How Important are Dual Economy Effects for Aggregate Productivity?

Abstract

This paper brings together development accounting techniques and the dual economy model to address the role that factor markets have in creating variation in aggregate total factor productivity (TFP). Development accounting research has shown that much of the variation in income across countries can be attributed to differences in TFP. The dual economy model suggests that aggregate productivity is depressed by having too many factors allocated to low productivity work in agriculture. Data show large differences in marginal products of similar factors within many developing countries, offering prima facie evidence of this misallocation. Using a simple twosector decomposition of the economy, this article estimates the role of these misallocations in accounting for the cross-country income distribution. A key contribution is the ability to bring sector-specific data on human and physical capital stocks to the analysis. Variation across countries in the degree of misallocation is shown to account for 30-40% of the variation in income per capita, and up to 80% of the variation in aggregate TFP.

Do all countries grow alike?

“…Recall that the share of the relatively unproductive and often inefficient agricultural sector (Vollrath, forthcoming) is the highest in regime C. The negative relationship between output per capita and primary sector share across our regimes may reflect a dual economy reallocation problem (Vollrath, forthcoming;Caselli, 2005). Labor in the agricultural sector, which tends to be less than perfectly mobile, may lead to factor market misallocations that seriously hamper growth if labor productivity in this sector falls too low.…”

Dualism and cross-country growth regressions

“…Our study of growth in the presence of marginal product differentials can be seen as a dynamic counterpart to the recent analyses of Temple (2004) and Vollrath (2005). Their work examines the static output losses that are associated with factor market distortions, by comparisons of a distorted equilibrium with a first-best allocation in which marginal products are equalized across sectors.…”

Labor reallocation in China: 1978–2011

“…The mismatch of labor forces resulting from these barriers leads to price distortion of input factors, which further affects the labor flow across sectors. This effect is channeled both through enterprises' production activities in agricultural sector and non-agricultural sector, and through residents' consumption behaviors (Chanda and Dalgaard, 2008;Vollrath, 2009). In particular, this mismatch exists not only just between agricultural and non-agricultural sectors, but also between public sector and private sector (Hsieh and Klenow, 2009;Song et al, 2011).…”