Are We Undercounting Reallocation's Contribution to Growth?
AbstractReallocation growth occurs when an input moves from a lower marginal product to a higher marginal product activity. Three recent studies use two distinct methodologies to examine the sources of the strong surge in aggregate productivity growth (APG) in India’s manufacturing sector since 1990 following significant economic reforms. They all conclude that APG was primarily driven by within-plant increases in technical efficiency and not between-plant reallocation of inputs. Given the nature of the reforms, where many barriers to input reallocation were removed, this finding has surprised researchers and been dubbed “India’s Mysterious Manufacturing Miracle.” In this paper we show that these findings may be an artifact of the way the studies estimate reallocation. One approach counts all reallocation growth arising from the movement of intermediate inputs as technical efficiency growth. The second approach introduces measurement error into estimated reallocation by using plant-level average products - total factor productivity residuals - as a proxy for marginal products, which could be problematic as economic theory suggests that average products and marginal products are unrelated in equilibrium. Using microdata on manufacturing from 4 countries — the U.S., Chile, Colombia, and Slovenia — we show that both approaches significantly understate the true role of reallocation in economic growth. In the U.S. almost 50% of reallocation growth is due to movements of intermediate inputs, meaning if India is similar to the U.S. then reallocation’s share of total Indian manufacturing APG since 1990 increases from the previous estimate of one-third to almost two-thirds.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 13-55.
Length: 38 pages
Date of creation: Oct 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-12-06 (All new papers)
- NEP-EFF-2013-12-06 (Efficiency & Productivity)
- NEP-MAC-2013-12-06 (Macroeconomics)
- NEP-PBE-2013-12-06 (Public Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ann E. Harrison & Leslie A. Martin & Shanthi Nataraj, 2013.
"Learning versus Stealing: How Important Are Market-Share Reallocations to India's Productivity Growth?,"
World Bank Economic Review,
World Bank Group, vol. 27(2), pages 202-228.
- Harrison, Ann E. & Martin, Leslie A. & Nataraj, Shanthi, 2011. "Learning versus stealing : how Important are market-share -- reallocations to India's productivity growth?," Policy Research Working Paper Series 5761, The World Bank.
- Ann E. Harrison & Leslie A. Martin & Shanthi Nataraj, 2011. "Learning versus Stealing: How Important are Market-Share Reallocations to India's Productivity Growth," Working Papers 832, RAND Corporation Publications Department.
- Ann E. Harrison & Leslie A. Martin & Shanthi Nataraj, 2011. "Learning Versus Stealing: How Important are Market-Share Reallocations to India's Productivity Growth?," NBER Working Papers 16733, National Bureau of Economic Research, Inc.
- Susanto Basu & John G. Fernald, 1996.
"Returns to scale in U.S. production: estimates and implications,"
International Finance Discussion Papers
546, Board of Governors of the Federal Reserve System (U.S.).
- Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
- Susanto Basu & John G. Fernald, 1997.
"Aggregate productivity and aggregate technology,"
International Finance Discussion Papers
593, Board of Governors of the Federal Reserve System (U.S.).
- Chang-Tai Hsieh & Peter J. Klenow, 2007.
"Misallocation and Manufacturing TFP in China and India,"
07-006, Stanford Institute for Economic Policy Research.
- Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1403-1448, November.
- Chang-Tai Hsieh & Peter Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," Working Papers 09-04, Center for Economic Studies, U.S. Census Bureau.
- Chang-Tai Hsieh & Peter J. Klenow, 2007. "Misallocation and Manufacturing TFP in China and India," NBER Working Papers 13290, National Bureau of Economic Research, Inc.
- Chang, Tai Hsieh & Peter, J- Klenow, 2007. "Misallocation and manufacturing TFP in China and India," MPRA Paper 35084, University Library of Munich, Germany, revised 15 Jun 2007.
- Chang-Tai Hsieh & Peter J Klenow, 2008. "Misallocation and Manufacturing TFP in China and India," 2008 Meeting Papers 121, Society for Economic Dynamics.
- Amil Petrin & James Levinsohn, 2012. "Measuring aggregate productivity growth using plant-level data," RAND Journal of Economics, RAND Corporation, vol. 43(4), pages 705-725, December.
- Griliches, Zvi & Regev, Haim, 1995. "Firm productivity in Israeli industry 1979-1988," Journal of Econometrics, Elsevier, vol. 65(1), pages 175-203, January.
- Hulten, Charles R, 1978. "Growth Accounting with Intermediate Inputs," Review of Economic Studies, Wiley Blackwell, vol. 45(3), pages 511-18, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fariha Kamal).
If references are entirely missing, you can add them using this form.