Investigate the Effect of Trade Liberalization and Structural Changes onTotal Factor Productivity

Trade liberalization, both directly and indirectly (through structural changes), affects the total factor productivity. The key factor in determining the direction of this impact is the quality of institutions. In this study, to consider the most important aspects of structural change, we propose a multidimensional index for structural change using the principal component method and then applying the Bayesian averaging method (IVBMA) econometrics model evaluate the effect of trade liberalization, structural changes, and the quality of institutions on total factor productivity in a subsample of 64 countries. our IVBMA results indicate that structural change, business freedom, and resources rents are the most important variables in explaining the observed differences in the total factor productivity index. Structural change with a posterior inclusion probability (PIP) of 0.74 Is the most important independent variable to explain the observed differences in the level of total factor productivity. Increasing the multidimensional index of structural change with a posterior coefficient of 0.14 has a negative effect on total factor productivity. An increase in business freedom index and resources rents leads to 0.39 and 0.22 increase in total factor productivity index. Trade liberalization with a posterior inclusion probability of 0.45 had a positive effect on total factor productivity. Granger causality test also shows that trade liberalization is the cause of structural change; Therefore, trade liberalization in this study has caused structural changes that reduce productivity.