Making noisy data sing : a micro approach to measuring industrial efficiency

Technical, scale and allocative inefficiency are widely believed to plague the industrial sectors of developing countries. This paper presents a way to measure this inefficiency with imperfect data. There is great interest in documenting the patterns and magnitudes of inefficiency, so that appropriate corrective policies can be designed. This paper presents a new approach to analyzing plant efficiency that recognizes and deals with such data imperfections as measurement error, missing observations and selectivity bias. The author has developed full-information maximum-likelihood (FIML) estimators of production technologies that deal with missing data and measurement errors, making alternative assumptions about the missing data patterns and the timing of employment and decisions. These estimators yield indices of the returns to scale, means square deviation from the efficient frontier and - when labor is treated as endogenous - mean square deviation from efficient factor mixes. To gauge the performance of the alternative estimators, the author applies them to census data on Chilean industry, and compares the results with naive estimators that do not recognize data imperfections.Economic Theory&Research,Environmental Economics&Policies,Statistical&Mathematical Sciences,Information Technology,Banks&Banking Reform

Trade Policy and Industrial Sector Responses: Using Evolutionary Models to Interpret the Evidence

Firm- and plant-level empirical studies typically find that trade liberalization squeezes price-cost margins among import-competing firms, that this heightened competitive pressure induces productivity gains among these same firms, and that further efficiency gains come from market share reallocations. Using a computable industrial evolution model to simulate the dynamic effects of import competition, we demonstrate what types of managerial behavior, long-term transition paths and welfare effects are consistent with this set of stylized facts.

Industrial portfolio responses to macroeconomic shocks : an econometric model for developing countries

This study identifies the macro conditions under which industrial growth and financial stability are most likely, and those conditions which are most prone to create disaster. The paper models interest rates, exchange rates, and aggregate demand conditions as affecting industrial growth and financial risk through two channels. First, because these variables affect firms'income, they affect firms net worth expansion. Second, because the link between macro variables and income depends upon the proportions in which firms hold fixed capital, inventories, financial assets, and debts, changes in macro variables also induce portfolio adjustments. The paper then develops an empirical model which allows one to calibrate the strength and timing of each effect. The paper is composed of two sections; one to develop the model, and one to report an application to Uruguayan data. There is also a brief summary section.Economic Theory&Research,Environmental Economics&Policies,International Terrorism&Counterterrorism,Banks&Banking Reform,Fiscal&Monetary Policy

Why Plant-Level Productivity Studies are Often Misleading, and an Alternative Approach to Interference

Applied economists often wish to measure the effects of managerial decisions or policy changes on plant-level productivity patterns. But plant-level data on physical quantities of output, capital, and intermediate inputs are usually unavailable. Therefore, when constructing productivity measures, most analysts proxy these variables with real sales revenues, depreciated capital spending, and real input expenditures. The first part of this paper argues that the resultant productivity indices have little to do with technical efficiency, product quality, or contributions to social welfare. Nonetheless, they are likely to be correlated with policy shocks and managerial decisions in misleading ways. The second part of the paper develops an alternative approach to inference. Using Steven Berry's (1994, RAND Journal) representation of equilibrium in a differentiated product market, we show how to impute each plant's unobserved marginal costs and product quality from its observed revenues and costs, and how to use this mapping to calculate plant-specific welfare-based performance measures. (Bayesian estimation techniques are required because the vector of unknown parameters is under-identified.) The final part of the paper demonstrates our methodology using panel data on Colombian pulp and paper plants.

A firm's-eye view of policy and fiscal reforms in Cameroon

After decades of heavy trade restrictions, fiscal distortions, and currency overvaluation, Cameroon implemented important commercial and fiscal policy reforms. Almost simultaneously, a major CFA devaluation cut the international price of Cameroon's currency in half. The authors examine the effects of these reforms on the incentive structure that manufacturing firms face. Did they create a coherent set of new signals? Was the net effect to stimulate the production of tradable goods? Was the dispersion of tax burdens lessened? They address each of these questions using a cost function decomposition applied to detailed firm-level panel data. They observe that Cameroon's reforms appear to have sent clear new signals to manufacturers, as the effective rate of protection fell by between 80 and 120 percentage points. Unlike trade liberalization, neither tax reforms nor the CFA devaluation had a major systemic effect on profit margins. But the CFA devaluation did twist relative prices dramatically in favor of exportable goods, so export-oriented firms exhibited rapid output growth.Economic Theory&Research,Environmental Economics&Policies,Labor Policies,Markets and Market Access,Public Sector Economics&Finance,Environmental Economics&Policies,Economic Theory&Research,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Markets and Market Access,Access to Markets

