Estimating Total Factor Productivity Growthin a Developing Country

World Bank Staff Working Paper No. 422

October 1980

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Prepared by: Anne 0. Krueger, ConsultantBaran Tuncer,.;ConsultantDevelopment Economics Department

Copyrig ht © 1980The World Bank1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

The views and interpretations in this document are those of the authorsand should not be attributed to the World Bank, to its affiliatedorganizations, or to any i6dividual acting in their behalf.'

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The views and interpretations in this document are those of the authorand should not be attributed to the World Bank, to its affiliated orga-nizations, or to any individual acting in their behalf.

WORLD BANK

Staff Working Paper No. 422

October 1980

ESTIMATING TOTAL FACTOR PRODUCTIVITY GROWTHIN A DEVELOPING COUNTRY

This paper studies the sources of growth from the supply side inTurkish manufacturing over the period 1963-1976. Primary factors and inter-mediate inputs are explicitly included in both the theoretical frameworkand the empirical analysis. The empirical analysis is based on data onoutput and factor inputs, at the two-digit industry level including eighteenmanufacturing industries. The major findings are that: there is (1) a seculardeclining trend in productivity growth over the period due perhaps to thecontinuing reliance on an import-substitution development strategy, (2) periodsof especially low productivity growth are (roughly) those in which there wereespecially restrictive foreign exchange controls, (3) the public sector hada higher rate of total factor productivity than the private sector although itwas absolutely less efficient, and (4) there was no pronounced tendency forimport-substitution industries to have higher total factor productivity growththan more traditional industries.

Prepared by: Anne 0. Krueger, ConsultantBaran Tuncer,ConsultantDevelopment Economics Department

Copyright @ 1980The World Bank1818 H Street, N.W., Washington, D.C. 20433 U.S.A.

ESTIMATING TOTAL FACTOR PRODUCTIVITY GROWTH IN A DEVELOPING COUNTRY

ArLne 0. Krueger and Baran Tuncer*

In examining the growth performance of developing countries, a wide

variety of statistics have been collected and analyzed. Chenery has pro-

vided profiles, or norms, of a number of variables, such a,3 the extent

of import substitution, the share of manufacturing in GNP, exports as a

fraction of GNP, investment and savings as a fraction of national income,

capital inflows, and so on, as a function of size of country, per capita

incomes, and other variables. These data are descriptive statistics,

and do not directly yield insights into determinants of growth rates

or per capita income levels, or other variables of concern. Nonetheless,

they are highly useful as a starting point for analysis, and have received

wide attention in the literature. Analysts of individual countries have

frequently found an analysis of the deviations of their country from the

Chenery norms to be a valuable first step.

Surprisingly, there has been no examination of the behavior of total

factor productivity growth (TFPG) in any of this literature. In part, the

* The authors wish to acknowledge gratefully support they have receivedfor this project from the National Science Foundation under Grant No.SOC77-25776 and from the Internacional Bank for Reconstruction and Devel-opment. We have benefited greatly from discussions with James M. Hendersonand have had very helpful comments and suggestions on earlier versionsof this paper from Tercan Baysan, Kemal Dervis, Maxwell Fry, Yujji Kubo,Mishiko Nishivizu, Martin Paldam, Sherman Robinson, Larry Westphal andEbbe Yndgaard. Zafar Ahmed, Lale Tezel and Paitoon Wiboonchutikul-a pro-vided research assistance at vaiious stages of the research.

1. See, for example, Frank, Kim and Westphal, pp. 93ff.

2

neglect has probably stemmed from a paucity of data, but it undoubtedly

has been to a large degree self-perpetuating.

Failure to analyze TFPG has been so all-pervasive that there has been

little attention paid to it, either analytically or emnpirically, anywhere

in the development literature. Yet all the evidence, from both developed

and developing coutLtries, strongly suggests that increased quantities of

inputs per head of factors of production cannot explain differences in

output per head, or total factor productivity, between countries, and

especially between the North and the South.

This paper reports on an attempt to begin to fill in thit gap in

our knowledge. We do four things: 1) we provide estimates of total factor

productivity growth rates for two-digit manufacturing industries in Turkey

over the period 1963-1976; 2) in so doing, a number of methodological issues

that arise in estimating the behavior of TFPG are discussed; 3) the findings

are utilized to examine, at least in a suggestive way, some hypotheses about

the determinants of growth in the manufacturing sector in Turkey; and 4)

we explore both the uses and the limitations of analysis of TFPG by analyzing

the relationship between sectoral and aggregate TFPG rates and by examining

apparent differences in efficiency between public and private sector firms

in Turkey.

Estimates of TFPG rates are of interest in their own right as descrip-

tive statistics. It is of course hoped that they will be even more useful

as others undertake comparable estimates for other countries. Below, we

1. See the seminal contribution by Solow, who first challenged the viewthat capital accumulation had accounted for economic growth and rising percapita income in the United States. For reasons discussed below, we dis-tinguish between accumulating quantities of factors and improved qualitiesof factors. It is at least possible, if it is not tautological, that alloutput increments are attributable to either increased quantities or qualitiesof inputs.

3

summarize available data on rates of TFPG for individual manufacturing indus-

tries (for which, to our knowledge, the only estimates available are for

developed countries). One can, however, imagine that some industries might

experience higher rates of TFPG than others, especially if "infant industry"

considerations are present. In that case, "normal" rates of TFPG in

developed countries' manufacturing industries might exhibit a different

structure from that found in developing countries.

Of course, it is also possible that country-specific policies (such

as investment licensing, quantitative restrictions upon trade and import

prohibitions, price controls, and restrictions upon technical assistance

arrangements) might affect both the fortunes of individual industries

within countries and the overall rate of manufacturing TFPG observed in

those countries. While an.wers to these questions must await the provision

of estimates of TFPG for a variety of countries, the Turkish data provide

at least one observation that may be useful in that analysis.

In ad(ition, rates of TFPG are of interest if they themselves are a

function of other variables. For example, it has long been widely believed

that certain effects of restrictive trade and payments regimes adversely

affect productivity. In particular, delays incurred in obtaining imported

inputs or spare parts, the necessity to substitute inferior domestic products

for imports or to use items of the wrong specification from a bilateral-

payments-agreetinent trading partner, the monopoly position conferred upon

1. In addition to the estimates presented here, we were able to obtaindata for a number of Turkish firms. Some interesting questions arise aboutlinks between rates of TFPG for firms and for industries. Those questionsare addressed in Krueger and Tuncer, and are not dealt with here.

4

domestic producers by the quantitative restrictions imposed on imports,

may result in higher inputs per unit of output (or slower growth rates of

output per unit of input) than would occur under a more liberalized trade

and payments regime.

Thus, it is a plausible hypothesis that productivity growth might

uniformly be more rapid during periods of relative liberalization of the

foreign trade regime than during periods of severe "foreign exchange

shortage." During the latter periods, one might expect that all industries

would be adversely affected, but that industries more dependent upon im-

ports (i.e., those with higher fractions oL their purchased inputs origi-

nating from abroad) might be relatively more adversely affected. The data

on Turkish manufacturing industries' rates of TFPG provide some sugges-

tive evidence with regard to this hypothesis, although there are too few

degrees of freedom for rigorous statistical testing.

One might also conjecture that countries with more liberalized trade

regimes experience higher rates of TFPG in their manufacturing industries

than do countries with restrictive trade regimes. Such a hypothesis is

not testable, even in suggestive terms, until data on TFPG rates become

available for a variety of developing countries. However, Turkey has had

a generally fairly restrictive trade regime and, as will be seen, her

overall rate of manufacturing TFPG has been fairly low, even in contrast

with rates estimated for developed countries.

We start, in the next section, with some background information on

the 'urkish economy and the Turkish manufacturing sector that is necessary

for interpretation of our findings. In Section II, we then discuss the

TFPG measure and the evidence on TFPG rates available from other studies.

5

In Section III, estimates of rates of TFPG for Turkish manlfacturing indus-

tries are presented and the evidence with regard to the hypotheses discussed

above is evaluated. The fourth section then discusses the links between

aggregated, sectoral, and industrial rates of TFPG, and then illustrates

some of the limitation of TFPG measures by examining the relative efficiency

levels of public and private sector industries in Turkey. A final section

considers promising lines for future research.

I. EVOLUTION OF TURKISH MANUFACTURING -

Like most developing countries, Turkey's initial development policies

and programs were formulated and carried out in the context of a predomi-

nantly rural economy. Starting in the 1930s, a good twenty years before

most other developing countries, government policy began consistently to

encourage the rapid growth of the industrial, and especially the manu-

facturing sector, although the instruments of policy have differed from

time to time and World War II interrupted the effort.

For purposes of understanding the environment in which inputs, outputs,

and productivity grew during the 1963-76 period, four facets of policy are

of particular importance: 1) the varying degrees of restrictiveness of the

trade and payments regime and the evolution of other policy instruments

which might conceivably impinge on the growth of efficiency of Turkish

industries; 2) the structure of protection accorded to Turkish manufacturing

industries and the incentives confronting producers; 3) the relationship

between public and private enterprises and policy toward them within the

manufacturing sector; and 4) the behavior of the real wage and the real

cost of using capital over the period covered by the estimates.

6

Phases in the Trade Regime and Other Incentives

Until the 1950s, policies toward industrialization were undertaken

primarily through the establishment of State Economic Enterprises (SEEs)

which undertook various manufacturing (and other) activities. The trade

regime was itself fairly liberal, except to the extent that access to

foreign markets was cut off during World War II.

By the early 1950s, there were SEEs producing manufactured goods

primarily in light consumer goods. Implicitly, encouragement to these

industries was given through government financing deficits, rather than

via trade restrictions. Starting in 1953, however, Turkey began experi-

encing serious difficulties witlh her balance of payments, largely because

of the inflationary pressures resulting from deficit financing and the con-

sequent excess demand for imports. The mid-1950s, until 1958, were a

period of severe import restriction. Imports wEŽie strictly licensed, with

a purpose to rationing scarce foreign exchange. Naturally, licenses were

not granted for goods which were produced domestically. As a result, the

protection accorded to manufacturing industry in general increased.

A devaluation of 1958, followed by a sharp drop in the rate of inflation

and a liberalization of imports, resulted in fairly liberal trade policies

in the early 1960s. To be sure, import licensing mechanisms remained intact,

although their stringency diminished noticeably after the 1958 devaluation

and the accompanying reduction in domestic excess demand. Also in the

early 1960s, however, a State Planning Organization (SPO) was established,

and that body was given considerable influence in formulating development

plans.

7

The SPO wished to encourage further import substitution, and also to

increase the rate of investment. As an instrument to encourage the establish-

ment of new industries domestically, the import licensing system was employed

to prevent imports of goods competing with domestic production. Once a pro-

ducer had installed industrial capacity, he could generally request that

the government remove the items he produced from the list of permitted im-

ports, and expect that his request would be granted.

Thus, the Turkish trade regime of the 1960s especially after about

1965, was one in which prohibitive protection was virtually automatically

granted to any new industry. This, of course, provided a powerful incen-

tive for the establishment of new industrial activities and created a

sizable bias toward producing for the highly sheltered domestic market,

rather than -xpanding production of existing lines for purposes of export.

Partly because of reemerging inflationary pressures as the 1960s

progressed, and partly because of the excess demand for imports generated

by the stepped-up rate of investment and the intermediate goods imports

needed to sustain the import-substitution activities, the restrictiveness

of the trade and payments regime intensified in the late 1960s. By 1968

and 1969, there were significant delays in obtaining import licenses even

for spare parts and machinery replacement, as well as for intermediate

goods employed in import substitution industries. Thus, the restrictive-

ness of the trade regime resulting from the prohibitive protection given

to import substitution industries was further intensified by the inability

of the government to finance even those imports deemed desirable for

development purposes.

