Factory-Floor and Net Measures of Productivity, using Investment Climate Data

1. Factory-Floor and Net Measures of Productivity, using Investment Climate Data • Benn Eifert, Alan Gelb, Vijaya Ramachandran • Development Economics, World Bank • July, 2005

2. How does the Business Climate impact on Productivity • By reducing labor productivity? • By reducing “factory-floor” productivity? • By influencing a range of “indirect costs”, some not normally included in productivity estimates, yet which affect profitability?

3. Micro Evidence on Costs:ICA Surveys of Manufacturing Firms • Surveys for 15 countries: 9 countries in Africa plus China, India, Morocco, Bangladesh, Bolivia, Nicaragua • 7,000 firms, 2,700 in Africa, 6 industry categories • Surveys include data on firm sales, costs, etc; plus subjective questions

4. Cross-Country Price Adjustments • Use of PPP conversions plus relative prices of capital goods (costly in Africa) to adjust data. • Implications: countries with “high prices” will appear to be less productive after adjustments; countries with costly capital goods will appear more productive after adjustments. • In practice, impact of adjustments does not radically change results • Potentially more accurate adjustments after the next rounds of PPP estimations

5. Low Labor Productivity alone does not explain weak competitiveness in Africa… • Labor productivity and unit costs in garments (Cadot-Nasir)

6. Gross (factory-floor) TFP • Ln (Y-M) – a ln (K) –b ln (L) – d ln (Z), correcting for price level differences: • African countries show a wide range of gross TFP relative to China: • Senegal, Kenya 70-80% • Uganda,Tanzania, Ethiopia,Nigeria 40-60% • Zambia, Eritrea, Mozambique 30-35%

7. Gross TFP Relative to China

8. Losses and Gross Productivity • Low productivity in Africa is partly due to losses caused by power outages, logistics failures etc. • Losses from power outages alone equal 6% of sales in Kenya vs. 1% in China…for many African firms, power-related losses 10% of sales • 1% losses is associated with 1% lower gross productivity

9. Indirect Costs can have Substantial Impact • Indirect costs can include: energy, transport, telcoms, water, security, bribes, etc; • In China, India, also Senegal, indirect costs are 13-15% of total costs; • In most other African countries, indirect costs are 20-30% of total costs, often higher than labor costs

10. Defining “Net” Productivity • Ln (Y-M-IC) –a.ln (K) –b.ln(L) – d.(ln (Z); • Y-M-IC is “net value added” • Moving from gross to net TFP widens the productivity gap between Africa and comparators: • Mid-range countries fall from 40-60% of China to 20-40%; Kenya from 70% to 40%, Zambia from 30% to 10% • Only Senegal continues to compare fairly well.

11. Gross and Net Productivity

12. Implications • Wage costs are below indirect costs (plus losses..) in many countries….reducing indirect costs to 13% would boost profits more than halving labor costs: in many countries. • High indirect costs squeeze net value added and reduce employment potential, even in firms with high factory-floor productivity • Effect of business climate variables may be felt in net productivity not necessarily on the factory floor.