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Total Factor Productivity Growth and Structural Change in Transition Economies

Total Factor Productivity Growth and Structural Change in Transition Economies. El-hadj Bah Arizona State University and University of Auckland Josef C. Brada Arizona State University and Macedonian Academy of Sciences and Arts. Closing pcy Differences Between Old and New Members.

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Total Factor Productivity Growth and Structural Change in Transition Economies

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  1. Total Factor Productivity Growth and StructuralChange in Transition Economies El-hadj BahArizona State University and University of Auckland Josef C. Brada Arizona State University and Macedonian Academy of Sciences and Arts

  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. TFP in New EU Members

  3. Income/Productivity Convergence TFP in New EU Members Source: EU

  4. Contributions to “potential” growth (period average) of: TFP in New EU Members Source: EU

  5. 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”. TFP in New EU Members

  6. Agriculture’s Share of Employment TFP in New EU Members Source: EU

  7. Industry’s Share of Employment TFP in New EU Members

  8. Market Services’Share of Employment TFP in New EU Members

  9. Why worry? • Can TFP growth continue? • What are the effects of structural change on TFP growth? TFP in New EU Members

  10. 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. TFP in New EU Members

  11. 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 TFP in New EU Members

  12. 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. TFP in New EU Members

  13. 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)) TFP in New EU Members

  14. 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 TFP in New EU Members

  15. 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 TFP in New EU Members

  16. Preferences • Household lives forever, supplies labor to 3 sectors, earns income. • Utility TFP in New EU Members

  17. Technologies • Agriculture uses only labor and land (L=1), and is only used for consumption. With NA the agricultural labor, where TFP in New EU Members

  18. 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. TFP in New EU Members

  19. Services • Services are only consumed. where TFP in New EU Members

  20. 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 TFP in New EU Members

  21. SP Model Choose TFP in New EU Members

  22. 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 Calibration to US Data 1950 - 2000 ε = 0.335 (U) γm= 0.019 (T) γs = 0.009 (T) λ = 0.01 (U) Θ = 0.03 (U) TFP in New EU Members

  23. Apply Model and Calibrated Values to Austria and New EU Members • Austria as a comparator Per Capita Incomes as % of EU-15 Average Country 1997 2005 Austria 112.9 113.3 Czech Republic 61.9 67.8 Estonia 35.0 51.7 Latvia 29.8 43.1 Lithuania 33.3 47.1 Hungary 45.5 57.2 Poland 40.1 46.0 Slovak Republic 42.3 50.1 Slovenia 64.5 75.0 (source: EU) TFP in New EU Members

  24. 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. TFP in New EU Members

  25. Austria TFP in New EU Members

  26. Bulgaria TFP in New EU Members

  27. Czech Republic TFP in New EU Members

  28. Estonia TFP in New EU Members

  29. Hungary TFP in New EU Members

  30. Latvia TFP in New EU Members

  31. Lithuania TFP in New EU Members

  32. Poland TFP in New EU Members

  33. Slovak Republic TFP in New EU Members

  34. Slovenia TFP in New EU Members

  35. AG TFP vs Austria TFP in New EU Members

  36. IND TFP vs Austria TFP in New EU Members

  37. SERVICES TFP vs Austria TFP in New EU Members

  38. Rankings of Sectoral TFPs Relative to the US -1950 Country Ranking Bulgaria IND>SER>AGR Czech Republic AGR>IND>SER Estonia AGR>IND>SER Hungary AGR>IND>SER Latvia IND>AGR>SER Lithuania IND>SER>AGR Poland IND>SER>AGR Slovak Republic AGR>IND>SER Slovenia IND>SER>AGR TFP in New EU Members

  39. Loss of GDP per capita due to structural transformation (as % of 1995 GDP per capita) Country % Loss Austria 1.28 Bulgaria 0.95 Czech Republic 2.29 Estonia 3.83 Hungary 2.31 Latvia 4.47 Lithuania 6.55 Poland 2.74 Slovak Republic 4.44 Slovenia 3.16 TFP in New EU Members

  40. 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. ? TFP in New EU Members

  41. Thank you. TFP in New EU Members

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