Total Factor Productivity Growth and Structural Change in Transition Economies El-hadj Bah Arizona...

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

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.


Income/Productivity Convergence

Source: EU


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


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”.


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


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



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



Why worry?

• Can TFP growth continue?

• What are the effects of structural change on TFP growth?


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.


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


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.


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))


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


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


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


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


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


Services

• Services are only consumed.

where

1stststt NKAS

tstsst AA )1(


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


SP Model

Choose ),,,,,,,( ttstmtatstmtt LSNNNKKK

Tt

tTt A)(log(max


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)


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)


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.


Austria


Bulgaria


Czech Republic


Estonia


Hungary


Latvia


Lithuania


Poland


Slovak Republic


Slovenia


AG TFP vs Austria


IND TFP vs Austria


SERVICES TFP vs Austria


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


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


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. ?


Thank you.

Total Factor Productivity Growth and Structural Change in Transition Economies El-hadj Bah Arizona...

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