Machicado & Birbuet (2012)

The B.E.
Journal of Macroeconomics
Topics
Volume 12, Issue 1 2012 Article 18
Misallocation and Manufacturing TFP in

Bolivia during the Market Liberalization
Period
Carlos Gustavo Machicado Juan Cristobal Birbuet

Institute for Advanced Development Studies, cmachicado@inesad.edu.bo

Centre for the Promotion of Sustainable Technologies, jc.birbuet@cpts.org
Recommended Citation
Carlos Gustavo Machicado and Juan Cristobal Birbuet (2012) Misallocation and Manufacturing
TFP in Bolivia during the Market Liberalization Period, The B.E. Journal of Macroeconomics:
Vol. 12: Iss. 1 (Topics), Article 18.
DOI: 10.1515/1935-1690.18
Copyright 2012
c De Gruyter. All rights reserved.
Authenticated | cmachicado@inesad.edu.bo
Misallocation and Manufacturing TFP in
Bolivia during the Market Liberalization
Period
Carlos Gustavo Machicado and Juan Cristobal Birbuet
Abstract
This paper analyzes productivity dispersion in the Bolivian manufacturing sector during the
Market Liberalization Period: 1988-2001. We analyze the effects of resource misallocation on
manufacturing total factor productivity (TFP) with firm-level data and by employing the Hsieh
and Klenow (2009) model. We found that if resource misallocation was eliminated, the gains
in productivity would have been on the order of 54 percent on average and would have ranged
from -6 percent to 38 percent relative to the United States (benchmark country). We also test if
misallocation is related to reforms, and firm or geographical characteristics. There is suggestive
evidence that the second-generation reforms were associated with an increase in the misallocation
of resources that reached a peak in 1998, the year the economy experienced an important economic
downturn.
KEYWORDS: TFP, market structure, manufacturing
The authors thank Carmen Pages, James Tybout, Nestor Gandelman and Emily Conover for
discussion and comments. We also thank Mauricio Chumacero for helping us with the data ac-
quisition and Soraya Roman and Mauricio Villalba, who provided research assistance. Financial
support from the Latin American Research Network (IDB) is gratefully acknowledged. The usual
disclaimer applies.
Machicado and Birbuet: Misallocation and Manufacturing TFP in Bolivia
1. Introduction
Economics researchers have long asked why some countries are much wealthier
than others. Recent studies show that one part of the answer to this question has
much to do with differences in productivity levels. If productivity has a strong
influence on growth and welfare in the long run, having a good productivity
measure and understanding the main factors that contribute to productivity are
crucial elements of economics research.
Since the seminal work of Solow (1956), an important concern in the
economic literature has been how to measure productivity. It is widely accepted
that the best way to estimate productivity is at the micro level, specifically, at the
firm-level. This can be done by calculating the output/employment and
output/capital ratios. For these calculations, the best scenario is one where outputs
and inputs are available in physical terms (e.g., quantities produced, man-hours,
machine-hours). However, this scenario greatly depends on the availability of
information collected in firms surveys, and these data sets do not usually contain
this kind of information.
To deal with this problem, economists have long used aggregate variables
to compute these ratios, and in particular for the computation of TFP. Growth and
developing accounting exercises have become popular in the macro literature, and
TFP measures proliferate in particular for research on developed countries.
However, these measures face not only the aggregation problem, but also a
problem that is typical in macroeconomics: TFP is computed as a residual, and
nothing guarantees that this residual reflects only productivity.
This is made worse by the poor quality of the aggregate data, despite the
considerable efforts to produce consistent and reliable data sets. This contrasts
with the increased availability of large, good quality, micro-economic data sets,
which allow for testing specific hypotheses and derive credible identifying
restrictions from theory and exogenous sources of variation.
Since Banerjee and Duflo (2005), resource misallocation has gained
importance in explaining TFP differences across countries. In particular,
Restuccia and Rogerson (2008) emphasize that differences in the allocation of
resources across heterogeneous plants may be an important factor in accounting
for cross-country differences in output per capita. Hsieh and Klenow (2009)
present TFP as a combination of revenue productivity (TFPR) and physical
productivity (TFPQ), where aggregate productivity depends not only on the
magnitude and quality of capital and labor, but also on the misallocation of
resources. We employ this model to analyze resource misallocation on
manufacturing TFP in Bolivia.
The central idea behind this model is as follows. Imagine an economy with
two firms, A and B, both belonging to the same industry, and suppose that firm A
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The B.E. Journal of Macroeconomics, Vol. 12 [2012], Iss. 1 (Topics), Art. 18
is more productive than firm B and therefore has a higher TFPQ

