Investigating the Effect of Trade Liberalization on Agricultural Growth and Trade in Iran: Application of Markov-Switching Model

Since 1995, Iran has been striving to liberalize its trade regime in order to increase its growth and trade performance. Despite a long period of liberalization, imports are still growing faster than exports, widening the trade deficit. Therefore, this study aimed mainly at investigating the effects of trade liberalization on the growth and trade of agricultural products using the Markov-switching model approach and annual time series data (from 1986 to 2018). The results showed that liberalization, by reducing the import tariff rate, increased exports by 1.56 percent in the short run, but reduced imports by about 7.65 percent in the long run. In addition, the results of growth pattern estimation showed that the liberalization index in both regimes had a significantly positive effect on agricultural growth, meaning that the implementation of trade liberalization policy in the studied period had a positive effect on agricultural growth by 1.98 percent. Thus, trade liberalization in the short run leads to growth in exports and in the long run, by increasing production, increases the volume of exports and decreases imports, and hence, leads to economic growth. According to the obtained results, in order to increase the trade potential of the agricultural sector, it is suggested that tariff policies on trade liberalization be developed in line with the objectives of the Perspective Document Programs of the country.