Are We Undercounting Reallocation’s Contribution to Growth?

23 Pages Posted: 31 Dec 2013

See all articles by Mitsukuni Nishida

Mitsukuni Nishida

Johns Hopkins University - Carey Business School

Amil Petrin

University of Minnesota - Duluth; National Bureau of Economic Research (NBER)

T. White

Government of the United States of America - Bureau of the Census

Date Written: November 1, 2013

Abstract

Reallocation growth occurs when an input moves from a lower marginal product to a higher marginal product activity. Three recent studies use two distinct methodologies to examine the sources of the strong surge in aggregate productivity growth (APG) in India’s manufacturing sector since 1990 following significant economic reforms. They all conclude that APG was primarily driven by within-plant increases in technical efficiency and not between-plant reallocation of inputs. Given the nature of the reforms, where many barriers to input reallocation were removed, this finding has surprised researchers and been dubbed “India’s Mysterious Manufacturing Miracle.” In this paper we show that these findings may be an artifact of the way the studies estimate reallocation. One approach counts all reallocation growth arising from the movement of intermediate inputs as technical efficiency growth. The second approach introduces measurement error into estimated reallocation by using plant-level average products - total factor productivity residuals - as a proxy for marginal products, which could be problematic as economic theory suggests that average products and marginal products are unrelated in equilibrium. Using microdata on manufacturing from 4 countries — the U.S., Chile, Colombia, and Slovenia — we show that both approaches significantly understate the true role of reallocation in economic growth. In the U.S. almost 50% of reallocation growth is due to movements of intermediate inputs, meaning if India is similar to the U.S. then reallocation’s share of total Indian manufacturing APG since 1990 increases from the previous estimate of one-third to almost two-thirds.

Suggested Citation

Nishida, Mitsukuni and Petrin, Amil and White, T., Are We Undercounting Reallocation’s Contribution to Growth? (November 1, 2013). US Census Bureau Center for Economic Studies Paper No. CES-WP-13-55. Available at SSRN: https://ssrn.com/abstract=2373564 or http://dx.doi.org/10.2139/ssrn.2373564

Mitsukuni Nishida (Contact Author)

Johns Hopkins University - Carey Business School ( email )

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HOME PAGE: http://https://sites.google.com/site/mitsukuninishida/

Amil Petrin

University of Minnesota - Duluth ( email )

1049 University Drive
Duluth, MN 55812
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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T. White

Government of the United States of America - Bureau of the Census

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Washington, DC 20233-9100
United States

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