Size rationalization and trade exposure in developing countries

Given the lack of direct evidence regarding industrial adjustment in response to trade liberalization, this paper tackles some very basic questions. Specifically, in LDCs, how is trade orientation correlated with the size distribution of plants and with plant-level labor productivity? It begins with a simple model that summarizes some effects of trade exposure on producer size and productive efficiency that have been stressed in the recent analytical and simulation literature. It then examines annual plant-level data from Chile and Colombia to determine whether these effects can be confirmed. The empirical results indicate that, over the long run, higher trade exposure is correlated with smaller plant sizes, controlling for industry and country effects. However, the mix of high versus low productivity plants is not strongly associated with trade exposure. Both of these findings cast doubt on the mechanisms linking trade, plant size, and productivity in a number of recent analytical and simulation studies.Economic Theory&Research,Environmental Economics&Policies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Trade Policy,Science Education

How relative prices affect fuel use patterns in manufacturing : plant - level evidence from Chile

Some economists have urged reliance on fuel taxes and other fiscal incentives to reduce air pollution in semi-industrialized countries. They argue that policies that act on relative prices are easier to enforce than those based on emission monitoring, create less misallocation of resources, and are relatively free of the rent-seeking and corruption that accompany regulations administered at the plant level. To be effective, however, fuel specific taxes and subsidies must inspire manufacturers to significantly adjust their input use as relative prices change. Moreover, these policies must not create politically unacceptable income redistribution. The authors shed light on both issues by analyzing detailed panel data on Chilean manufacturing plants. Overall, their estimates suggest that there is substantial scope for fuel taxes to encourage fuel substitution, but that the response will be very uneven - not only across sectors but across producers of different sizes. Although others may be correct in arguing that fiscal incentives are easier to implement that are direct emission controls, the costs of adjustment are likely to be concentrated fairly narrowly for some fuels. The authors found bakeries, for example, to be very responsive to changes in the relative prices of alternative fuels. By contrast, energy demand in metal products plants appears to be very insensitive to relative prices, no matterwhat estimates are used. Meatpackers fall somewhere between the two - with little price responsiveness in electricity demand, but more in the demand for energy from other sources, especially if coherency-constrained figures are used. It seems that the effects of fuel taxes would depend in significant measure on the sectoral composition varies and some sectors have little flexibility.Energy and Environment,Economic Theory&Research,Transport and Environment,Access to Markets,Environmental Economics&Policies

Openness and industrial response in a Wal-Mart world : a case study of Mexican soaps, detergents, and surfactant producers

This paper uses a case study approach to explore the effects of NAFTA and GATT membership on innovation and trade in the Mexican soaps, detergents, and surfactants (SDS) industry. Several basic findings emerge. First, the most fundamental effect of the NAFTA and the GATT on the SDS industry was to help induce Wal-Mart to enter Mexico. Once there, Walmex fundamentally changed the retail sector, forcing SDS firms to cut their profit margins and innovate. Those unable to respond to this new environment tended to lose market share and, in some cases, disappear altogether. Second, partly in response to Walmex, many Mexican producers logged impressive efficiency gains during the previous decade. These gains came both from labor-shedding and from innovation, which in turn was fueled by innovative input suppliers and by multinationals bringing new products and processes from their headquarters to Mexico. Finally, although Mexican detergent exports captured an increasing share of the U.S. detergent market over the past decade, Mexican sales in the U.S. were inhibited by a combination of excessive shipping delays at the border and artificially high input prices (due to Mexican protection of domestic caustic soda suppliers). They were also held back by the major re-tooling costs that Mexican producers would have had to incur to establish brand recognition among non-Latin consumers and to comply with zero phosphate laws in many regions of the U.S.Markets and Market Access,Transport Economics Policy&Planning,Access to Markets,Economic Theory&Research,Water and Industry