In mid-1970, a major devaluation (from TL 9 to TL 15 per U.S. dollar)

was carried out. The following three years were ones of relative ease

in import licensing, as workers' remittances from Germany and greatly

increased export earnings both contributed to an easy foreign exchange

situation. The ease persisted for several years despite the fact that the

authorities were unable to neutralize the iaflow of foreign exchange, and

the resulting increase in the money supply triggered a much.more rapid

rate of inflation than had occurred in the 1960s. By 1974, however, the

combination of internal inflation (at a fixed exchange rate) of 40 percent

annually over the 1970-73 period, combined with higher oil prices and a

deterioration in Turkey's terms of trade, all resulted in a reemergence

of excess demand for foreign exchange. To some extent, the government

was able to buffer the domestic economy from the impact of severe foreign

exchange difficulties by borrowing from abroad. Nonetheless, starting in

1974, import licensing once again became increasingly restrictive, and that

trend continued throughout most of the 1970s.

One other facet of policy also deserves mention. That is, in 1972-73,

the government decided to introduce a set of "investment incentives" in an

effort to speed up the rate of investment. Although there had earlier been

a number of "incentives," such as delayed payment of import duties, and a tax

1. There is widely believed to be a considerable volume of unrecorded (arndpresumably illegal) trade in Turkey. To some extent, this trade arose inresponse to the restrictiveness of the regime, but it nonetheless impliesthat official figures overstate the extent to which foreign exchange earningsdeclined in the late 1970s.

9

allowance, the 1972-73 measures went well beyond this in that they con-

tinued the former, increased duty deferments and exemptions, and provided

for low rates of interest on loans. The result was an investment boom

of major magnitude. The incentives, which were equivalent to 54% of the

cost of the investment, were probably large enough to encourage relatively

indiscriminate investment in all sorts of economic activities which would

not have been justified, had there been even minimal selectivity in their

application.1

As the above description indicates, there were four major periods of

trade policy during the 1963-76 period covered by our TFPG estimates. The

first period, from 1963 to about 1967, was one of relative ease of the import

licensing system except for goods competing with comestic production. The

second period, from 1967 to 1970, was one of stringency of the import regime.

The thi;rd period, 1970 to 1973, corresponds to the period of relative ease

followLag the devaluation, while the fourth period, from 1973-76 was one

of increased difficulties in obtaining import licenses and indiscriminate

investment incentives.

If stringency of the foreign trade regime (and indiscriminate invest-

ment incenitives) results in efficiency losses, the periods 1963-67 and

1970-73 should have witnessed relatively higher rates of TFPG than the2periods 1967-70 and 1973-76. On the other hand, if continuing import

1. World Bank, p. 59.

2. In the terminology of the National Bureau of Economic Research projecton Foreign Trade Regimes and Economic Development the periods 1963 to 1967and 1970 to 1973 correspond roughly to Phase IV regimes, whiile 1967 to 1970and 1973 to 1976 correspond to Phase II regimes. See Krueger for more de-tails on the 1960s.

The regime became increasingly restrictive after 1976. If data were available,we would hypothesize that the observed rate of TFPG would be evein lower in tle1976-79 period than it was in the 1973-76 period. Lack of data prevents usfrom testing this hypothesis, but a test may be possible at a later date.

10

substitution results in new resources being committed to ventures which

are less and less economically efficient, one sbluld observe a secular

decline in the rate of TFPG.

Protective Content of the Regime

As already mentioned, domestic production of import substitutes was

encouraged throughout the 1963-70 period by removal of *the goods from the

list of eligible imports once domestic production capability had been

established. Thus, protection was granted primarily through quantitative

restrictions, rather than through tariffs, making it necessary to estimate

the restrictive content of the regime through direct price comparisons,

rather than with the tariff schedule. Even then, difficulties arise once

it is recognized that the intent of the regime was not to permit any

imports if domestic production sufficed, su that price comparisons may fail

to capture quality and other differences.

Nonetheless, the disparities between import and domestic prices revealed

by direct comparison are so great that they provide a good indication of the

degree of restrictiveness of the regime. A 1968 survey of import prices,

landed costs, and wholesale prices, revealed that the ratio of wholesale

prices to landed costs ranged, among manufactured commodities, from a low

of 1.87 (for unplated pipes and methyl alcohol) to a high of 13.56 for

artificial fibers.

To gain some idea of the structure of protection across industries,

it is necessary to obtain estimates for individual manufacturing sectors.

For the period under consideration there is a compilation of estimates of

domestic resource costs, covering 90 individual manufacturing industries

grouped into fourteen sectors (which are not precisely comparable to the

sectoral classification given below, as can be seen by comparison of the

industry categories in Table 1 with those of Table 2 below). A simple

average of the DRCs in each sector was then takern to yield the estimates

given in Table 1, where DRCs are expressed relative to an estimated plausi-

ble cutoff point for economically efficient industries in the late 1960s,

which was taken to be a DRC of TL 15 per dollar. Thus, food and beverages

had a DRC estimated to be an average of TL 14.10, thus equal to 94 percent

of the maximum economically efficient range, while plastic products had an

average DRC of 37.05, or 2.7 times as high as that of food and beverages

and 2.47 times the maximal estimated economically efficient level.

The data under "mean DRC" represent simple averages of estimates for

individual industries within the sector, and therefore may not give an

accurate representation of the entire industry's situation. Nonetheless,

we believe that the averages are broadly representative of the situation of

individual industries in the late 1960s: food and beverages, textiles,

forest products, leather products, and stone, clay and glass products were

all "traditional" industries and received (or needed) relatively little

protection from the trade and payments regime. By contrast, paper products,

rubber products, plastic products, iron and steel products, machinery and

parts and transport equipment were all industries in which import substitu-

tion was being actively encouraged. The relatively low DRCs for chemicals,

basic metals, and other metal products reflect primarily the fact that

import substitution was just starting in the first two industries. Other

1. Baysan estimated effective rates of protection for 1968, but had legalrates of tariff protection and then added a factor to allow for the pro-tective effect of quotas.

2. As already mentioned, the actual exchange rate was 9 TL per dollar, andthe 1970 devaluation increased it to 15 TL per dollar.

12

Table 1. Domestic Resource Costs, by Manufacturing Industry, late 1960s

Industry Mean DRC Variance

Food and beverages .94 3.07Textiles .90 2.92Forest products .70 n.a.Leather products .68 n.a.Paper products 1.58 4.49

Rubber products 3.04 59.37Plastic products 2.47 56.26Chemicals .97 1.12Stone, clay and glass products .80 1.23Basic metals .91 1.98

Iron and steel products 6.25 2915.81Other metal products .94 1.53Machinery and parts 1.45 9.29Transport equipment 1.85 18.59

Source: Adapfed from Krueger, pp. 219-222.

13

metal products consists primarily of refined copper, wqhich is a large

Turkish export industry.

The right-hand column of Table 1 gives the estimated variance of

DRCs within each sector. Since these, too, are unweighted, they can serve

only to give some id.ea of the spread of DRCs within industry categories.

As can be seen, the variance of DRCs in some sectors was extremely high,

although that outcome was sometimes the result of the inclusion of one

or two industries subject to extremely high rates of effective protection.

This was especially the case within industries in which some import sub-

stitution had occurred while there were still some goods not domesitcally

produced and imported which were treated as capital goods or intermediate

goods subject to low rates of duty.

Public Sector and Private Sector Enterprises

As already mentioned, a number of State Economic Enterprises (SEEs)

were founded in the 1930s in various manufacturing (and other) activities.

They were the earliest import-substitution industries, as there were few

private-sector firms except in traditional industries, and factories under

public ownership were set up in such diverse fields as textiles, sugar

refining, iron and steel, and cement. SEEs have continued to be important

in the manufacturing sector, entering such fields as paper and products,

fertilizers, heavy chemicals, metal products, and machine tools in the

1960s and 1970s. Indeed, at; will be seen below (Table 3), there are only

three two-digit manufacturing sectors in which no SEEs are operating.

The relative importance of the public sector in the value of manu-

facturing output has fallen since the early 1960s, but as late as 1976,

14

SEEs accounted for 30 percent of manufacturing value added, with considerable

variation in their relative weight among two-digit industries.

It is a virtually unanimously-held view in Turkey that SEEs are inefficient.

Some of the reasons are political, as managers have been constrained to

hire additional employees on political grounds even when they were not

needed for production, pay scales have been subject to civil service rules,

and location decisions have been mandated on political, rather than efficiency,

grounds.

Except for a period during the 1950s when SEE output prices were held

artificially low (as an "anti-inflationary" measure), SEE outputs of manu-

facturing enterprises have competed in the marketplace with outputs of the

private sector. However, some SEEs have incurred fairly substantial losses,

and rates of profit have generally been so low that rates of return on

capital have been negligible. This has happened despite the facts that:

1) SEEs were widely believed to have favorable access to import licenses

and to avoid payments of duties on imported inputs; 2) SEEs were subject

to lower rates of interest on their borrowings than were their private

counterparts; 3) SEEs were able to obtain some of their domestically-

produced purchased inputs at lower prices than were their private com-

petitors (especially by avoiding payment of some taxes);2 and 4) in some

manufacturing industries, and especially in fertilizers (in the chemical

sector), there have been outright subsidies to production in public sector

firms.

1. It may even be the case that with proper depreciation accounting, ratesof return would have been negative.

2. There were also cases where the opposite is believed to have occurred:some SEEs apparently paid high prices for some inputs because of social policy.This may have been more important in nonmanufacturing concerns, howqever.

15

Thus, a question of considerable interest is how the growth of TFPG in

public sector manufacturing enterprises has compared with that of private

sector firms in the same industries. There are also interesting questions

about absolute efficiency levels, which are examined in Section IV below.

Relative Costs of Capital and Labor

Until the early 1960s, the Turkish labor market was relatively compe-

titive, and wages appear to have been flexible and market-determined. In

the early 1960s, however, social insurance regulations, laws strengthening

the power of unions, and minimum wage legislation were enacted. As a con-

sequence, despite the fact that there was substantial immigration from

rural areas, and increasing open urban employment, the real wage rose

rapiciL,-. If one takes data from the Social Insurance statistics (which

gives only that portion of wages covered by social insurance, but which is

fairly representative for Turkey) on nominal wages, and deflates them

by the Turkish price index of industrial products, the resulting estimate

of daily real wages rises from 16.24 TL in 1963 to 35.55 TL at 1963 prices

in 1976. This represents an average annual rate of increase in the real

wage of over 6 percent annually.2

1. Some of the pressure on the labor market was deflected by the demand forTurkish workers in Germany and some other EEC countries. Howqever, Turkeyregulated the outflow of workers, and there was always considerable excessdemand to migrate to Germany. At its maximum, the percentage of workers abroadwas about 5 percent of the labor force.

2. There is no basis to believe that the average skill level of the indus-trial labor force increased over the interval. All factory workers in Turkeyhave a primary education, and few have any more. To be sure, experience ofthe labor force may have increased, but that is probably offset by the factthat the wages reported above are daily, and hours of work may have decreased.

16

Simultaneously, several forces were operating on the costs of hiring

the services of capital. On one hand, some capital goods began to be pro-

duced domestically during the 1963-76 period. To that extent, the price of

capital goods probably rose for all potential purchasers. The real effective

exchange rate applicable to capital goods imports, however, probably fell

somewhat over the period, as tariff duties on imported capital goods were

first postponed and later completely suspended. While these factors may

have been offsetting, the most significant influence on the cost of using

capital undoubtedly arose not from the price of capital goods, but from

the interest rate at which capital goods purchases were financed. There

has been credit rationing in Turkey throughout the period under review;

interest rates have been held at artificially low levels, and credit has

been channeled toward the manufacturing sector at these low rates. In

general, the real rate of interest paid by firms was low in the early

1960s, probably close to zero in the mid-1960s, and then became negative

in the 1970s as the inflation rate rose much more sharply than did interest

rates.

