Boosting productivity in Sub-Saharan Africa

AFRCE Regional Study

Concept Note

March 2017

The unprecedented growth in Sub-Saharan Africa (SSA) over the past two decades, coined as Africa Rising,
witnessed many countries in the region growing at a rate that exceeded 5 percent per annum. Greater growth
benefits in the region were reaped not only by resource-rich countries but also by non-resource-rich low-
income countries as well as some fragile and conflict-affected states.
The Africa Risings earlier narrative attributes the regions faster growth to external tailwinds, progress in
macroeconomic management and robust public investment. On the external front, the commodity price
super-cycle, the emergence of China as an important trade and investment partner, and massive inflow of
foreign capital helped boost SSA growth. Domestically, improved macroeconomic frameworks delivered
lower inflation and helped economies to accommodate shocks (due partly to healthy fiscal and external
positions). In this context, a buoyant domestic demand supported growth as (private and public)
investment increased in both resource-intensive sectors e.g. energy and extractives industries and non-
resource sectors e.g. telecommunications, finance, transportation, real estate and retail, among others.1
Many SSA countries continue registering positive rates of growth in economic activity despite the large
external shock that affected the world economy in 2008-09. However, the post-crisis economic performance
of the region has not been as stellar as that of the pre-crisis period. There is a marked growth deceleration
during the post-financial crisis period. Overall, SSAs economic performance in the aftermath of the global
financial crisis remains below that of the pre-crisis period: GDP grew at an average annual rate of 4.1
percent in 2011-15 compared with 7.3 percent in 2003-08. In per capita terms, this is equivalent to a drop
from an annual rate of 4.5 percent in 2003-08 to 1.3 percent in 2011-15.
Growth in Sub-Saharan Africa has been primarily driven by factor accumulation rather than total factor
productivity (TFP) growth over the past 50 years. For instance, growth of output per worker in Sub-Saharan
Africa over the period 1961-2014 (at about 1 percent per annum) was mainly attributed to factor
accumulation with the relative contribution of physical and human capital per worker representing about
87 percent. However, the relative contribution of factor accumulation declined to about 40 percent for the
region as a whole over the period 1995-2008 (Africa Rising).
Recent developments suggest that the global economic environment will be less conducive to growth
among developing countries and, notably, Sub-Saharan Africa over the next several years than it has
been in the recent past. Global trade is growing at a much slower pace than before the global financial crisis
and the international prices of commodities (especially, energy and extractives) are predicted to remain at
lower levels. On the domestic front, efforts by policymakers in the region to further stimulate aggregate

1
See Calderon and Boreux (2016).

1
demand could exacerbate domestic vulnerabilities and structural weaknesses. In this context, improving the
living standards of the population in Sub-Saharan Africa requires a policy agenda that boosts productivity.
What do the facts tell us about income per capita and TFP growth in Africa? According to the literature:
(a) At the aggregate level, there is a large and growing gap between income per capita in SSA countries
relative to industrial economies (and other benchmark developing countries/regions). This growing
gap is overwhelmingly explained by TFP differences.
(b) At the sectoral level, the underdevelopment of the Africa region is the outcome of large sectoral
productivity gaps. It reflects a process of structural transformation where labor productivity in
agriculture is lower than in the rest of the economy and most of the labor force works in agriculture.
Furthermore, a substantial amount of resources is being shifted to (traditional) services rather than
to manufacturing. Hence, the lower productivity of countries in the region could be partly attributed
to the role of factor reallocation at the sectoral level.2
(c) At the establishment level, the lower productivity of SSA countries is attributed to misallocation of
resources. In fact, lower productivity reflects: (i) having less efficient individual producers
(operating inside the production possibility frontier), or (ii) having resources allocated away from
the more efficient firms (either incumbents or entrants).3

Figure 1. Income disparity and dispersion across the world

65 1.4
Income per capita ratio of top to bottom 10 percent

Standard deviation of (the log of) GDP per capita

60 1.35

55 1.3

50 1.25

45 1.2

40 1.15

35 1.1

30 1.05

25 1

20 0.95
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014

Ratio of world richest to poorest Standard Deviation (RHS)

Notes. The figure plots the ratio of the average of the top decile to the average of the bottom decile of the world distribution, and
the standard deviation of the log of GDP per capita. The data are collected from the Penn World Tables 9.0 (Feenstra, Inklaar,
and Timmer 2015).

2
See Kongsamut, Rebelo, and Xie (2001), Ngai and Pissarides (2007), and Herrendorf, Rogerson, and Valentinyi
(2011).
3
See Syverson (2011), Restuccia (2013), Restuccia and Rogerson (2013) and references therein.

2
I. Cross-country income per capita and productivity differences
1.1 Evidence at the aggregate level
One of the salient features of economic development across the world is the sizable and growing differences
in living standards across countries in the world. To illustrate this point, Figure 1 depicts the ratio of the
average GDP per capita of the richest countries in the world (top decile) relative to the poorest countries in
the world (bottom decile). It shows that income per capita of the richest countries in 1960 was about 25
times that of the poorest countries whereas it was about 46 times that of the poorest countries in 2014.4
Cross-country income differences have not only surged dramatically but also the dispersion of income per
capita has increased over the last two decades thus, revealing a widening of the distribution of income
per capita across the world.
The remarkable differences in income per capita across countries in the world as depicted in Figure 1
are even larger and growing at a faster pace over time when comparing the richest countries in the world
(top decile of the world distribution) to the poorest countries in Sub-Saharan Africa (bottom decile of the
regional distribution). To be more concrete, Figure 2 (panel A) plots the ratio of the average GDP per
worker of the richest countries in the world relative to the poorest countries in sub-Saharan Africa (see red
bold line in Figure 2A). In 1960, the average income per person of the worlds richest countries was a factor
of approximately 30-fold that of the poorest countries in SSA. That proportion soared to about 65 times in
2014 (see red bold line in panel A of Figure 2). This implies that the average person in a rich country
produces in about 5.6 days what the average person in the poorest SSA countries produces in a year.
Rising income inequality between the rich and the poor countries (as depicted in Figures 1 and 2) is
attributable to a fall in relative income in the poor countries. In fact, poorer countries and, especially,
those in Sub-Saharan Africa have failed to grow as fast over time as industrialized nations; most notably,
the United States. This absence of convergence of living standards among Sub-Saharan African countries
relative to that of the United States is illustrated in Table 1.
Panel A of Table 1 looks at the evolution of income per capita relative to the United States for the different
quartiles of the Sub-Saharan Africa distribution of income in selected years. Panel A assumes that the
country composition of the different quartiles of the SSA distribution of relative income per capita changes
over time. In this context, the relative income of the top quartile of the SSA distribution (i.e. quartile 4) is
the only one that experienced an average gain over the last five decades: it increased from 0.195 in 1960 to
0.291 in 2014. In contrast, the poorest quartile of the regions income distribution (quartile 1) failed to gain
any ground on the United States and even lost about 40 percent of its relative income position: the relative
income of the bottom quartile in the region decreased from 0.032 in 1960 to 0.021 in 2014. However, the
largest drop in relative income per capita over time was experienced by the second quartile of the SSA
distribution: it lost half of its relative income position as it declined from 0.058 in 1960 to 0.032 in 2014.
Panel B of Table 1, on the other hand, examines the evolution of the distribution of income per capita among
Sub-Saharan African countries relative to that of the United States over time but keeping the country
composition of each quartile unchanged. The country classification into four different quartiles (with
approximately 9 to 10 countries in each quartile) is conducted according the each countrys relative position
to the United States in 1960 (and keeping the make-up of these different quartiles constant over time).
Looking at the ratio of relative income of the top and bottom quartiles of the SSA country distribution (say,
quartiles 4 and 1 respectively), the income per capita gap between those two groups in the region declined

4
These calculations use the (expenditure-side) real GDP per capita at chained PPPs (in millions of 2005 US dollars)
from Feenstra, Inklaar, and Timmer (2015).

3
from a factor of 6 in 1960 to about 4 in 2014. This results from: (a) the relative decline of income per capita
in the regions richest quartile in 1960 whose income per capita relative to the United States falls from
0.22 in 1960 to 0.2 in 2014, and (b) the poorest quartile in 1960 catching up relative to the United States
(thus, increasing from 0.037 in 1960 to 0.055 in 2014).

Figure 2. Development gap between the rich and the poor

A. Relative income per capita B. Capital-Output ratio

100 5
90
80 4
70
60 3
50
40 2
30
20 1
10
- -
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014

World Richest/SSA Poorest World Richest/Poorest World Richest/SSA Poorest World Richest/Poorest

C. Human capital D. Total factor productivity

3.0 70
2.9
60
2.8
2.7 50

2.6
40
2.5
2.4 30

2.3 20
2.2
10
2.1
2.0 -
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014

1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014

World Richest/SSA Poorest World Richest/Poorest World Richest/SSA Poorest World Richest/Poorest

Notes. The four panels of Figure 2 depict the gap between the richest and poorest countries in terms of relative income per capita,
capital-output ratio, human capital, and total factor productivity. The figures for the richest countries are computed as the average
of the top decile of the distribution of the income per capita whereas those of the poorest countries are the average of the bottom
decline of the distribution. The data are collected from the Penn World Tables 9.0 (Feenstra, Inklaar, and Timmer 2015).

4
 Table 1. Real GDP per capita of Sub-Saharan African countries relative to the US
(in percentages)
Quartile 1960 1970 1980 1990 2000 2010 2014
Panel A. SSA Countries ranked each year
1 3.18 3.01 2.83 2.08 1.52 1.77 2.05
2 5.78 5.62 4.62 3.11 2.50 3.07 3.23
3 9.17 7.99 6.77 4.88 4.09 5.03 5.59
4 19.48 18.72 19.91 16.74 16.64 25.25 29.13

Panel B. SSA Countries ranked in 1960

1 3.72 3.37 3.75 4.17 4.04 5.06 5.54
2 7.02 6.63 5.10 3.73 2.93 3.25 3.37
3 10.87 8.52 7.17 5.35 6.05 13.81 12.98
4 21.76 22.81 24.06 19.70 16.95 18.27 20.05

Notes. GDP per capita from Penn World Tables 9.0 (Feenstra, Inklaar and Timmer 2015). Countries are ranked according to GDP
per capita and divided into quartiles. The first quartile refers to the poorest countries and the fourth quartile to the richest countries
in the region. In panel A, countries in each quartile may vary from year to year. In panel B, the country groups remain constant
across the years based on their relative position in 1960.

Figure 3. Relative income per capita for selected Sub-Saharan African countries
(As a ratio of US income per capita, Hodrick-Prescott trend component)
35

30

25

20

15

10

0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Botswana DRC Ghana Mauritius Niger South Africa Zimbabwe

Notes. GDP per capita is collected from Penn World Tables 9.0 (Feenstra, Inklaar and Timmer 2015). The trend component of
real output per capita (in logs) is obtained using the Hodrick-Prescott filter. The value of the smoothing parameter for annual
data is equal to 6.25 (Ravn and Uhlig 2002).

