Factory floor and net measures of productivity using investment climate data
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Factory-Floor and Net Measures of Productivity, using Investment Climate Data. Benn Eifert, Alan Gelb, Vijaya Ramachandran Development Economics, World Bank July, 2005. How does the Business Climate impact on Productivity . By reducing labor productivity?

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Factory floor and net measures of productivity using investment climate data l.jpg
Factory-Floor and Net Measures of Productivity, using Investment Climate Data

  • Benn Eifert, Alan Gelb, Vijaya Ramachandran

  • Development Economics, World Bank

  • July, 2005


How does the business climate impact on productivity l.jpg
How does the Business Climate impact on Productivity Investment Climate Data

  • 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?


Micro evidence on costs ica surveys of manufacturing firms l.jpg
Micro Evidence on Costs: Investment Climate DataICA 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


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Cross-Country Price Adjustments Investment Climate Data

  • 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


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Low Labor Productivity alone does not explain weak competitiveness in Africa…

  • Labor productivity and unit costs in garments (Cadot-Nasir)


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Gross (factory-floor) TFP competitiveness in Africa…

  • 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%


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Gross TFP Relative to China competitiveness in Africa…


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Losses and Gross Productivity competitiveness in Africa…

  • 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


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Indirect Costs can have Substantial Impact competitiveness in Africa…

  • 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


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Defining “Net” Productivity competitiveness in Africa…

  • 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.


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Gross and Net Productivity competitiveness in Africa…


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Implications competitiveness in Africa…

  • 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.


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