Because different firms and industries were able to finance different

fractions of their machinery, equipment, and construction expenditures

by borrowing (and purchased different proportions of their capital goods

from abroad), it is not possible to provide precise estLimates as to the

trend in the cost of employing capital services. However, it seems certain

that the real interest rate's sharp decline dominated other trends, and

that the cost of employing capital goods decreased somewhat over the 1963-76

period, at least for firms with access to domestic credit. M4ost import sub-

stitution firms, were, of course, in that pOSitiOn.

17

Combining knowvledge that the real wages rose with the fact that borrow-

ing costs fell over the period on which we are focusing, suggests that pri-

vate entrepreneurs, at least, had significant incentives to resort to

increasingly capital-intensive techniques in the period under review. As

will be seen below, much of the capital accumulation in Turkish manufacturing

industries appears to have been designed to substitute for labor.

II. MEASUREMENT AND INTERPRETATION OF TFPG

Estimates of TFPG are designed to provide an indication of the change

in output per unit of input. If output were homogeneous and there were

only a single homogeneous input (e.g., labor), estimation would be straiglht-

forward. The rate of growth of factor productivity would be the rate of

growth of output less the rate of growth of the input. That rate of FPG

would then indicate the rate at wqhich the real return to the single factor

(measured in terms of the single commodity) could grow.

An estimate of TFPG in the multi-factor, multi-commodity case provides

much the same sort of information. Although estimates of labor productivity

growth are useful, they fail to distinguish increases in output per worker

that arise from more inputs of other factors per worker from increases re-

sulting from improved efficiency, or technical progress. To make such a

distinction, TFPG is defined as the difference .between the rates of growth

of output and the rata of growth of inputs, appropriately weighted. As always,

whenever weighting is involved, index number questions arise.

In this section, we first address the question of appropriate weighting

procedures for inputs. Next, the relationship between output growth rates

Lor individual industries and for economy-wide aggregates is considered. Ln

18

light of that discussion, the interpretation of TFPG measures is considered,

and available estimates of TFPG growth rates for individual manufacturing

sectors in developed countries and for manufacturing sectors as a whole

in developing countries are briefly reviewed.

Weighting Inputs

Consider first the case of a single homogeneous output produced with

several inputs, subject to a production function of the form:

(1) Xt = Atf (V1, ... ... , V)

where Xt is output at time t, and the Vs denote the various factor inputs.

There has been considerable debate over whether a full accounting of all

inputs (in terms of both quantity and quality) would permit changes in

outputs over time to be fully explained. If so, then the change in output

could be written simply as the sum of changes in inputs times their respec-

tive partial derivatives of the production function, as the "A" term would

be a constant.

Alternacivrely, one can regard the A term as representing the "state

of the art" at time t. In that form, At can be formally regarded as Hicks-

neutral technical change. Total factor productivity growth can then be

measured as:

dAt d dV1 dV. dV(2) - a -a _

At X 'V 1 * i V '" ' mVm

where the as are the elasticities of output with respect to the factors

denoted by the subscript and sum to unity. If the elasticity of output

with respect to each input is constant over a considerable range, the under-

production function must be of Cobb-Douglas form.

19

It is in the form of Equation (2) that estimates of TFPG are usually

made (see Nishimizu). WThen observations are gathered on rates of increase

of outputs and inputs and on factor shares, the resulting estimate of TFPG,

equal to dA/A, is derived directly. An important empirical problem is that,

as derived, dA!A is a residual, thereby rendering estimates sensitive to

errors of measurement in inputs and outputs (and factor shares).

In the short run, in a competitive environment where factors are paid

the value of their marginal products, the elasticity of output with respect

to a factor input is equal to the factor's share in the value of output. 1

The methodology for measuring total factor productivity growth has conse-

quently been to estimate the growth rate cf output less the weighted average

rate of growth of identified inputs, where the weights are the shares of

each factor in the value of total output. 2, 3

1. There are important questions about the treatment of indirect taxes inthe value of output. These are discussed in Section III.

2. When shares change over time, using a Divisia index for estimating aggre-gate inputs is ideal, as Nishimizu shows. We did not follow that procedure,for reasons outlined below.

3. If firms do not face competitive factor markets (either because of a monopolyreturn to capital or through monopsony power in the labor market), use of thedA/A measure is biased. Consider, for example, a Cobb-Douglas function,

a', 1-a a'-1 1-a~ a-aasX A L K If W = Xa At L K and r (l-a) A L K , with X <

> 1, then using labor and capital shares will yield an estimate of TFPG,

dA, of dA = dX dL dKA A

dA - a (1-A) L - (1-a) (1-) dK. If X > 1 and R < 1, the first term isA A L Knegative and the second positive, and vice versa for X < 1 and < > 1. We usethis result below in interpreting TFPG estimates for SEEs.

20

Aggregating Outputs

Indices of real output (GNP, manufacturing real output, etc.,) have

been employed in estimating TFPG for the sector or economy under observation.

That procedure is followed here, for two-digit -anufacturing industries,

and for the entire Turkish manufacturing sector.

A relatively little-explored question pertains to the relationship

between TFPG rates in firms, industries, sectors, and economy-wide. Nishimizu

has already explored the relationship between rates of TFPG for real value

added and real output. In particular, she has shown that the economy-wide

rate of TFPG of real output will equal the rate of growth of real value

added times the ratio of output to value added. That is, there is a

7'multiplier"-term on increases in factor productivity in that productivity

increases in a supplying sector reduce the resources necessary to produce

a unit of final output in the receiving sector. Thus, one must take care

to insure that estimated rates of TFPG are comparable, i.e., either in

output terms or in value added terms.

There are also important questions about links between economy-wide

rates of growth of factor productivity, and the behavior of individual

sectors. Consider, for example, a dual economy with an urban sector pro-

ducing manufactured goods and a rural sector producing food. Assume that

total factor productivity within each sector is constant over time, but

that output per unit of input is significantly higher in the urban than in

the rural sector. In such a circumstance, there will be zero TFPG for

each sector considered individually. If, however, resources are flowing

from rural to urban areas, the economy-wide rate of TFPG will be positive

as a consequence of the intersectoral shift.

21

As this simple example shows, the economy-wide rate of TFPG is nct a

simple weighted average of sector, or industry rates, unless all sectors

and industries are equally productive in uses of inputs per unit of output

over the period of observation. Insofar as resources can be shifted from

less to more productive uses, there will be two sources of TFPG: that

observed within individual sectors and industries, and that achieved by

reallocating resources to sectors with above-average productivity.

What do TFPG Estimates Tell Us?

As mentioned above, in a single-commodity, single-factor economy,

the rate of TFPG is also the rate at which real returns to tne factor of

production can increase. In that context, the importance of TFPG is

evident. The significant question is how such a notion generalizes to

1) the multi-factor case; and 2) the interpretation of rates of TFPG for

individual industries.

Consider first the multi-factor case, with a single output. In that

circumstance, the rate of TFPG is the rate at which real incomes to all

factors of production can increase, consistent with unchanged factor shares.

A higher rate of TFPG is consistent with higher attainable growth rate of

real incomes for all factors of production.

Next assume a country producing many commodities with a single factor

of production, confronted by given world prices for all its produced goods.

In that circumstance, the rate of TFPG in each industry indicates the rate

at which real income to the single factor of production can increase in that

1. See Robinson for an estimate of the importance of intersectoral shiftsas a source of growth in developing countries.

22

industry. If the single factor of production is perfectly mobile between

industries, one would expect that factors would rapidly shift out of

industries experiencing below-average rates of productivity growth (at

constant world prices) and into the industries with high rates. Indeed,

carrying the assumption of constant world prices to its logical conclusion,

if one industry's rate of productivity growth were more rapid than any

others, one would expect all resources eventually to be allocated to that

industry, in which case real incomes would be able to grow at the rate of

growth of productivity of that industry.

Finally, consider the case in which world prices of all commodities

are given, but there are many outputs and several factors of production.

If TFPG rates were the same in all industries, with factors receiving

equal rewards in all occupations initially, the rate of TFPG would indicate

the rate at which real incomes could increase. Suppose, instead, that some

industries increase productivity more rapidly than others. If real returns

to factors remain equal across all industries, the industries with rapidly

rising productivity would expand, as the rate of increase of real factor

returns would fall short of their TFPG rates; industries with below-average

rates of TFPG would experience contraction. Stated another way, the economy-

wide rate of TFPG provides an indication of the rate at which real factor

return's can grow; the rate of TFPG in individual sectors, relative to that

economy-wide rate, indicates what is happening to the competitive position

of an individual industry given those world prices. Thus, an industry

experiencing a rate of TFPG equal to the economy-wide average would find

its competitive position unchanged as it increased payment to factors of

production within the industry at the average rate. It would have no

incentive either to expand or to contract production.'

1. The statement needs qualification insofar as relative factor prices arechanging.

23

Thus far, nothing has been said about changes in the qualities of

factors of production. There is considerable evidence that a major

contributor to increases in output per unit of input (quality-unadjusted)

in the now-developed countries has resulted from increasing the quality of

the labor force. Consideration of TFPG in the developed countries has

attempted to measure the importance of quality improvements in factors of

production alongside quantitative increases in physical capital and other

inputs.

Such a procedure could be followed in developing countries as well.

However, to do so would require an altered interpretation of TFPG rates.

For, to the extent that the labor force increases its skills over time, real

wages can increase commensurate with the increase in efficiency units. If

the increase in skills is counted as an increase in the quantity of input,

then the natural interpretation of TFPG is lost.

Ideally, one could proceed to estimate TFPG as a function of quantities

of labor, capital, and other inputs only and then later to divide the

resulting estimate into components attributable to improved qualities of

factors of production, transfer of resources from less to more productive

sectors, and so on.

In this paper, TFPG is estimated as a function only of quantities of

inputs, and no quality adjustments are made. This is due to the unavaila-

bility of data with which to make such adjustments.

One other aspect of TFPG measurement deserves special notice, in part

because it plays a major role in our results below. Rates of total factor

productivity growth provide no clue as to absolute levels of efficiency.

Thus, the fact that TFPG is higher in one industry than another can, in a

24

straightforward way, be interpreted to mean that profitability is growing

more rapidly (or tllat losses are shrinking) in the former if world prices

(and the country's structure of protection) are constant. It cannot,

however, be used as an indication that efficiency, in the sense of total

use of inputs, is higher in the first industry than in the second. As

we discuss elsewhere (Krueger and Tuncer), one can in some circumstances

(such as the infant industry argument) use observations on TFPG rates to

reject certain types of hypotheses about the relative performance of

various sectors over time, but rates of TFPG can never confirm hypotheses

with respect to efficiency. As will be seen below, this shortcoming of

the measure proved initially to be particularly troublesome in understanding

our results with respect to public and private sector behavior in Turkey.

Estimates of TFPG Rates for Other Countries

Few estimates of rates of TFPG are available for developing countries,

and those that there are are normally economy-wide. For the manufacturing

sector, there are even fewer estimates, and those that there are were under-

taken with differing methodologies, different definitions of the scope of

manufacturing, and cover manufacturing, however defined, only in the aggregate.

Chen estimated rate of manufacturing TFPG for Hong Kong, South Korea and

Taiwan for the period 1960-70 and for Singapore for 1957-70. He estimated

that the annual rate of manufacturing TFPG was 2.29 percent in Hong Kong,

3.75 percent in Singapore, 3.47 percent in South Korea and 3.59 percent in

Taiwan. Other available estimates include one for the Philippines for the

1. See Robinson for one attempt to estimate sources of growth in developingcountries. Robinson considers capital accumulation, labor growth, the transferof factors between sectors, and the availability of foreign exchange.

