Dani Rodrik and co-authors have a very important paper that has several lessons of relevance to countries like India. I have blogged earlier about the dual nature of the Indian economy, a small formal sector co-existing with a very large informal sector.
The paper highlights a dual nature of the manufacturing sectors in Tanzania and Ethiopia,
Recent growth accelerations in Africa are characterized by increasing productivity in agriculture, a declining share of the labor force employed in agriculture and declining productivity in modern sectors such as manufacturing. To shed light on this puzzle, we disaggregate firms in the manufacturing sector by size using two newly created panels of manufacturing firms, one for Tanzania covering 2008-2016 and one for Ethiopia covering 1996-2017. Our analysis reveals a dichotomy between larger firms that exhibit superior productivity performance but do not expand employment much, and small firms that absorb employment but do not experience any productivity growth. We suggest the poor employment performance of large firms is related to use of capital-intensive techniques associated with global trends in technology.
As to its reasons, they question the conventional wisdom,
We find no evidence of a “missing middle” in the size distribution of firms in Tanzania and Ethiopia. The distribution of firm size is heavily right skewed, with a predominance of small firms and generally a smooth decline in frequency over the firm size distribution. There are no indications of a bimodal distribution... high labor costs (relative to productivity) are often cited as constraints on employment growth in Africa. But as we will show below, payroll shares in total value added in both Tanzania and Ethiopia are exceedingly low, even in the more labor-intensive sectors... explanations that posit a “poor business environment” are belied by the high dynamism in Tanzania’s and Ethiopia’s manufacturing sectors, as captured by our analysis of entry and exit rates... entry rates during the two countries’ high-growth periods have been as high, if not higher, than the levels observed for Vietnam.
Comparing Ethiopia and Tanzania with a much richer country like Czech Republic, they find,
We note in particular that the 10% most capital-intensive large firms, producing around a quarter of manufacturing value added (but employing less than 10 percent of the manufacturing workforce), have particularly high capital to labour, K/L, ratios. In Ethiopia these large firms are at 72 percent of the K/L ratio for Czech manufacturing. Tanzania’s large firms actually have K/L ratios that significantly exceed those for Czech manufacturing... the increase in capital-intensity in large manufacturing firms in both Tanzania and Ethiopia has far outstripped economy-wide capital deepening. By contrast, in the Czech Republic not only is capital intensity lower in manufacturing than in the economy as a whole, the two measures have moved more or less in parallel in recent years.Another striking indicator of low levels of labor-intensity in African manufacturing is the payroll share in total value added. In the Czech economy, the payroll share in aggregate manufacturing is slightly below 50 percent and rises to 57 percent for garments & textiles. In Tanzania and Ethiopia, by contrast, the payroll share is in the range of 11-12 percent and rises merely to 20-24 percent in garments & textiles. It is generally known that labor shares in value added are overstated in developing countries because of the predominance of owner-operated firms. Even accounting for that downward bias, the low payroll share in Tanzania and Ethiopia is striking... This evidence on payroll shares also suggests that high labor costs – in relation to per capita incomes or level of productivity – cannot account for the capital intensity of our African firms.
Their conclusions are important,
In sum, we draw four conclusions from this evidence. First, while K/L ratios in African manufacturing are lower than in much richer comparator nations, these ratios are still much higher than would be expected based on their relative labor abundance and low per-capita income levels. Second, if we focus on the largest firms, K/L ratios in Tanzania and Ethiopia are actually comparable to those in much richer OECD countries. Third, exporting firms or the traditionally labor-intensive textiles and clothing firms do not exhibit lower K/L ratios than other manufacturing firms on average. Finally, K/L ratios have increased much more rapidly in Tanzanian and Ethiopian manufacturing than in the economy as a whole.
For a small sample of countries, they find that the trend of decline in employment due to 'premature deindustrialisation' is almost completely concentrated among low-skill labour category.
A World Bank study found that both the direct and indirect employment created per dollar of exports have halved between 1997 and 2011 for a sample of 30 countries,
So, Rodrik et al posit an alternative explanation for the dual-nature economy,
We argue that the broad patterns we have observed with respect to productivity and employment can be explained by excessively capital- intensive modes of production in manufacturing in our two African economies... Since the bulk of technological innovation takes place in the advanced countries where factor proportions favor automation and skills, the direction that technological change has taken is not surprising. Producers in developed countries have tried to save on labor costs, especially as competition from low-wage exporters became more intense. But for developing countries, who are technology importers, the consequences are hardly salutary. Even if the new technologies disseminate rapidly and poor nations can easily acquire them, the declining low-skill intensity of manufacturing implies a reduction in comparative advantage in simple manufactures, less labor absorption by manufacturing, and lower growth possibilities...
In short, the manufacturing technologies on offer on world markets have moved steadily away from the factor proportions of labor-abundant countries. This has made it difficult for African firms to simultaneously enhance productivity and increase employment. Adopting new technologies has meant adopting mostly capital- and skill-intensive technologies and has resulted in less price-responsive supply curves. As a result, only the less productive firms retain the ability to absorb significant amounts of labor.
Its long-term implications are deeply disturbing,
From the standpoint of trade theory, our interpretation amounts to an argument that African and other low-income countries have been losing comparative advantage in traditionally labor-intensive manufactures due to a trend reduction in their labor intensity. This implies a loss in the gains from trade. It also lowers the ceiling on industrialization and constrains the capacity of African manufacturing to absorb labor productively.
Dani Rodrik writes elsewhere of the revival of an old dilemma for African economies,
Their manufacturing firms can either become more productive and competitive, or they can generate more jobs. Doing both at the same time seems very difficult, if not impossible.
The dual nature economy contrast between African and East Asian countries is captured in the two graphics. The share of formal sector in employment is tiny in case fo Tanzania and Ethiopia.
In contrast, the share of formal sector dominates employment distribution in Taiwan and Vietnam.
The graphic is interesting. In the case of India, while the productivity boost due to structural transformation is significant and as large as those of Asia as a whole, the change within agriculture is negligible and within non-agriculture small. Incidentally, in Asia, the major boost to productivity in growth acceleration period came from productivity increases within non-agriculture sectors.
No comments:
Post a Comment