(TFPQA>TFPQB). In the absence of distortions, more capital and labor should be
allocated to firm A to the point where its higher output results in a lower price for
firm A than for firm B (PA<PB). This efficient allocation of resources should be
reflected in equal TFPR values for both firms (TFPRA=TFPRB). In contrast, in the
presence of distortions e.g., subsidies, differentiated access to credit - the
negative effect of these distortions should be reflected in differences in TFPR
among firms (TFPRATFPRB). In other words, the variance of TFPR among firms
in the same industry is an indicator of misallocation of resources and should have
a negative impact on aggregate TFP and on aggregate output. This is true in part
because firms that take advantage of distortions (a subsidy, for instance) may
produce above their efficient level; the other side of the coin would reflect a
situation where firms are negatively affected by distortions (higher taxes, among
others) and produce below their efficient level.
In a free-market economy, and in the context of the model used here, one
would expect fewer distortions and therefore minor differences in TFPR between
firms. With this in mind, we analyze the extent to which distortions have
prevailed in the Bolivian manufacturing sector since the application of the New
Economic Policy (NEP). The NEP, implemented in 1985, liberalized the economy
in a context of high economic instability that reflected the depletion of the
centralized planning model with strong State leadership that had prevailed in
Bolivia since 1952. Before the NEP, there was a high share of public investment
in the manufacturing sector; the State had established a complicated system of
incentives and sanctions to influence private-sector production and investment
decisions, including the allocation of heavily subsidized credit and differentiated
taxes. There were also protective barriers to shelter domestic industry from
competitive imports. This system changed with the implementation of the NEP.1
Because the unique firm-level data set available in Bolivia only covers the
period from 1988 to 2001, it was not possible to compare the degree of distortions
and the consequential effects on productivity before and after the application of
the NEP. However, it has been possible to analyze to what extent the distortions
(presumable low) persisted and evolved in a free-market context by computing
the productivity gains without these distortions. Distortions could have changed
(increased or decreased) due to the structural reforms or due to an economic
downturn that the Bolivian economy experienced by the end of the 1990s. This
analysis is limited to the manufacturing sector as the existing database only
includes companies in this sector.
1
The stabilization program and the first reforms were packaged in the omnibus Supreme Decree
(S.D.) 21060. Later, S.D. 21060 became the symbol of the new development model for Bolivia.
Bolivians would refer to the liberal model in force after 1985 as the model of S.D. 21060.
Using the United States as the benchmark country, the results show that
the average relative gains in productivity for Bolivias manufacturing industry are
only 8 percent.2 Without distortions, the gains in productivity would have
averaged 54 percent for the whole period. Allocative efficiency clearly declined
during the credit crunch crisis of 1998, a year for which the exercise of
removing distortions resulted in productivity gains of up to 98 percent and relative
gains to the United States of up to 39 percent. However, it is important to note
that since 1995, amid the sub-period called second-generations reforms (1994-
1997), greater distortions are observed, a phenomenon reflected in higher and
increasing potential gains in TFP. As discussed below, it is in this period where
the most profound changes that could have affected the manufacturing sector
occurred in the Bolivian economy.
Finally, by employing multivariate regressions of TFPQ and TFPR on
exporting status, size, age and geographical location, we find that size is the main
aspect that explains TFPQ differences. Large firms are consistently the most
productive throughout the analyzed period. The standard deviations of TFPR
within the different size divisions confirm that large firms have the smallest
variance, in other words size is inversely correlated with TFPR dispersion.
The rest of the paper proceeds as follows. In section 2, we present relevant
aspects of the analyzed period to clarify the economic reforms undertaken
between 1988 and 2001. In section 3, we present the monopolistic competition
model developed by Hsieh and Klenow (2009) to measure the effects of
distortions on productivity. In section 4, we describe the panel data set used in the
analysis. In section 5, we describe the empirical findings by computing the TFP
gains, providing some robustness checks, testing for measurement error and
regressing our measures of productivity on firms characteristics. Finally, section
6 summarizes the main findings and conclusions.
2. Structural reforms in Bolivia