5
The evolution of the world and SSA distribution of income (as portrayed in Figures 1 and 2 as well as Table
1) conceals the great diversity of country experiences over time. Over the last 50 years, there have been
several episodes of growth acceleration, catch-up, slowdown and growth collapses. Figure 3 plots the
evolution of the relative GDP per capita over time for selected Sub-Saharan African countries and highlights
the different growth experiences across countries in the region. It shows a wide variety of growth
experiences in the region: (a) the remarkable growth surge of Botswana, (b) a certain degree of catch-up in
Mauritius, (c) growth deceleration and recovery in South Africa, (d) stagnation in Zimbabwe, and (e)
growth collapse in Niger and the Democratic Republic of Congo.
The large differences in GDP per capita across countries that we have documented so far are, according to
the literature, overwhelmingly attributed to differences in total factor productivity (TFP) rather than to
differences in the stock of either physical or human capital see, among others, Klenow and Rodriguez-
Clare (1997), Hall and Jones (1999), Caselli (2005) and Hsieh and Klenow (2010).5 The consensus in the
literature points to 20 percent of country income differences explained by the accumulation of physical
capital and 10-30 percent by human capital. Hence, differences in TFP may account for 50-70 percent of
country income differences (Hsieh and Klenow 2010).
Figure 2 not only shows the income per capita differences between the worlds richest countries and SSAs
poorest nations (panel A) but also differences in terms of capital deepening (i.e. physical and human capital
in panels B and C, respectively) and total factor productivity (panel D). In 1960, income per capita of the
richest countries in the world was 34 times greater than that of the poorest countries in SSA. Differences in
capital-output ratios between rich countries and the poorest SSA countries were not as high: the capital
output ratio of the poorest SSA countries was about 60 percent of that in the United States. Because of
diminishing returns on physical capital, differences in physical capital only led to about a 25 percent
difference in GDP per worker between worlds richest countries and SSAs poorest ones. Furthermore, a
factor of 2.4 of the income per capita differences is attributed to education while a factor 3.1 of this
difference is due to the accumulation of human and physical capital. Finally, it should be noted that a factor
of 11 of the income per capita gap in 1960 was due to TFP which implies that the share of income per
capita differences between the worlds richest countries and SSAs poorest economies explained by TFP is
about 75 percent. On the other hand, income per capita among the richest countries in the world was nearly
65 times that of the poorest countries in Sub-Saharan Africa in 2014. The ratio of capital output in the
richest countries is similar to that of the poorest countries in the region and the difference in the
contribution of capital output-ratios led to nearly 3 percent difference in GDP per worker. A factor of 2.4
of this difference is attributable to both accumulation of human capital while a factor of 27 is explained by
TFP. Overall, the bulk of the income per capita gap between the richest countries in the world and the
poorer nations in Africa in 2014 can be explained by TFP (about 90 percent).
The literature points out to country differences in social infrastructure as one of the drivers of the cross-
country differences in the accumulation of physical and human capital as well as productivity documented
above (Hall and Jones 1999). The concept of social infrastructure rests upon institutions and public policies
that provide the right incentives for individuals to acquire skills and for firms to accumulate physical capital,
innovate and/or adopt new production techniques.6 A well-functioning social infrastructure requires the
suppression of diversion (which typically takes the form of rent-seeking activities). In this context, public

5
In a comprehensive survey, Caselli (2005) finds that factor accumulation cannot explain more than half of the
differences in income per capita across countries.
6
If inappropriately designed, those policies and institutions may encourage predatory behavior; including corruption
and rent-seeking, among others (Hall and Jones 1999).

6
policy plays a role in the implementation and enforcement of rules that effectively deters (private and
public) diversion.
Understanding why the labor force is less productive in Sub-Saharan African countries than in advanced
countries requires a theory of total factor productivity (TFP). After accounting for the stock of (tangible
and intangible) capital, Prescott (1998) argues that the disparities in income per person could be explained
by the fact that African workers are not fully exploiting usable knowledge as much as workers in advanced
countries. However, the stock of knowledge is necessary but not sufficient to explain these differences in
TFP. Other factors may play a role, including the ability and incentives to resist the efficient use of existing
technologies or adopt new technologies. In fact, policies that constrain choices of technology and work
practices at the establishment level will affect the allocation of resources at the country level that is, it
affects its degree of resistance to efficient use of resources (Parente and Prescott 2000, 2005).

1.2 Structural transformation and productivity growth

On the path towards economic development, nations across the world experience a process of structural
transformation where the reallocation of labor (and hours) across agriculture, industry and services takes
place. According to the literature, factor reallocation across sectors plays a role in explaining cross-country
differences in income and growth (e.g. Kongsamut, Rebelo and Xie 2001; Ngai and Pissarides 2007;
Herrendorf, Rogerson and Valentinyi 2014).
Long-term growth of income per capita and productivity has been associated with: (i) declining
employment share and nominal value added share in agriculture, (ii) rising employment share and nominal
value added share in services, and (iii) hump-shaped evolution over time of employment share and nominal
value added share in manufacturing (Duarte and Restuccia 2010, Herrendorf, Rogerson, and Valentinyi
2014).7 The latter implies that employment share and value added share rise for lower levels of development
and decline for higher levels of development.
Figure 4 shows the relationship between labor share in the different sectors of economic activity (namely,
agriculture, manufacturing, resources and services) and the level of aggregate labor productivity (relative
to that of the US) over time and across countries,8 and corroborates the main stylized facts from the
literature as follows:
First, the labor share in agriculture is considerably higher in countries with low levels of development
that is countries, with lower income per capita relative to the US (panel A of figure 4). Restuccia, Yang and
Zhu (2008) find that not only do poorer countries tend to have most of their workers in agriculture but also
that agriculture is the least productive sector.
Second, the employment share of the services sector increases with the level of economic development
(panel D of figure 4). At the same time, the share of the labor force engaged in the services sector is bounded
away from zero at very low levels of development in fact, that share exceeds 10 percent of total
employment in 2010. This is consistent with the findings of Herrendorf, Rogerson and Valentinyi (2014).
In addition, Buera and Kaboski (2012 a b) find that there is an acceleration in the growth rate of the nominal
value added share in services when GDP per capita exceeds US$ 8,000.
Third, the labor share of manufacturing follows an inverted U-shape: it increases during the low stages of
development with capital accumulation and it decreases afterwards at higher levels of development as

7
Duarte and Restuccia (2010) find these stylized facts with hours worked in each sector of economic activity (that is,
agriculture, industry and services).
8
The resources sector includes: (a) mining and quarrying, (b) construction, and (c) electricity, water and gas.

7
greater income per capita drives demand for services and labor costs renders manufacturing less competitive
(Duarte and Restuccia 2010, Herrendorf et al. 2014). Moreover, Buera and Kaboski (2012 a b) show that
accelerated growth in the share of services in economic activity coincides with the start of the decline in
the value added share for the manufacturing sector. Finally, it is notable that the same pattern is observed
for the resources sector (panel C of figure 4).
Figure 4. Sectoral shares of employment, 1970-2010

Panel A. Agriculture Panel B. Manufacturing

100 40

90
35

80
30

Share of Labor in Manufacturing

70
Share of Labor in Agriculture

25
60

50 20

40
15

30
10
20

5
10

0 0
- 10.0 20.0 30.0 40.0 50.0 60.0 70.0 - 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0
Relative labor productivity to US Relative labor productivity to US
1970 1990 2010 1970 1990 2010

Panel C. Resources Industry Panel D. Services

18
80

16
70

14
60
Share of Labor in Resources

Share of labor in services

12
50

10
40
8
30
6

20
4

10
2

0
0 - 10.0 20.0 30.0 40.0 50.0 60.0 70.0
- 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0
Relative economy-wide labor productivity to the US
Relative labor productivity to US
1970 1990 2010 1970 1990 2010

Source: Groningen Growth and Development Centre (GGDC) 10-sector database (Timmer, de Vries, and de Vries, 2015).

In general, countries experience a process of structural transformation characterized by declining labor (or
hours worked) in agriculture over time, rising share of labor (or hours worked) in services, and the share of
labor (or hours worked) in manufacturing is hump-shaped (increasing for countries at an early stage of
development while declining for those at a more advanced stage). Along their respective development
paths, countries that managed to pull out of poverty and reach upper-middle and high income status were
able to diversify away from agriculture and other traditional sectors. The shift of labor from agriculture into
modern economic activity (that is, manufacturing and modern services) was accompanied by sustained
productivity growth and an expansion of incomes. Finally, note that the process of structural transformation
has occurred at different moments and at different speeds across countries in the world. In some countries

8
especially those in Sub-Saharan Africa there is a substantial lag: countries in the region have the largest
shares of employment in agriculture while for advanced nations, agriculture has the smallest labor shares.
Calibrated models corroborate the patterns of factor reallocation and aggregate productivity experiences
across countries (Duarte and Restuccia 2010): first, aggregate labor productivity (relative to the United
States) can initially increase and subsequently stagnate or decline during the process of structural
transformation.9 Second, productivity catch-up in manufacturing accounts for nearly 50 percent of the
aggregate productivity gains across countries. Third, country experiences of slowdown, stagnation and
decline in (relative) aggregate productivity are primarily driven by the lack of catch-up and low productivity
in the services sector. Finally, it has been argued that policies that boost competition in some sectors may
play a key role in explaining sectoral productivity performance (e.g. Schmitz 2005, Galdn-Snchez and
Schmitz 2002). For instance, size-regulations might explain cross-country productivity differences in the
retail sector (Baily and Solow 2001).
Relative sectoral productivity differences. The literature has argued that cross-country differences in income
per capita are overwhelmingly explained by the very low labor productivity in the agricultural sector rather
than that of non-agriculture activities (Restuccia, Yang and Zhu 2008). Unfortunately, this is also the case
for Sub-Saharan African countries. Using the Groningen Growth and Development Centre (GGDC)
database on productivity across 10 sectors of economic activity (Timmer, de Vries, and de Vries 2015), we
compare the labor productivity of 11 Sub-Saharan African countries relative to the United States.10
On aggregate, labor productivity in the US is 28 times greater than that of (the median of the 11 countries
in) Sub-Saharan Africa. At the sectoral level, this labor productivity gap is mostly attributed to differences
in agricultural labor productivity specifically, the US value added per worker in agriculture is more than
150 times greater than that of SSA countries. On the other hand, non-agriculture labor productivity in the
US is about 15 times greater than that in the region. Within non-agriculture activities, US labor productivity
in industry and services is 17- and 13-fold the size of Sub-Saharan Africa, respectively. Nevertheless, the
productivity gap across sectors relative to the US is not heterogeneous across countries. It appears to be
larger for some countries than others (Table 2).
Finally, it is important to highlight that understanding sectoral productivity differences requires accounting
for the heterogeneity of the services sector. Duarte and Restuccia (2016) show that differences in non-
traditional services (e.g. communication and transportation) are as large as those in manufacturing, and
much larger than those in traditional services (e.g. health and education). Specifically, the authors find that
labor productivity differences between top and bottom deciles of the cross-country income distribution is
about 73 times in non-traditional services, 71 times in manufacturing, and 21 times in traditional services.
Note that traditional services have a greater share in services and, hence, a greater weight in explaining the
productivity differences in aggregate services (which is just 28 times).
Growth-enhancing structural change. Developing countries, and notably Sub-Saharan African economies,
tend to show large productivity gaps between different parts of the economy (say, agriculture), and these
gaps tend to be larger than that of industrial economies. Inefficiencies in the sectoral allocation of resources
can potentially trigger growth. Shifting factors of production from less productive to more productive
activities will boost output and productivity even if within-sector productivity growth is negligible. Such

9
McMillan, Rodrik and Verduzco-Gallo (2014) argue, in this context, that the speed at which the process of structure
transformation takes place plays an important role in explaining the success of growth strategies across countries.
10
Note that the group of SSA countries comprises Botswana, Ethiopia, Ghana, Kenya, Malawi, Mauritius, Nigeria,
Senegal, South Africa, Tanzania, and Zambia.

