total factor productivity growth and structural change in transition economies el-hadj bah arizona...
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![Page 1: Total Factor Productivity Growth and Structural Change in Transition Economies El-hadj Bah Arizona State University and University of Auckland Josef C](https://reader030.vdocuments.us/reader030/viewer/2022032709/56649ea35503460f94ba7f9c/html5/thumbnails/1.jpg)
Total Factor Productivity Growth and Structural
Change in Transition Economies
El-hadj BahArizona State University
andUniversity of Auckland
Josef C. BradaArizona State University
andMacedonian Academy of Sciences and Arts
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Bah-Brada TFP in New EU Members 2
Closing pcy Differences Between Old and New Members
• Growth accounting literature (Solow (1957), Prescott (1998) and Hall and Jones (1999), etc.) stresses:– Changes in total factor productivity (TFP)
account for the largest part of economic growth.
– International differences in TFP account for the bulk of international differences in pcy.
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Bah-Brada TFP in New EU Members 3
Income/Productivity Convergence
Source: EU
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Bah-Brada TFP in New EU Members 4
Contributions to “potential” growth (period average) of:
Labor Hours
Capital TFP Change
EU 10
1998-2000 -0.8 2.3 2.2
2001-2005 -0.4 1.8 2.1
EU 15
1998-2000 0.3 0.8 1.3
2001-2005 0.4 0.6 1.0
Source: EU
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Income/Productivity Convergence is Accompanied by Structural Change
• Kuznets (1966) – pervasive pattern of structural change accompanying economic development.
• Over-industrialization, over-“agrarianism” and neglect of service sector under Communism (Gregory, 1970; Ofer, 1976) due to ideology and “common sense”.
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Bah-Brada TFP in New EU Members 6
Agriculture’s Share of Employment
Country 1991 2001
Czech Rep 8.6 4.7
Estonia 18.9 6.8
Hungary 17.9 6.1
Poland 25.4 18.8
Slovakia 12.7 6.1
Slovenia 8.2 5.1
8 New EU 15.1 9.8
12 rich EU countries 5.2 3.5
Source: EU
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Industry’s Share of Employment
Country 1991 2001
Czech Rep 31.5 27.6
Estonia 25.0 23.0
Hungary 26.1 24.4
Poland 24.7 20.1
Slovakia 26.9 25.9
Slovenia 39.0 28.9
8 new EU 27.1 23.0
12 rich EU countries 21.2 17.9
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Market Services’ Share of Employment
Country 1991 2001
Czech Rep 24.7 31.9
Estonia 24.4 34.9
Hungary 28.5 33.6
Poland 19.0 28.8
Slovakia 26.2 30.4
Slovenia 26.9 33.2
8 new EU 25.4 31.9
12 rich EU countries 33.1 37.0
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Why worry?
• Can TFP growth continue?
• What are the effects of structural change on TFP growth?
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Barriers to Continued TFP Growth in New Members
• Reforms cease – better institutions yield higher TFP.
• Outward opening slows – globalization and FDI inflows raise TFP.
• Granick - Prescott effects wear off.
• EE has a poor record of TFP growth.
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EE’s record of TFP
• Slowdown in Soviet TFP growth noted in 1960s (Kaplan, 1968).
• We were confused by Weitzman (1970) and Easterly and Fischer (1995).
• Studies of EE economies used variety of models & statistical techniques but all came to the same conclusion. By the early 1980s, only source of growth was “extensive” – TFP was zero.
• If determinants of the level of TFP are slow to change, current TFP growth may be temporary
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Structural Change
• Is the structural change we have seen in EE a source of positive change in TFP?
• Development literature (e.g.,Herrendorf and Valentinyi (2006); Hsieh and Klenow (2007); Bah(2008)) suggest that TFP levels differ among sectors.
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Why Not Apply Growth Accounting to Transition Economies ?
