Table 2. The results show that the total reallocation effects are mainly due to shifts in labour rather than in capital, but the effects are small in both cases. Concluding,
neither shifts of labour nor of capital provide an additional bonus to aggregate TFP growth in the manufacturing sector of the Asian countries.
6. Critical evaluation of the conventional shift-share analysis
Measuring the contribution of resource reallocation to productivity growth by the conventional shift-share method using only shifts of labour or also shifts of capital
needs some qualifications. First of all, the shift-share analysis is supply-side oriented and focuses on the effects of changes in the distribution of factor inputs. Changes
in demand are taken as exogenously determined and the role of demand effects as such is ignored. Irrespective of the contribution of structural change to aggregate
productivity growth, structural change is an important aspect of economic develop- ment. As pointed out by Pasinetti 1981, income elasticities for various goods differ
and change over time as per capita income increases. This inevitably implies non-proportional expansion of demand and offers different opportunities for sectors
to grow. Industries that are confronted by demand barriers to further growth need to shrink in favour of new industries, although a decline in domestic demand can
be partly offset by producing for international markets, especially in the case of agricultural and manufactured goods. These demand-side aspects are not taken into
account in the shift-share analysis. It uses an accounting identity in which output changes are taken as given. What the shift-share analysis does show is that the shifts
in inputs that have taken place, whether or not driven by developments on the demand side, appear not to be important in quantitative terms for aggregate productivity
growth.
However, the conventional shift-share analysis is based on a number of assump- tions of which the invalidity can result in an under- or overestimation of the
contribution of structural change to productivity growth. The problematic assump- tions involve the aggregate level of analysis, the assumption of marginal productivity
equal to average productivity, the assumption of input homogeneity, the incidence of spillovers and the causal links between growth of output and productivity.
First of all, due to the aggregate level of analysis, the real importance of resource reallocation might be underestimated. Although this is a fairly disaggregated study,
factor reallocation within our 13 manufacturing branches is not accounted for. However, our findings are corroborated by a recent more detailed study of
productivity growth in Indonesian manufacturing. Using data on 28 branches, Aswicahyono 1998 Table 5.6 found that reallocation of labour and capital had
only minor positive or even negative effects on aggregate TFP growth. Using firm-level data, Aw et al. 1997 found that growth of aggregate TFP in Taiwan was
mainly due to productivity growth of incumbent firms. These findings support our conclusions on the absence of the structural bonus in manufacturing, based on
more aggregate data.
Inadequate measurement of marginal productivity is a second potential source of
underestimation of the effect of structural change. In the shift-share analysis it is assumed that all labour inputs and all capital inputs in a branch have the same
productivity. Hence, average productivity in an industry will not be affected by factor inputs moving in, or out of the industry. However, the marginal productivity of factor
inputs within an industry may be lower than the average productivity. For example, if surplus labour is shed and finds employment in other branches, average productivity
will rise in the shedding branch. This increase will end up as part of the intra-branch productivity effect in Eq. 2, but was in fact caused by a shift of labour towards
other branches. Hence the importance of structural change may be underestimated. This line of reasoning prompted Denison 1967 to make upward adjustments in the
effects of structural change calculated with the shift-share decomposition. However, it seems safe to assume that within modern manufacturing, the incidence of surplus
labour is much less common than in agriculture or in the informal sector.
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A possible source of over- rather than underestimation of the effects of structural change is found in the assumption of factor input homogeneity. Productivity levels
of factor inputs may differ across branches due to differences in input quality. If structural change involves a shift towards industries that have a higher level of
productivity due to a higher average level of input quality, the effects of resource allocation will also include the increased quality of factor inputs. Hence the effects
of structural change are overestimated. To examine this we need a detailed decomposition of the different types of labour and capital input. In general, labour
quality is higher in the technologically more sophisticated industries such as chemicals and machinery, and lowest in branches like textiles. Especially in the East Asian
countries, labour shifted from low skill to higher skill branches and the effects of structural change are overestimated in this respect.
Externalities are a possible source of causal links between increases in factor shares in one branch and productivity growth in other branches. Increasing output
in a sector with strong forward and backward linkages may promote growth of output and productivity in other sectors in various ways. For example, output
growth in a sector may lead to quality improvements of its products that are not fully reflected in proportionate price increases. If so, other sectors which use these
products as inputs can profit from so-called rent spillovers. Also, other sectors can benefit from various pure knowledge spillovers from dynamic sectors, for example
through the diffusion of organisational and marketing techniques. When structural change involves a shift to dynamic sectors with strong linkages and spillovers, then
the shift-share method will underestimate the impact of structural change. There is ample empirical evidence of strong spillover effects among different industries,
9
Labour surplus may exist in for example state enterprises in India, which provide a number of unproductive jobs primarily for social-security considerations. But, as the agricultural example indicates,
shedding of surplus labour involves a combination of rising labour productivity and declining absolute numbers of workers. In Indian manufacturing, the only sectors in which the number of employees
actually declined were textiles and food. However, in the textile industry labour productivity growth was poor. Only in the case of food manufacturing labour shedding was accompanied by rapid labour
productivity growth. During 1980 – 1985 : 400 000 employees were shed, but as this is only 116 of the total manufacturing labour force the effects on aggregate productivity growth are small.
especially in industries which are active in R and D activities themselves Nadiri, 1993. However, most studies pertain to advanced OECD countries and it is
debatable whether similar strong effects are present in countries which operate far from the world technology frontier and perform little R and D.
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Unfortunately, the data base for this paper does not allow us to examine these assumptions further
here. Apart from spillovers across sectors, the conventional shift-share method also
ignores externalities within a sector. Output growth and productivity growth in a sector is assumed to have no causal link. This is a potentially serious omission as
possible virtuous circles between output growth and productivity growth within a branch might exist. This effect is known as the Verdoorn effect Verdoorn, 1949.
If resources shift to branches with a higher Verdoorn elasticity, one part of the productivity improvements will be included in the dynamic shift effect, but
another part in the intra-branch effect. Hence the contribution of structural change as measured by the shift-share analysis is underestimated. This might provide an
explanation of the lack of empirical support for the structural-bonus hypothesis we found so far.
7. The Verdoorn effect and the modified shift-share analysis
