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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.
Bah-Brada TFP in New EU Members 3
Income/Productivity Convergence
Source: EU
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
Bah-Brada TFP in New EU Members 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”.
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
Bah-Brada TFP in New EU Members 7
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
Bah-Brada TFP in New EU Members 8
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
Bah-Brada TFP in New EU Members 9
Why worry?
• Can TFP growth continue?
• What are the effects of structural change on TFP growth?
Bah-Brada 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.
Bah-Brada 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
Bah-Brada 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.
Bah-Brada 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))
Bah-Brada 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
Bah-Brada 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
Bah-Brada TFP in New EU Members 16
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
Bah-Brada 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,
1tatatt LNAA
tataat AA )1(
where
Bah-Brada 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.
1mtmtmttt NKAXM
tmtmmt AA )1(
1 (1 )t t tK K X
Bah-Brada TFP in New EU Members 19
Services
• Services are only consumed.
where
1stststt NKAS
tstsst AA )1(
Bah-Brada 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
Bah-Brada TFP in New EU Members 21
SP Model
Choose ),,,,,,,( ttstmtatstmtt LSNNNKKK
Tt
tTt A)(log(max
Bah-Brada TFP in New EU Members 22
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)
Bah-Brada TFP in New EU Members 23
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)
Bah-Brada 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.
Bah-Brada TFP in New EU Members 25
Austria
Bah-Brada TFP in New EU Members 26
Bulgaria
Bah-Brada TFP in New EU Members 27
Czech Republic
Bah-Brada TFP in New EU Members 28
Estonia
Bah-Brada TFP in New EU Members 29
Hungary
Bah-Brada TFP in New EU Members 30
Latvia
Bah-Brada TFP in New EU Members 31
Lithuania
Bah-Brada TFP in New EU Members 32
Poland
Bah-Brada TFP in New EU Members 33
Slovak Republic
Bah-Brada TFP in New EU Members 34
Slovenia
Bah-Brada TFP in New EU Members 35
AG TFP vs Austria
Bah-Brada TFP in New EU Members 36
IND TFP vs Austria
Bah-Brada TFP in New EU Members 37
SERVICES TFP vs Austria
Bah-Brada TFP in New EU Members 38
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
Bah-Brada TFP in New EU Members 39
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
Bah-Brada 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. ?
Bah-Brada TFP in New EU Members 41
Thank you.