Trade and Development

Trade, Productivity, and Economic Development

Lecture 6
Quick review of growth drivers
• Production functions, tech change, biased tech
change, and TFP
• PPFs – extensive vs intensive growth
• Most sophisticated assessments of growth suggest the
magic elixir is tech change, TFP that allows growth well
beyond additional input requirements. Allows labor
productivity growth and rising wages (and profits!)
• So does trade enhance productivity growth?
What can be done to boost productivity?
• From Atkin et al…
• Productivity growth is the driving force behind economic development.
• A large development accounting literature has shown that much of the difference in
income per capita across countries can be explained by differences in total factor
productivity (TFP) (see, e.g., Hall and Jones 1999, Caselli 2005).
• On top of its “direct” effect on output, TFP growth can have positive feedback effects on
human and physical capital accumulation (Hsieh and Klenow, 2010).
• Although productivity growth is a macroeconomic phenomenon, it results from a large
number of micro-level changes, including the reduction of critical distortions that appear
more prevalent in developing countries.
• It is useful to think about the necessary changes as arising from three types of
transformations: in the capabilities of firms, the functioning of markets, and the
interaction of firms with world markets.
• As discussed in previous class there are widespread differences across and within
countries in the capabilities of individual firms.
• Developing countries are typically characterised by a large number of small, unproductive
firms and very few large, highly-efficient, and disruptive companies (Hsieh and Olken 2014,
Eslava et al. 2019).
• Although there is abundant evidence that differences in capabilities explain an important
part of the differences in productivity across both firms and countries, there is little
evidence on why exactly these differences arise, and even less on interventions that could
solve the problem.
Allocative vs. Technical Efficieny
• A substantial literature shows that differences in management practices explain an
important part of overall differences in productivity across firms and across countries.
• New forms of technology that would bring firms closer to the efficiency frontier are
generally poorly adopted in developing countries. We review the evidence as to why this is
and explore possible interventions that would improve their adoption.
• There are also large differences in access to critical inputs across countries.
• There appear to be significant constraints in the access to skilled workers and capital, and
again, solving this problem looks complex. In developing countries, programs to upgrade
worker skills tend not to be effective, and programs to make capital available have, at best,
mixed results.
• Second, there appear to be significant distortions in the way that markets operate in
developing countries.
• How “good” is the allocation of factors of production across firms? Numerous studies
argue that there is significantly more dispersion in the value of marginal products of inputs
across firms in developing countries than in high-income countries, which can help explain
low levels of aggregate productivity.
• Misallocation can also take the form of output market distortions and frictions such as
trade and search costs that prevent firms from accessing domestic and world markets.
What does this mean in terms of
PPFs? Yes, again and again…
Declining costs of “equipment”
Domestic “institutions”
• Competitive forces may also be weaker in developing countries. For
example, there is emerging evidence that agricultural value chains in
many countries are controlled by a small number of firms with
significant market power. Yet, very few low-income countries have
antitrust strategies, and scarcely any sub-Saharan country has a
competition authority.
• Industrial policy can also play a role in alleviating market failures and
promoting positive externalities. Again, there is very limited evidence on
the magnitude of market failures and externalities that industrial policy
could help solve, or on the sectors in which these failures are more likely
to be present. Further research is needed to identify these externalities
and design appropriate policies, taking low implementation capacity
into account.
The role of trade?
• Trade can raise firm productivity.
• What are the ways international trade might exacerbate or alleviate the
distortions discussed in preceding slides?
• These include production externalities, firm-level and size-dependent
distortions, and potential thick-market adjustment frictions in factor markets.
• How might the various externalities that can be generated through trade or
connections with multinational corporations affect productivity?
• How might the state provide services to promote trade?
• Such as building the infrastructure necessary to conduct trading activities in a
cost-efficient way and pursuing export promotion policies where it makes sense
to do so.
• There is evidence on how international trade affects the distribution of income
across the economy. A large number of studies have documented that trade
liberalisation increases inequality, at least in the short run – which suggests one
needs to think about opportunities for inclusion in export-led growth.
How do you raise productivity in
ways that can reduce inequality?
• Most of the poor are informally employed in low-productivity and low-
paying jobs.
• Increasing the productivity of the firms that employ them
• Giving them the skills to be more productive agents
• Facilitating their transition to more productive sectors
• Enabling the gains from trade to be shared more widely are all crucial
elements of inclusive growth.
• But there is significant heterogeneity in the size of firms and variation in
ownership structures in developing countries and the magnitude of the
distortions or markets failures is likely to be significantly different across
firm types.
• Thus no one-size fits all policy approach.
Developed country example
• Collard-Wexler and De Loecker – Reallocation and
Technology: Evidence from the US Steel Industry
• Technological change…minimills
• “We find that the main reason for the rapid productivity growth and
the associated decline in employment is neither a steady drop in
steel consumption nor the emergence of globalization. Nor is it a
displacement of production away from the Midwest. The increase
in productivity can be directly linked to the introduction of a new
production technology, the steel minimill.
• TFP in steel grew by 28% compared to an avg of 7% over the period
1972 to 2002. Employment dropped 80%
• Tons of steel used per billion dollars of constant-dollar GDP:
• 2018-2020: 5,360 tons
• 1993-1997: 9,190 tons
• 1968-1972: 18,850 tons
Developing country example…
• Hsieh and Klenow – Misallocation and
Manufacturing TFP in China and India.
• Resource misallocation can lower aggregate total factor productivity (TFP). We use microdata on
manufacturing establishments to quantify the potential extent of misallocation in China and India
versus the United States. We measure sizable gaps in marginal products of labor and capital across
plants within narrowly defined industries in China and India compared with the United States. When
capital and labor are hypothetically reallocated to equalize marginal products to the extent observed in
the United States, we calculate manufacturing TFP gains of 30%–50% in China and 40%–60% in India.
• Large differences in output per worker between rich and poor countries have been attributed, in no
small part, to differences in total factor productivity (TFP). The natural question then is: What are the
underlying causes of these large TFP differences? Research on this question has largely focused on
differences in technology within representative firms. For example, Howitt (2000) and Klenow and
Rodrıguez-Clare (2005) show how large TFP differences can emerge in a world with slow technology
diffusion from advanced countries to other countries. These are models of within-firm inefficiency, with
the inefficiency varying across countries.
• We use a standard model of monopolistic competition with heterogeneous firms, essentially Melitz
(2003) without international trade, to show how distortions that drive wedges between the marginal
products of capital and labor across firms will lower aggregate TFP.
Trade opening and firm
productivity…
• Amiti and Konings: Trade Liberalization and
Productivity: Evidence from Indonesia.
• This paper estimates the productivity gains from reducing tariffs on final goods and from reducing
tariffs on intermediate inputs. Lower output tariffs can increase productivity by inducing tougher
import competition, whereas cheaper imported inputs can raise productivity via learning, variety, and
quality effects. We use Indonesian manufacturing census data from 1991 to 2001, which include plant-
level information on imported inputs. The results show that a 10 percentage point fall in input tariffs
leads to a productivity gain of 12 percent for firms that import their inputs, at least twice as high as any
gains from reducing output tariffs.
Discussion questions:
• How important do you think the trade channel is
for enhancing productivity?
• What other channels exist to enhance productivity
growth?
• For a development and growth strategy, particularly
for governments with limited budget capacity, what
might be some creative ways to enhance
productivity growth at relatively low cost?
• Can you give examples from your personal
experience where you have observed successful or
unsuccessful attempts to raise productivity?