1.79* -0.29 5.70*
(Kt) x (Tt) βKT 0.04 1.04 -0.01 0.27 0.01 1.65
(Lt) x (Tt) βLT 0.03 0.65 -0.01 0.32 -0.01 0.74
Inefficiency model
constant δ0 -0.36 0.16 2.37 1.99** 6.16 5.96*
INPt δ1 1.85 2.99* 0.14 0.40 -0.90 3.82*
KDt δ2 0.23 3.22* -0.14 0.25 -0.83 1.08
XORt δ3 -0.06 1.38 -0.09 1.62 -1.07 3.44*
NPLt δ4 1.35 1.39 0.25 0.41 0.22 0.45
INPt2 δ5 -0.22 5.08* -0.03 1.70** 0.03 1.88**
KDt2 δ6 0.09 0.75 -0.22 2.59* 0.01 0.29
XORt2 δ7 -0.13 1.12 -0.18 1.90** -0.06 1.80*
NPLt2 δ8 -0.33 3.53* -0.26 1.94** -0.19 3.63*
(INPt) x (KDt) δ9 -0.24 3.74* 0.02 0.28 -0.07 1.27
(INPt) x (XORt) δ10 0.02 0.29 -0.16 1.84* -0.01 4.13*
(INPt) x (NPLt) δ11 -0.28 2.44* -0.04 0.41 0.01 0.07
(KDt) x (XORt) δ12 0.27 1.81* 0.07 0.78 0.09 1.47
(KDt) x (NPLt) δ13 -0.59 2.83* -0.47 2.08* -0.26 3.04*
(XORt) x (NPLt) δ14 0.39 1.59 0.20 1.56 0.31 2.98
Dj’s X
T1
(time dummies) dt 0.21 not -0.48 not -1.07 not
t¼15 available available available
Variance parameters
σs2 = σ2 + σv2 0.19 6.20* 0.23 7.41* 0.22 11.21*
γ = σ2 / (σ2 + σv2) 0.54 2.82* 0.14 2.02* 0.11 4.37*
Log-likelihood -64.09 -144.68 -55.39
LR-test of the one-sided
error*** 153.22* 125.90* 125.24*
Mean TE 0.392 0.531 0.554
Note: *significant at 5 per cent level or less; **significant at 10 per cent level or less; ***tests
the null hypothesis of no inefficiency effects (γ =0).
TABLE A 5
TECHNICAL E FFICIENCY E STIMATES OF VARIOUS THREE-DIGIT MANUFACTURING INDUSTRIES OF BANGLADESH, 1978–1994
114
( BAS E D ON TH E SU B-PA N ELS ESTIMATIO N )
Industry
Code/year 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
311+312 .95 .95 .92 .94 .95 .95 .97 .96 .94 .95 .95 .98 .98 .98 .97 .98 .96
313 .83 .78 .84 .61 .41 .57 .41 .21 .20 .24 .17 .19 .15 .11 .13 .16 .16
314 .76 .84 .78 .77 .82 .88 .88 .86 .86 .92 .75 .91 .95 .93 .93 .94 .91
321+322 .95 .96 .94 .95 .96 .96 .96 .97 .96 .96 .96 .97 .97 .97 .97 .96 .96
323 .10 .14 .12 .07 .15 .36 .60 .42 .42 .51 .88 .97 .97 .97 .96 .94 .91
324 .69 .74 .62 .49 .43 .50 .60 .49 .48 .54 .50 .78 .70 .57 .61 .56 .54
325 .20 .25 .28 .26 .37 .54 .28 .28 .30 .29 .22 .43 .37 .30 .33 .39 .34
326 .29 .22 .27 .26 .22 .38 .43 .54 .49 .48 .40 .28 .49 .33 .32 .37 .36
331 .10 .13 .14 .10 .10 .20 .40 .18 .25 .25 .23 .66 .61 .46 .49 .46 .52
THE J OURNAL OF D E V E L O P ME N T ST U D I E S
332 .11 .09 .07 .06 .17 .55 .42 .63 .49 .40 .45 .12 .19 .29 .31 .33 .39
341 .46 .53 .65 .55 .37 .42 .41 .42 .47 .38 .46 .66 .72 .70 .73 .75 .69
342 .07 .10 .10 .12 .14 .38 .30 .34 .42 .43 .40 .89 .63 .47 .49 .54 .47
351 .57 .66 .75 .75 .81 .83 .94 .93 .90 .75 .77 .92 .89 .82 .79 .76 .72
352 .52 .58 .51 .50 .40 .53 .61 .56 .77 .82 .56 .84 .90 .89 .88 .84 .78
353 .29 .37 .38 .41 .35 .91 .95 .95 .91 .89 .75 .74 .75 .55 .65 .74 .76
356 .09 .09 .10 .09 .11 .14 .14 .14 .14 .14 .14 .23 .29 .20 .27 .29 .34
357 .06 .05 .04 .06 .05 .10 .12 .16 .22 .24 .22 .24 .32 .21 .31 .28 .25
361 .06 .09 .09 .10 .08 .13 .19 .12 .13 .18 .20 .27 .29 .27 .28 .31 .29
362 .09 .10 .13 .11 .12 .27 .29 .26 .19 .13 .11 .13 .14 .12 .13 .14 .12
369 .29 .32 .32 .31 .28 .34 .36 .37 .35 .20 .19 .13 .11 .11 .14 .12 .16
371+372 .87 .95 .93 .72 .74 .65 .88 .61 .82 .81 .75 .94 .92 .86 .88 .89 .81
381+382 .09 .10 .10 .11 .25 .25 .27 .28 .26 .27 .26 .45 .73 .57 .66 .62 .54
383 .15 .19 .27 .30 .36 .21 .33 .31 .27 .24 .25 .19 .25 .15 .19 .22 .22
384 .41 .49 .57 .61 .60 .61 .75 .73 .85 .88 .85 .79 .84 .71 .73 .78 .70
385 .28 .38 .36 .39 .52 .62 .96 .94 .93 .94 .80 .47 .88 .55 .64 .77 .72
TE1 .368 .404 .411 .386 .390 .491 .538 .506 .521 .514 .489 .576 .610 .532 .552 .566 .545
S.D. .320 .320 .320 .306 .207 .265 .291 .292 .297 .302 .287 .3123 .300 .296 .293 .289 .272
TE2 .519 .546 .550 .631 .610 .549 .591 .540 .581 .609 .512 .703 .755 .697 .699 .651 .657
Median .280 . 250 .280 .300 .360 .500 .420 .420 .470 .430 .450 .660 .700 .550 .610 .560 .540
Note: TE1 and TE2 represent respectively the simple and the weighted average of the efficiency estimates for the manufacturing sector
as a whole and S.D stands for the standard deviation from the mean value (TE1).

