The Impact of Special Labor and Tax Regimes on the Extensive and Intensive Margins of Small Agricultural Exporters

This research assesses the impact of Peru’s Agrarian Promotion Law (APL)—which reduced tax and labor costs by half since 2001—on (i) non-traditional agricultural exports (NTAXs) by micro, small, and medium-sized enterprises (MSMEs); and on (ii) these firms’ capability of penetrating new foreign markets. To theoretically explore this impact, we devised a heterogeneous firm framework based on Melitz (2003), but also incorporated financial and labor frictions used by Manova (2013) and Helpman & Itskhoki (2007). We then conducted an empirical test by using detailed customs data at the firm level for 1994–2019. We find that the APL explained 40% and 59% of the MSMEs’ NTAXs and trade links, respectively, from between 2001 and 2019. Hence, the APL may have involved approximately 100,000 additional jobs on average per year—i.e., 64% of the jobs reported by APL firms. These findings strongly suggest that law’s repeal, which took place very recently, may bring these positive effects on exports and employment to an end. They may also serve as a benchmark for the yet-to-be-explored benefits of special labor and tax regimes in emerging economies.