Resource Misallocation and Labor Productivity in SSA

Technical Resources Overview

  • Topic: Resource Misallocation in Development Economics

  • Context: Analyzing productivity trends in Sub-Saharan Africa versus East Asian countries.

Key Readings

  • Hsieh and Klenow (2009): Insights on resource distortions and misallocation.

  • Hsieh and Olken (2014): Research on credit constraints relative to marginal products.

  • World Bank Report (2021, Calderon): "Boosting Productivity in Sub-Saharan Africa" provides an overview of resource misallocation.

Labor Productivity Trends

  • General Observation: Sub-Saharan Africa (SSA) lost productivity advantage over East Asia in six decades.

  • Development Accounting (Hsieh & Klenow, 2010): Differentiates labor productivity into:

    • a. Differences in input intensity (capital and land)

    • b. Differences in production efficiency.

Drivers of Labor Productivity Gaps

  • 1960s-1980s: Labor productivity differences largely due to capital endowment.

  • 1990s-Present: Total Factor Productivity (TFP) differences became the main driver of output-per-worker gaps.

  • Key Query: What contributed to widening productivity gaps?

    • Misallocation plays a significant role in explaining TFP differences.

Sources of Labor Productivity Gap (SSA vs. US)

  • Increasing evidence suggests inefficient use of resources is a growing narrative in SSA productivity discussions.

Firm-Level Productivity Sources

  • Within Component (Technology): Involves productivity growth through improved efficiencies and capabilities.

  • Between Component (Misallocation): Indicates how reallocation of factors like labor and capital can improve overall productivity.

  • Selection: Emphasizes the impact of firm turnover on productivity gains.

Resource Misallocation Definition

  • Refers to the inefficient distribution of inputs across production units, leading to output inefficiencies.

    • The literature categorizes resource misallocation into three areas:

    1. Extent of factor misallocation.

    2. Impact on TFP across countries and time.

    3. Factors that drive misallocation.

Quantification of Distortions and Misallocation

  • Hsieh and Klenow (2009) Model: Introduces a methodology to infer misallocation by assessing gaps in marginal products.

  • Experiments assessed potential productivity gains from reallocating capital and labor, and reducing distortions to US levels.

Background Context: TFP Differences

  • Aggregate TFP Disparities: US manufacturing TFP significantly exceeds that of China and India, reflecting inefficiencies in the use of technology.

  • The disparity can be traced back to barriers to technology diffusion and misallocation of resources.

Aggregate TFP and Misallocation

  • Derived expressions demonstrate the inverse relationship between misallocation and aggregate TFP, highlighting how distortions among firms can impede productivity.

TFPQ vs. TFPR

  • Definition: TFPQ is physical productivity, while TFPR is revenue productivity.

  • TFPR tends to be constant across firms in efficient markets, while TFPQ varies with different levels of productivity.

Dispersion in TFPR

  • Data suggests that distortions in productivity are more pronounced in countries like India and China compared to the US.

  • Indications from Census Data: Larger distortions correlated with specific countries reveal the extent of misallocation.

Sources of TFPR Variation

  • Ownership and age of firms contribute variably to productivity dispersion.

  • Differences in operational structures could account for aggregate gains from more efficient cross-sectional allocation.

Efficient vs Actual TFP Distribution

  • Conclusion: Misallocation leads to less than optimal firm sizes, indicating potential improvements in TFP with better resource allocation.

Alternative Explanations for Dispersion

  • Issues such as measurement errors, within-industry markup variations, adjustment costs, and market inefficiencies are considered.

  • Findings indicate that lack of adjustment frictions does not account significantly for TFPR variations across countries.

Implications for Policy

  • Focus on reducing constraints on larger firms might yield better productivity outcomes.

  • Be cautious about policies favoring only small firms, as they could disincentivize growth.