Resource Misallocation in Manufacturing

46 b oostin G Pro D u C tivity in s ub- sA h A r A n Afri CA

insecure property rights and land market restrictions limit their ability to raise capital for agricultural production (Besley and Ghatak 2010; de Soto 2000). Eliminating resource misallocation in agriculture may yield significant aggregate output and productivity gains in Sub-Saharan Africa—for example, an increase of about 200 percent in Ethiopia (Chen, Restuccia, and Santaeulàlia-Llopis 2017) and 260 percent in Malawi (Restuccia and Santaeulàlia-Llopis 2017).

The inefficient allocation of inputs across manufacturing firms plays an important role in understanding underdevelopment: resource misallocation can explain up to 60 percent of aggregate TFP differences between poor and rich countries (Bartelsman, Haltiwanger, and Scarpetta 2013; Hsieh and Klenow 2009; Restuccia and Rogerson 2008). Firmlevel evidence from select Sub-Saharan African countries shows substantial misallocation of capital—as reflected in a greater dispersion in marginal products of capital (as well as domestic interest rates).9 In this context, smaller firms tend to display the largest degree of misallocation, which might be tied to their higher cost of capital relative to medium and large firms.10 More broadly, there is severe misallocation of resources across manufacturing firms as resources are shifted from the more-productive firms to the less-productive ones. This implies the coexistence of few productive firms with many low-productivity ones.

The efficient allocation of resources (say, capital and labor) is achieved when the marginal products of the factors of production are equal across manufacturing firms. In the presence of multiple intermediate inputs, efficiency is attained when TFPR is equal across firms. Hence, dispersion in TFPR signals resource misallocation, which in turn can be attributed to distortions in output and capital. Evidence from firm-level manufacturing census data of Côte d’Ivoire (2003–12), Ethiopia (2011), Ghana (2003), and Kenya (2010) shows that there is pervasive misallocation of resources across Sub-Saharan African manufacturing firms (Cirera, Fattal-Jaef, and Maemir 2018).

A look at the distribution of quantity and revenue productivity (TFPQ and TFPR, respectively) shows that there is also substantial variation in firm-level productivity in all four of these Sub-Saharan African countries. The productivity dispersion across manufacturing firms in Sub-Saharan Africa is larger than in more productive benchmarks—say, China, India, and the United States (Hsieh and Klenow 2009).

The magnitude of this productivity dispersion is particularly striking in Kenya, where less-productive firms coexist with a few very productive ones. Kenyan firms in the top decile of TFPQ are 290 percent more productive than firms in the bottom decile. The gap between the most and the least productive firms is about 87 percent in Ghana, 39 percent in Ethiopia, and 26 percent in Côte d’Ivoire (table 3.3) (Cirera, Fattal-Jaef, and Maemir 2018).

The dispersion of TFPR across manufacturing firms in the selected Sub-Saharan African countries is significantly higher than that of manufacturing firms in China, India, and the United States. For instance, the gap between the most and the least productive firms (as measured by the ratio of top to bottom TFPR deciles) is equal to 51 in Kenya, 17 in Ghana, 13 in Ethiopia, and 7 in Côte d’Ivoire. These gaps are substantially larger than those in China (4.9), India (5.0), and the United States (3.3). A plausible explanation for the excessive dispersion of TFPR across manufacturing firms is that policies and institutions in Sub-Saharan Africa may prevent the most-productive firms from expanding and replacing the least-productive ones. The potential productivity gains from better allocation of resources across manufacturing establishments would be substantial. An equalization of TFPR across firms in each industry would raise manufacturing productivity by 31.4 percent in Côte d’Ivoire, 66.6 percent in Ethiopia, 75.5 percent in Ghana, and 162.6 percent in Kenya.11