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 capital misallocation. Their interpretation is that this misallocation is due to institutions and policies that distort resources away from productive firms in these developing countries. 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 U.S. at this time. What these countries share are not similar institutions rather similar levels of economic development. The institutions of the U.S. at this time were much better than India or China in terms of protecting property rights and allocating resources. This suggests that the Hsieh-Klenow measure of imperfections is not related to institutions but simply the level of development. I apply their accounting procedure to the U.S. and find that almost 15% of manufacturing TFP growth between 1890 and 1997 can be attributed to a more efficient intra-industry allocation of resources.