Bolivia experienced the highest inflation in the history of the Latin American
countries between the first quarter of 1982 and the fourth quarter of 1985 (20,560
percent according to Morales, 1990). The NEP, initiated in August of 1985, put an
end to this plight. It was designed to: (i) restore macroeconomic stability; (ii)
correct relative prices to make them closer to market-determined prices; (iii) open
the economy to foreign trade; and (iv) remove the bigger obstacles to the smooth
functioning of markets (see Morales, 1995). Then it became a far-reaching
structural reform aimed at changing how the economy worked by reducing the
2
Hsieh and Klenow (2009) found relative gains ranging 30.5 percent to 50.5 percent for China and
from 40.2 percent to 59.2 percent for India.
influence of the State on production and promoting private-sector initiatives. The

NEP was implemented in two phases known as first- and second-generation
reforms, respectively.3
2.1 First-generation reforms (1985-1993)

Before 1985, economic activity in Bolivia was characterized by heavy
involvement of the State in the economy. The framework of incentives adopted
under the NEP included free convertibility of foreign exchange, reduced
government intervention in labor contracts, commercial and financial
liberalization, and elimination of price controls. Price controls created distortions
in the private sector as private firms under controlled prices asked the government
for subsidies. The most important mechanism of subsidization was that of Central
Bank loans to the banking system, and ultimately to private firms, at very low
interest rates (negative real interest rates in the inflationary context). In many
markets, some private firms were compensated with cheap credit for selling their
production at controlled prices that were far below equilibrium prices.
The commercial liberalization involved the reduction of tariffs to all kinds
of imports and the elimination of non-tariff barriers like import quotas and of the
need to obtain prior import or export licenses. In addition, exports -particularly
non-traditional exports- were promoted to encourage commercial diversification
and the production of value-added products. Tax neutrality was introduced to
eliminate the anti-export bias, and industrial and commercial zones were
subsequently created (see Muriel and Barja, 2006).4
In 1990, an investment law was enacted to establish favorable conditions
for foreign investment. This law liberalized all sectors and promoted Foreign
Direct Investment (FDI) by establishing national treatment for foreign
investors. This meant that foreign investors were given the same rights, duties and
guarantees as domestic investors. Subsequently, in 1992, Bolivia's government
began the process of privatization of public enterprises. In this first wave of
privatizations, only small and medium state-owned enterprises (SOEs) were
privatized. These firms belonged to the manufacturing sector.5
The financial liberalization suspended all restrictions on banking and
financial transactions denominated in foreign currency and removed controls on
capital movements to and from foreign countries. The labor reforms included free
recruitment and wage bargaining between employers and employees and repealed
3
See Barja (2000) for a detailed explanation of the reforms.
4
In 1986, a tax reform was carried out. The new tax system included only 6 taxes with an
understandable and controllable structure that helped to improve fiscal revenues (see Otalora,
2009).
5
See Garrn et al. (2003) for a detailed analysis of the impact of privatization on firm
performance.
provisions guaranteeing job security. However, the employment rights established

by the General Labor Law of 1939 were kept, and subsequent decrees were
enacted to regulate the labor market (see Muriel and Jemio, 2008).
2.2 Second-generation reforms (1994-1997)