2. See the manuscript of Kelley and Williamson for a survey of such estimates.

25

short period 1965-69 of 1.89 percent by Ezaki, and an estimated rate of

4.00 percent by Lianos for Greece for 1958-68.

In some regards, all these estimates are surprising low, in that

estimated rates for the developed countries are generally as high if not

higher. Thus, estimated rates of manufacturing TFPG are 3.5 percent for

Norway (Ringstad); 3.66 percent for Japan (Hulten and Nishimizu), in excess

of 3.75 for Italy (Conti and Filosa) and 2.1 percent for the United States

(Kendrick).

When. it comes to estimated rates of TFPG for individual two-digit

manufacturing industries, the available data are even sparser. To our

knowledge, there are no estimates available on a two-digit basis for

developing countries. For developed countries, the best available set is

probably that of Ringstad for Norway. Although he found substantial evi-

dence of non-neutral technical change in some industries, he also presented

estimates of rates of shift of Cobb-Douglas production functions for most

two-digit industries (Ringstad, p. 139). Estimated rates of neutral techni-

cal change ranged from a negative 1.8 percent for printing and publishing

(the only negative observation) to 9.7 percent for miscellaneous manu-

facturing, with an average over all manufacturing industries of 3.5 percent.

Rates below two percent were recorded only for clothing, mineral products

and transport equipment (in addition to printing and publishing).

If rates of TFPG in developed countries' manufacturing sectors have

been in excess of two-three percent, it would suggest that any developing

country failing to achieve TFPG rates in excess of that range in its manu-

facturing sector would not be able both to maintain its competitive position

in its existing manufacturing industries and increase real factor incomes

26

at a rate equal to the rate of TFPG. As will be seen, estimates for

Turkish manufacturing industry fall below the two percent level, a subject

that deserves further consideration after presentation of the estimates.

III. RATES OF TFPG IN TURKISH MANUFACTURING INDUSTRIES

Sources and Methods

Details of the data and of procedures used to obtain the needed time

series - output, labor, capital and material inputs, and -factor shares,

are given in Appendix A and only a brief overview is given here.

Our data include: physical capital stock, number of workers, purchased

inputs, nominal value of output, and appropriate sector-specific price de-

flators for output and purchased inputs. Data were also available for

wage payments. Combining them with the value of purchased inputs, the

return to capital was estimated as a residual. There were no data available

with which to adjust for indirect tax payments. While there are always

some data problems, checks of the data set for consistency and "reasonable-

ness" were highly satisfactory.

Essentially, for the period 1963-76, rates of TFPG were estimated based

upon regression equation estimates of (logarithmic) time trends for outputs

and inputs, and on average shares of three factors of production (capital,

labor, and purchased inputs). Use of time trends smoothed a great deal of

1. See Appendix A for an estimate of the sensitivity of our results to thefailure to adjust for taxes. Essentially, the bias in our TFPG estimatesis downward, but must be less than .1 percent, given the range of tax rates.

27

year-to-year variation in our data, and average shares were used for the

same reason: year-to-year observations fluctuated over extremely wide

ranges.

The fourteen year period covered by our estimates roughly corresponds

to the first three Five Year Developmant Plans, and thus to the period

of'planned development" of the Turkish economy. As already mentioned,

Turkish economic growth slowed drastically after 1976.

We also estimated rates of TFPG for the subperiods of interest because

of fluctuations in the trade regime. For those estimates, initial and

terminal year observations were employed to derive time trends, and the

average of the factor shares in the first year and last year of the period

under consideration was used. Finally, three-year moving averages of outputs,

inputs, and factor shares were computed, and employed as a further means

of analyzing behavior over time.

Data cover each two-digit manufacturiuig industry in Turkey except for

printing and publishing and miscellaneous manufacturing. The coverage is

for all firms with ten or more employees. The printing and publishing and

miscelldneous manufacturing sectors were omitted for lack of a suitable

1. Appendix A provides some evidence that alternative specifications ofshares would not greatly affect the private sector results. For the publicsector, the labor share increased much more rapidly. Estimates of the effectsof using alternative estimates of shares are given in Section IV.

2. See Appendix A for data on the share of firms with less than ten employeesin each industry and the changing shares of small firms over the period covered.

28

price deflator for their output. Since the State Institute of Statistics

collects data on public and private firms within each two-digit industry,

rates of TFPG were estimated separately for public and private sectors of

each industry, and also for the industry as a whole.1

Table 2 gives data on the characteristics of each two-digit manufact-

uring industry covered by the estimates (which include all two-digit manu-

facturing industries except for printing and publishing and miscellaneous

manufacturing for which no appropriate price deflators were available).

The first three columns give the labor, purchased input, and capital (defined

as the residual) shares of manufacturing output in 1968. The fourth and

fifth columns give the shares of labor and capital in value added. As can

be seen, labor, capital, and materials shares vary widely across industries.

The sixth column of Table 2 gives the share of 1968 manufacturing output

(public and private sector together) originating in finns with more than

ten employees in each two-digit industry. As can be seen, food processing,

tobacco, textiles, and petroleum and coal were the largest sectors in termis

2.of value of output. By contrast, the industries with the most rapid rates

of growth over the period were wearing apparel and footwear (probably re-

sulting from a growing number of firms passing the ten-employee threshold),

rubber products, chemicals, petroleum and coal, machinery (both electrical

and nonelectrical), and transport equipment. With the exception of wearing

1. Because public and private shares of labor, capital, and materialsdiffer, it occasionally happened that the observed rate of TFPG for theentire sector lay outside the range for each component.

2. Exclusion of firms employing less than ten workers accounts for thesmall share of apparel and footwear.

29

Table 2. Characteristics of Turkish Two-Digit Manufacturing Industries

1968 Share of Output 1968 Share in 1963-1976 Growthof: Value Added of: Rate of:

Pur- 1968chased Share of Real

Labor Inputs Capital Labor Capital Output Labor Capital Output

Food products .066 .750 .184 .254 .736 .223 4.9 8.5 7.1Beverages .072 .285 .643 .101 .899 .031 8.5 8.5 11.6Tobacco .091 .505 .404 .184 .816 .091 2.2 7.3 11.3Textiles .147 .601 .252 .368 .632 .162 3.6 1l.0 10.0Wearing apparel .188 .639 .173 .521 .479 .004 - 12.6 11.0 18.7

and footwear

Wood and cork .158 .674 .168 .485 .515 .101 6.7 12.1 8.6products

Furniture and .135 .646 .219 .381 .619 .002 4.7 14.2 6.6fixtures

Paper and products .159 .573 .268 .372 .628 .019 7.3 15.3 14.6Fur and leather .110 .773 .117 .485 .515 .004 7.8 17.0 8.6

productsRubber products .121 .559 .320 .274 .726 .020 5.1 13.3 16.8

Chemicals .121 .609 .270 .309 .691 .059 8.0 12.5 15.2Petroleum and coal .011 .270 .719 .015 .985 .094 9.9 20.5 18.2

productsNonmetallic minerals.191 .414 .395 .326 .674 .040 7.6 14.0 13.2Basic metals .103 .489 .408 .202 .798 .087 12.2 14.0 13.7Metal products .147 .617 .236 .384 .616 .055 3.1 5.4 8.0

Machinery .112 .650 .238 .320 .680 .034 16.5 16.8 18.6Electrical machinery.124 .027 .249 .332 .668 .022 13.1 20.7 19.9Transport equip- .195 .629 .176 .526 .474 .043 9.8 16.9 21.0

mentTotal or average .105 .572 .323 .245 .755 1.000 6.3 12.8 12.3

Note: All growth rates are continuous .annual rates derived from fitting the variableto the natural logarithm of time for l)'53 and 1976.

Capital stock estimates were available only jointly,for food and beverages, on onehand and for textiles and wearing apparel, on the other.

Source: State Institute of Statistics: Census of Manufacturing Industries, 1963and 1970; Annual Survey of Manufacturing Industries, various years to 1976.

30

apparel and footwear, these industries (plus paper and products) have con-

stituted the main import-substitution sectors within Turkish manufacturing,

and have had high rates of effective protection, as discussed above.

The final columns of Table 2 give the estimated growth rates of labor

and capital inputs and output for each sector for the 1963-76 period. As

can be seen, for the large-scale manufacturing sector as a whole, output

grew at a continuous annual rate of 12.2 percent, while capital inputs

grew 12.8 percent and the number of employees at an annual rate of 6.3

percent. Thus, capital inputs grew roughly twice as rapidly as labor inputs.

This held in the aggregate, and for every sector considered individually

except for wearing appa el and footwear. While not definitive, these rela-

tive rates of increase, combined with knowledge that the real relative

cost of hiring labor was rising fairly rapidly, strongly suggests that

much Turkish investment in the manufacturing sector was devoted to sub-

stitution of capital for labor, rather than to expanding capacity.

Rates of TFPG

Table 3 gives estimated rates of TFPG for the two-digit industries indicated.

The numbers correspond to continuous annual rates as computed from regressed

time trends,while those in parentheses indicate the estimates that result from

using an average of the first two years and of the last two years as a basis

1for estimating growth rates of inputs and outputs.

As can be seen, the overall rate of TFPG for Turkish manufacturing has

been a relatively low 2.10 percent, taking the trend line as best estimate.

This does not auger well for "closing the gap," when contrasted with the

1. Estimates based upon single and terminal years were even more volatilethan the two-year rates, but deviations from the trend rates were in thesame direction as the two-year based rates in all cases.

31

Table 3. Rates of Growth of Total Factor Productivity, Individual Industries,1963 to 1976

Sector Sector Public PrivateNumber Name Sector Sector Total

20 Food processing - .36(- .61) .16(- .36) .09(- .54)21 Beverages 4.79( 6.43) 5.31( 4.96) 3.16( 4.39)22 Tobacco 7.40( 6.97) 5.97( 5.79) 7.44( 7.07)23 Textiles 2.53( 2.16) .84( .61) 1.14( .84)24 Wearing apparel 2.35( 2.65) 4.10( 3.20) 2.50( 2.20)

and footwear

25 Wood and cork -2.43(-2.36) - .55(- .44) -1.26(-1.26)products

26 Furniture and none - .56( .59) - .56( .59)fixtures

27 Paper and pro- .04( .48) 1.55( 2.50) .59( 1.01)ducts

29 Fur and leather none -1.17(-1.04) -1.17(-1..04)products

30 Rubber products none 4.27( 6.07) 4.27( 6.07)

31 Chemicals 4.23( 3.47) .46( .75) 1.67( 1.73)32 Petroleum and .36( .53) -8.80(-9.92) .24( .46)

coal products33 Nonmetallic - .24(- .33) .72( .22) .62( .16)

mineral pro-ducts

34 Basic metals .98( .21) - .93(- .09) .61( .31)35 Metal products .06(- .14) 1.61( 1.65) 2.39( 2.34)

36 Machinery 2.53( 1.43) .62( .63) 1.02( .83)37 Electrical ma- 3.05( 4.23) 1.41( 1.64) 1.30( 1.55)

chinery38 Transport equip- .53( .55) .94( 2.14) 1.42( 2.24)

ment

Total manufac- 2.65( 2.43) 1.84( 1.70) 2.10( 1.96)turing

Note: All rates are continuous. Figures in parentheses are the rates com-puted from first-two-years and last-two-years data. Total manufacturingwas computed by summing deflated outputs across sectors. It is thereforeweighted by the value of outputs in each sector.

32

rates of TFPG for other developing and developed countries reported in

Section II.

There is some variation in the estimates depending upon whether

trend rates or actual averages of the first two years and last two years

are used. Nonetheless, the correlation between them is fairly substantial.