• Sectoral Data Not Available.• Even Aggregate Capital Stocks Suffer from
Major Defects (Campos and Coricelli (2002)). – Large but unmeasured depreciation and
abandonment– Moral depreciation – large changes in pattern of
production and in technology
• Estimates of TFP depend critically on “revisions” of “official” data (Izumov and Vahaly (2006, 2008))
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This Paper
• Builds a dynamic 3 sector (Agriculture, Industry, Services) model
• Calibrates the model using US data
• Calculates Austrian sectoral TFP using Austrian sectoral labor allocation
• Compares Austrian TFPs to those of transition economies
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The Model
• Key features for labor reallocation across sectors:– Non-homothetic preferences and agricultural TFP
growth drive labor out of agriculture– TFP growth differential and elasticity of substitution
between industrial and services output drive labor reallocation in those 2 sectors.
• Closed economy
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Preferences
• Household lives forever, supplies labor to 3 sectors, earns income.
• Utility
AAifA
AAifA
AU
tt
tt
tt
)log(
)(
AAifA
AAifA
AU
tt
tt
tt
)log(
)(
111
)1(
ttt SM
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Technologies
• Agriculture uses only labor and land (L=1), and is only used for consumption. With NA the agricultural labor,
1tatatt LNAA
tataat AA )1(
where
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Technologies
• Industrial output can be consumed or invested.
where
• The law of motion of the aggregate capital stock (K) in the economy is given by:
where δ is the depreciation rate.
1mtmtmttt NKAXM
tmtmmt AA )1(
1 (1 )t t tK K X
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Services
• Services are only consumed.
where
1stststt NKAS
tstsst AA )1(
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Solving the Model
• A competitive equilibrium is a set of allocations and prices such that:(i) Taking prices as given, the householdmaximizes lifetime utility subject to its budgetconstraint(ii) Taking prices as given, the representativefirm in each sector maximizes profits(iii) Markets clearEquivalent to a social planner’s (SP) problem
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SP Model
Choose ),,,,,,,( ttstmtatstmtt LSNNNKKK
Tt
tTt A)(log(max
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Calibration to US Data 1950 - 2000
Aa = 1 in 1950
Am = 1 in 1950
As =1 in 1950
Ãa = 0.24
α = 0.70 (T)
β = 0.975
δ = 0.05
ε = 0.335 (U)
γm = 0.019 (T)
γs = 0.009 (T) λ = 0.01 (U)
Θ = 0.03 (U)
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Apply Model and Calibrated Values to Austria and New EU Members
• Austria as a comparatorPer Capita Incomes as % of EU-15 Average
Country 1997 2005Austria 112.9 113.3Czech Republic 61.9 67.8 Estonia 35.0 51.7Latvia 29.8 43.1Lithuania 33.3 47.1Hungary 45.5 57.2Poland 40.1 46.0Slovak Republic 42.3 50.1Slovenia 64.5 75.0 (source: EU)
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Intuition for Solution
At a heuristic level, given the calibrated preference
parameters:
Employment in agriculture determines agricultural
TFP.
Relative employment between industry and services determines relative TFP between them.
Aggregate GDP per capita determines the levels of TFP in industry and services.
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Austria
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Bulgaria
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Czech Republic
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Estonia
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Hungary
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Latvia
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Lithuania
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Poland
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Slovak Republic
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Slovenia
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AG TFP vs Austria
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IND TFP vs Austria
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SERVICES TFP vs Austria
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Rankings of Sectoral TFPs Relative to the US -1950
Country RankingBulgaria IND>SER>AGRCzech Republic AGR>IND>SEREstonia AGR>IND>SERHungary AGR>IND>SERLatvia IND>AGR>SERLithuania IND>SER>AGRPoland IND>SER>AGRSlovak Republic AGR>IND>SERSlovenia IND>SER>AGR
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Loss of GDP per capita due to structural transformation (as % of 1995 GDP per capita)
Country % LossAustria 1.28Bulgaria 0.95Czech Republic 2.29Estonia 3.83Hungary 2.31Latvia 4.47Lithuania 6.55Poland 2.74Slovak Republic 4.44Slovenia 3.16
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Policy Implications
• Sectoral differences are important– In some countries catch up is hampered by poor
performance in one or more sectors– Structural change not a major drag
• Specific policy measures depend on how we believe TFP is determined
• Research question: Is sectoral TFP performance linked to nature of reforms such as privatization, governance, regulation, etc. ?
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Thank you.