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 two-sector 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.

Structural Change and Income Inequality – Agricultural Development and Inter-sectoral Dualism in the Developing World, 1960-2010

“…The neglect of agriculture and the dual nature of the developing economy in the discussion on the relationship between growth and income inequality continues to attract surprisingly little attention (Timmer, 1988(Timmer, , 2007Bourguignon and Morrisson, 1998;Vollrath, 2009). One reason might be that the decline of the agricultural income share in the total gdp gives the impression of being automatic and unlikely to act as a stimulator of the economy at large.…”

Use Rights for Common Pool Resources and Economic Development

“…This implies that in both sectors, steady-state incomes can only be equal in a developed economy. This result is supported by empirical evidence that the income gap between the traditional and the modern sector declines with GDP per capita (Vollrath 2009). Furthermore, the threshold value n for the mass of individuals in the traditional sector decreases in the incomes of the modern sector.…”

“…This is in sharp contrast to empirical evidence in low-income countries. In these countries, the returns to human capital are much higher in the manufacturing sector than in agriculture (Vollrath 2009;Gollin et al 2014), and a large share of the income differences between countries can be attributed to this misallocation of labor (Vollrath 2009;Duarte and Restuccia 2010). An inefficient labor allocation and the resulting low productivity in parts of the economy have been explained by credit market imperfections in combination with fixed investment costs and unequal wealth distribution (Galor and Zeira 1993;Banerjee and Newman 1993;Aghion and Bolton 1997;Matsuyama 2006).…”

Escaping Famine Through Seasonal Migration

“…Inducing the inaugural migration by insuring against this devastating outcome (which our grant or loan with implied limited liability managed to do) can lead to long-run benefits where households either learn how well their skills fare at the destination, or improve future prospects by allowing employers to learn about them. Such frictions may be part of what keeps workers in agriculture despite the persistent productivity gap between rural agriculture and urban nonagriculture sectors (Gollin et al, 2002;Caselli, 2005;Restuccia et al, 2008;Vollrath, 2009;Gollin et al, 2011;McMillan & Rodrik, 2011).…”