9
growth-enhancing structural change can contributed significantly to output and productivity growth
(McMillan and Rodrik 2011; McMillan, Rodrik and Verduzco-Gallo 2014).
Table 2. Relative labor productivity of the United States vis--vis SSA countries, 2009
2009
Total Agriculture Industry Services Non-Agriculture
Sub-Saharan Africa (median) 28.21 156.36 17.21 13.10 15.32
Botswana 4.34 112.93 2.45 2.91 2.72
Ethiopia 80.36 376.90 64.68 17.03 23.13
Ghana 18.29 129.47 22.36 9.32 11.17
Kenya 34.37 179.83 50.67 15.09 19.72
Malawi 72.97 459.41 41.76 24.62 27.34
Mauritius 5.38 19.40 7.86 4.52 5.10
Nigeria 35.52 149.77 7.11 26.79 16.83
Senegal 28.21 156.36 27.48 13.10 15.32
South Africa 4.81 32.38 6.20 3.85 4.22
Tanzania 59.34 221.40 17.21 24.26 21.18
Zambia 22.33 223.10 8.42 6.42 6.65

Source: GGDC-10 database (Timmer, de Vries, and de Vries, 2015)

In this context, countries in the region can potentially reap the largest growth benefits from structural
change. McMillan et al. (2014) outline three factors that may prevent structural change to have an impact
on aggregate productivity growth: first, countries with enclave sectors (e.g. minerals and natural
resources) which are high-productivity operations but are unable to fully absorb the surplus labor from
agriculture. Second, overvalued currencies may act as a tax on modern and tradable industries and prevent
their expansion (Rodrik 2008). Finally, inflexible labor markets reduces the contribution of structural
change to aggregate productivity growth by impeding the flow of labor across firms or sectors.
The aggregate productivity gains from factor reallocation across sectors can be potentially large. McMillan
et al. (2014) estimate the potential gains in aggregate labor productivity of SSA countries if their sectoral
productivity levels remain invariant and their inter-sectoral distribution of employment is similar to that of
industrial nations.11 Aggregate productivity of Ethiopia would increase six times while that of Senegal
would surge 11 times thus, reflecting the dualism of these economies. Overall, about 20 percent of the
productivity gap between developing countries and industrial economies would be erased by the type of
factor reallocation mentioned above.
In general, labor productivity growth is achieved through two channels: (i) within-sector productivity
growth (within component), and (ii) factor mobility from low- to high-productivity sectors (structural
change component). For a sample of 19 SSA countries, and from 2000 to 2010, McMillan and Harttgen
(2014) find that the participation of labor force in agriculture declined by an average of 10.6 percentage
points whereas the participation of labor force in manufacturing and services expanded by an average of
2.2 and 8.2 percentage points. Overall, structural change accounted for roughly half of Africas aggregate
labor productivity growth.12

11
This counterfactual analysis implies that SSA countries would employ a significantly lower amount of labor (or
hours worked) in agriculture and a sharply higher amount of labor in modern and productive activities.
12
McMillan and Rodrik (2011) and McMillan, Rodrik and Verduzco-Gallo (2014) document a significant productivity
gap between agriculture and non-agriculture sectors. Structural change in Africa contributed negatively to growth
during the 1990s and then positively to growth during the period 2000-5.

10
Figure 5. Decomposition of aggregate labor productivity growth, 1995-2008
(Weighted average)

AMER

EAP

SSA

0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00%

Within Structural

Table 3. Decomposition of labor productivity growth in selected African countries, 1995-2008

(Growth)
Within Component Structural Component
Total Growth
Countries Total Agriculture Industry Services Total Agriculture Industry Services
Botswana 7.76% -0.10% 4.98% 2.88% -2.32% -0.02% -4.04% 1.74% 5.44%
Ethiopia 3.07% 2.07% -0.42% 1.41% 3.02% -0.95% 1.48% 2.50% 6.09%
Ghana 7.16% 4.07% 1.96% 1.13% 1.84% -2.41% 0.33% 3.92% 8.99%
Kenya -4.60% 1.14% -2.66% -3.09% 3.77% -1.99% 2.22% 3.54% -0.83%
Malawi -0.93% 3.20% -0.63% -3.49% 5.63% -1.35% 1.93% 5.05% 4.70%
Mauritius 13.11% 1.68% 5.92% 5.51% 1.78% -1.84% -2.84% 6.46% 14.89%
Nigeria 3.35% 2.24% -0.88% 1.99% 0.50% 0.26% 0.62% -0.38% 3.85%
Senegal -0.35% 0.32% -1.01% 0.35% 4.59% -1.02% 1.86% 3.75% 4.24%
South Africa 8.29% 0.72% 3.29% 4.28% 1.58% -0.47% -1.87% 3.93% 9.88%
Tanzania 0.36% 1.25% -0.15% -0.74% 3.92% -0.75% 1.94% 2.73% 4.27%
Zambia 3.48% -0.90% 1.08% 3.30% 1.28% -0.06% 0.45% 0.90% 4.76%

Source: GGDC-10 database (Timmer, de Vries, and de Vries, 2015). Calculation of the within and structural components based
on McMillan, Rodrigo and Verduzco-Gallo (2014) and McMillan and Harttgen (2014)

Figure 5 shows the decomposition of labor productivity growth for sub-Saharan Africa as well as other
developing regions (say, Latin America and the Caribbean and East Asia) during the period 1995-2008.
Note that this period coincided with the growth resurgence of the region also known as Africa Rising.
Growth-enhancing structural change contributed about 45 percent of labor productivity growth for the 11
SSA countries in the GGDC sectoral dataset during the Africa Rising period. Notably, the sources of

11
aggregate productivity growth are different for East Asia during this period i.e. the within component
explains about 4/5 of aggregate labor productivity growth in that region.
Table 3 provides further information on the within and structural components of aggregate labor
productivity growth for selected SSA countries during the period 1995-2008. In Ethiopia, Kenya, Malawi,
Senegal and Tanzania, the structural change component plays an important role in explaining labor
productivity. Agricultural labor declines were matched by increases of labor participation in industry and
services with the latter having the largest rate of increase. In Botswana, South Africa, and Mauritius,
one can observe a decline in the share of labor in agriculture and manufacturing and an increase in the share
of labor in the services sector.

1.3 Evidence for sub-Saharan Africa at the firm level

There are two distinct approaches to understanding the microeconomics of the differences in productivity
across countries. The first strand of the literature examines the factors explaining why total factor
productivity (TFP) of individual firms in a country may be lower than their counterparts in another country.
It highlights cross-country differences in the ability to adopt more efficient technologies (Aghion and
Howitt 1992, Parente and Prescott 1994) or to operate technologies efficiently (Parente and Prescott 2000;
Bloom et al. 2013, Bloom and van Reenen 2016).
The second strand of the literature points to resource misallocation as an important factor in accounting for
cross-country differences in TFP. It assumes economies with heterogeneous production units where TFP
depends on the productivity of individual production units and factor allocation across production units.
Two dimensions characterize the resource allocation process: first, the type of establishments operating in
the economy (whether newcomers are more productive than either incumbent or exiting firms) and, second,
the allocation of labor and capital across establishments in operation. Distortions in either of these
dimensions will lead to resource misallocation and, in turn, lower aggregate TFP.
The main goal of this second strand of the literature is to understand: (a) the extent of factor misallocation
in the economy, (b) its impact on TFP differences across countries and over time, and (c) the underlying
factor driving misallocation. Two main approaches have been followed to address these questions, namely
the indirect and direct approach (Restuccia and Rogerson 2013). The indirect approach quantifies the extent
of resource misallocation in accounting for cross-country aggregate TFP differences. This approach,
however, does not dig deeply into the underlying factors that generate the distortions driving the inefficient
allocation of resources. It provides a measure of the total net effect of these distortions without fully
identifying their main sources. The direct approach aims at understanding the underlying sources of
misallocation including, distortions related to labor market policies (firing taxes, employment protection
and unemployment insurance), trade restrictions, financial frictions, informality, entry barriers, and credit
market imperfections, among others.
The evidence on resource misallocation in sub-Saharan African countries is still incipient. It focuses not
only on the indirect but also on the direct approach to quantify the extent of resource misallocation across
SSA countries and its influence on aggregate total factor productivity (TFP). While some papers provide a
measure of the total net effects of distortions on aggregate productivity (i.e. the indirect approach), others
assess specific sources of distortions.
On the extent resource misallocation in Sub-Saharan Africa manufacturing sector
Recent research using establishment-level manufacturing census data evaluated the extent and nature of
resource misallocation among Sub-Saharan African economies and its consequences on aggregate

12
productivity. Following the approach implemented by Hsieh and Klenow (2009), allocative distortions are
measured as deviations from the output-maximizing condition of equal marginal returns across comparable
production units. These studies report statistics about the joint distribution of productivity and distortions
from the data more specifically, measures of dispersion in the deviation from the efficient allocation and
the correlation from the efficient allocation and the correlation between these deviations with idiosyncratic
features of the firms (such as, their physical productivity and their age). Finally, this approach quantities
the gain in aggregate manufacturing total factor productivity (TFP) that would result from a reversal of
distortions and a reallocation of resources according with the output-maximizing rule.
Cirera, Fattal-Jaef and Maemir (2017) find evidence of severe resource misallocation in the manufacturing
sector of Ethiopia, Ghana and Kenya as factors of production shift from high-productivity establishments
to low-productivity ones. The authors find substantial dispersion in firm-level productivity in all three Sub-
Saharan African countries and that dispersion is even larger than that of the United States, China and
India. For instance, the ratio of the 90th to the 10th percentile of the distribution of physical productivity
(TFPQ) indicates that Kenyan manufacturing firms in the top decile of productivity are 455 percent more
productive than those in the bottom decile. This gap is about 73 percent in Ghana and 44 percent in Ethiopia
(see Table 4).
Table 4. Dispersion of revenue productivity (TFPR) and physical productivity (TFPQ)

Kenya Ghana Ethiopia India China

TFPR TFPQ TFPR TFPQ TFPR TFPQ TFPR TFPQ TFPR TFPQ
2010 2010 2003 2003 2011 2011 1994 1994 2005 2005

Standard Deviation 1.56 2.33 1.00 1.69 0.99 1.48 0.67 1.23 0.63 0.95
Ratio:
75-25th percentile 2.18 3.62 1.25 2.60 1.26 1.94 0.81 1.60 0.82 1.28
90-10th percentile 3.95 6.12 2.52 4.29 2.51 3.78 1.60 3.11 1.59 2.44
Corr(TFPQ, TFPR) 0.79 0.73 0.79
Reg. Coefficient 0.52 0.44 0.53
Observations 757 757 1151 1151 4012 4012 41006 41006 211304 211304

Note: TFPR and TFPQ are in logs and demeaned by industry-specific average. Industries are weighted by their value added shares.
The statistics for India and China are taken from Hsieh and Klenow (2009). Source: Cirera, Fattal-Jaef and Maemir (2017).

The evidence for these African countries suggests that the most productive firms have not expanded their
production to replace less productive ones. In a frictionless environment, the dispersion of marginal
products should be negligible as they are equal across firms. Instead, the observed dispersion in revenue
productivity (TFPR) indicates resource misallocation. Again, the dispersion of TFPR across firms in the
three sub-Saharan African countries is higher than in India, China and the United States.13 For instance,
the ratios of 90th to 10th percentiles of TFPR are 51.9 in Kenya, 12.4 in Ghana and 12.3 in Ethiopia compared
to 5 in India, 4.9 in China and 3.3 in the US. It is likely that policies and institutions in the sub-Saharan
African countries may have prevented the more productive firms from eliminating the less productive ones
(Cirera et al. 2017).14

13
Note that the dispersion of TFPR is the geometric average of the marginal products of capital and labor.
14
Using panel data of manufacturing establishments in Ethiopia during the period 1996-2009, Gebresilasse (2016)
also finds that the extent of resource misallocation in the East African countries is substantially greater than the one
estimated by Hsieh and Klenow (2009) for the manufacturing sector of the United States, China and India.
Furthermore, removing idiosyncratic distortions in the Ethiopian manufacturing sector would lead to TFP gains that
fluctuate between 92 and 180 percent.