Disparities of more than one percentage point are found only for public

beverages, private rubber products, private petroleum and coal (which, as

can be seen by examining the total column, is a relatively small component

of the sector and consists mostly of small firms fabricating coal products;

there is above-average reason to suspect that use of the same price index

as a deflator for public and private Lutput is especially unfortunate in

this sector), public machinery, public electrical machinery, and private

transport equipment. In no sector is the differential as large as two

percentage points.

In general, there does not appear to be any pronounced tendency for

import-substitution firms to have increased their output per unit of input

more rapidly than firms in more traditional sectors, such as wearing apparel

and footwear. While rubber products and metal products both show rates in

excess of two percent, basic metals shows a rate of TFPG of only .61 percent,

and paper and products only .50 percent. Rubber products was a sector

in which tire manufacturing (as an import substitution activity) started in

1963 and 1964, with rapid increases in output starting only in 1965. The

high rate of TFPG for that sector may therefore in part reflect simply a

1. The public sector component of petroleum and coal products is dominatedby petroleum refining, which was also a major thrust of import substitutionpolicy. The rate of TFPG in that sector is also very low.

33

timing phenomenon (as is partially reflected in the higher terminal estimate

than in the trend-rate estimate).

It would be of great interest to examine estimated rates of TFPG for

other developing countries to find out if there is a standard, or normal,

profile of rates against which the estimates for Turkey could be judged.

Until a great deal more work is done, however, it will be difficult to

evaluate profiles of TFPG across industries within a country. In part,

this pinpoints a major difficulty of TFPG estimates: they are indicative

of rates of increase of output per unit of input (either because of quality

improvements of inputs or for other reasons), but they give no indication

as to the efficiency level. Thus, it is a plausible hypothesis that firms

with low rates of TFPG are those that are already efficient; it is at least

equally plausible that firms with high rates of TFPG are now efficient.

Further evidence with regard to the efficiency level issue is provided

below in evaluating the performance of public and private sector firms

within individual industries.

Variations over Time in TFPG Rates

As already indicated, the continued drive toward import substitution

and evident increasing costs of restrictive trade regimes led us to believe

that there would be something of a tendency for a secular decline in rates

of TFPG, and also that there would be fluctuations between subperiods re-

flecting inefficiencies associated with difficulties and delays in obtaining

imported raw materials, intermediate goods, and spare parts. To investigate

this, TFPG rates were estimated for four subperiods: 1963-67, 1967-70,

1970-73 and 1973-76. Because of the shortness of the intervals, estimates

are necessarily based on first year-last year rates and are thus more

34

volatile with respect to year-to-year fluctuations in outputs and inputs.

The resulting estimates are given in Table 4.

As is immediately evident, there has been something of a secular de-

cline in the average rate of TFPG across all industries, although the fortunes

of individual industries have varied. For all large-scale manufacturing,

the rate of TFPG is estimated to have been 3.2 percent annually over the

1963-67 period, to have fallen to 1.31 percent annually from 1967 to 1970,

risen to 2.51 percent over the 1970-73 period, and then fallen to -1.18

percent for 1973-76. Thus, even the average rate of 'TFPG of 2.1 percent

per annum is based largely on the relatively good performance of the mid-

1960s. In the "sources of growth" context, only about 17 percent of manu-

facturing output growth is residual: 83 percent of manufacturing output

growth is "explained" by increases in inputs into the sector. Moreover,

the proportionate residual became smaller as time wore on.

The overall rate of TFPG for the individual subperiods also provides

some support for our hypothesis that periods of import stringency (1967-70

and 1973-76) would be associated with lower rates of TFPG. The rate fell

by more than half from 1963-67 to 1967-70, and it went from positive to

negative from 1970-73 to 1973-76.

If attention turns to individual industries, the picture is far less

clear. For the 1967-70 period, rates of TFPG were generally below those

of the preceding period, and there is some tendency for rates to have

fallen more drastically in the import-dependent industries (rubber products,

1. As already mentioned, in light of subsequent events in Turkey, with risingrates of inflation, increased foreign exchange stringency, and other economicdifficulties, there is every reason to believe that data for the 1976-79 periodwould show continued deterioration in rates of TFPG.

35

Table 4. Annual Average TFPG: Four Subperiods

Sector 1963-67 1967-70 1970-73 1973-76 Total

Food processing .85 .78 2.14 -4.32 - .09Beverages 16.32 -8.64 5.02 -1.18 3.16Tobacco 6.68 3.02 8.50 2.93 7.44Textiles 2.08 4.82 2.24 -4.42 1.14Wearing apparel and 2.00 6.60 5.62 -4.18 2.50

footwear

Wood and cork products .40 -3.13 -2,06 -1.15 -1.26Furniture and fixtures 3.00 2.14 -10.62 9.73 - .56Paper and products 2.99 -2.82 -1.17 4.14 .59Fur and leather pro- -2.72 4.31 -8.93 1.17 - 1.17

ductsRubber products 11.97 -3.28 2.68 6.07 4.27

Chemicals 3.31 2.47 2.73 -1.87 1.67Petroleum and coal 9.27 -8.30 -0.66 -7.90 .24Nonmetallic minerals -1.06 2.82 3.31 -4.32 .62Basic metals .74 7.06 -1.83 -6.27 .61Metal products 2.23 -3.48 8.08 -0.29 2.39

Machinery .60 6.66 -4.96 1.46 1.02Electrial machinery -3.81 -3.84 6.26 7.21 1.30Transport equipment 5.77 -6.44 9.35 3.25 1.42

Total 3.20 1.31 2,,51 -1.18 2.10

Note: All subperiod rates are continuous rates spanning the initial andterminal year indicated.

36

petroleum and coal, metal products, and transport equipment) than in

some of the more traditional industries. The same pattern reappears, but

not in quite as pronounced form, for the 1973-76 period. In that period

some of the more traditional industries appear also to have experienced

dimunition in TFPG rates: textiles, wearing apparel and nonmetallic

minerals are notable in that regard.

To further inve§tigate the hypothesis that there were marked differences

in subperiods, we calculated three-year moving averages of inputs, outputs,

and factor shares. We then calculated rates of TFPG between pairs of

calculations. The results for a number of industries are reported in

Table 5. The growth rate indicated for food products for the period

1963-66, for example, is the rate of growth of TFPG calculated by taking

the average values for 1963-65 and 1964-66 and estimating the growth rate

between them. While there is some tendency for retardation of TFPG rates

in the late 1960s, it is not as uniform as we expected, although there is a

pronounced downward trend in the estimate for all manufacturing. What does

emerge clearly again is the sharp deterioration in rates of TFPG in most

industries in the period after about 1973. Paper and paper products (whose

productivity is estimated not to have reattained the level of 1967 until

about 1975), rubber products, metal products, machinery, and electrical

machinery do not share the strong downward trend.

While there are too few observations and too much variability across

industries to draw firm conclusions with regard to the individual subperiods,

it nonetheless seems warranted to conclude that, not only was the average

rate of TFPG low for Turkish large-scale manufacturing over the 1963-76

1. Tobacco, wood and cork products, and furniture and fixtures are omittedlargely because those sectors rely heavily on domestic rawv materials.

37

Table 5. Moving Average Rates of TFPG, Selected Industries

Food Apparel and Paper andPeriod processing Beverages Textiles footwear products

1963-66 2.02 14.50 2.58 7.35 4.441964-67 - 1.51 25.24 1.22 - 2.09 2.961965-68 - 2.50 13.01 2.54 - .50 8.451966-69 - .95 3.59 3.80 .60 .371967-70 .89 - 8.73 4.78 7.94 - 3.58

1968-71 2.33 - 3.35 .46 4.22 -12.271969-72 .67 - 2.43 3.02 6.68 - 3.811970-73 2.27 4.70 2.54 6.48- .511971-74 1.05 .14 - 2.56 - 2.51 6.901972-75 - 3.37 - 4.42 - 6.23 - 4.22 5.541973-76 - 4.24 - .73 - 3.77 - 2.66 4.31

Rubber Petroleum and Nonmetallic Basicproducts Chemicals coal products minerals metals

1963-66 15.77 3.23 8.86 1.06 - 3.661964-67 10.53 4.08 22.93 - 4.11 3.641965-68 - 2.96 - .17 '16.88 1.21 4.701966-69 - 3.42 2.32 2.85 .20 10.651967-70 - 2.96 2.70 - 8.76 1.95 6.54

1968-71 .11 2.46 -14.93 3.45 - 1.021969-72 5.33 4.55 -16.61 1.60 .061970-73 2.40 2.07 4.45 3.65 - 1.701971-74 6.00 - 1.42 1.03 - 1.84 - 8.141972-75 4.63 - 2.49 - .54 - 1.45 - 9.381973-76 5.77 - 1.57 - 7.41 - 4.32 - 5.41

Metal Electrical Transportproducts Machinery machinery equipment Total

1963-66 .13 - 1.17 - 5.87 7.36 2.681964-67 3.63 .80 - 3.19 9.33 4.391965-68 2.24 4.48 - 6.24 .97 2.941966-69 1.18 6.17 - 3.61 - 3.61 2.691967-70 - 3.38 6.84 - 3.45- - 5.75 1.22

1968-71 4.25 - .90 2.82 - 1.33 1.311969-72 7.27 - 3.40 4.87 9.69 .211970-73 7.19 - 4.73 5.96 8.53 2.611971-74 .10 - .20 10.11 - .07 .451972-75 2.10 2.87 7.63 - 2.36 - .691973-76 - .04 1.42 5.82 1.56 - .86

38

period, but there was a tendency for that rate to diminish. Obviously,

these conclusions raise more questions than can immediately be answered,

but that in itself does not diminish the importance of the finding.

IV. PUBLIC AND PRIVATE SECTORS

One of the surprising results of our estimates was that they showed

that public sector enterprises had higher rates of TFPG on average than had

their private counterparts. To be sure, some of this finding was attribu-

table to different weights attaching to different two-digit industries:

tobacco, for example, has a much higher weight in the public sector than

in the private sector and its hign rate of TFPG raises the public sector

average relative to the private sector by more than the differential in

TFPG rates. Likewise, the estimated large negative TFPG for petroleum and

coal may have been due in part to different product mixes in the two sectors

with different price behavior which was not captured by our use of a single

index. Nonetheless, the finding that public sector enterprises had more

rapid productivity growth than private firms remained puzzling. Our inter-

pretation of this result is of interest in its own right, and also illus-

trates both the uses and the limitations of analyzing rates of TFPG.

A first line of inquiry was whether there was any basis to believe that

prices confronting public sector firms had risen systematically more slowly

than those confronting private firms in the same industry. This would, of

course, have biased estimates of private sector output growth rates down-

ward and those of the public sector upward. However, there is no evidence

of this sort of phenomenon. Likewise, there is no reason to believe that

there is any systematic difference in ways of estimating capital stock

grow¢th.

39

A next question was whether public sector enterprises' outputs were

so different from their private-sector counterparts within individual

industries as to invalidate the assumption of a common price index.

Although, as already mentioned, there is some basis for believing that

this might be the case in petroleum and coal products (and also for beverages

and tobacco), there is no basis for such a belief in such sectors as textiles

and basic metals, and even then one would have to explain wqhy the deviations

appeared systematically in the way that they did.

