Are China and India Backwards? Evidence from the 19th Century U.S. Census of Manufactures

Hsieh and Klenow (2009) argue that a large fraction of aggregate TFP differences between the U.S. and the developing countries of China and India can be explained by factor misallocation. Their interpretation is that this misallocation is due to institutions and policies in these developing countries that redirect resources from productive to unproductive firms. Using the U.S. Census of Manufactures from the late 19th century, I find that the level of dispersion in these modern, less developed countries is very similar to that in the 19th century U.S. What is similar about the countries is their level of development not the existence of institutions that Hsieh and Klenow (2009) emphasize such as state owned enterprises as in China or entry restrictions as in India. These results suggest that the institutional basis of misallocation potentially goes beyond these overtly distortionary policies. I apply their accounting procedure to the U.S. and find that between 4% and 7% of total manufacturing TFP growth in the 20th century can be attributed to a more efficient intra-industry allocation of resources. I conclude by discussing some other explanations for these results including differences in transportation networks and lack of competitive regulation. (Copyright: Elsevier)