Chapter 2: Reallocation and Productivity

1
Chapter 2 Reallocation and Productivity
2
Outline IPES

• I. Setting the stage
• Chapter 1 Productivity level and trends
• Chapter 2 Productivity and Reallocation
• Chapter 3 Within firm productivity growth

3
Outline of IPES

• II. Policy levers for higher productivity
• Social policies (taxes on social security)
• Taxes uneven enforcement
• Trade, FDI and transportation costs
• Small firm policies
• Barriers to the entry and exit of firms
• Access to credit capital
• Innovation policies
• Industrial and cluster-based policies

4
Outline of IPES

• III- Going forward
• Understanding the political economy of
  productivity policies
• Unlocking productivity in LAC

5
Outline

• Hypothesis
• Main questions
• Reallocation across sectors
• Reallocation across firms
• Reallocation across formal and informal firms

6
Hypothesis

• Lack of dynamism in, and barriers to the
  reallocation of resources in the economy across
  sectors and firms is a key factor explaining the
  low productivity levels and growth in the region.
  

7
Main questions

• How much room there is to improve productivity by
  reallocating existing factors?
• Across sectors
• Across firms
• Across formal and informal firms
• How much entry/exit of firms contribute to
  productivity growth?
• What drives low reallocation?

8
Heterogeneity

• Productivity in the aggregate is the weighted
  productivity across activities.
• High heterogeneity Productivity in manufacturing
  and even business sector accounts for fraction of
  TPF
• Gains through reallocation are possible if
  heterogeneity in marginal products

9
There is seemingly a big share of employment in
very low productivity activities
We plan to do this for more countries (Brazil,
Chile?) Ideally, we would like to estimate
marginal product across activities
10
Reallocation across sectors
Average for ARG, BRA, CHL, COL, MEX, PER,
VEN Output from UN, Employment from LAC
Statistical offices
11

• Across history, large gains in TFP from getting
  people out of agriculture and into manufacturing
• Latin America has still a relative large share of
  agriculture. It also has a relative low share of
  manufacturing compared to other economies.

12
Sector distribution of output across countries
Source UN
13
Whereas many other developing countries have
larger shares of manufacturing
Source UN
14
I. Reallocation across sectors
Reallocation of employment and output Lilien
Index. Early 1990s Early 2000
Note GDP series by economic activity at one
digit level of disaggregation at constant 1990
prices in US Dollars from the United Nations
Statistics Division. Lilien Index measures the
dispersion in the growth rate across industries
and is defined as follows
15
Lilien index of reallocation. LAC
Sources GDP United Nations Statistics Division
EMP
16
Measuring gains from reallocation

• Issue Marginal versus average products

17
Total Growth
18
Counterfactual exercises

• How much productivity growth would we have seen
  in LAC had we observed the same sector
  reallocation than in East Asia?
• If LAC had same sector allocation than EAST ASIA.
• Compare sector reallocation in LAC with other
  resource intensive nations (New Zealand,
  Australia, Finland).
• (using GGDC total economy 10-sector database
  1950-2005)

19
Contribution of each sector to productivity

• Which sectors are in relative terms more
  productive in each country?
• Which sectors have contributed more to growth in
  LAC?
• Which sectors have contributed more to
  productivity growth in EAST ASIA and how do they
  compare to LAC?
• How does the sector productivity evolution in LAC
  compare to other resource-rich economies?

20
Reallocation and reforms

• Data presented in Timmer and de Vries (2008)
  suggest that contribution of between term in
  post reform period negative, in all countries but
  Mexico.
• We would like to relate between and within growth
  to reforms
• Did the destruction of jobs in manufacturing and
  shift towards low productivity services
  contribute to this phenomenon?

21
II. Reallocation across firms

• Decompositions of productivity growth

• Issues
• Marginal versus average products
• Revenue versus quantity productivity

22
Firm Entry and Exit

• An important margin of how reallocation of
  resources affects productivity growth is through
  the entry/exit of firms and establishments
• Policies that prevent exit of unproductive firms
  (i.e. low competition, high transportation costs)
  or prevent entry of productive firms (high
  barriers of entry)

23
Labor Productivity Growth Decomposition
ManufacturingFive years differencing, real gross
output -1990s
24
Labor Productivity Growth Decomposition
ManufacturingFive years differencing, real gross
output -1990s
Very little importance of entry/exit in Argentina
25
Decompositions for LAC countries

• Will do with TFP decomposition
• With a few exceptions only in manufacturing
• But interpretation problems with this
  methodology.
• It says how much of the productivity growth
  occurred because of the different dimensions.
• It does not say how much room for productivity
  gains of reallocation.