Next, it is widely known that public enterprises were constrained to

hire more labor than was probably optimal from a viewpoint of produccive

efficiency. Using shares of expenses in the public sector was therefore

probably a biased procedure. To test the importance of this possible source

of bias, rates of TFPG were reestimated for public sector industries using

the shares of the private sector counterparts, on the rationale that those

-hares might more appropriately represent the outcome of cost-minimizing

behavior. The TFPG rates so computed, contrasted with the ones given in

Table 3 above are:

Public enterprise TFPG Estimates withestimated with private public sectorsector shares shares from Table 3

Food products - 1.13 - .36Beverages 4.84 4.79Tobacco 8.16 7.40Textiles 2.14 - 2.53Wearing apparel and foot- 2.06 2.35

wear

Wood and cork products - 2.63 - 2.43Paper and products - 3.98 o04Chemicals 3.76 4.23Petroleum and coal 1.10 .36Nonmetallic minerals - .17 - .24

Basic metals 1.68 .98Metal products 1.07 .06Machinery 2.57 2.53Electrical machinery - .74 3.05

Total public sectormanufacturing 2.85 2.65

40

As can be seen, there are differences in shares between public and

private sectors, and they do significantly affect estimates of public sector

TFPG growth. Especially for food processing, paper and products, machinery

(both electrical and nonelectrical) and transport equipment, use of private

sector shares significantly lowers the estimate of TFPG. However, in other

sectors, use of private sector shares raises it. This is because of the

fact that the capital share is usually given a higher weight in the private

sector, and capital was the more rapidly growing factor in those sectors.

In other sectors, however, the opposite result holds, as either the lower

weight attached to the growth of labor, or a changed weight on materials

inputs, outweighs whatever estimated reduction there is in TFPG. For the

manufacuring SEEs as a whole, use of private sector weights actually increases

the estimated rate of TFPG by two-tenths of one percent.

This exercise, however, pointed up another line of inquiry. If public

firms are earning less profit per dollar of output than private firms and

are implicitly subsidized in their costs of inputs (through subsidized

credit, failure to pay import duties and so on), then the costs in the

public and private sector are not comparable. It is possible directly to

estimate inputs per unit of output in the public and private sector, given

the availability of estimates of capital stock and number of employees.

The final step was to consider what the case would be if public sector

firms were indeed selling at a price below their economic costs and, in

particular, if input prices were subsidized. If public and private sector

firms within the same two-digit industry were using similar inputs, priced

differently, it is possible to estimate efficiency levels.

In particular, we examined :arefully the structure of inputs in the

public and private sectors, industry by industry. It turned outt that,

41

in almost all cases, capital and labor per unit of sales price were sub-

stantially greater in the public sector than in the private, while raw

material costs per unit of sale price were substantially lowqer. Indeed,

for manufacturing as a whole, in 1963, the public sector firms paid 59.7

liras on purchased inputs per 100 TL of sales, while private firms paid

72.0 liras per 100 TL of sales. For some subsectors, the discrepancy was

even more pronounced: for wearing apparel, SEEs paid 45.4 of TL and pri-

vate firms 68.8 per 100 TL of sales.

It seems plausible to believe that SEEs are not likely to use less

cloth per dress, or leather per pair of shoes than the private sector, while

simultaneously using more labor and capital, at least to the degree reported.

If anything, there is probably more vertical integration in the private

sector than in the public in comparable industries. It therefore seems

reasonable to assume that the true use of materials per unit of sales was

the same in both public and private sectors, industry by industry. If

that assumption is accepted, it is possible to compute factor use per unit

of output in the public sector, relative to the private sector, and thus to

estimate differences in "efficiency." The estimates are presented in Table 6.

The ratio of capital input per unit of output in the public sector to that

in the private sector is given in column (1) for 1963, while that for 1976

1. Recall that the unit of measure for labor was number of workers, whilethat for capital is an estimate of the constant-price value of machinery,equipment, buildings and so on.

2. That selling prices of outputs of public and private sector enterprisesmust be much the same follows from the fact that the goods are competitivein the market.

42

is given in column (4). For paper and products, for example, the SEEs

in the sector used just over twice as much capital per unit of output as the

private sector in 1963, and their capital utilization had increased slightly

more than that of the private sector by 1976. Meanwhile, in 1963, labor

utilization per unit of output in the public sector was slightly less,

while by 1976, public sector firms employed 1.31 times as many workers per

unit of output as did private firms.

To estimate the average efficiency of the public sector relative to

the private sector, the private-sector shares of value added for the years

in question were used, For paper and products, for example, the private

sector's labor share was 32.4 percent of value added in 1963 and 28.8 per-

cent of value added in 1976. Those weights were multiplied by labor utili-

zation ratios, to obtain an "average inefficiency"! measure. Comparison

of the direction of change of these ratios with the differential in TFPG

rates reported in Table 3 indicates that, in general, when the private

sector's TFPG rose more rapidly than the public sector (as with paper

and products), the measure of inefficiency increases.1

These estimates must be taken as approximations only. In some sectors,

as for example petroleum and coal products, the output mix of the public

and private sectors is so different that it seems evident that the use of

a common price index probably dominates the results. Interpretation of

1. There could be divergences between the two because the measure of TFPGincludes materials utilization. Thus if apparent utilization of materialsin the public sector rose less rapidly relative to output than in the privatesector, it is conceivable that the two measures would diverge. This happened,for example, with food products, where the fraction of purchased inputs tooutputs in the public sector rose from .57 to .70 while that in the privatesector fell from .85 to .82 - apparently more efficient use of inputs accountsfor the private sector's higher estimated TFPG.

43

Table 6. Relative Public Sector Inputs (Ratio of Public Sector to PrivateSector Inputs)

1963 1976Capital Labor Capital Laborper unit per unit Weighted per unit per unit Weighted

Sector of output of output inputs of output of output inputs(1) (2) (3) (4) (5) (6)

Food 4.725 1.558 3.784 1.212 1.688 1.371Beverages .285 .634 .362 .330 .533 .396Tobacco .585 1.461 .819 1.188 1.083 1,167Textiles, 1.350 1.242 1.313 .584 1.559 .926wearingapparel andfootwear

Wood and .834 1.120 .936 1.227 1.867 1.429cork products

Paper and 2.002 .995 1.676 2.021 1.318 1.818products

Chemicals 3.179 1.398 2.709 2.347 1.294 2.016Nonmetallic 1.023 .645 .886 1.231 1.100 1.179mineralsPetroleum - - - 1.588 .125 1.281and coal

Basic metals 1.652 .779 1.409 4.538 2,786 3.986

Metal pro- 4.577 1.222 3.332 8.212 1.364 5.493ducts

Machinery .530 .855 .613 .619 1.407 .941Electrical 1.493 2.338 1.705 3.141 5.522 4.039machineryTransport 2.688 4.410 3.198 2.538 4.875 3.196equipment

Total 1.905 .964 1.603 1.436 1.013 1.290

Notes: Weights are factor shares in the private sector as of the years inquestion.

Because capital stock was presented jointly for textiles and wearing appareland footwear, any separate estimation of efficiency were biased by the splitused, and it was deemed preferable to aggregate the two sectors.

44

the data on beverages and tobacco products is subject to the same difficulty:

the public sector produces alcoholic beverages and cigarettes, while the

private sector produces mainly soft drinks and processes tobacco for export.

According to the estimates in Table 6, there are a number of

sectors in which public sector firms increased their relative efficiency:

food processing, textiles and wearing apparel, chemicals, and transport

equipment. There were also some where the opposite happened, as in wood and

cork products, nonfmetallic mineral products, basic metals, metal products,.

machinery, and electrical machinery.

Leaving aside beverages and tobacco products, where the output mix may

be different enough to make comparisons less than meaningful, there were two

public sector industries in 1963 that were apparently more efficient than

their private counterparts: nonmetallic mineral products, and nonelectrical

machinery. By 1976, only nonelectrical machinery was apparently more effici-

ent in the public sector, although the public sector as a whole had reduced

its relative inefficiency, using about 1.22 times as many resources per unit

of value added in 1976 (compared with about 1.60 in 1963).

It is of some interest that, during the 1973-76 period, the private

sector was engaged in substituting capital for labor as the real wage rose

(see growth rates of labor, capital, and output in Table 3). In 1963, the

public sector was employing higher capital-to-labor ratios in every industry

than their private counterparts except for beverages, tobacco products,

wood and cork products, and machinery, electrical machinery, and transport

equipment. On average, however, labor per unit of output was slightly

less in the public sector than in the private. By 1976, this had re-

versed; the public sector used about one percent more labor per unit of

output, and about 43.6 more capital per unit of output than the private sector.

These computations, which can at best be taken as approximate orders

of magnitude, nonetheless illustrate several points of significance. First

45

and foremost, it is not inconsistent to believe that the public sector

had a higher rate of growth of total factor productivity than the private

sector, and yet was absolutely inefficient. Indeed, our estimates of

inefficiency accord wi-th widely-held views about the public sector and

its comparative efficiency in Turkey. Thus, they point to the importance

of concern with levels of efficiency as much as with growth in factor

productivity: it is possible that investing in a transfer of resources

from public to private electrical machinery might have had a far greater

payoff than an equal investment in raising productivity within the private

electrical machinery industry. To be sure, if there are policies that simul-

taneously accomplish both, the payoff may be still greater yet.

V. CONCLUSIONS

Estimates of TFPG for individual industiies, as well as economy-wide,

are of interest for a number of reasons. On one hand, there are significant

questions as to what a "normal" pattern of TFPG might be, and whether the

profile of rates across Turkish two-digit industries is similar to that in

other countries. Such a question cannot be answered until comparable esti-

mates are available for a variety of countries. On the other hand, there

are significant questions as to the determinants of rates of growth of

output per unit of input. In the Turkish case- we hypothesized that Turkish

manufacturing would have experienced an overall slowdown in the rate of TFPG

as import-substitution policies pushed resources into increasingly inefficient,

high-cost, protected industries and also that periods of highly restrictive

exchange controls would have been periods of slower growtlh of factor pro-

ductivity than periods of relative liberalization.

46

While our observations have only one degree of freedom, they nonethe-

less provide some support for the notion that highly restrictive exchange

control regimes may result in lower rates of increase in output per unit

of input than more liberalized regimes. Also, there has been a fairly pro-

nounced tendency in Turkey for the rate of productivity growth to decel-

erate over the period in question.

Other important questions remain to be explored. There are interesting

questions as to the links between the growth of factor productivity in the

economay as a whole and in individual sectors. Further ahead, there are im-

portant questions as to the factors influencing rates of TFPG, and policies

that can (efficiently) accelerate it.

Finally, useful as estimates of TFPG may be, both in providing an esti-

mate of "other factors" to be explained by policy variables such as trade

regimes and domestic incentive systems, they do not permit any analysis of

absolute levels of efficiency. As illustrated by our efforts to interpret

data from the public and private sectors, estimation of productivity

differentials requires a means of estimating production functions, or a proxy

for them.

47

REFERENCES

Baysan, Tercan, Economic Implications of Turkey's Entry into the Common

Market, Ph.D. dissertation, University of Minnesota 1974.

Chen, Edward K. Y., "Factor Inputs, Total Factor Productivity and Economic

Growth: The Asian Case," The Developing Economies, Vol. XV, June 3,

1977.

Chenery, Hollis and Moises Syrquin, Patterns of Development, 1950-1970,

Oxford University Press, London 1975.

Conti, Vittorio and Filosa, Renato, "A Disaggregate Analysis of Accumulation,

Productivity, and Labor Costs in the Manufacturing Industry" in Bank of

Italy Research Department, Economic Papers 2, June 1979.

Denison, E. F., Why Growth Rates Differ, The Brookings Institution, Washington,

D. C. 1976.

Ezaki, Mitsui, "Growth Accounting of the Philippines: A Comparative Study

of the 1965 and 1969 Input-Output Tables," The Philippine Economic

Journal, Vol. XIV, 1975.

Frank, Charles R., Jr., Kim, Kwang Suk, and Westphal, Larry, Foreign Trade

Regimes and Economic Development: South Korea, Columbia University

Press, New York 1975.