The second-generation reforms, implemented from 1994 to 1997, were related to
a redefinition of the roles of national and local government and the private sector.
Privatization and decentralization within government are central to this
redefinition. The complementary reforms were also intended to foster institutional
change to enhance savings and investment and to strengthen international
competitiveness. The reform of Social Security and the laws to guarantee private
investment stand out in this area.
Under the capitalization law enacted in 1994, the Bolivian government
privatized the State's largest companies. The idea behind the capitalization was to
convert the States biggest firms into joint-stock companies, then increase their
capital by issuing new shares and selling them to the private sector. One of the
conditions that made the capitalization attractive to new investors was that,
regardless of whether they held the majority of shares, they would have control of
the companies.
This approach was expected to expand and modernize these strategic
sectors by promoting a substantial increase in investment flows (mainly foreign)
that would reverse the chronic under-investment and technological backwardness
in which these companies were immersed. In addition, the capitalization process
sought to generate multiplier effects for the rest of the economy by increasing the
equity of the companies.6 The equity of the companies was increased through a
primary issue of new shares, which were acquired by strategic partners with
investment commitments within the company. This meant that the proceeds of
capitalization were not collected by the State, but invested in the companies. This
mechanism should have expanded the companies production capacity, achieved a
technology transfer and generated positive externalities to other sectors, including
manufacturing.
The economic reforms also included a pension reform that sought to
correct several problems that had arisen under the old system of distribution. The
reform replaced the old pay-as-you-go system with a system of individual
capitalization under the management of pension fund administrators (AFPs),
where retirement pensions were financed with personal funds that workers
accumulated during their working lives. This new pension system also aimed to
promote the development of the financial market through individual savings. The
idea was to generate long-term resources to finance long-maturity investments;
6
The strategic sectors were hydrocarbons, energy, telecommunications and transport.
however, much of these savings were used to finance the States process of
transformation from one system to the other, making AFPs the main holders of
government debt.
2.3 Post-reform years (1998-2001)

The last SOEs were privatized between 1999 and 2000. This third wave of
privatizations (see Garron et al., 2003) adopted the classical approach and
involved the sale of 100 percent of the firms assets. This wave included the
privatization of 14 SOEs, some of which were units of State monopolies.
But, this period was mainly characterized by the sudden stop that took
place between 1998 and 1999. Muriel and Jemio (2008) attributed this crisis to the
forced eradication by the State of coca crops, the currency crisis of Bolivias
trading partners (Argentina and Brazil), the deterioration of the terms of trade
(mainly mineral prices) and the (relative) decline of FDI. These circumstances
jointly caused a severe but transitory economic downturn. This economic
downturn manifested internally as a credit crunch (see Jemio, 2000) resulting
from the contagion effects of the international financial crisis on the Bolivian
economy through lower capital flows, trade flows and policies followed by other
countries. There was also a contraction of international demand that reduced the
prices for major Bolivian export commodities, affecting exporters incomes and
deteriorating their cash flows and the ability to service their debts.
2.4 The macroeconomic effects of the NEP