13
What are the productivity gains of Kenya, Ghana and Ethiopia that would arise from allocating factors of
production efficiently? Cirera and co-authors (2017) calculate the hypothetical allocation that sets the
dispersion of TFPR equal to zero within each four-digit industry. An efficient reallocation of resources
would raise manufacturing productivity in Kenya by 162.6 percent. The same counterfactual analysis
renders productivity gains of 75.5 and 66.6 for Ghana and Ethiopia, respectively. It should be noted that
these potential productivity gains are comparable to those for Chinese and India manufacturing firms (Hsieh
and Klenow 2009) as well as those in Latin America (Busso et al. 2013).
Paganini (2016) extends the calculation of resource misallocation for nineteen countries in Sub-Saharan
Africa.15 She computed measures of misallocation based on the dispersion of marginal products across
different establishments and an index of capital distortions. There is evidence of high dispersion in firms
marginal product of capital (a standard deviation of about 1.6 for all SSA manufacturing firms). There is
also evidence that the extent of misallocation (as proxied by the dispersion of the marginal product of
capital) may depend on the assumption about production technology notably, changes in the value of the
input elasticity of substitution in the production function. The findings show that the extent of misallocation
is lower when the degree of substitutability between labor and capital () is higher. For instance, the
dispersion of marginal product of capital is equal to 4 when =0.4 and equal to 1.1 when =1.5.
Finally, Dennis et al. (2016) uses the dynamic Olley-Pakes decomposition to examine the within firm
and reallocation components of productivity growth in Uganda during the 2000s. They gather information
on 326 four-digit ISIC industries across nine sectors from two waves of the Uganda Business Inquiry in
2002 and 2009. Allocative efficiency gains from inter-industry reallocation explain about one-fifth of the
economy-wide (aggregate) labor productivity growth. This finding reflects the shift of resources
(specifically, labor) to more productive industries and sectors both on average and at the margin. On the
other hand, allocative efficiency gains from the correction of intra-industry, inter-firm misallocation of
labor explains 55 to 90 percent of the observed within-industry productivity growth.
Drivers of resource misallocation
One of the main features of the resource misallocation literature is the predicted relationship between
productivity and firm size in an efficient allocation: if all establishments face similar technological
parameters and prices, the more productive establishments are larger that is, they demand more labor,
produce more output and generate more profits (Restuccia 2011, Poschke 2014, and Bento and Restuccia
2016). Misallocation may arise from government policies that impose restrictions on the size of large
establishments or firms, or try to promote small ones. For instance, policies that reduce the average size of
manufacturing establishments by 20 percent would cut output per establishment by 25 percent, and increase
the number of establishments by about 24 percent (Guner, Ventura and Xu 2008).
Page and Sderbom (2015) evaluate the impact of aid programs targeted to small and medium enterprises
(SMEs) on job generation. Using cross-sectional data for nine African countries and firm-level panel data
for Ethiopia, the authors find a positive relationship between value added per employee and firm size; that
is, the average employee in a 200-worker firm produces as much value added in 17 minutes as the average
employee in a 5-worker enterprise does in one hour. These productivity differences are reflected in wage
differences across firms: a 10 percent increase in firm size, on average, is associated with a 2.9 percent
higher wage. These findings provide caution against targeting programs to support firms based on ex-ante

15
Her final sample consists of 3627 firms across 19 SSA countries namely, Burkina Faso, Burundi, Cameroon,
Cape Verde, Ethiopia, Ghana, Kenya, Lesotho, Madagascar, Malawi, Mali, Mozambique, Niger, Nigeria, Rwanda,
Tanzania, Senegal, Uganda, and Zambia.

14
criteria and in favor of an approach that creates jobs through the support of rapid firm growth (regardless
of size) and the strengthening of the countrys investment climate.
Trade policies that provide support to prioritized sub-sectors and regions may also distort the allocation of
factors and, hence, lower aggregate productivity. Gebresilasse (2016) evaluates the distortionary effects on
the Ethiopian manufacturing sector of two policies designed to support targeted sectors and regions in the
country; namely, an activist industrial policies that favored import substitutions during the period 1996-
2002 and export promotion policies during the period 2003-2012. Based on establishment-level panel
census data during the period 1996-2009, priority-sector support policies have had an adverse impact on
manufacturing firms (physical and revenue) productivity in Ethiopia. These policies have exacerbated the
degree of within-industry resource misallocation; however, the shift from import substitution to export
promotion may have contributed to an improvement in allocative efficiency. The author find that the
dispersion of productivity at the sector level is largely attributed to within-priority-region variation; thus,
suggesting that sector-based variation (as opposed to location-based) of the priority-sector targeting policy
is the most distortionary. Finally, removing these sector and location specific distortionary policies and
export-based eligibility criteria may boost efficiency in the allocation of resources.
Mhlanga and Rankin (2015) also assess the importance of resource misallocation vis--vis other sources of
productivity gains at the individual firm level in the manufacturing sector of Swaziland. Specifically, they
test whether productivity arising from learning-by-doing and learning-by-watching dominates productivity
coming from market share reallocation across incumbent firms (as a result of net firm entry). The authors
decompose aggregate labor productivity into a real productivity and reallocation components following the
approach implemented by Baily et al. (1992), Foster et al. (2001) and Nishida et al. (2013). Using
manufacturing plant-level information for Swaziland during the trade liberalization period of 1994-2013,
they find that the margins of resource reallocation contributed more than technical efficiency to aggregate
productivity growth in the manufacturing sector. Overall, Swaziland firms were not making additional
investments to enhance production efficiency through innovation and technology adoption. Instead, they
were shifting labor and capital to higher activity producers.
Poor infrastructure networks are also an obstacle to factor mobility and productivity. Shiferaw, Sderbom,
Siba, and Alemu (2015) examine the influence of having an improved road network on the entry decision
and entry size of manufacturing firms in Ethiopia. The analysis is conducted using geographic information
system (GIS)-based panel data on road accessibility of Ethiopian towns and census-based panel data for
manufacturing firms over the period 1996-2008. The authors construct three (3) measures of road
infrastructure: (a) total distance that can be travelled during a 60-minute drive, (b) total area accessible
during the 60-minute drive, and (c) total travel time from a particular locality to major economic
destinations.16 The evidence shows that: first, the quality of local road infrastructure is positively associated
with the number of firms present in the locality. However, the number of firms has no significant
relationship with the connectivity of the road infrastructure. Second, the size of new entrants is more
strongly associated with connectivity rather than with the quality of the local road infrastructure. In sum,
local road infrastructure is important as it enables more firms to set up but more extensive market
connectivity may be important for the entry of large firms. In other words, poor infrastructure could be a
source of resource misallocation through the selection channel.
Financial frictions are one of the most important distortions behind resource misallocation (Banerjee and
Duflo 2005) and some quantitative studies confirm that assertion (Restuccia and Rogerson 2013). The

16
Note that the measures in (a) and (b) capture primarily the local improvement in road infrastructure while the that
in (c) is a more comprehensive measure of how roads affect connectivity of firms with local and distant markets.

15
majority of models examining the misallocation effects of financial frictions consider entrepreneurs that
face collateral constraints.17 Greenwood, Sanchez and Wang (2013) analyze the capital deepening and
reallocation effects from financial intermediation. This effect refers to the fact that countries with lower
interest rate spreads tend to have higher capital-output ratios and higher TFP levels. In turn, lower interest
spreads are the outcome of improved financial intermediation. The authors build a costly state verification
model in the spirit of Greenwood et al. (2010) to evaluate the impact of financial development on economic
development. The model is calibrated to match the facts about the US economy and observed international
data on cross-country interest rate spreads and per capita GDPs. The evidence suggests that a country like
Uganda could raise its output level by 116 percent if it were to adopt the worlds best practice in the financial
sector. However, this effect amounts to only 29 percent of the gap between the Sub-Saharan African
countrys potential and actual output.
Kalemli-Ozcan and Sorensen (2016) analyze the extent of capital misallocation and its drivers across
countries in Africa. They use establishment-level data from the World Bank Productivity and Investment
Climate Survey to compute capital misallocation across manufacturing establishments in 10 African
countries during a two-year period (2005-2006).18 Specifically, the authors construct measures of
dispersion in the marginal product of capital (MPK) and the Hsieh-Klenow index of distortions to quantify
resource misallocation. They examine the drivers of firm-level differences in returns to capital within
countries and variation in misallocation across countries: (a) firms with less access to finance have higher
MPK, and (b) small firms have lower MPK (conditional on access to finance). These findings imply that
higher efficiency could be attained by allocating more capital to larger firms. Restricted access to finance
has important real effects: moving firms from places with easy access to finance to those with poor access
increases the MPK by 45 percent. Finally, they find that misallocation at the country level is significantly
associated to the strength of property rights: firms may be reluctant to reinvest their profits in the absence
of secure property rights.19 Overall, financial constraints help explain within-country resource
misallocation while property rights are a driver of cross-country misallocation of factors.
Cirera, Fattal-Jaef and Maemir (2017) examine the nexus between distortions associated with resource
misallocation and specific policies. The bulk of misallocation of resources across firms in Ethiopia, Ghana,
and Kenya is primarily driven by the presence of financial market imperfections, uneven implementation
of regulations, and poor infrastructure. Specifically, they find that misallocation is a major bottleneck in
industries with pervasive corruption. On the other hand, establishments in regions with constrained access
to short-term finance have a greater level of capital distortions. Finally, regulatory red tape not only
increases the output wedge but also creates higher labor distortions relative to capital. Nonetheless, the
authors argue that their analysis of the drivers of misallocation should be taken with caution given the
insufficient variation in the data as it prevents an accurate identification of the relationship between policies
and distortions.
Finally, Table 5 summarizes the findings of recent research on resource misallocation in manufacturing and
its impact on productivity in African countries using the indirect and direct approaches (Aguirre and Parro
2016).
Resource misallocation in agriculture productivity

17
Buera et al. (2015) provides a comprehensive review of models with entrepreneurs and financial frictions.
18
This sample of countries includes Botswana, Burundi, Tanzania, Uganda, Kenya, South Africa, Ghana, Nigeria,
Zambia, and Senegal.
19
Strength of property rights is measured using the indicators of expropriation risk and investment profile from the
International Country Risk Guide (ICRG).

16
Agriculture plays an important role in understanding the large disparities in labor productivity across
countries. For instance, real GDP per worker in the richest 5 percent of countries in the world was, on
average, 34 times that of the poorest in 1985. Labor productivity differences in agriculture, on the other
hand, were even larger: value added per worker in agriculture of the richest countries was about 78 times
that of the poorest countries. In spite of this very low agricultural productivity, the poorest nations allocated
86 percent of their employment to this sector as compared to only 4 percent in the richest nations
(Restuccia, Yang and Zhu 2008). Hence, a key question that emerges is why labor productivity in
agriculture is so low in poor countries.
Farm size is an important factor driving low agriculture productivity among poorer nations. Adamopoulos
and Restuccia (2014) show that there are striking differences in the size distribution of farms between rich
and poor countries. For instance, the average farm size in the richest 20 percent of countries in the world is
34 times larger than that of the 20 percent poorest countries that is, 54 and 1.6 hectares, respectively. The
average farm size is lower than 1 hectare in some sub-Saharan African countries. They also show that larger
farms have greater labor productivity than smaller farms. These two empirical regularities suggest that farm
size differences can potentially have large effects on measured agricultural productivity. The calibration of
a two-sector model (agriculture and non-agriculture) that endogenizes farm size suggests that measured
aggregate factors (such as capital, land, and economy wide productivity) account for no more than of the
differences in average farm size and productivity across rich and poor countries. Hence, policies and
institutions that misallocate resources across farms have the potential to account for the remaining
differences.20 Farm size distortions are calculated by exploiting within-country variation in crop-specific
price distortions and their correlation with farm size. Aggregate factors along with farm size distortions
account for of the cross-country differences in size and productivity.
Imperfections in land market appear to have played a role in explaining resource misallocation in Malawi
(Restuccia and Santaeulalia-Llopis 2015). The vast majority of land in Malawi is not titled and a very small
portion of operated land is rented. These imperfections prevent an efficient reallocation of land and has an
adverse impact on productivity in the agricultural sector and, hence, on aggregate productivity. Household-
farm level data from Malawi suggests that operated land size and capital (per hour worked) are unrelated
to farm total factor productivity (see panel A of Figure 6). This implies that marginal product of capital and
operated land size have a strong positive association with farm TFP which constitutes evidence of factor
misallocation.21 If capital and land were reallocated across farms to their efficient uses, agricultural
productivity in Malawi would increase by 3.6 times. Furthermore, reallocation gains are 2.6 times larger
among farms with no marketed land than among farms with only marketed land.
Institutional restrictions on land allocation in Ethiopia may also lead to resource misallocation in agriculture
(Chen, Restuccia and Santaeulalia-Llopis 2015). The state owns the land in Ethiopia and it cannot be sold.
Moreover, there is prohibition of rentals and even if they were allowed as is the case in certain zones
the use rights are not properly defined and enforced by local leaders. Based on an egalitarian basis, use
rights are assigned by local leaders within the Kebele members.22 In contrast to theoretical allocative
efficiency, land allocation in Ethiopia is not positively related to farm productivity (see panel B of Figure
6). On the other hand, there are cross-regional differences in the procedure to allocate the use of rights and
the allowance for rentals. Hence, Chen et al. (2015) compared the reallocation gains across zones in Ethiopia

20
Adamopoulos and Restuccia (2014) argue that size-dependent policies in agriculture may exacerbate farm size
distortions in poorer countries. For instance, they document size dependent policies (e.g. input subsidies to farm
smallholders) in several African countries namely, Kenya, Malawi, Tanzania, Zambia, among others.
21
This pattern of correlations, in turn, suggests positive gains from land reallocation from less productive farms in
Malawi to more productive ones.
22
Ethiopia has recently initiated a process of certification of use rights to enable more flexible land allocation.

