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Structural transformation and allocation efficiency in China and India

Author

Listed:
  • Enrica Di Stefano

    () (Bank of Italy)

  • Daniela Marconi

    () (Bank of Italy)

Abstract

Market frictions prevent the efficient allocation of factors of production, slow down structural transformation and lead to costs in terms of lower output and aggregate total factor productivity (TFP). We use a theoretical framework developed by Aoki (2012) featuring sector-specific frictions on capital and labor à la Chari, Kehoe and McGrattan (2007), and compute capital and labor misallocations in China and India using data for 26 sectors over the period 1980-2010. Our findings show that large factor misallocations exist in the two countries. We estimate the potential gains in terms of aggregate TFP stemming from an efficient allocation of factors to range from 25% to 35% in China and from 35% to 40% in India. Finally, we discuss the implications for structural transformation and the relationship between the observed allocation inefficiencies and the evolution of the business environment in the two countries.

Suggested Citation

  • Enrica Di Stefano & Daniela Marconi, 2016. "Structural transformation and allocation efficiency in China and India," Temi di discussione (Economic working papers) 1093, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1093_16
    as

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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2016/2016-1093/en_tema_1093.pdf
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    References listed on IDEAS

    as
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    5. Enrica Di Stefano & Daniela Marconi, 2015. "Assessing potential growth in emerging countries after the global financial crisis," Questioni di Economia e Finanza (Occasional Papers) 256, Bank of Italy, Economic Research and International Relations Area.
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    More about this item

    Keywords

    structural transformation; frictions; resource allocation; productivity; China; India;

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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