The NEP had its first significant effect in controlling inflation. After consolidating
macroeconomic stability, the Bolivian economy entered a period of moderate
economic growth with lower external and fiscal deficits. The effects were also
reflected in the restructuring of public expenditures and the increase in the gross
investment rate, largely as a result of the capitalization process. However, the
reforms were not only focused on capitalizing the former SOEs. The creation of a
new regulatory framework resulted in a greater openness to private investment in
different types of sectors. FDI for manufacturing sector grew by 826 percent
between 1998 and 1999. The increase in FDI in the manufacturing sector was in
part related to the credit expansion. According to Jemio (2006), the credit
expansion that lasted until 1998 helped to hide the inefficiencies of the firms,
resulting in the accumulation of excessive debt and fixed assets. As a result,
between 1990 and 1998, manufacturing companies expanded their production
levels mainly through increasing employment, but without increasing
productivity.
Figure 1:7
Growth Accounting in Manufacturing
110
100
90
Index (1988=100)
Output
80
70
60
Productivity
50
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Note: Output refers to GDP per-working-age person and productivity is TFP raised to
1/(1-) and =1/3.
Source: INE for production data and Timmer and de Vries (2009) for labor data.
The significant increase of the capital stock per worker around 1996-2002
was not accompanied by productivity growth, it was associated with a greater
accumulation of capital in non-labor-intensive sectors (hydrocarbons, transport,
storage and telecommunications). In this context, we find that little support was
given to the industrial sector, which experienced a decrease in productivity
between 1988 and 1997, as shown in Figure 1. It is true that the reforms led to the
opening of markets after the signing of several trade agreements with different
countries. However, the problems of smuggling, poor investment climate in terms
of productive infrastructure, bureaucracy and lack of funding remained. In this
regard, the productive development did not have a free market scenario. The State
continued subsidizing a large portion of imports through exemptions from
customs duties and consumption taxes; and the persistence of high costs
precluded competitiveness and the creation and expansion of firms (see Muriel
and Jemio, 2008).
Certainly, one aspect of the second-generation reforms was that FDI
moved to sectors that were capital intensive like hydrocarbons and not to sectors
that were labor intensive, such as manufacturing (see Choque and Jemio, 2006).
7
To construct manufacturing TFP, we performed the same growth accounting exercise as Kehoe
and Prescott (2007), assuming that the capital-output and employment-working age population
ratios in the manufacturing industry are the same as in the aggregate economy.
In addition, technological innovations concentrated in the hydrocarbons, financial

and telecommunication sectors, with few diffusion effects and little intermediate
consumption demand for other sectors.
Finally, from 1998 to 2001, the Bolivian economy shrunk. GDP per capita
grew by 0.29 percent, and manufacturing GDP increased only by 2.47 percent. As
observed in Figure 1, productivity in the manufacturing sector decreased by 4.2
percent between 1995 and 1997, it remained low until 1998 and then recovered
starting in 1999.
3. The Model: Distortions and Productivity with Monopolistic

Competition
To document resource misallocation and productivity in Bolivias manufacturing
industry, we employ the model developed by Hsieh and Klenow (2009). It is a
standard model of monopolistic competition with heterogeneous firms that shows
how distortions that drive wedges between the marginal products of capital and
labor across firms lower aggregate Total Factor Productivity (TFP). In this
section, we present a brief description of the model.8
First, consider an economy where a representative firm produces the single
final good Y. Output and factor markets are perfectly competitive, and the firm
combines the output Ys of S manufacturing industries using the following Cobb-
Douglas production function:
S S
Y Ys s where
s 1

s 1
s 1 (1)
By minimizing costs, we obtain:
Ps Ys s PY (2)
s
P S

where Ps refers to the price of industry aggregate output Ys and P s
s 1 s
represents the price of the final good. We assume the final output good as the
numeraire, so P=1.
Aggregate industry output Ys is itself a CES aggregate of Ms differentiated

products:
8
This version includes the correct equations pertaining to the definition of TFP given by the
correction appendix of Hsieh and Klenow (February 4, 2011).

M s 1 1
Ys Ysi (3)
i 1
Each differentiated product is produced according to a typical Cobb-Douglas

production function, combining capital and labor with Total Factor Productivity
(TFP):
1 s
Ysi Asi K si s Lsi (4)
where capital and labor shares are fixed within an industry but differ between
industries.
A firms profits are given by:
si (1 Ysi ) Psi Ysi wLsi (1 Ksi ) RK si (5)
where w represents the wage rate, R is the rental price of capital, K is a distortion
(tax) that increases the marginal product of capital relative to labor, which we call
a capital distortion, and Y is the distortion (tax) that raises the marginal products
of capital and labor by the same proportion, which we call the output distortion.9
By maximizing profits, we obtain the demands of capital and labor of each firm:
1 (1 Ysi ) s Psi Ysi