17
by the share of marketed land (farmers that operate more land than their use right). The authors find a strong
negative correlation between the extent of marketed land in a zone and the gains from reallocation that
is, zones with more marketed land displaying smaller gains.23

Figure 6. Land misallocation in Sub-Saharan Africa

A. Land size and farm TFP in Malawi B. Operational land and Farm TFP in Ethiopia

Notes. Panel A plots land operated by each farmer against farm TFP. Each blue dot representa a farm in the data while the
dashed line represents the efficient land size of each farm. Actual allocation of land in Malawi shows that there is almost no
systematic relationship between operated land in farms and their TFP. Panel B shows the actual allocation of operational land
across farmers in Ethiopia by farmers TFP. Description and finding is similar to that of Malawi. Source: Restuccia and
Santaeulalia-Llopis (2015) for Malawi, and Chen, Restuccia and Santaeulalia-Llopis (2015) for Ethiopia.

Small-sized agriculture rather than being a problem is the symptom of low agricultural productivity that
discourages the uptake of modern technologies (Restuccia 2016). Resource misallocation may be at the
heart of understanding the very low productivity of agriculture in poorer country. In particular,
misallocation related to land market imperfections. Resource misallocation in agriculture leads to devoting
an excessive amount of resources towards agriculture to produce a certain minimum level of agriculture
value added per capita. This implies, on average, lower operational scales. In this context, Restuccia (2016)
suggests that the main policy recommendation is to improve the quality of institutions supporting the
functioning of land markets. In this context, Chen (2016) argues that not only does untitled land lead to
resource misallocation but also to distorted individuals occupational choices between farming and non-
agricultural activities.24 The author builds a two-sector general equilibrium model where untitled land
cannot be rented or traded across farmers, and it can only be used by those who were originally assigned to
the plot. Simulations of the model show that titling all of the land raises agricultural productivity by 51.8
percent. About 42.5 percent of this productivity gain arises from land reallocation while 57.5 percent
reflects lower distortions in occupational choice.

23
The authors argue that this finding implies that actual allocation across zones is closer to the efficient allocation.
24
Individuals opting to work in the non-agricultural sector may have to forfeit their untitled land.

18
Table 5
Resource misallocation in Africa: The Evidence

Authors Sample Database Approach Friction Main findings

Mhalanga and Swaziland, 1994-2003 Manufacturing plant- Indirect Growth from within-firm activity (-4.9%)
Ranking (2015) level dataset lower than growth due to reallocation
(0.4-3.5%)
Page and 9 African countries Cross-country data Direct Aid programs to Productivity decreases with size: value
Sdebom and Ethiopia (panel) from Enterprise small & medium added in a 160-worker firm is 4 times
(2015) Surveys and enterprises larger than in a 5-worker firm. Earnings in
large+medium (SMEs) a 100-worker firm are about 80% higher
manufacturing than in a 5-worker enterprise. Differences
industries survey for are persistent along the life-cycle of firms
Ethiopia
Cirera, Fattal- Ethiopia, Ghana and Establishment-level Indirect Efficient allocation raises manufacturing
Jaef and Maemir Kenya manufacturing productivity in Ethiopia, Ghana and
(2016) census data Kenya by 67, 75 and 163 percent,
respectively.
Gebresilasse Ethiopia, 1996-2009 Establishment-level Indirect TFP gains from efficient allocation in
(2016) manufacturing Ethiopia's manufacturing ranges from 92
census data to 180 percent.
Paganini (2016) 19 Sub-Saharan AfriPANet Survey Indirect Standard deviation of the marginal
African countries 2010 product of capital (MPK) between 1.6 and
4 depending on the value of the elasticity
of substitution.
Shiferaw, Ethiopia, 1996-2008 Establishment-level Direct Road Quality of local road infrastructure
Sderbom, Siba, manufacturing infrastructure positively associated to number of firms
and Alemu census data present in a locality. Road connectivity
(2015) raises the size of entrant firms.
Kalemli-Ozcan 10 African countries, WB Productivity and Indirect and Financial Firm-level regressions show significant
and Sorensen 2005-2006 Investment Climate Direct distortions, relationship between access to finance
(2016) Survey property rights and MPK. Cross-country regressions show
significant relationship between
misallocation and institutions.
Greenwood, 45 countries (cross- Penn World tables, Direct Financial Financial best practices could raise output
Sanchez, and country analysis) Beck et al. (2000, distortions by 116% and TFP by 23% in Uganda.
Wang (2013) 2001) dataset

Source: Aguirre and Parro (2016)

19
II. The Regional Study
The regional study Boosting productivity in Sub-Saharan Africa aims at understanding the trends and
drivers of productivity gaps in the region vis--vis other benchmark regions in the world. It will complement
three major research projects being conducted during FY17 and FY18:
First, the programmatic research project Second-generation policy research to help developing countries
boost firm-level productivity currently undertaken by the EFI Chief Economist Office (William Maloney
and Ana Paula Cusolito). The project being conducted by AFRCE focuses its analysis on Sub-Saharan
Africa countries while the EFI will expand its analysis to middle-income countries in other regions (e.g.
Chile, Malaysia, India, among others). Furthermore, the AFRCE project will provide greater emphasis to
the role of resource misallocation in explaining aggregate productivity growth in Africa while the EFI
project provide more insights into the within component of productivity.
Second, the AFRCE-funded and led regional study Industrialization as a driver of productivity growth
(Emmanuel K. Lartey and Taye Mengistae). This project will address the following issues: first, lack of
industrialization in post-independence sub-Saharan Africa and patterns of deindustrialization in some
countries. Second, it evaluates the prospects over the next two decades of countries in the region undergoing
industrialization through participation in regional or global manufacturing value chains. Third, it evaluates
industrial policy tools that might foster country participation in the right regional or global manufacturing
value chains. The analysis in this project is also conducted at three different levels of aggregation namely,
country-level, country groups defined by resource abundance, and income groups and natural trade
groupings. The analysis will provide benchmarking of SSA countries against appropriate international
comparators.
Third, the EFI-SD joint flagship Understanding productivity growth in Agriculture currently undertaken
by the EFI Chief Economist Office (led by Aparajita Goyal). This project will examine constraints to
technology adoption and dissemination of productivity-enhancing technologies by farmers from recent
impact evaluations. It will also discuss emerging developments in agricultural value chains, and the
emergence of new institutions arrangements to include small-holder farms in these value chains.

2.1 Objectives of the Report

The main goal of the study is:
(1) Document productivity trends for countries in the region. This analysis will be comparative in
nature as it will benchmark the evolution of productivity in Africa vis--vis other countries/regions.
It will be undertaken for different levels of aggregation:
a. Aggregate level. The analysis at this level will be two-fold: first, provide a standard Solow
decomposition that examines the sources of growth of SSA countries over the last five
decades. Second, it will conduct a development accounting exercise to identify the extent
of income per capita gaps relative to benchmark regions and the sources of these
differences.
b. Sectoral level. It will document the patterns of structural change among SSA countries.
Using data on labor productivity and labor shares, it will analyze the shifts of resources
across sectors over the past five decades. An international comparison will be conducted
to examine whether Africas pattern is unique or similar to other regions.

20
 c. Establishment level. The regional study will present farm- and firm-level analysis of
productivity in selected SSA countries depending upon the availability of data at this
level of disaggregation.
(2) Document the productivity gap between SSA countries and other benchmark (developing and
developed) countries in both agriculture and manufacturing. Farm- and firm-level data analysis will
be the heart of this regional study and it will be focused on:
a. Compute the extent of the resource misallocation at the farm- and firm-level to understand
the impact of allocative inefficiencies in explain productivity differences between firms
SSA countries and other benchmark countries
b. Identify policies and institutions that drive resource misallocation; namely: (a) credit
market imperfections, (b) governments granting tax or regulation exceptions to certain
producers, (c) government subsidies to public enterprises (financed through taxes on other
producers), (d) labor market regulations, and (e) trade restrictions (Restuccia and Rogerson
2008).
Why the emphasis on resource misallocation?
The consensus of the growth literature is that cross-country differences between rich and poor countries in
output per worker are largely attributed total factor productivity (TFP). Low TFP among poor countries
could be attributed to the slow diffusion and adaptation of technology and best practices among these
countries. On the other hand, it can also be explained by the inefficient allocation of factors of production
across heterogeneous producers (Restuccia and Rogerson 2016).
There is a growing literature trying to understand how the microstructure of establishments can contribute
to explain the development gap between rich and poor nations. This strand of the literature accounts for the
fact that production units are different in terms of their size and productivity level. Aggregate total factor
productivity (TFP) is, in turn, influenced by: (i) the distribution of productivity across production units and
their corresponding allocation of resources (say, capital and labor across manufacturing establishments),
and (ii) the number of firms per capita (Hopenhayn 2014).
The baseline model consist of heterogeneous production units under perfect competition a la Lucas (1978)
and Hopenhayn (1992). The technology of production is common to firms and exhibit decreasing returns
to scale in capital and labor. Productivity shocks are idiosyncratic across firms. In the absence of distortions,
allocative efficiency entails an output-maximizing allocation of capital and labor (according to their
productivity at the margin). The model predicts that in the efficient allocation:
(a) Marginal products of factors will be equal across all active producers,
(b) High productivity firms should have a higher level of output.25
This model provides a clear benchmark to calculate resource misallocation as expressed by deviations
from allocative efficiency. In turn, there is ample evidence that misallocation is quantitatively important
factor in accounting for differences in measured TFP across rich and poor countries as documented by
the seminal paper by Hsieh and Klenow (2009). According to this framework, institutions and policies may
impede the equalization of the marginal value of inputs across firms and thus result in aggregate
productivity losses.26

25
Hopenhayn (2014) argues that one of the consistent findings of this literature is that the average firm size increases
(decline) with aggregate productivity if the elasticity of the cost of entry relative to TFP is smaller (greater) than one.
26
Several of the types of institutions and policies that lead to such misallocation prevail in developing countries
and, notably, SSA economies.

21
More specifically, policies/institutions that entail a systematic redistribution of resources from more
productive to less productive establishments will have large effects on aggregate TFP. Restuccia and
Rogerson classify these types of policies/institutions into two groups:
(a) Regulation and discretionary provisions, including firing costs, size-dependent policies (e.g. SME
subsidies), labor and product market regulations, state-owned enterprises, restrictions on land
markets, and
(b) Market imperfections, including trade policies, mark ups, credit constraints, imperfect information
and insurance, among others.
A more detailed version of the basic setting of the model as well as extensions can be found in Aguirre and
Parro (2016). This paper was commissioned by the team, and it is available as a companion to this concept
note.

