6. Total Factor Productivity and Resource Reallocation 135 1. Measurement of Total Factor Productivity Growth
6.4. The Impact of Resource Allocation on TFP Growth
Empirical Findings
Before interpreting the results of the analysis there is a need to review TFP growth performances of promoted industries especially after 1985.
TFP growth rates of promoted industries will be compared below with the economy and manufacturing averages and later the contributions by pro- moted industries to aggregate TFP growth will be investigated. TFP growth
found by the following approximation formula:
soi= 1
2(soi(T )+soi(T−1)).
Multiplying the sectoral growth rates of productivity by sectoral value-added shares and deducting this value from aggregate productivity growth rate:
sT =soi sqi ãsTi
+
[lnQ(T )−lnQ(T−1)] −
soi[lnQi(T )−lnQi(T−1)] + soiãsKi
sqi
sKki[lnKki(T )−lnKki(T−1)]
− sK
sKk[lnKk(T )−lnKk(T−1)]
+ soiãsli sqi
sLli[lnLli(T )−lnLli(T−1)]
− sL
sLl[lnKl(T )−lnLl(T −1)]
,
wheresoirefers to the Divisia share of value-added. Note that value-added shares of sectors are derived from the maximization problem of gross output. Therefore, the weights reflect the output to value-added shares of each sector and hence their sum is larger than unity. The first term on the first line of the right-hand side of the equation above is a weighted sum of sectoral productivity growth rates and represents the intra-industry productivity growth effect. The other two terms represent the impacts of capital and labor allocations across sectors. This is a reinterpretation of Equations (6.45) and (6.46). Jorgensonet al. (1987, p. 66) touch upon the meaning and significance of reallocation effects, but they do not elaborate on the issue.
figures are calculated using the SMPI-deflated real value-added figures. The promoted industries for each period will be identified as follows:
(i) 1965–1978: textiles, wearing, petroleum and refined oil products, transport equipment;
(ii) 1979–1985: chemicals, petroleum and refined oil products, electrical and electronic machinery and equipment, transport equipment; and (iii) post-1985: chemicals, electrical and electronic machinery and
equipment (including IT services), precision equipment.
Among the promoted industries, only textiles and transport equipment industries in the period 1965–1978 and transport equipment industry in the period 1979–1985 exhibit TFP growth rates higher than the manufacturing average (Table 6.3). All other promoted industries had lower TFP growth rates. After 1985, however, promoted industries had higher TFP growth rates than manufacturing average. A simple conclusion that can be drawn from this finding, ignoring the reallocation effects for the time being, is that the selection of promoted industries was more effective in the post-1985 era than the pre-1985 era. An examination of reallocation effects provides more. It is also important to note that unlike the pre-1985 era which is characterized by negative TFP growth rates (which means that high growth was input-driven rather than productivity-driven, the post-1985 era is one with productivity- led growth. This is evident from very high intra-industry TFP growth effects resulting from promoted industries after 1985 (Table 6.5).
The results of the TFP decomposition exercise based on Eq. (6.46) for the aggregate economy and manufacturing sector are presented in Table 6.5. The sum of reallocation effects are small for the aggregate economy accounting for only 4.4 percent of TFP growth for the pre-1985 period and a relatively higher 10.6 percent for the post-1985 period. Reallocation effects are sub- stantial only for the period 1979–1985. In the post-1985 era, reallocation effects are minimal and the contribution of labor reallocation is higher than that of capital reallocation. Note that, during the crisis period, aggregate TFP growth resulted almost entirely from TFP growth resulting from within industries.