K si (6)
(1 Ksi ) R
1 (1 Ysi )(1 s ) Psi Ysi

Lsi (7)
w
Replacing these demands in the production function yields an expression for the
firms output price. Notice that it is a fixed mark-up over marginal costs.
1 s s
w R (1 Ksi ) s
Psi (8)
1 1 s s Asi (1 Ysi )
9
In contrast with the Hsieh and Klenow (2009) model, the wage rate and the rental price of capital
are specific to each firm.
Equations (6) and (7) imply also:
K si s w 1
(9)
Lsi 1 s R (1 Ksi )
In addition to the allocation of labor:
(1 s ) s s s
1 1 s s 1 s R Asi 1 (1 Ysi )
Lsi Ps Ys
w R s w (1 Ksi ) s ( 1)
(10)
and the firms output:
(1 s ) s
1 1 s s Asi (1 Ysi )
Ysi Ps Ys (11)
w R (1 Ksi ) s
It is apparent that the allocation of resources across firms will depend not
only on firm TFP levels, but also on the output and capital wedges that a firm
faces. The fact that resource allocation is driven by distortions rather than by firm
TFP will result in differences in the marginal revenue products of labor and
capital across firms:
1 Y w
MRPLsi Psi (1 s ) si (12)
Lsi (1 Ysi )
1 Ysi (1 Ksi ) R
MRPK si Psi s (13)
K si (1 Ysi )
To obtain aggregate TFP as a function of the misallocation of capital and labor,

we first solve for the equilibrium allocation of resources across sectors:
Ms
(1 s ) s / MRPL s
Ls Lsi L S
(14)
i 1
(1
s '1
s' ) s ' / MRPL s '
10
Ms
s s / MRPK s
K s K si K S
(15)
i 1

s '1
s ' / MRPK s '
s'
S S
where L Ls and K K s represent the aggregate supplies of labor and
s 1 s 1
capital, respectively.
We can then express aggregate output as a function of Ks, Ls and TFPs as:
S
Y (TFPs K s s L1s s ) s (16)
s 1
where aggregate TFP in sector s is a weighted average of Asi and is given by:
1
1
M s MRPK MRPL s
1 s 1

TFPs Asi
s s
s 1 s (17)
i 1 MRPK si MRPLsi
For the analysis, it is relevant to show that firm-specific distortions can be

measured by the firms revenue productivity. Most of the time, industry deflators,
but not firm-specific deflators, are available. Foster, Haltiwanger and Syverson
(2008) note that when industry deflators are used, differences in plant-specific
prices show up in the customary measure of firm TFP. Therefore, it is important
to distinguish between physical productivity (TFPQ) and revenue
productivity (TFPR). Using firm-specific deflators yields TFPQ, whereas using
an industry deflator yields TFPR. In other words:
Ysi
TFPQsi Asi s 1 s
(18)
K si Lsi
Psi Ysi
TFPRsi Psi Asi s 1 s
(19)
K si Lsi
Using equations (12) and (13), we can express TFPR per firm as a
weighted average of the firms marginal revenue products of capital and labor:
s 1 s
MRPK si MRPLsi
TFPR si (20)
1 s 1s
or
s 1 s
R w (1 Ksi ) s
TFPR si (21)
1 s 1 s 1 Ysi
From equations (20) and (21), it can be seen that a high firm TFPR is a
sign that the firm faces barriers that increase its marginal products of capital and
labor, rendering the firm smaller than optimal.
Using equation (20) and the definition of TFPR s , which is a geometric
average of the average marginal revenue product of capital and labor in the sector,
in equation (17) yields:
1
1
M s TFPR s 1
TFPs Asi (22)
i 1 TFPRsi
Finally, by assuming that Asi and TFPRsi are jointly log-normally distributed, we
can express aggregate TFP as:
2 (1 s ) 2
ln TFPs
1
1
2

ln M s ln E ( Asi 1 ) Y2 s KY s s K
2 2
(23)
where Y2 and K2 represent the variances of ln(1-Ysi) and ln(1+Ksi), respectively,