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This article was downloaded by:[Hiroshima University]

On: 20 June 2008

Journal of Development Studies

Online Publication Date: 01 February 2004

PLEASE SCROLL DOWN FOR ARTICLE

Full terms and conditions of use: http://www.informaworld.com/terms-and-conditions-of-access.pdf

M.A. HOSSAIN and N.D. KARUNARAT NE

The paper investigates the effects of trade liberalisation on the

The notion of efficiency lies at the core of economics, and an improvement

The Journal of Development Studies, Vol.40, No.3, February 2004, pp.87–114

and quality of physical and human capital, technological know-how,

competition, among others. Likewise, changes in government policies such

liberalisation and efficiency is yet to flourish. It is the dearth of empirical

I I . THEORY AND EVIDENCE

The implications of a liberal trade regime for growth, total factor

liberalisation is based on the perceived benefits from the division of

classical economists view international markets not to differ

orientation. Since its emergence as an independent country in 1971,

I I I . DATA AND THE DEFINITIONS OF THE VARI A BLES

problems of under coverage and under-reporting may seriously affect the

report information on all the firms or enterprises registered or operating in

I V. EMP IRICAL TECHNIQUE

Following the pioneering work of Farrell [1957], the literature on technical

important issue and where firms do not have a well-defined optimisation

mit ¼ d0 þ d1 INPit þ d2 KDit þ d3 XORit þ d4 NPLit þ d5 ðINPit Þ2 þ d6 ðKDit Þ2 (2)

the t-th year of observation;

The inclusion of time as an explanatory variable in equation (1) allows

both representing trade liberalisation. Unfortunately, neither of these

Parameters Estimates and Hypotheses Testing

Null hypothesis, H0 Likelihood-ratio Critical 2value

βKK=βLL=βTT= βKL =βKT=βLT = 0 45.74* χ2.05, 6 = 12.59 reject H0

meaning that technical inefficiency of production is associated with a small

A Test for Heterogeneity Among the Industries

Ytj ¼ b0 þ bK Ktj þ bL Ltj þ bT Tj þ vtj utj (3)

the Cobb-Douglas production technology as well as fewer inefficiency

the inclusion of more inefficiency variables is impracticable given the

Technical Efficiency Estimates

plastic and plastic products, pottery and chinaware, fabricated metals,

Technical efficiencies based on

Simple Weighted Simple Weighted

1978–82 0.414 0.478 0.420 0.392 0.571 0.280

Source: author’s calculations from the estimated results.

However, the weighted average technical efficiency (TE2) increases until

Further Hypotheses Testing

(a) the assumption of a common production technology (translog, in this

Based on the likelihood function statistics presented in Tables A2 and A4,

production technology of the Bangladesh manufacturing sector over time.

1. For an elaborated discussion, see Kalirajan and Shand [1999].

Theory, Methodology and Applications, Boston: Kluwer Academic Publishers.

Economics, Vol.22, pp.30–42.

Industry Code Description

311 & 312 Food processing

Source: Bangladesh Statistical Yearbook, 1997.

MANUFACTURING SECTOR (BASED ON THE F ULL PA NEL ESTIMATIO N )

Variable description Parameter Coefficient S.E. Asymptotic

1978–1982, 1983–1991 AND 1992–1994

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