International Bank for Reconstruction and Development, Turkey: Prospects

and Problems of an Expanding Economy, Washington, D.C., Feb. 1974.

Jorgensen, D. W. and Griliches, Z., "The Explanation of Productivity Change,"

Review of Economic Studies, Vol. 34, no. 99, 1967.

Kelley, A. and Williamson, J.G., "Estimating Total Factor Productivity Growth

by Sector in LDCs during the Sixties and Early Seventies," Interim

Report, mimeo., May 1979.

48

Kendrick, John W., "Productivity Trends and the Reverse Slowdown: Hlistorical

Perspective, Causal Factors, and Policy Options," in W. Fellner

(project director), Contemporary Economic Problems, American Enterprise

Institute, Washington, D.C. 1979.

Krueger, Anne 0., Foreign Trade Regimes and Economic Development: Turkey,

Columbia University Press (for the National Bureau of Economic Research),

New York 1974.

Krueger, Anne 0. and Tuncer, Baran, "Microeconomic Aspects of Productivity

Growth under Import Substitution: Turkey," forthcoming.

Lianos, T.P., "Factor Augmentation in Greek Manufacturing," European Eco-

nomic Review, Vol. 8, 1976.

Nishimizu, M., "On the Methodology and the Importance of the Measurement

of Total Factor Productivity Change: the State of the Art," mimeo.,

World Bank, October 1979.

l'ishimizu, M. and Hulten, C.R., "The Sources of Japanese Economic Growth:

1955-71," The Review of Economics and Statistics, Vol. 60, August

1978.

Park, W. R., Cost Engineering Analysis, John Wiley and Sons, New York 1973.

Ringstad, V., Estimating Production Functions and Technical Changes from

Microdata, Statistisk Sentralbyra 1971.

Robinson, S., "Sources of Growth in Less Developed Countries: A Cross

Section Study," Quarterly Journal of Economics, August 1971.

Solow, Robert M., "A Contribution to the Theory of Economic Growth,"

Quarterly Journal of Economics, Vol. 70, Feb. 1956, pp. 65-94.

State Institute of Statistics, Census of Manufacturing Industries, 1963.

49

, Census of Manufacturing Industries, 1970.

, Annual Survey of Manufacturing Industries, various years

to 1976.

, Turkey's National Income: 1962-77.

State Planning Organization, Turkiye Imalat Sanayiinde Sermaye ve Isgucu

(Capital and Labor in Turkish Manufacturing Industry), Ankara, Dec. 1977.

A-1

APPENDIX A.

DATA AND PROCEDURES FOR ESTITMATION

As examination of Equation (2) indicates, estimates of dA/A are a

residual, and as such, are extremely sensitive to errors of measurement.

To be sure, estimating the fraction of output growth attributable to fac-

tor accumulation is itself of interest, but the residual nature of the

TFPG estimates still warrants care.

Basic data at hand covered the period from 1963 to 1976. They origi-

nated from the Turkish State Institute of Statistics, which publishes both

a periodic Census of Manufacturing Industries and a yearly Annual Survey

of Manufacturing Industries. Those publications provide data by industry

on: value of sales; number of employees; value of purchases of inter-

mediate goods and raw material inputs; annual exper'ditures on assets for

plant and equipment; and wage payments. There was also available, from the

State Planning Organization, a time series on capital stock.2

1. There is, to be sure, one check: the upper bound rate of TFPG is thedifference between the rate of growth of output and the most slowly growinginput while the lower bound is output growth rate less most rapidly growinginputs. Also, when errors in estimation of rates of growth of output andof inputs are biased in the same direction (or better yet grow in the sameproportion), the impact on the residual is reduced.

2. At first, we tried to use the SPO's capital stock figures for 1965and then to form our own capital stock estimates by subtracting depreciationand adding new assets (after adjusting for price level changes) for lateryears, and reversing the procedure for earlier years. The resulting figuresyielded implausibly low estimates of the rate of growth of capital stock inmanufacturing which has been the sector most encouraged by Turkish plannersand the trade regime. On investigation, it turned out that the Annual Surveyscover investments of existing firms but do not record net asset acqtuisitionby newly-starting firms in years before production begins. Thus, total invest-ment in industries is understated. It is perhaps reassuring that we couldinfer what was wrong from the estimates we had. See below for an accountof the procedures we used.

A-2

Researchers focusing on other countries will be confronted with a dif-

ferent set of data and different problems. Nonetheless, it is instructive

to record some of the difficulties wve faced and the procedures used to

resolve them, both to help others avoid some of our mistakes, and to

permit judgment as to the comparability of our results with those which

may be forthcoming fromv other countries. This is more conveniently

accomplished by discussing problems one by one than by describing pro-

cedures for forming each of the variables on the right hand side of

Equation (2).

Deflators for Output and Purchased Inputs

The SPO capital stock data were already in constant prices and

1therefore needed no adjustment on that account. For output and purchased

inputs, however, the data were in nominal terms and deflators were necessary

in order to adjust for price level changes. For output, this was readily

accomplished, as the Ministry of Commerce provided price data on a basis

comparable with the two-digit industries covered by the Census and Annual

Surveys. That using individual sectoral deflators is important can be

seen from the consideration that, in Turkey, the range of annual rates of

1. In attempting to construct our own capital stock series (as reportedin the preceding footnote), we did have separate "capital goods" pricedeflators, and used them to deflate investment before adding it to the(constant price) capital stock.

2. There were three exceptions. The index for "textiles and wearing apparel"was used for both textiles and for wearing apparel and footwear; similarly,the same index was used for both the machinery and the transport equipmentsectors.

For furniture and fixtures, the clothing and household goods component ofthe Istanbul wage earners' cost of living index was used.

A-3

price increase is estimated to have been from 4.8 percent annually (for

rubber and plastic products) to 12.5 percent annually (for wood and cork

products). Had, instead, the price index for all manufacturing been

used, with an annual average rate increase of 9.4 percent, the rate of

growth of output for wood and cork products would have been overstated

by 3.46 percent.

For purchased inputs, choice of deflators was more difficult. At

first glance, it would appear that one might assign to purchased inputs

a price index based upon the major supplying sector. That this procedure

is unsatisfactory can readily be appreciated by noting that an industry

such as textiles uses both cotton and synthetics as major inputs. The

price movements of the two are extremely divergent over the period under

review. Choice of cotton price as a deflator will overestimate the rate

of growth of purchased inputs (as the price of synthetics rose much more

rapidly) while choice of synthetics prices would underestimate the rate

of growth of purchased inputs. The final solution was to use the 1973

input-output table, applying the weights from that tableI (of purchased

inputs) to the different price indices (including agricultural and mineral

commodities as well as other industrial sectors) to yield a composite

1. The input-output table is at market prices. It does not differentiatenon-competitive and competitive imports. Presumably, the price index refersto the basket of goods, both domestic and imported, of a particular sector.When producers received import licenses directly, the price index presumablyoverstates their input cost for imported intermediate goods.

A-4

index for each manufacturing sector representing its average price of

purchased inputs.

W4e could have, as an alternative, estimated TFPG for real value added,

rather than for output. Initially, we chose output as a base because it

was clear that the quality of purchased inputs varied with the fraction of

those inputs which were imported and over time. Analysis of the data

quickly revealed that there was another, perhaps more compelling, reason.

That is, much of the development of manufacturing industry in Turkey has

been a process of vertical integration within firms and industries. The

development of the textile industry, for example, has taken place in

1. We are grateful to Yuji Kubo of the World Bank for having the computationsperformed. At a later date, the computations were rerun, using 1963, 1968,and 1973 input-output tables and interpolating weights for intervening years.Comparison of the constant-weight to interpolated weight estimates revealedonly very small differences in the indices, and then only for the middleyears, so that our final estimat2s were not affected for the 1963-76 meriod.For only one sector - transport equipment - did any yearly deviation amountto five percent, and even that deviation was reduced in subsequent years.We therefore did not rerun our results using interpolated indices.

For researchers interested in how much varying weights affect estimatedprices, we note the following. There was no change (up to five digits) inprice indices for food, beverages, tobacco, textiles, wearing appareland footwear, wood products, furniture, and both machinery sectors.Naturally, estimates for the years 1963 and 1973 to 1976 were unaltered.The ratio of the interpolated to the constant-weight price indices for theaffected sectors was, for the years indicated:

1964 1966 1968 1970 1972Paper .9956 1.0026 .9881 .9946 1.0001Leather 1.0026 1.0180 1.0023 1.0113 1.0108Rubber .9963 1.0085 1.0247 1.0174 1.0090Chemicals 1.0037 1.0158 1.0212 1.0147 1.0055Petroleum and coal products 1.0005 1.0026 .9978 .9967 .9994

Nonmetallic mineral products .9917 1.0000 1.0060 1.0012 1.0041Basic metals .9963 .9924 1.0067 .9970 1.0059Metal products 1.0039 1.0049 1.0047 1.0018 .9999Transport equipment .9937 .9631 .9811 .9896 .9914

A-5

large part through the purchase of progressively less processed materials,

and adding greater value to the raw materials in the domestic industry.

Output Elasticities

As indicated above, the value of wage payments and of purchases of raw

materials and intermediate goods was provided by the State Institute of

Statistics. Although the value of production taxes (an excise tax ranging

from 4-20 percent of value added imposed at the factory level) and other

indirect taxes are included in the value of output, data were not available

with which to correct for that. Thus, the residual was used as the share

of capital for purposes of estimating TFPG. Failure to correct for the

production tax undoubtedly overestimates the share of capital. Since capital

was growing more rapidly than labor in most industries, there is something

of a downward bias in the estimate of TFPG.3

1. There is a close relationship between value-added and output-based TFPGestimates. As Nishimizu (p. 15) has shown, if Xi = Ait (Li, K.i Mi), (where

L, K, and M are inputs of labor, capital, and purchased inputs respectively),failure to include M in estimating TFPG will result in an upward bias pro-portionate to the purchased input share in the value of output. Under thealternative specification of the production function (separability betweenprimary factors and purchased inputs with technological progress applyingonly to the former), the bias is reversed. In the Turkish case, it seemsclear that output is the preferable basis for estimation.

2. The other indirect taxes significantly affecting gross output valuesare important primarily for beverages, tobacco, and petroleum and coalproducts. Fertilizer production (in the chemicals sector, and mostly inthe public sector),is subsidized.

3. There is no reason to believe that tax rates changed to any significantextent over the 1963-76 period. The bias results from an overstatementof the capital share throughout.

A- 6

To glean some idea of the importance of the resulting bias, assu-me

two industries, both with rates of growth of output of 12 percent, of

capital stock of ten percent, of labor of five percent, and materials of

11 percent. Assume that the observed share in output of labor was 25

percent in each'industry, while that of materials was 40 percent. Failure

to adjust for production taxes would yield an estimate of TFPG of 2.85

percent. Assume now that the first industry had a production tax rate of

four percent on value added while the second had one of 20 percent. In

the first industry, the tax is four percent of 60 percent, so that the

"true" labor share is 25.6 percent, that of materials is 41 percent, and

that of capital is 33.4 percent. The revised TFPG estimate is 2.87

(compared with 2.85). In the second industry, with a tax of 20 percent

(on value added), the labor share is revised to 28.4 percent, the materials

share to 45.5 percent, and that of capital to 26.1 percent, and the TFPG

estimate is 2.97 percent. These numbers give some idea of the range of

bias imparted to our estimates: higher materials shares lower the scope

for bias, while higher capital shares raise it. In general, it does not

appear that failure to correct for the production tax could significantly

affect either the rank ordering of TFPG among industries, or the orders of

magnitude of our estimates. Under other circumstances, with taxes on

output (instead of value added) or higher tax rates, of course, the situa-

tion might be different.

