Are We Undercounting Reallocation's Contribution to Growth?

24 Pages Posted: 2 Mar 2017

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)

Martin Rotemberg

New York University (NYU)

T. White

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

Date Written: March 1, 2017

Abstract

There has been a strong surge in aggregate productivity growth in India since 1990, following significant economic reforms. Three recent studies have used two distinct methodologies to decompose the sources of growth, and all conclude that it has been 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 the methodologies used may artificially understate the extent of reallocation. One approach, using growth in value added, counts all reallocation growth arising from the movement of intermediate inputs as technical efficiency growth. The second approach, using the Olley-Pakes decomposition, uses estimates of plant-level total factor productivity (TFP) as a proxy for the marginal product of inputs. However, in equilibrium, TFP and the marginal product of inputs are unrelated. Using microdata on manufacturing from five countries – India, the U.S., Chile, Colombia, and Slovenia – we show that both approaches significantly understate the true role of reallocation in economic growth. In particular, reallocation of materials is responsible for over half of aggregate Indian manufacturing productivity growth since 2000, substantially larger than either the contribution of primary inputs or the change in the covariance of productivity and size.

Suggested Citation

Nishida, Mitsukuni and Petrin, Amil and Rotemberg, Martin and White, T., Are We Undercounting Reallocation's Contribution to Growth? (March 1, 2017). US Census Bureau Center for Economic Studies Paper No. CES-WP-13-55R, Available at SSRN: https://ssrn.com/abstract=2925854 or http://dx.doi.org/10.2139/ssrn.2925854

Mitsukuni Nishida (Contact Author)

Johns Hopkins University - Carey Business School ( email )

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Amil Petrin

University of Minnesota - Duluth ( email )

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National Bureau of Economic Research (NBER)

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Martin Rotemberg

New York University (NYU) ( email )

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T. White

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

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