The Effects of Economic Reforms on Manufacturing Dualism: Evidence from India
49 Pages Posted: 18 May 2011 Last revised: 2 Apr 2012
Date Written: May 17, 2011
Dualism is a pervasive feature of the manufacturing sectors of less-developed countries, with large differences in productivity between the informal and the formal sectors. Policy distortions are viewed as an important factor behind the prevalence of manufacturing dualism. We examine whether tariff reforms, industrial de-licensing and the withdrawal of reservation of products for small firms implemented since the mid-1980s have had any effects on efficiency differentials between informal and formal firms in Indian manufacturing. We find strong evidence that economic reforms have exacerbated dualism by increasing the productivity differentials between the more efficient formal firms and the less efficient informal firms. Furthermore, the reforms have widened within industry efficiency differences for both formal and informal firms, though the unequalising effect of the reforms on within industry productivity differences has been larger for formal firms.
Keywords: reforms, dualism, efficiency, informal, manufacturing, India
JEL Classification: O1, O4, L6
Suggested Citation: Suggested Citation