The results of TFP decomposition in Table 6.5 show that reallocations of capital and labor across industries make up a substantial portion of manu- facturing TFP growth, 67.0 and 50.3 percent for the pre-1985 and post-1985
11:539inx6inB-655b655-ch06
DevelopmentinEastAsia
1965–1978 1979–1985 1986–1997 1998–2002 1965–1985 1986–2002 A. Entire economy
TFP growth rate −4.22 0.61 0.82 0.50 −2.61 0.73
Intra-industry TFP growth −5.44 0.14 0.71 0.49 −2.50 0.65
Capital reallocation effect 0.42 0.14 0.00 0.00 −0.01 0.00
Labor reallocation effect 0.79 0.32 0.11 0.01 −0.10 0.07
B. Manufacturing sector only
TFP growth rate −3.77 0.12 3.21 −1.78 −2.47 1.74
Intra-industry TFP growth −0.70 0.08 1.48 −1.08 −0.82 0.87
Capital reallocation effect −2.49 0.04 2.26 −0.36 −1.35 1.01
Labor reallocation effect −0.58 0.01 −0.53 −0.34 −0.31 −0.13 C. Percentage contributions of its components to TFP growth (Aggregate economy)
Intra-industry TFP growth 128.8 23.7 86.4 97.4 95.6 89.4
Capital reallocation effect −10.0 23.0 0.6 0.0 0.4 0.4
Labor reallocation effect −18.8 53.3 13.0 1.5 4.0 10.2
D. Percentage contributions of its components to TFP growth (Manufacturing only)
Intra-industry TFP growth 18.5 64.5 46.0 61.0 33.0 49.7
Capital reallocation effect 66.0 30.0 70.4 20.1 54.6 57.9
Labor reallocation effect 15.5 5.5 −16.4 18.9 12.4 −7.6
(Continued)
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TotalFactorProductivityandResourceReallocation169
Table 6.5. (Continued)
1965–1978 1979–1985 1986–1997 1998–2002 1965–1985 1986–2002 E. Contributions
Intra-industry Manufacturing −0.78 0.39 0.38 0.31 −0.86 0.36
TFP growth
Others −4.66 −0.25 0.33 0.19 −1.64 0.29
Capital reallocation Manufacturing −2.79 0.18 0.58 0.10 −1.43 0.42 effect
Others 3.21 −0.04 −0.58 −0.10 1.42 −0.42
Labor reallocation Manufacturing −0.66 0.03 −0.14 0.09 −0.32 −0.06 effect
Others 1.45 0.29 0.24 −0.09 0.22 0.13
Note: Vertical sums of contributions are equal to the total economy values.
Source: Author’s calculations.
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DevelopmentinEastAsia
(Percentage Points) (Percentage Points) (Percentage Points)
1965–
1978 1979-
1985 1986–
1997 1998–
2002 1965–
1985 1986–
2002 1965–
1978 1979–
1985 1986–
1997 1998–
2002 1965–
1985 1986–
2002 1965–
1978 1979–
1985 1986–
1997 1998–
2002 1965–
1985 1986–
2002 Food 0.03 −0.01 0.16 0.01 0.07 0.06 0.07 0.00 −0.16 −0.08 0.03 0.01 0.10 0.00 −0.02 −0.02 0.04 0.00 Tex −0.05 0.00 0.03 0.00 −0.03 0.01 0.22 0.00 −0.04 0.00 0.08 −0.01 −0.03 0.00 −0.01 0.00 −0.01 0.00 Wear −0.02 0.03 −0.02 0.00 −0.11 −0.01 0.01 0.00 −0.07 −0.02 0.00 0.00 −0.05 0.00 −0.03 0.00 −0.02 −0.01 Leat 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.01 0.00 −0.01 −0.01 0.00 0.00 0.00 0.00 0.00 Wood −0.15 0.00 0.01 −0.01 −0.12 0.00 0.02 0.00 −0.02 0.00 0.00 0.00 −0.07 0.00 −0.01 0.00 −0.03 0.00 Furn 0.00 0.00 0.00 −0.01 −0.01 0.00 −0.08 0.00 −0.03 −0.01 −0.03 0.00 0.01 0.00 0.00 −0.01 0.00 0.00 Paper −0.01 0.00 0.05 0.02 0.00 0.01 −0.06 0.00 −0.04 0.00 −0.07 −0.01 −0.01 0.00 0.00 0.00 −0.01 0.00 Pub 0.03 0.01 0.49 0.05 −0.03 0.19 0.08 0.00 −0.18 0.27 0.05 −0.28 0.00 0.00 0.03 −0.02 0.00 0.00 Chem −0.11 0.05 −0.03 −0.54 −0.26 0.12 −0.29 −0.01 0.28 −3.98 0.01 3.40 0.01 0.00 0.03 −0.04 0.01 0.00 Petr −0.15 −0.03 −1.13 −0.31 −0.01 −0.39 0.29 0.02 0.14 −0.08 −0.10 0.11 −0.03 0.00 −0.01 −0.01 −0.01 0.00 Rub −0.10 0.00 0.05 0.00 −0.08 0.02 −0.72 0.00 0.01 −0.02 −0.29 0.02 0.05 0.00 0.02 0.01 0.01 0.00 Nonmet −0.01 0.00 0.11 −0.07 0.00 0.06 0.25 0.00 −0.01 0.09 0.06 −0.08 0.03 0.00 0.04 0.00 0.02 0.01 Met −0.08 0.00 0.16 0.00 −0.05 0.07 0.29 0.00 −0.07 −0.01 0.09 −0.01 −0.04 0.00 −0.01 −0.01 −0.01 0.00 Fabmet −0.07 0.01 0.07 −0.14 −0.08 0.06 −0.71 0.01 0.23 −0.03 −0.39 0.09 0.00 0.00 0.00 0.00 −0.01 0.00 Mach 0.07 0.00 −0.04 −0.06 0.05 −0.01 −0.85 0.01 −0.04 −0.05 −0.46 0.03 −0.11 0.00 −0.09 −0.04 −0.04 −0.02 Elec 0.02 0.06 1.85 −0.14 −0.19 0.80 −1.17 −0.01 2.01 3.35 −0.25 −2.15 −0.28 0.00 −0.37 −0.13 −0.14 −0.08 Prec 0.00 0.00 0.17 −0.12 0.01 0.10 0.16 0.00 −0.02 0.10 0.04 −0.09 −0.05 0.00 −0.02 −0.02 −0.03 −0.01 Tran −0.09 −0.01 −0.20 0.17 −0.02 −0.12 0.09 0.01 0.18 0.12 −0.09 −0.05 −0.11 0.00 −0.07 0.00 −0.06 −0.01 Total −0.69 0.08 1.72 −1.13 −0.83 0.98 −2.40 0.03 2.15 −0.34 −1.31 0.96 −0.59 0.01 −0.53 −0.28 −0.29 −0.13 Notes: 1. Estimates are based on real value-added deflated by SMPI.
