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Allocative efficiency between and within the formal and informal manufacturing sector in Zimbabwe

Author

Listed:
  • Godfrey Kamutando

    (Post-doctoral Research Fellow, School of Economics, University of Cape Town and Policy Research in International Services and Manufacturing (PRISM).)

  • Lawrence Edwards

    (School of Economics, University of Cape Town and Policy Research in International Services and Manufacturing (PRISM).)

Abstract

Resource misallocation has the potential to reduce aggregate total factor productivity and undermine industrial development. These effects can be particularly pronounced in emerging economies where large market frictions impede efficient resource allocation. This paper investigates the extent and nature of resource misallocation between and within the formal and informal manufacturing sector in Zimbabwe. Applying the approach developed by Hsieh & Klenow (2009) to firm-level microdata, the results reveal extensive resource misallocation in both the formal and informal manufacturing sector. Misallocation is more pronounced in informal sector firms and is associated with relatively large capital market distortions. Further, misallocation is more pronounced amongst relatively productive firms, thus exacerbating aggregate losses in total factor productivity (TFP). Estimates indicate that aggregated gains in TFP of 126.7% can be realized through efficient resource allocation.

Suggested Citation

  • Godfrey Kamutando & Lawrence Edwards, 2023. "Allocative efficiency between and within the formal and informal manufacturing sector in Zimbabwe," SALDRU Working Papers 302, Southern Africa Labour and Development Research Unit, University of Cape Town.
    • Handle: RePEc:ldr:wpaper:302
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    File URL: https://www.opensaldru.uct.ac.za/handle/11090/1035
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    References listed on IDEAS

    as
    1. Siba, Eyerusalem, 2015. "Returns to Physical Capital in Ethiopia: Comparative Analysis of Formal and Informal Firms," World Development, Elsevier, vol. 68(C), pages 215-229.
    2. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
    3. Matias Busso & Maria Victoria Fazio & Santiago Levy Algazi, 2012. "(In)Formal and (Un)Productive: The Productivity Costs of Excessive Informality in Mexico," Research Department Publications 4789, Inter-American Development Bank, Research Department.
    4. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(1), pages 83-116.
    5. Bils, Mark & Klenow, Peter J. & Ruane, Cian, 2021. "Misallocation or Mismeasurement?," Journal of Monetary Economics, Elsevier, vol. 124(S), pages 39-56.
    6. Wu, Guiying Laura, 2018. "Capital misallocation in China: Financial frictions or policy distortions?," Journal of Development Economics, Elsevier, vol. 130(C), pages 203-223.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Misallocation; total factor productivity; informal sector;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E29 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Other
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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