The Impact of Trade Liberalization on Firm Profitability in Ghana: Panel Evidence from Private Firms in the Manufacturing Sector

Abstract

Since 1983, Ghana has witnessed trade liberalization policies that were introduced as part of structural adjustment and economic recovery programmes and meant to open up the once closed economy. As part of such reforms, tariffs were reduced, and non-tariff trade barriers lessened. The adjustment programme also sought to make the once neglected private sector a key player in Ghana’s economic development since the sector is recognized as an engine of growth, hence, needed to accelerate the rapid industrialization of the country. In view of this, a key question begging for answers has been: how has the reductions in import restrictions in Ghana impacted on the performance of firms in terms of profitability in the private sector? This paper attempts to answer this question by investigating the effects of tariffs on the profitability of private firms in the manufacturing sector using firm-level data. Profitability is measured as the net profit margin of a firm. For our regression analysis, we employ robust pooled OLS and the fixed effects estimators. The findings reveal that tariff reductions are associated with increased profitability in such firms. Also, firm productivity and profitability were found to be positively related.