2. The figures refer to percentages of manufacturing TFP growth for the relevant period.
3. Bold figures refer to the relevant values of the promoted industries for the major sub-periods.
Source: Author’s calculations.
periods, respectively. For the period 1980–1990, Wong and Gan (1994) also found contributions of reallocation effects to TFP growth over 60 percent.
This characteristic of the manufacturing sector calls for a detailed decom- position of TFP growth at the industry level as presented in Table 6.6, where the column sums of industry contributions correspond to the manu- facturing aggregates which are presented in Table 6.5. Capital reallocation effect stands out as it accounts for more than 50 percent of manufacturing TFP growth for both pre-1985 and post-1985 periods and labor reallocation effect is relatively unimportant, with negative contribution after 1985. This is a period where the labor market was gradually liberalized and there was a large shift of labor to service sectors.
Reallocation of capital towards the promoted industries paid off well in terms of contribution to manufacturing TFP growth in the pre-1985 era except the case of electrical and electronics machinery industry. This is most likely because this industry consisted mainly of assembly activities with not much technology transfer. Negative or very low TFP growth rates in promoted industries (intra-industry TFP growth effect) partially explain extremely low manufacturing TFP growth before 1985. It is interesting that the stimulation of producers to shift to higher value-added activities by the high wage policy (1979–1985) did not produce any TFP growth in manufacturing (0.08 percent) and the reallocations of labor and capital did not have a significant impact on manufacturing TFP growth.
After 1985, TFP growth resulted largely from the reallocations of resources. Here, we ignore the period 1998–2002 because of highly absurd numbers which result from the Asian financial crisis and other external shocks, e.g., the slump in world electronics markets. The results of the analysis in Table 6.5 reveal that both of the two most important promoted industries, electrical and electronics machinery and chemicals industries, exhibit highly positive capital reallocation effects while the former is dom- inant. In other words, capital reallocations toward promoted industries had a high payoff for manufacturing TFP growth. Note that negative labor real- location effects of this period result mainly from electrical and electronics machinery industry, because of the release of some labor from restructuring electrical and electronics machinery industry to service sectors.
To sum up, the reallocations of resources in the manufacturing sector, stimulated by the industrial policies of the Singaporean government, worked
generally in favor of aggregate TFP growth both before and after 1985, but much stronger in the post-1985 era. With the initially low TFP growth rates turning to positive after the 1985 recession, promoted industries con- tributed to TFP growth both by leading TFP growth rates and through their resource reallocation effects. To the extent that industrial diversification and changing industrial policies after 1985 that incorporated the opportunities of globalization and regionalization succeeded in raising manufacturing TFP growth performance, one can argue that such changes in industrial policies benefited the manufacturing sector and the economy.
Note that a dynamic adjustment mechanism that creates reallocation effects involves not only differences in marginal products of capital and labor but also changes in the sectoral demand structures (Massell, 1961).
Here the analysis is purely supply-side and changes in demand are taken as exogenous. Certain sectors experienced sharp declines in demand for their products from the late 1970s to the 1980s, especially petroleum refining and transport equipment (i.e., shipbuilding and ship-repairing) industries whose output shares in manufacturing also declined steadily in this period. Note that capital reallocation effects involving these two declining industries are positive, most likely due to the fact that these industries faced a slump in world demand for their products. On the other hand, chemicals, precision equipment, and electrical and electronic machinery industries experienced high demand for their products. This led to an increase in real wages in these industries and to high rates of return to capital especially for the first two.
Strong government involvement in the direction of investment capital (both foreign and local) into the areas designated by the government according to its industrial policies resulted in highly positive capital reallocation effects in the period 1986–1997.