Tuesday, 12 June 2012

Productivity differences in the BRIC club

Keeping the  appeal of diminishing appeal of the elite club aside, here is a nice paper comparing BRIC economies. The paper looks at structural changes in the economies and also the productivity differences over the years. The logic behind such studies is well-known. As economies develop, people move to more productive sectors. This leads to structural changes.

Productivity also improves in the lagging sectors as now there are lesser number of people in the sector:
A central insight in development economics is that development entails structural change. Structural change, narrowly defined as the reallocation of labour across sectors, featured prominently in the early literature on economic development by Kuznets (1966). As labour and other resources move from traditional into modern economic activities, overall productivity rises and incomes expand. The nature and speed with which structural transformation takes place is considered one of the key factors that differentiate successful countries from unsuccessful ones (McMillan and Rodrik, 2011). Therefore, new structural economists argue that production structures should be the starting point for economic analysis and the design of appropriate policies (Lin, 2011).

Technological change typically takes place at the level of industries and induces differential patterns of sectoral productivity growth. At the same time, changes in domestic demand and international trade patterns drive a process of structural transformation in which labour, capital and intermediate inputs are continuously relocated between firms, sectors and countries (Kuznets, 1966; Chenery et al., 1986; Harberger, 1998, Hsieh and Klenow, 2009).

The findings of the paper are interesting.
Using the canonical shift-share method we find strong growth-enhancing effects of structural change in China, India, and Russia, but not in Brazil. This confirms the findings of McMillan and Rodrik (2011) and Bosworth and Collins (2008). However, we show that these results are sensitive to the level of aggregation by performing the same decomposition at various levels of aggregation such as 3, 10 and 35 industries. This is true in particular, when a distinction is made between formal and informal activities within sectors. To this end, we use detailed national accounts data for India, and nationally representative surveys of the informal sector in Brazil. 

For example, in India the informal sector accounts for up to 30 per cent of manufacturing‟s value added, compared with an 80 per cent share in employment, indicating large differences in productivity between formal and informal activities. Our analysis suggests that in India the expansion of informal activities after the reforms is associated with a reduction in aggregate growth. In contrast, employment reallocation towards formal activities in Brazil is increasing aggregate growth after 2000.

In sum, it is important to also look at composition of the sector. In India, post reforms informal sector has actually grown and become  less productive. Brazil has an opposite story:
The case of Brazil shows that growth-enhancing structural change is necessary but not sufficient for aggregate productivity growth. The shift of employment from informal to formal activities coincided with slow or even negative productivity improvements in formal industry and services. On the other hand, in India, informal activities expanded after the reforms, creating more dualism. The expansion of the low-productive informal activities was accompanied by dynamic formal activities, especially in the manufacturing and business services sector (Eichengreen and Gupta, 2011). 

India shows that growth-reducing structural change can go hand-in-hand with productivity improvements within particular industries generating high aggregate productivity growth. These divergent growth paths between India and Brazil indicate that within- and reallocation-effects have to be considered in combination in any analyses of structural change. . Clearly, these analyses also depend critically on the level of sector detail used and should be interpreted with care.

More on India:
growth rates in the formal sector, partly achieved by economizing on the use of labour through outsourcing labour-intensive activities to small informal firms (Pieters et al., 2011). And while informal employment is increasing, productivity growth in that sector is stagnating, leading to growth-reducing structural change. In this case, the sectoral productivity growth is less than the weighted sum of formal and informal productivity growth rates. This effect is picked up as a negative reallocation effect in our more detailed decomposition analysis, but not by an analysis based on aggregate data. Also within manufacturing a similar growth-reducing structural change is to be seen (results available upon request), in particular in transport manufacturing, where informality is growing rapidly.

Apart from this many more insights on Chinese and Russian economy.

A nice read.


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