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Structural transformation and allocation efficiency in China and India

Enrica Di Stefano () and Daniela Marconi ()
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Enrica Di Stefano: Bank of Italy

No 1093, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Market frictions prevent the efficient allocation of factors of production, slow down structural transformation and lead to costs in terms of lower output and aggregate total factor productivity (TFP). We use a theoretical framework developed by Aoki (2012) featuring sector-specific frictions on capital and labor à la Chari, Kehoe and McGrattan (2007), and compute capital and labor misallocations in China and India using data for 26 sectors over the period 1980-2010. Our findings show that large factor misallocations exist in the two countries. We estimate the potential gains in terms of aggregate TFP stemming from an efficient allocation of factors to range from 25% to 35% in China and from 35% to 40% in India. Finally, we discuss the implications for structural transformation and the relationship between the observed allocation inefficiencies and the evolution of the business environment in the two countries.

Keywords: structural transformation; frictions; resource allocation; productivity; China; India (search for similar items in EconPapers)
JEL-codes: E23 O11 O41 O47 O53 O57 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cna, nep-eff, nep-mac, nep-tid and nep-tra
Date: 2016-12
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