and KY its covariance.
From equation (23) we can see that the negative effect of distortions on
aggregate TFP can be summarized by the variance of log TFPR. Intuitively, the
extent of misallocation is worse when there is greater dispersion of marginal
products.
12
4. Data
We employ data drawn from the Bolivian Annual Manufacturing Survey 1988-
2001 (BAMS). The BAMS is an unbalanced panel of Bolivian manufacturing
firms. This survey was implemented every year, approximately 8 months after the
bookkeeping period ended. Thus, the survey is based on the bookkeeping
registries and balance sheets of the firms.10 The institution in charge of
implementing the BAMS is the National Institute of Statistics (INE). The survey
was first implemented in the 1970s as a survey of all kinds of economic
establishments (e.g., commercial, logistics facilities, construction, mining and
manufacturing). However, from 1988 to 2001, the survey covered only the
manufacturing industry11.
The survey has national coverage; therefore, the database includes
industrial establishments from the 9 Departments of Bolivia.12 All large and
medium firms from the sample universe are included. Large firms are defined as
having 50 or more employees, and medium firms have between 15 and 49
employees. Small and micro firms were included as a sample of this type of firm
in the country. Small firms are categorized as having between 5 and 14
employees, and micro firms are categorized as having between 1 and 4
employees.
The survey contains variables related to the value of production, sales,
consumption of raw materials, electrical energy and fuel consumption; it also
contains information on personnel, fringe payments and wage bills, taxes and
fixed assets. Firms are classified by sectors according to their four-digit
International Standard Industrial Classification (ISIC). In addition, as all
establishments with more than 15 employees were included in the survey and
firms with fewer than 15 employees were subject to random sampling, the survey
is not based on a census of firms. Establishments were added into the database to
achieve a representative picture of the sectoral structure of the manufacturing
industry. Certainly, this issue does not exclude the possibility that some sectors
may be under- or over-represented.
According to the data, the INE divided the whole period into two sub-
periods, the first from 1988 to 1994 and the second from 1995 to 2001. The
division was evident because, first, firms in the data set from 1988 to 1994 were
classified according to ISIC revision 2, whereas firms in the data set from 1995 to
2001 were classified according to ISIC revision 3. Second, although some firms
10
The accounting period in bookkeeping in Bolivia goes from April to March.
11
The INE stopped its implementation in 2001, but resumed it in 2008. This new version (not
available yet) includes questions related to environmental aspects and the usage of information
and communication technologies (ICT).
12
Although it has national coverage, it includes only 1 firm from the Department of Pando and
few from the Department of Beni.
appear in both sub-periods, they were given different identification numbers in

each. To merge the two data sets, we had to identify firms by their commercial
names, addresses and even their numbers in the Unique Registry of Contributors.
In some cases, we also had to reassign the ISIC numbers because they were not
standardized.
We deleted from the database all firms that systematically reported
negative and zero value added and those firms that reported no employees and no
fixed assets in any year. After deleting those firms, we arrived at an average
number of 736 firms per year. Table 1 summarizes the number of firms in each
year by size, where size is measured as the number of workers.
Table 1: Number of Firms in the Panel by Size
NumberofWorkers
Year [14] [59] [1019] [2049] [5099] [100249] [250+] Total
1988 124 190 174 169 67 47 14 785
1989 159 186 160 165 81 48 18 817
1990 236 208 180 158 83 50 17 932
1991 104 104 136 150 79 59 18 650
1992 174 160 168 156 88 59 24 829
1993 108 197 152 165 99 54 32 807
1994 100 194 147 150 88 60 37 776
1995 78 176 161 131 71 55 27 699
1996 25 141 141 131 72 68 31 609
1997 60 195 164 124 77 68 30 718
1998 82 231 183 141 77 78 39 831
1999 119 194 177 123 82 62 42 799
2000 70 101 92 88 53 53 29 486
2001 92 112 102 116 57 64 26 569
Source: Authors calculations
Table 2 displays the number of firms that enter and exit the panel over time, with
the last column indicating the net entry. We define entry as a firm that appears in
the data set that was not included in the previous year. Exit corresponds to a firm
that was previously observed but is not observed in the data set the next year. Net
entry is calculated as the difference between the number of firms that enter in year
t and the number of firms that exit in year t-1. This pair-wise comparison implies
that a firm can be counted in both the entry and the exit columns (although not in
the same year). On average, 191 firms enter the sample each year, and 208 exit.
These values correspond to average annual entry and exit rates of approximately 9
percent and 10 percent, respectively, of the firms observed in the panel.
14
Table 2: Entry and Exit of Firms