A second problem also presented itself: as mentioned above, ideally

one should use a Divisia index of inputs, altering shares of each input

from year to year. After some experimentation, this procedure was not

followed for Turkish data because of th(J extreme volatility of the observed

factor shares from year to year. Indeed, there were even instances of

A- 7

reported negative returns to capital (as we computed the return), in which

case use of the Divisia index would have resulted in an assumed negative

share of capital for the affected industries for some part of the period.'

Extreme volatility of factor payments and of output also led us to

use trend values of outputs and inputs as computed by regressions of the

variables on time, rather than initial-year and terminal-year observa-

tions to estimate TFPG. Of the surprises encountered when dealing with

the data, perhaps the greatest was the large short-run vQlatility of the

variables.

Ultimately, average factor shares were used in conjunction with time-

trend rates of growth of outputs and inputs to estimate TFPG. No correc-

1. The use of negative elasticities gives meaningless results. In onecomputer run, a sector which had experienced negative output growth whileaccumulating capital with its workforce and materials inputs unchanged wascomputed to have had rapid TFPG: the high rates of capital accumulation,with its negative sign increased TFPG.

2. We also experimented with taking an average of the first two yearsand then last two years and computing the average growth rate between thosetwo periods. Even the, the trend value estimates were deemed preferable,because single-year fluctuations in the first or last two years still in-fluenced the estimates unduly, in our judgment.

3. The range of possible TFPG estimates is bounded by highest and lowestshares. To test the sensitivity of results, we examined sector 36, whichhad an above-average change in input shares and above-average differencesin rates of growth of inputs within the public-and private sector. Laborshare was lowest in 1963 in both public and private sectors. For the privatesector it was highest in 1971 (but never reatta?ined that level) and secondhighest in 1976. For the public sector it was highest in 1975 (at 21.'/percent of the value of output) and was 21.0 percent in 1976.

The following estimates of TFPG are obtained:Private Public

First-year shares .56 2.98Average .62 2.53Last-year shares .67 2.01

In general, the private sector substituted more toward capital than did thepublic sector, so that shares changed less. In sector 36, for example,the labor share was the same (at 9.8 percent) in 1963. By 1976, theprivate sector share had risen to 14.3 percent and that of the public sectorto 21.0 percent.

A-8

tion was possible for underutilization of capital stock and no

information was available to alter the observed "rnumber of employees" to

a more suitable measure such as man-hours (or to take account of any quality

changes in the labor force). Especially since strikes can affect indus-

tries for part of a year this latter omission may be at least as serious

as the former, although using time-trends reduces the likelihood that years

of extreme underutilization of capacity (which was not a prevalent phe-

nomenon in Turkey during the period under observation) or of part-year

work significantly affected the results.

Size Bias

The State Institute of Statistics and State Planning Organization

data cover only firms with ten or more employees. Insofar as data are

consistent, reporting all output and inputs for firms with ten or more

workers and no output or inputs for firms with less than ten employees,

estimated rates of TFPG are not affected. The reported rate of growth

of output and inputs do, however, overstate industry growth rates for

sectors where small firms become large enough to be enumerated. If,

however, prior investments of small firms are not included in capital

stock estimates when those firms expand to employ ten or more workers

(and other firms do not shrink their employment in offsetting fashion),

capital stock estimates will be understated. This in fact turned out.to

be the flaw in our effort to construct a capital stock series by per-

petual inventory methods.

For census years in Turkey, there has been a complete enumeration of

firms, so it is possible to draw some inferences about the relative import-

ance of small firms over time, and also their relative importance in dif-

A-9

ferent sectors of the Turkish economy. Appendix Tables A-1 and A-2

give details. As can be seen, in 1970 there were three sectors, wearing

apparel and footwear, wood and cork products, and furniture and fixtures,

in which firms with less than ten employees produced in excess of half of

industry output. This makes our data and estimates for those sectors in-

herently more unreliable than that for sectors where a very sizable fraction

of output was produced in firms covered by the Annual Surveys.

Table A-2 shows the diminishing role of smaller firms over time. Where-

as 51 percent of manufacturing employment was in firms employing less than

teni workers in 1963, only 39 percent of employment was in those firms in

19-0. In terms of value added, the share of small firms fell from 20 per-

cent in 1963 to 12 percent in 1970. That trend undoubtedly continued over

the 1970-76 period, although there are no further data available with which

to track the trend.

Interesting questions arise from examining the data in Tables A-1 and

A-2. If small firms are less productive than large firms, then the increas-

ing importance of firms with ten or more employees should itself constitute

a source of TFPG not covered by our estimates. If, on the other hand,

small firms concentrate on labor-intensive methods of production (while

not subject to social insurance laws, minimum wage provisions, and other

constraints on the employment of labor in the large-scale sector), in-

creasing concentration of output and value added in larger firms could

be a source of upward bias in our estimates to the extent that smaller

firms were more efficient in their use of inputs than larger ones.

This is an important question, but one on which the data available do

not provide a means to answer.

A-10

Table A-1. Distribution of Output Among Three Firm Size Classes inTwo-Digit Private Manufacturing Industries in 1970. (Per-centage of Output)

Number of Employees

1 - 4 5 - 9 10 or more

Food processing .10 .06 .84Beverages .03 .03 .94Tobacco .02 .01 .97Textiles .05 .03 .92Wearing apparel and footwear .73 .07 .20

Wood and cork products .48 .12 .40Furniture and fixtures .61 .12 .27Paper and paper products .04 .04 .92Fur and leather products .12 .02 .86Rubber products .04 .03 .93

Chemicals .04 .03 .93Petroleum and coal - - 1.00Nonmetallic minerals .09 .03 .88Basic metals .003 .02 .98Metal products .23 .10 .67

Machinery .08 .03 .89Electrical machinery .16 .07 .77Transport equipment .17 .04 .79

Total manufacturing .12 .04 .84

Source: State Institute of Statistics, Census of Manufacturing Industries1970

A-li

Table A-2. Relative Importance of Different Size Firms in Turkish Private

Manufacturing Industry: 1963 and 1970 (Percentage of Indicated

Total)

Number of Number ofEmployees Establishments Employment Output Value Added

1963 1970 1963 1970 1963 1970 1963 1970

1 to 4 .92 .93 .42 .33 .16 .12 .15 .09

5 to 9 .06 .04 .09 .06 .08 .04 .05 .03

10 or more .02 .03 .49 .61 .76 .84 .80 .88

Total 1.00 1,00 1.00 1.00 1.00 1.00 1.00r 1.00

Sources: State Institute of Statistics, Census of Manufacturing

Industries, 1963 and 1970

A-12

Perpetual Inventory Estimates of Capital Stock

For reasons stated in the text, we ultimately used SP0 estimates of

capital stock. Prior to doing so, however, considerable time and effort

was devoted to building our own perpetual inventory estimates. The pro-

cedures, and lessons we learned from them may be of value to other re-

searchers. Had our nominal investment data not been flawed, it is our

judgment that our procedure would have been satisfactory.

Estimates of capital stock were formed by depreciating existing

capital stock and adding new investment to it. A benchmark was provided

by assuming that the 1965 SP0 data were correct for the end of the year.

The estimates of investment from the Survey of Manufactures were then con-

verted to. 1963 prices, using the SP0 deflators. The missing data for 1969

were filled in by the following procedure. First, the average of 1968

and 1970 SP0 total investment figures was computed separately for public

and private investments. Then, these ratios were used to multiply the

average of individual sector (public and private separately) investments

for 1968 and 1970 to derive an estimated 1969 figure. The same procedure

was used for 1972 investments since the 1979 Annual Survey did not givie

any figures for investments.

The next step was to obtain estimates of economic rates of depreciation.

The SP0 has estimated that, in Turkey, the econor'. ife of a building is

233 years, while for machinery and equipment it is 15 years. About two-thirds

1. Capital stock figures came from State Planning Organization, TurkiyeImalat Sanayiinde Sermaye ve Isgucu (Capital and Labor in Turkish Manufactu-ring Industry), December 1977. The estimates are for 15 sectors. We dis-aggregated by taking the average shares of investment over 1963 to 1965of 20 and 21 in "food and beverages," 23 and 24 in "textiles and clothing,"25 and 26 in "wood products and furniture." We then prorated the SP0 esti-mates over the appropriate subitems.

2. State Planning Organization, Turkiye Imalat Sanayiinde Sermaye ve Isgucu,2op cit., p. 24.

A-13

of total investment is in machinery and equipment and about one-third in

buildings and other construction. The economic life of buildings does

not appear to vary significantly across industries, but that for maclhin-

ery and equipment may. We therefore used estimates for economic life of

machinery and equipment in the United States, scaled so that the weighted

average was 15 years. The length of life for machinery and equipment

so obtained is given-in Column (3) of Appendix Table A-3. We then muilti-

plied those estimates by two-thirds and added 11 (one-third times the

length of the life of buildings) to form the estimate of each sector's

depreciation rate.

Using those depreciation rates and the known rates of investment in

1965 prices, we were able to estimate capital stock. For 1963 through

1965, we subtracted the investment in those years, and added back in

implied depreciation. For later years, we added investment and subtracted

estimated depreciation on a straight line basis. This was done in such

a way that it was assumed that investment in year t became a part of

operational capital stock in year t plus one. For example, 1967 capital

stock was formed by taking the appropriate depreciation rate for the 1965

capital stock (which was taken from SPO data to be.1966 capital because

it was an end-of-year figure) and adding to it .the SIS-reported 1966

investment.

1. Data were from W. R. Park, Cost Engineering Analysis, John Wiley arid Sons,New York, 1973, p. 99, Table 26. To set the weighted average equal to thatestimated by the SPO, we took the share of each industry in output in 1968,and multiplied that share times that industry's assigned depreciatiorn rate.We then estimated the average length of life for all manufacturing, whichturned out to be 14.45 years. We therefore multiplied the estimate for eachindividual sector by 1.0376 to equate the weighted average to the SPO estim;it:e.

A-14

Table A-3. Output Deflators and Depreciation

Sector Output Deflator Depreciation

Food processing w Gida sanayii 22.57Beverages w Icki 22.57Tobacco w Tutum 21.37Textiles w Dokuma etc. 20.00Wearing apparel and footwear w Dokuma etc. 17.21

WJood and cork products w Agac sanayii 17.92Furniture and fixtures icl Giyim ve ev eUyasi 17.92Paper and products w Kagit 20.70Fur and leather products w Deri sanayii 18.62Rubber products w Kaucuk 20.70

Chemicals w Kimya 18.62Petroleum and coal w Petrol 22.07Nonmetallic minerals w Metalden g. mamul. 23.09Basic metals w Esas metal 22.07Metal products w Madeni esya 19.30

Machinery w Tarim makinalari 19.30Electrical machinery w Elektrik makinalari 19.30Transport equipment w Tarim makinalari 19.30

Note: w : "New" wholesale price index, Ministry of Commerceicl : Istanbul wage earners cost of living index.

A-15

Although any such procedure is subject to errors, experimentation

with different rates of depreciation and different methods of depreciation

(other than straight line) did not appear to alter the estimates signi-

ficantly. It should be noted that insofar as the method was wrong by the

same factor for each sector, the ranking of industries in terms of total

factor productivity cannot be affected unless the time-stream of invest-

ment differed by much more than appears to have been the case over Turkish

industries. The difference between a 12.5-year economic life and a

15-year economic life, for example, was about a percentage point difference

in the rate of growth of capital stock over the 13 year period.

1. If one industry had virtually no growth of capital stock and anotherindustry all new capital, while the first industry had a true straight-linedepreciation of capital and the second an economic life and then ceased tofunction, we would understate the second industry's rate of growth ofcapital stock relative to the first's. But there was no evidence that thetime path of depreciation differs significantly between industries-