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

Data

Benn Eifert, Alan Gelb, Vijaya Ramachandran Benn Eifert, Alan Gelb, Vijaya Ramachandran Development Economics, World BankDevelopment Economics, World Bank

July, 2005July, 2005

How does the Business Climate impact on Productivity

By reducing labor productivity?By reducing labor productivity? By reducing “factory-floor” productivity?By reducing “factory-floor” productivity? By influencing a range of “indirect costs”, By influencing a range of “indirect costs”,

some not normally included in productivity some not normally included in productivity estimates, yet which affect profitability? estimates, yet which affect profitability?

Micro Evidence on Costs:ICA Surveys of Manufacturing Firms

Surveys for 15 countries: 9 countries in Surveys for 15 countries: 9 countries in Africa plus China, India, Morocco, Africa plus China, India, Morocco, Bangladesh, Bolivia, NicaraguaBangladesh, Bolivia, Nicaragua

7,000 firms, 2,700 in Africa, 6 industry 7,000 firms, 2,700 in Africa, 6 industry categoriescategories

Surveys include data on firm sales, costs, Surveys include data on firm sales, costs, etc; plus subjective questionsetc; plus subjective questions

II. Cross-Country Price Adjustments

Use of PPP conversions plus relative prices of Use of PPP conversions plus relative prices of capital goods (costly in Africa) to adjust data.capital goods (costly in Africa) to adjust data.

Implications: countries with “high prices” will Implications: countries with “high prices” will appear to be less productive after adjustments; appear to be less productive after adjustments; countries with costly capital goods will appear countries with costly capital goods will appear more productive after adjustments.more productive after adjustments.

In practice, impact of adjustments does not In practice, impact of adjustments does not radically change resultsradically change results

Potentially more accurate adjustments after the Potentially more accurate adjustments after the next rounds of PPP estimationsnext rounds of PPP estimations

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

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

Shirts per Shirts per OperatorOperator

Unit Labor Unit Labor CostsCosts

Low-Income Low-Income AfricaAfrica

1414 $0.16$0.16

South AfricaSouth Africa 1515 $0.65$0.65

China China EPZ/IndiaEPZ/India

1818 $0.23$0.23

Gross (factory-floor) TFP

Ln (Y-M) – a ln (K) –b ln (L) – d ln (Z), Ln (Y-M) – a ln (K) –b ln (L) – d ln (Z), correcting for price level differences: correcting for price level differences:

African countries show a wide range of African countries show a wide range of gross TFP relative to China:gross TFP relative to China:

Senegal, Kenya 70-80%Senegal, Kenya 70-80% Uganda,Tanzania, Ethiopia,Nigeria 40-60%Uganda,Tanzania, Ethiopia,Nigeria 40-60% Zambia, Eritrea, Mozambique 30-35%Zambia, Eritrea, Mozambique 30-35%

Gross TFP Relative to China

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Losses and Gross Productivity

Low productivity in Africa is partly due to losses Low productivity in Africa is partly due to losses caused by power outages, logistics failures etc.caused by power outages, logistics failures etc.

Losses from power outages alone equal 6% of Losses from power outages alone equal 6% of sales in Kenya vs. 1% in China…for many sales in Kenya vs. 1% in China…for many African firms, power-related losses 10% of salesAfrican firms, power-related losses 10% of sales

1% losses is associated with 1% lower gross 1% losses is associated with 1% lower gross productivityproductivity

Indirect Costs can have Substantial Impact

Indirect costs can include: energy, transport, Indirect costs can include: energy, transport, telcoms, water, security, bribes, etc;telcoms, water, security, bribes, etc;

In China, India, also Senegal, indirect costs In China, India, also Senegal, indirect costs are 13-15% of total costs;are 13-15% of total costs;

In most other African countries, indirect In most other African countries, indirect costs are 20-30% of total costs, often higher costs are 20-30% of total costs, often higher than labor coststhan labor costs

Defining “Net” Productivity

Ln (Y-M-IC) –a.ln (K) –b.ln(L) – d.(ln (Z); Ln (Y-M-IC) –a.ln (K) –b.ln(L) – d.(ln (Z); Y-M-IC is “net value added”Y-M-IC is “net value added” Moving from gross to net TFP widens the Moving from gross to net TFP widens the

productivity gap between Africa and comparators:productivity gap between Africa and comparators: Mid-range countries fall from 40-60% of China to Mid-range countries fall from 40-60% of China to

20-40%; Kenya from 70% to 40%, Zambia from 20-40%; Kenya from 70% to 40%, Zambia from 30% to 10%30% to 10%

Only Senegal continues to compare fairly well.Only Senegal continues to compare fairly well.

Gross and Net Productivity

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gross TFP net TFP

Implications Wage costs are below indirect costs (plus losses..) Wage costs are below indirect costs (plus losses..)

in many countries….reducing indirect costs to in many countries….reducing indirect costs to 13% would boost profits more than halving labor 13% would boost profits more than halving labor costs: in many countries.costs: in many countries.

High indirect costs squeeze net value added and High indirect costs squeeze net value added and reduce employment potential, even in firms with reduce employment potential, even in firms with high factory-floor productivityhigh factory-floor productivity

Effect of business climate variables may be felt in Effect of business climate variables may be felt in net productivity not necessarily on the factory net productivity not necessarily on the factory floor. floor.