2.2 Background research for the Report

In what follows, it is outlined the different background papers that will contribute to the report.
2.2.1 Aggregate evidence: Laying out some basic stylized facts
Understanding aggregate productivity growth in Sub-Saharan Africa: Stylized facts and drivers, by
Cesar Calderon (AFRCE), Erina Iwami (AFRCE), and Luis Serven (DECRG)
The goal of this paper is to document the evolution of aggregate TFP for a wide array of SSA countries
from 1960 to 2014. This exercise will be conducted following two different approaches: (i) the Solow
decomposition, and (ii) the development accounting (Hsieh and Klenow 2010). Sensitivity analysis will be
undertaken for different TFP definitions, different country groups (classification by resource abundance,
fragility and geography) and different sample periods. These two approaches will help us examine whether
the Africa rising narrative: (a) is a capital accumulation of TFP growth story, and (b) implies lower gaps in
living standards and productivity for SSA countries vis--vis advanced countries (as well as other
developing region benchmarks).27
Productivity gaps across sectors are a feature of underdevelopment: they are the widest for the poorest
countries and they decline as a result of robust and sustained growth (McMillan et al. 2014). Across, sector
this paper will try to identify sectors productivity gaps across countries. Unlike other papers in the literature,
it will compute the ratio of marginal products rather than that of average products as suggested by Sinha
(2016). This distinction is important as large gaps in average productivity between two sectors do not imply
inefficiency in resource allocation. It may reflect differences in labor shares across sectors rather than
differences in distortions.28 On the other hand, absence of gaps in relative average productivity do not imply
efficiency of resource allocation. Even if the average productivity is similar across sectors, there are gains
from reallocation if the labor shares vary across sectors. In this context, considering gaps in marginal
productivity would lead to quantitative differences relative to considering gaps in average productivity to
the extent that labor shares vary across sectors.

27
The development accounting framework will enable us to link persistent cross-country differences in income per
capita across countries to cross-country differences in TFP. It will also help identify country experiences of success
and stagnation.
28
For instance, if the relative shares are inverse of relative average productivity, there are not distortions present in
the economy (or all sectors face the same level of distortions). This implies that there are no possible gains to be
realized by moving resources across sectors.

22
2.2.2 Structural Transformation
The Role of Structural Transformation in Sub-Saharan Africa, by Margarida Duarte (University of
Toronto) and Diego Restuccia (University of Toronto and NBER)
This paper examines the role of sectoral productivity and structural transformation on aggregate outcomes
in Sub-Saharan African (SSA) countries.
First, it will document trends in sectoral labor productivity and shares of employment across SSA countries
and their differences relative to the U.S. and other developed economies. The data will likely show that
agriculture may play a disproportionate role in aggregate outcomes for SSA countries. The analysis will
rely on data from the Groningen Growth and Development Centre, 10-sector database, data from the FAO,
and aggregate income data from the Penn World Table or World Bank. It will also analyze the expenditure
patterns associated with the sectoral structure using the detailed International Comparison Project data on
the expenditure side of the national accounts for SSA countries.
Second, the paper will examine the extent to which the sector productivity patterns uncovered can be
rationalized by a standard tractable model of structure change a la Duarte and Restuccia (2010). Through
the lens of the model, the paper will discuss: (a) the extent to which productivity patterns alone explain
observed cross-sectoral reallocation, and (b) the instances in which this process is at odds with the data or
other country experiences.
Finally, to the extent that productivity patterns drive structural change and aggregate outcomes in Africa,
the paper will evaluate some key determinants of sectoral productivity levels and growth, analyze
counterfactual experiments and discuss potential policy implications. For instance, it will connect patterns
of agricultural productivity with the literature on resource misallocation in agriculture, as well as patterns
in manufacturing and services with other experiences in the process of development.
2.2.3 Boosting productivity in manufacturing
Resource misallocation in manufacturing across Sub-Saharan African countries (Roberto N. Fattal Jaef)
Distortions in factor and product markets are pervasive across low-income and developing countries. This
paper evaluates the extent of distortions in Sub-Saharan Africa along two particular dimensions:
First, distortions to allocative efficiency that create resource misallocation across heterogeneous production
units. Leveraging on a parallel project that collects firm-level data from manufacturing censuses in SSA, it
will characterize the degree of misallocation in these economies, and quantify the costs of the underlying
distortions in terms of lower total factor productivity (TFP) and income per capita.
Second, distortions in intermediate good markets that constrain the degree of linkages across sectors in the
economy. Specialization is crucial for productivity, and distortions that hinder the ability of an economy to
rely on other sectors for the production of essential inputs hinder efficiency maximization. Combining data
from input-output tables with a multi-sector general equilibrium model, the paper seeks to characterize the
degree of disruptions to linkages in productions and their costs in terms of aggregate efficiency.
Finally, the authors collected firm-level data from manufacturing censuses for an expanding number of
countries in the region. Up to this point, the sample of countries includes Ghana, Ethiopia, Kenya, Ivory
Coast, Morocco, and Cameroon. The coverage in terms of input-output tables is uncertain but presumably
much more comprehensive given the multiplicity of sources for this kind of data including those provided
by the countries' statistical offices.

23
Sources of Manufacturing Productivity Growth in Africa: Demand side drivers vs. supply side factors
(Taye Alemu Mengistae and Emmanuel K.K. Lartey)
This paper builds on ongoing collaborative research with the University of Oxford to assess the importance
of different barriers to manufacturing productivity growth in Africa. Specifically, it identifies and estimates
the relative weight of supply-side factors and demand-side drivers of plant-level productivity growth in a
wide range of individual industries (at the four-digit ISIC level).29 Supply side (or technological) sources
include improvement in management practices, capital vintage effects, innovative practices, discoveries
through R&D efforts, among others. Demand-side drivers include the exogenous component of expanded
access of plants to local or international markets via changes in trade policy, or transportation and
communication costs. In turn, these policy changes will have an influence on the product market structure
within which plants operate. The policy implications of demand-side driven productivity growth are quite
distinct from those that could be inferred from supply-side factors.
First, the paper interprets the results of the analysis of a long panel of manufacturing establishment census
data on Ethiopia that identifies the effects of both idiosyncratic supply shocks and demand shocks on firm
dynamics, industry and average productivity levels as well as the dispersion of productivity. Using
information on the producers physical output and prices enables us to measure both physical total factor
productivity and revenue total factor productivity at the establishment level (TFPQ and TFPR,
respectively).30 Empirical studies that examine the importance of firm selection mechanisms based on TFPR
alone are unable to isolate the effects of supply-side and demand-side factors on aggregate (manufacturing)
productivity.31 Previous studies based on TFPR alone confound these two mechanisms and they were
unable to identify supply from demand effects on firm survival and within-industry reallocation.
Second, the findings from the Ethiopian manufacturing sector will be replicated for manufacturing at the
establishment level for Cote dIvoire. The results for Ethiopia and Cote dIvoire will be benchmarked vis-
-vis Colombia. This paper will further investigate how these results can be projected to other countries
with establishment-level manufacturing census data namely, Ghana, Kenya, Uganda, Rwanda, and
Zambia. This assessment will include the systematic comparison of the relative weight of individual supply-
and demand-side factors explaining productivity growth across the seven SSA countries. Finally, it will
examine the policy implications of the aforementioned assessment for individual countries and build up a
policy narrative at the regional level.
Assessing resource misallocation in Ethiopia (Mns Sderbom)
Agriculture employs 85 percent of the labor force in Ethiopia, but contributes less to Ethiopias gross
domestic product (GDP) than the other sectors of the economy taken together. The differences in value
added per worker across sectors are thus remarkable. Another striking, but sometimes forgotten, fact about
African firms is that very considerable differences in firm performance can be observed across firms
operating within the same sector. This paper uses firm census data on Ethiopian manufacturing firms to

29
The earliest industry productivity studies such as Bailey and Campbell (1992) and some of the best of known of
more recent ones such as Hsieh and Klenow (2009) focused on supply side drivers of its growth. However, as clearly
shown, most notably in Melitz (2003), Syverson (2004) and Melitz and Ottaviano (2008) demand side sources of the
same growth could be at least as important.
30
This distinction is important as TFPR measures cannot distinguish between plants that charge higher prices due to
greater demand from those that pass-on higher production costs (as a result of higher input costs or lower efficiency)
by raising prices.
31
Note that TFPQ is negatively correlated with price while TFPR is positively correlated.

24
document and explain differences in productivity across firms. The outcome variables of interest will be
labor productivity (value-added per worker) and total factor productivity.
One general goal is to shed light on why some firms have much higher levels of labor productivity and total
factor productivity than others. We will have access to very rich and comprehensive firm-level data
collected by the Central Statistical Agency (CSA) of Ethiopia, as part of the Large and Medium
Manufacturing Industries Survey. We will use information on output, capital, labor, raw material, energy
inputs, and other industrial costs in the dataset. There is also a detailed product-price module in the survey
instrument. Using these data we can test whether product choice, output prices and productivity are
important driving factors of the value-added differences observed across firms. Moreover, it will be possible
to obtain estimates of physical productivity that are not directly affected by price differences. This means
we can distinguish decompose pricing and physical productivity as potential driving factors of value-added
per worker. In the final part of the analysis we will infer shadow costs of capital and labor from marginal
products of labor and capital, and assess aggregate output losses due to misallocation of factor inputs and
imperfection in factor markets.
2.2.4 Boosting productivity in agriculture
Agriculture Productivity and Economic Transformation in Sub-Saharan Africa. Aparajita Goyal (The
World Bank Poverty and Equity Global Practice) and Keith Fuglie (USDA Economic Research
Service).
The fact that agriculture in Sub-Saharan Africa (SSA) was by-passed by the Green Revolution of the 1970s
and 1980s appears to be a key impediment to economic development in this region (World Development
Report, 2008). Agricultural productivity in SSA continues to be low by world standards, and is falling
further behind as other countries advance (Fuglie, 2012). Nonetheless, evidence of modest growth in
agricultural productivity in some parts of SSA began to emerge in the 1990s although at a slow and uneven
pace in the 2000s (Block, 1995; Fuglie and Rada, 2013). This raises the question as to whether agricultural
(and economic) development in the region may be reaching a turning point. Is agricultural productivity
rising enough to stimulate broader economic transformations, including reduction in severe poverty and
malnutrition? Can growth in agricultural productivity be broadened and sustained?
The goal of this paper is three-fold:
(1) Assess long-term trends in agricultural productivity in SSA countries from 1980 to 2014.
(2) Estimate the impact of underlying factors that can help boost agricultural productivity.
(3) Explore the consequences of improved agricultural productivity for broader economic development
particularly, poverty reduction.
Measuring agricultural productivity is not trivial. The paper compares and contrast TFP estimates over the
period 1980-2014 using different sources of data; namely, the World Bank, FAO, and USDA. Using this
measures, it will identify a set of growth countries and will compare their performance vis--vis other
countries.32

32
The USDAs Economic Research Service (2015), on the other hand, has constructed an index of agricultural total
factor productivity (TFP) for each SSA country based primarily on FAO output and input data. The TFP is a ratio
between an index of gross agricultural output (in constant 2005 I$) and an index of aggregate inputs including labor,
land, fertilizer, livestock capital and machinery. Inputs are combined using econometrically estimated production
elasticities as weights. The growth rate of aggregate input is the weighted average of the growth rate of each factor of
production. Finally, TFP growth is the difference in the growth rate between gross agricultural output and aggregate
input.