26
Other methodological issues

• What does it mean to transfer resources to more
  productive firms?
• What determines allocation of resources across
  firms in a world where firms are heterogeneous?

27
Hsieh-Klenow (2008) approach

• It quantifies the extent of resource
  misallocation across firms within sectors.
• Static model with heterogenous firms (Ai) and
  imperfect competition
• In equilibrium, pi is inversely related to Ai and
  piAi is constant for all firms. Firms hire L and
  K to the point where MPL MRL. High Ai firms are
  larger.

28
Hsieh-Klenow (2008) approach (II)

• It allows for departures of optimal firm
  specific taxes and subsidies imply that MPL?MRL.
• Taxes are more distorting the more correlated
  they are with productivity they make more
  productive firms smaller than otherwise.
• Reallocation gains occur when resources flow from
  low to high marginal product firms.

29

• Hsieh-Klenow 2008 find that if resources were
  reallocated as in US benchmark, productivity in
  manufacturing will increase
• INDIA 40-60
• CHINA 30-50
• LAC ?
• Computations assume distribution of
  productivities across firms as given. Gains occur
  by reallocating L and K across these firms.

30
HK (2008) Methodology in LAC

• Through Research Network Project ( other
  sources) will obtain results for
• Argentina
• Bolivia
• Brazil
• Chile
• Colombia
• Ecuador
• Mexico
• Uruguay
• Venezuela
• El Salvador?
• Peru?

31
Some preliminary results (1)
32
The data does not show gains in allocative
efficiency
33
The data does not show gains in allocative
efficiency
34
Ecuador 1995-2005
35
Uruguay 1998-2005
36
TFPR (Distortions) and Size
Brazil
Smaller firms have subsidies (they are larger
than they should be)
Smaller firms are constrained
37
In Ecuador..
Large firms should expand more
Actual versus Efficient size
More firms should expand
38
In Colombia
Many small should shrink
39
In Bolivia, many large firms are too large and
many small are too small.
12 of largest Plans should shrink
10 of smallest plans Should grow by more Than
200
40
Correlation between distortions and
productivityBrazil 2000-2005
More productive firms tend to be more distorted
(they should be larger than they are)
41
Very preliminary results suggest that

• There is a large correlation between size and
  distortions in Brazil, Ecuador, and Colombia (as
  in India). Many large firms are too small many
  small firms are favored and therefore are too
  large given they inherent productivity
• Things look quite different in Bolivia where many
  small firms look too small and distortions make
  large firms too large.

42
Some remarks

• Picking winners through industrial policy
  requires important within gains in productivity
  to make it worthwhile, particularly if picking
  firms of low productivity to begin with.
• Low relative to sector average?
• Low relative to world average?
• Can those break even gains in within
  productivity be computed?
• Cost-benefit analysis should account for
  between distortion as well.

43
III. Reallocation across formal and informal
firms the importance of high taxes and imperfect
enforcement

• Are there too many small, informal, and
  unproductive firms in Latin America?
• How much of the distortions in productivity are
  explained by taxesimperfect enforcement?
• Hsieh and Klenow application to Mexican Census
  Data in 1994, 1999, and 2004

44

• Gain from equalizing TFPR 140
• Still more work to do
• How much due to IMSS non-compliance?
• How much in other sectors?
• How has this changed over time?
• Why so many firms with low TFPQ?

Mexico
45
Informality and productivity

• Will compare productivity distributions of formal
  versus informal firms (Brazil, Chile?).
• Case studies and focus groups Do formal and
  informal firms compete?
• -Supermarkets in Argentina
• -Lingerie industry in Colombia

46
Rest of the report examine in detail
reallocation (and within firm) productivity
effects of

• Social policies (taxes on social security)
• Taxes and uneven enforcement
• Trade, fdi and transportation costs
• Access to credit capital
• Small firm policies
• Barriers to entry and exit of firms
• Innovation policies
• Industrial policies

47
(No Transcript)