25
Regarding the factors contributing to agricultural productivity growth, there is evidence that higher
agricultural productivity among SSA countries is associated to: (a) adopting improved agricultural
technologies (through R&D investment and improving the enabling environment), (b) raising the nominal
rate of assistance to agriculture, (c) increase in farmer schooling, and (d) reduced armed conflict (Fuglie
and Rada 2013).
This paper extends the quantitative findings of Fuglie and Rada (2013) to examine the importance of
different (structure and/or policy) factors in predicting the measured productivity growth performance of
selected SSA countries from 1980 to 2013. The extent to which growth is attributed to technology-driven
factors (say, R&D investment) or improvements in terms of trade carries implications on the sustainability
of productivity growth.
The Role of Agriculture in Boosting Productivity in Sub-Saharan Africa, by Chaoran Chen (University
of Toronto) and Diego Restuccia (University of Toronto and NBER)
This paper will investigate four sets of basic facts related to agriculture for SSA countries:
First, it will examine trends in agricultural labor productivity of SSA countries both across time and relative
to that of advanced countries (e.g. U.S. and Europe).33
Second, it documents the size distribution of farms of SSA countries. According to the literature, the farm
size distribution has important implications of agricultural productivity: distorted farm size distributions
signal the likelihood of land or other factors misallocation (e.g. Adamopoulos and Restuccia 2014).
Third, it will document land market institutions (such as, land ownership, extent of reallocations and land
rentals among farmers) in some SSA countries, using data from both the FAO and the Integrated Surveys
of Agriculture (ISA) from the World Bank.
Fourth, it will document geographical conditions in some SSA countries using the Global Agro-Ecological
Zones (GAEZ) data. Although geographical conditions are believed to have an important impact on
agricultural productivity, recent research show that these conditions are unlikely to account for a substantial
portion of the large observed cross-country differences in agricultural productivity (Adamopoulos and
Restuccia 2015). This paper will investigate the extent to which this conclusion applies to SSA countries
as well as to what extent geographical conditions can account for their differences in agricultural
productivity.
Once these facts are documented, the paper plans to quantify the importance of resource misallocation in
agriculture for some SSA countries using survey data from ISA.34 Following the methods used in Restuccia
and Santaeullia-Llopis (2015) this paper quantifies misallocation: first, it measures TFP at the household-
farm level (under some technology assumptions). Second, it computes the aggregate agricultural output and
productivity gains from relocating resources to the efficient allocation given the aggregate amounts of
capital, labor, and land input in agriculture. Third, it characterizes the implicit micro-level distortions in
agriculture, their relationship with micro-level TFP, and the relationship between reallocation gains from
resource misallocation to variations in land institutions, both regionally and across countries in SSA.35

33
It uses internationally comparable data on output and employment from both the Food and Agricultural Organization
(FAO) and the Africa Sector Database (ASD) from the Groningen Growth and Development Centre.
34
Recent research shows that resource misallocation substantially lowers agricultural productivity in poor and
developing countries see Adamopoulos and Restuccia, 2014, 2015; Restuccia and Santaeullia-Llopis, 2015; Chen
et al, 2016.
35
Whenever available we will exploit the panel structure of the ISA data to help identify the impact of land market
imperfections on resource misallocation.

26
Fourth, it will study resource misallocation also affects agricultural technology adoption among farmers
within SSA countries.36
This paper will estimate the impact of land market imperfections and other frictions creating misallocation
on the choice of technology by farmers. By considering technology choice, we will study the broader
dynamic impact of misallocation: poor institutions such as imperfect land markets not only affect static
resource allocation across farms, but also impedes farms from adopting more productive production
technologies. Finally, it will assess and discuss the quantitative impact of this dynamic gain from improving
institutions and policies in SSA countries in policy analysis.
Inefficient Crop Selection and Agricultural Productivity in Developing Countries by Rishabh Sinha
(The World Bank) and Xican Xi (University of Fudan)
It is essential to understand the causes behind low agricultural productivity to comprehend the large income
disparities across countries. An important difference in agricultural practices is the cross-country variation
in the nature and number of crops cultivated on a typical plot. Production efficiency implies that farmers
should growth the crop that renders the highest returns. Yet, farming in developing countries involves
harvesting multiple crops including some crops that are often not suitable for the climate and geography.
This paper aims at finding whether and to what extent inefficient crop selection of farmers in developing
countries results in low observed agricultural productivity. It will focus on three drivers of farmers
cropping decisions: (a) trade costs, (b) subsistence requires across multiple crops, and (c) extreme hedging
near subsistence consumption.37 This paper seeks to understand the role of economic and institutional forces
that drive inefficiencies in crop selection. It will quantify the effects of such forces on agricultural, income
and welfare. To this end, the research will proceed in two stages.
First stage: It establishes the patterns of crop selection and measures inefficiencies in crop selection among
developing countries. It uses two rich micro-level data sets: (a) FAOs Global Agro-Ecological Zones
(GAEZ),38 and (b) the World Banks Living Standards Measurement Study - Integrated Surveys on
Agriculture (LSMS-ISA) data (available for Burkina Faso, Ethiopia, Malawi, Mali, Niger, Nigeria,
Tanzania and Uganda) and the Indian Human Development Survey.39 The combined information from these
two datasets using spatial data analysis will help establish the patterns between crop selection and
household/plot level characteristics, and measure to what extent these observed patterns deviate from the
optimal crop choices, which are determined by the relative productivity differences across crops and plots.40

36
Chen (2016) shows that farmers in poor countries use technologies that are different from farmers in developed
countries, and that technology differences contribute to low agricultural productivity in poor countries.
37
As poorer farmers are more prone to practice inefficient crop selection based on these factors, the gains from shifting
to optimal selection will enable them to fight extreme poverty through increases in agricultural productivity.
38
The GAEZ database provides rich micro-geography information that is important for agricultural production for
millions of high-resolution plots covering the entire planet: soil quality, climate conditions (rainfall, temperature,
humidity, etc.) and topography (elevation and average land gradient, etc.). Combining this information with a detailed
agronomic model, a potential yield for each crop at each plot is obtained given a level of water supply (irrigated or
rain-fed) and input use (fertilizers, machinery, and labor).
39
The agricultural surveys provide detailed information on household characteristics, agricultural inputs, actual crop
selection decisions and yields, and crop prices. While there have been earlier studies that have considered these
databases separately, to the best of our knowledge we will be the first to bridge these rich datasets together.
40
Given the significant heterogeneity in crop selection within a small geographical region of a country (e.g. the
number of crops cultivate by a district-level Tanzanian household can range from 1 to 10 different crops), such an
analysis will help analyze the role of households economic conditions as well as other institutional variables like
trade costs in driving inefficiency of crop selection.

27
Second stage: It develops a general equilibrium model of agricultural production and trade that focuses on
households crop selection decisions. The model will feature four key elements: (a) heterogeneous
productivity across crops and plots, (b) trade costs across regions, (c) agricultural risks associated with
fluctuations in crop prices and weather, and (d) households will require a subsistence level of agricultural
consumption. The model is calibrated using the quantitative facts obtained from the combined GAEZ and
agricultural surveys data. Next, if evaluates the quantitative importance of the three drivers of inefficient
crop selection: (i) high trade costs (which act as barriers for practicing regional comparative advantage in
crop selection), (ii) extreme hedging against agricultural risks lead to selecting crops with lower variance
but also lower mean in returns due to consumption near subsistence levels, and (iii) a large fraction of the
produce being used for subsistence consumption which requires growing multiple crops due to nutritional
requirements and preference for variety. More importantly, it will be used to evaluate the aggregate effect
on productivity and welfare of policies that aim to reduce trade costs across regions or insure rural
households against agricultural risks, through the channel of reducing inefficiencies in crop selection.
Temperature and agriculture in Uganda: Farmers resilience and coping mechanisms by Fernando
Aragon (Simon Fraser University) and Juan Pablo Rud (Royal Holloway, University of London)
Climate change will bring about large shifts in agricultural productivity at the global scale. Conservative
projections of 2C temperature increase in tropical and temperate regions are predicted to negatively impact
wheat, maize and rice crop yields, with losses of up to 25% compared to late 20th century averages (IPCC
2014). The potential impact of this shock is particularly relevant for developing countries where a majority
of poor lives in rural area and whose livelihoods heavily depend of agriculture. These vulnerable
populations are at the front line of this increased climate risk exposure.
The goal of this paper is examine the relationship between extreme temperatures and agricultural output in
the case of Uganda. It will estimate the response function linking temperature and precipitation to
agricultural productivity, and examining the different mechanisms used by farmers to cope and adjust, in
the short term, to extreme weather shocks. This paper also seeks to study the heterogeneity of effects and
assess the importance of environmental and economic factors to shape the resilience of farmers to these
shocks. A potentially important factor is access to markets and modern agricultural technologies which
might complement coping mechanisms and reduce agricultural losses.
This paper has two important contributions:
First, it will provide the first estimates of the effect of weather shocks on agricultural productivity in an
African country, as well as insights on coping and short-term adaptation mechanisms used by subsistence
farmers.
Second, it will provide novel evidence on how modern technologies and other economic factors
complement farmers ability to mitigate damages. These findings are very important to inform the academic
and policy debate on climate change in developing countries.
This paper will use: (a) detailed microdata at the household level (Uganda National Panel Survey for 2009
and 2014) with detailed data on agricultural activities at the plot level including agricultural practices,
and household living standards over time. (b) Rich and novel satellite imagery to measure temperature and
precipitation at a high degree of spatial and temporal resolution for Uganda see Shen and Leptoukh
(2011) for validation of the data against in situ temperatures.
2.3 Proposed outline for the Report

28
The Africa Regional Studies Program has a driving framework that aims at understanding the factors that
may help boost productivity of Sub-Saharan African countries and close the income per capita disparities
vis--vis richer countries. Closing this gap requires formulating policies to close the gaps in: (a)
infrastructure (say, reliable provision of energy and an improved road network), (b) technology (improving
institutions that enable the adoption of best practices in know-how and technology), (c) markets (say,
allowing markets to be more contestable by allowing greater flexibility of labor and product markets), and
(d) social contract (by providing people the skills to adapt to the jobs of the 21st century and protect the
more vulnerable people in hard times). Diagram 1 summarizes the four pillars behind the productivity push
in the region.

Diagram 1. Drivers of productivity growth in SSA

Source: AFRCE Program Update

The proposed outline of the report will be:
Chapter 1. Aggregate stylized facts on income per worker and total factor productivity in Sub-Saharan
Africa
1.1 Evolution of TFP across SSA over time
1.2 Income disparities of SSA vis--vis developed economies
Chapter 2. Sectoral patters of productivity growth and structural transformation
2.1 Patterns of factor reallocation and structural changes in Africa
2.2 Determinants of sectoral productivity patterns and policy implications
Chapter 3. Resource misallocation as a driver of aggregate productivity loss
3.1 Agriculture: Evidence at the farm level
3.2 Manufacturing: Firm-level evidence
Chapter 4. Policies and institutions driving resource misallocation (Diagram 1)

29
 4.1 Credit constraints
4.2 Size dependent policies: Taxation
4.3 Market contestability: Regulatory policies, state-owned enterprises, restrictions on land markets
4.4 Trade policies
4.5 Technological choices
4.6 Infrastructure: Impact of endogenous placement of infrastructure

III. Proposed Timeline

The proposed preparation and implementation timeline is as follows.
- Concept Note Review: April 6, 2017
- Midterm Workshop: January 2018
- Meeting with first full drafts: April 2018
- Decision Meeting: June 2018

IV. Budget Estimate

Find below the budget for the current and subsequent fiscal years.
FY17-FY18: US$ 250,000

V. Proposed Team
The proposed team would include the following Bank staff and qualified academics:
Csar Caldern, Lead Economist (AFRCE) Task Team Leader
Fernando Aragn (associate professor, Simon Fraser University)
Chaoran Chen (Ph.D. Student candidate - University of Toronto, Department of Economics)
Margarida Duarte (Associate Professor of Economics - University of Toronto, Department of Economics)
Roberto N. Fattal Jaef, Economist (DECMG)
Aparajita Goyal, Senior Economist (GPV01)
Mary Hallward-Driemeier (GTCD4) To be confirmed
Erina Iwami (AFRCE), Consultant (AFRCE)
Emmanuel K.K. Lartey, Economist (AFRCE)
Taye Alemu Mengistae, Senior Economist (GTC13)

30
Diego Restuccia (Professor of Economics at the University of Toronto, Canada Research Chair in
Macroeconomics and Productivity)
Juan Pablo Rud (Senior Lecturer Royal Holloway, University of London)
Rishabh Sinha, Economist (DECMG)
Mns Sderbom (Professor, Head of Department, Department of Economics, University of Gothenburg,
Sweden)
Luis Servn, Senior Adviser (DECMG)

VI. Peer Reviewers

Richard Rogerson (The Charles and Marie Robertson Professor of Public and International Affairs,
Princeton University)
Daniel Lederman (Lead Economist, LCRCE)
Luc Christiaensen (Lead Agriculture Specialist, GPSJB)

31
References
Adamopoulos, Tasso and Diego Restuccia (2014) "The Size Distribution of Farms and International
Productivity Differences." American Economic Review 104(6): 1667-97.
Aghion, Philippe, and Peter Howitt (1992) A Model of Growth Through Creative Destruction."
Econometrica 60, no. 2: 323-351.
Aguirre, Alvaro and Francisco Parro (2016) Quantifying misallocation and its effects on aggregate TFP:
A survey. Universidad Adolfo Ibaez, manuscript
Baily, Martin N., Charles Hulten, and David Campbell (1992) Productivity Dynamics in Manufacturing
Plants. Brookings Papers on Economic Activity. Microeconomics, pp. 187249.
Baily, Martin Neil and Robert M. Solow (2001) "International Productivity Comparisons Built from the
Firm Level." Journal of Economic Perspectives 15(3): 151-172.
Banerjee, Abhijit V., and Esther Duflo (2005) Growth Theory through the Lens of Development
Economics. In Handbook of Economic Growth, Vol. 1A, edited by Philippe Aghion and Steven Durlauf.
NewYork: North Holland, pp. 473552.
Bento, Pedro, and Diego Restuccia (2016) Misallocation, establishment size, and productivity.
Unviersity of Toronto Working Paper 557.
Bigsten, Arne, Mulu Gebreeyesus, and Mns Sderbom (2016) Tariffs and Firm Performance in Ethiopia.
Journal of Development Studies 52(7): 986-1001.
Bloom, N., Draca, M., & Van Reenen, J. (2016) Trade induced technical change? The impact of Chinese
imports on innovation, IT and productivity. The Review of Economic Studies 83 (1): 87-117.
Bloom, Nicholas, Mark Schankerman, and John van Reenen (2013) Identifying technology spillovers
and product market rivalry. Econometrica 81(4): 13471393.
Buera, Francisco J., and Joseph P. Kaboski (2012a). Scale and the Origins of Structural Change. Journal
of Economic Theory, 147: 684-712.
Buera, Francisco J., and Joseph P. Kaboski (2012b) The Rise of the Service Economy. American
Economic Review 102(6): 2540-2569.
Buera, Francisco J., Joseph P. Kaboski, and Yongseok Shin (2015) Entrepreneurship and Financial
Frictions: A Macrodevelopment Perspective. Annual Review of Economics 7: 409-436.
Busso, Matias, Lucia Madrigal, and Carmen Pages (2013) Productivity and resource misallocation in
Latin America. BE Journal of Macroeconomics 13(1): 903-932.
Calderon, Cesar and Sebastien Boreux (2016) Citius, Altius, Fortius: Is Growth in Sub-Saharan Africa
More Resilient? Journal of African Economies: 1-27.
Caselli, Francesco (2005) Accounting for cross-country income differences. In: Aghion, Philippe, and
Steven N. Durlauf (eds.), Handbook of Economic Growth, Volume 1A, Amsterdam, North-Holland:
Chapter 9, pp. 679-741.
Chen, Chaoran (2016) Untitled Land, Occupational Choice, and Agricultural Productivity. University of
Toronto, manuscript.

32
Chen, Chaoran, Diego Restuccia, and Raul Santaeulalia-Llopis, R. (2015) Land markets, resource
allocation, and agricultural productivity. University of Toronto Working Paper.
Cirera, Xavier, Roberto N. Fattal-Jaef, and Hibret B. Maemir (2017) Taxing the good? Distortions,
Misallocation, and Productivity in Sub-Saharan Africa. The World Bank Policy Research Working Paper
7909, January
Dennis, Allen, Taye Mengistae, Yutaka Yoshino, and Albert Zeufack (2016) Sources of Productivity
Growth in Uganda: The Role of Inter-Industry and Intra-Industry Misallocation in the 2000s. The World
Bank Policy Research Working Paper 7909, December
Duarte, Margaride, and Diego Restuccia (2010). The role of the structural transformation in aggregate
productivity. The Quarterly Journal of Economics 125(1): 129173.
Duarte, Margaride, and Diego Restuccia (2016) Relative Prices and Sectoral Productivity. University of
Toronto Working Paper.
Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2015), "The Next Generation of the Penn
World Table" American Economic Review, 105(10), 3150-3182.
Foster, Lucia, John C. Haltiwanger, and C.J. Krizan (2001) Aggregate Productivity Growth. Lessons
from Microeconomic Evidence. In: Charles R. Hulten, Edwin R. Dean, and Michael J. Harper (Eds.),
New Developments in Productivity Analysis. Chicago, IL: University of Chicago Press, pp. 303-372.
Fuglie, Keith. 2012. Productivity Growth and Technology Capital in the Global Agricultural Economy.
In, Productivity Growth in Agriculture: An International Perspective (Keith Fuglie, Sun Ling Wang and
V. Eldon Ball, eds.) Wallingford, UK: CAB International, pp. 335-368.
Fuglie, Keith, and Nicholas Rada. 2013. Resources, Policy and Agricultural Productivity in Sub-Saharan
Africa. Economic Research Report 145, Economic Research Service, U.S. Department of Agriculture,
Washington, DC, February.
Gebresilasse, Mesay M. (2016) Industrial Policy and Misallocation in the Ethiopian Manufacturing
Sector. Boston University, manuscript [Paper presented at the 2016 CSAE Conference]
Greenwood, Jeremy, Cheng Wang, and Juan M. Sanchez (2010) Financing development: The role of
information costs. American Economic Review 100: 18751891.
Greenwood, Jeremy, Juan M. Sanchez, and Cheng Wang (2013) Quantifying the impact of financial
development on economic development. Review of Economic Dynamics 16: 194-215.
Guner, Nezih, Gustavo Ventura, and Yi Xu (2008) Macroeconomic implications of size-dependent
policies. Review of Economic Dynamics 11: 721-744.
Hall, Robert E., and Charles I. Jones (1999). Why do some countries produce so much more output per
worker than others? The Quarterly Journal of Economics 114 (1), 83116.
Herrendorf, Berthold, Richard Rogerson, and Akos Valentinyi (2014) Growth and Structural
Transformation. Handbook of Economic Growth Volume 2, pp. 855941.
Hopenhayn, Hugo A. (2014) Firms, Misallocation, and Aggregate Productivity. Annual Review of
Economics 6: 735-770.

33
Hopenhayn Hugo A., and Richard Rogerson (1993) Job turnover and policy evaluation: a general
equilibrium analysis. Journal of Political Economy 101: 915-938.
Hsieh, Chang-Tai, and Peter J. Klenow (2009) Misallocation and Manufacturing TFP in China and
India. The Quarterly Journal of Economics 124(4), 1403-1448.
Hsieh, Chang-Tai, and Peter J. Klenow (2010) Development Accounting. American Economic Journal:
Macroeconomics 2 (January): 20723.
IPCC (2014). Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to
the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. Technical report, IPCC,
Geneva, Switzerland. [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)].
Kalemli-Ozcan, Sebnem, and Bent E. Sorensen (2016) Misallocation, Property Rights, and Access to
Finance: Evidence from Within and Across Africa. Forthcoming in: African Successes: Modernization
and Development, Volume 3, Sebastian Edwards, Simon Johnson, and David N. Weil, editors. Chicago,
IL: University of Chicago Press for NBER.
Klenow, Peter J., and Andrs Rodrguez-Clare (1997) The Neoclassical Revival in Growth Economics:
Has It Gone Too Far? In NBER Macroeconomics Annual, ed. Ben S. Bernanke and Julio J. Rotemberg.
Cambridge, MA: MIT Press, pp. 73114.
Kongsamut, Piyabha, Sergio Rebelo, and Danyang Xie (2001) Beyond balanced growth. Review of
Economic Studies 68: 869-882.
Lucas, Robert E. Jr. (1978) On the size distribution of business firms. Bell Journal of Economics 9:
50823
McMillan, Margaret S., and Kenneth Harttgen (2014) What is driving the African Growth Miracle?
NBER Working Paper 20077, April.
McMillan, Margaret S., and Dani Rodrik (2011). Globalization, structural change and productivity
growth. In M. Bacchetta, & M. Jense (Eds.), Making globalization socially sustainable (pp. 4984).
Geneva: International Labour Organization and World Trade Organization.
McMillan, Margaret S., Dani Rodrik, and Iigo Verduzco-Gallo (2014) Globalization, structural change,
and productivity growth, with an update on Africa. World Development, 63(1), 11-32.
Mhlanga, Samuel V., and Neil A. Rankin (2015) Does Technical Efficiency Dominate Resource
Reallocation in Aggregate Productivity Growth? Firm-Level Evidence from the Manufacturing Sector in
Swaziland. Department of Economics, University of Stellenbosch, manuscript [Paper presented at the
2016 CSAE Conference]
Ngai, L. Rachel, and Christopher A. Pissarides (2007) Structural change in a multisector model of
growth. American Economic Review 97: 429-443.
Nishida M., Petrin, A., and Polanec, S. (2013 Exploring Reallocation's Apparent Weak Contribution to
Growth." Journal Productivity Analysis 42, 187-210.
Paganini, Monica (2016) Mis-Allocation and Capital-Labour Substitution in Sub-Saharan Africa.
University of Kent, manuscript [Paper presented at the 2016 CSAE Conference]

34
Page, John, and Mns Sderbom (2015) Is Small Beautiful? Small Enterprise, Aid and Employment in
Africa. University of Gothenburg, manuscript.
Parente, Stephen L. and Edward C. Prescott (1994) Barriers to Technology Adoption and
Development. The Journal of Political Economy 102(2): 298-321.
Parente Stephen L. and Edward C. Prescott (2000) Barriers to Riches. MIT Press, Cambridge.
Parente Stephen L. and Edward C. Prescott (2005) A Unified Theory of the Evolution of International
Income Levels. In: Aghion P, Durlauf S (eds) Handbook of Economic Growth 1B.Elsevier BV, 1371-
1416.
Poschke, Markus (2014) The Firm Size Distribution across Countries and Skill-Biased Change in
Entrepreneurial Technology. The Institute for the Study of Labor, Working Paper.
Prescott, Edward C. (1998). Needed: A theory of total factor productivity. International Economic
Review 39 (3), 525551.
Ravn, Morten O. and Harald Uhlig (2002) On adjusting the Horick-Precott filter for the frequenct of
obeservations. The Review of Economics and Statistics 84(2): 371380.
Restuccia, Diego (2011) Recent Developments in Economic Growth. Economic Quarterly 97(3): 329-
357.
Restuccia, Diego (2013) Factor misallocation and development. From The New Palgrave Dictionary of
Economics, Online Edition, edited by Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan,
2013. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan.
Restuccia, Diego (2016) Resource Allocation and Productivity in Agriculture. University of Toronto,
manuscript.
Restuccia, Diego, and Richard Rogerson (2008) Policy distortions and aggregate productivity with
heterogeneous establishments. Review of Economic dynamics 11(4): 707-720.
Restuccia, Diego, and Richard Rogerson (2013) Misallocation and productivity. Review of Economic
Dynamics 16(1): 1-10.
Restuccia, Diego, and Richard Rogerson (2016) The Causes and Costs of Misallocation. University of
Toronto, manuscript.
Restuccia, Diego, Dennis Tao Yang, and Xiaodong Zhu (2008) Agriculture and aggregate productivity:
A quantitative cross-country analysis. Journal of Monetary Economics 55: 234250.
Restuccia, Diego, and Raul Santaeulalia-Llopis (2015) Land misallocation and productivity. University
of Toronto, Department of Economics, Working Paper 533, February
Rodrik, Dani (2008) The Real Exchange Rate and Economic Growth. Brookings Papers on Economic
Activity.
Shiferaw, Admasu, Mns Sderbom, Eyerusalem Siba, and Getnet Alemu (2015) Road Infrastructure
and Enterprise Dynamics in Ethiopia. Journal of Development Studies 51(11): 1541-1558.
Syverson, Chad (2011) What determines productivity? Journal of Economic Literature 49(2): 326365.

35
Timmer, Marcel P., Gaaitzen J. de Vries, and Klaas de Vries (2015) Patterns of Structural Change in
Developing Countries. In J. Weiss, & M. Tribe (Eds.), Routledge Handbook of Industry and
Development. (pp. 65-83). Routledge.
USDA Economic Research Service (2015) International Agricultural Productivity. ERS Public Data
Product. Economic Research Service, U.S. Department of Agriculture, Washington, DC.

36