Year Continue Exit Entry Net Entry
1988 - 147 - -
1989 638 131 179 32
1990 686 353 246 115
1991 579 121 71 -282
1992 529 229 300 179
1993 600 215 207 -22
1994 592 271 184 -31
1995 505 227 194 -77
1996 472 145 137 -90
1997 464 168 254 109
1998 550 225 282 114
1999 607 358 193 -32
2000 442 110 45 -313
2001 377 - 193 83
Source: BAMS
Finally, to illustrate how well the panel represents the manufacturing
industry in Bolivia, we compare the number of firms by size class in 1992 in the
panel with the data of the second Census of Economic Establishments conducted
in the same year. The panel under-represents the micro and small firms having
fewer than 10 workers, but it is a good representation of large firms (with more
than 50 employees). According to the census, there were 111 firms with 50-99
employees, and the panel includes 88 firms.13
Our data accounts for 33,872 employees per year, on average. The
maximum number of workers is observed for the year 1998, with 42,821
employees, and the minimum number of workers is observed for the year 1988,
with 26,646 employees. In the same manner, our panel represents well the
employment in firms with more than 50 employees. And, in terms of the share of
employment by industries (at the 2-digit ISIC level), it matches relatively well to
the composition of employment within the manufacturing industry.
5. Productivity Dynamics
Using the BAMS data set, we computed the gross production value and
intermediate consumption to obtain the value-added, which is our measure of
output. We used the number of workers as our measure of labor and, we
13
The second Census of Economic Establishments is the unique census of formal firms performed
in Bolivia.
employed the value of fixed assets as our capital measure. All of the variables are
firm-level variables, and the industries are classified according to 4-digit ISIC
(ISIC-4) codes.
To calibrate our model, we set the elasticity of substitution between firm
value added to =3 (the same parameter value as Hsieh and Klenow, 2009). This
value corresponds closely to the Broda, Greenfield and Weinstein (2006) estimate
of =2.8 for Bolivia. The rental price of capital, R, was set to 0.1. As Hsieh and
Klenow (2009) we have in mind a 5 percent real interest rate and a 5 percent
depreciation rate.
We also set the elasticity of output with respect to capital in each industry
(s) to be one minus the labor share in the corresponding industry in the United
States. To construct the shares, we used the NBER data and defined labor share as
labor compensation divided by value-added. We took the average over all years in
the data set after matching the United States codes to the relevant codes for
Bolivia. These elasticities were not set based on labor shares in Bolivian data as
there are reliability problems in the calculus of these shares because Bolivia has a
large informal sector.
Based on these parameter values and the firm data, we infer the wedges
and firm-specific productivities using the following equations:
s wLsi
1 Ksi (24)
1 s RK si
wLsi
1 Ysi (25)
1 (1 s ) Psi Ysi

1
( Psi Ysi )
Asi s 1 s
(26)
K si s Lsi
Equations (24) and (25) enable us to infer the presence of capital and
output distortions, respectively. Equation (26) allows us to compute TFPQ (our
measure of physical productivity) and needs some explanation. In the data set, we
do not observe prices for all firms and products, so we cannot calculate directly
the firms real output Ysi. However, we have for all firms the value-added or
nominal output PsiYsi. Because firms with high real output must charge a lower
price to explain why buyers would demand the higher output, we can raise PsiYsi
to the power /(-1) to arrive at Ysi.
16
In addition, two considerations about the scalar s are important. First, the scalar
1

s ( Ps Ys ) 1
/ Ps is not observable because we do not have industry prices for
all sectors. However, even though we do not observe s, relative productivities
and hence reallocation gains are unaffected by setting s =1 for each industry s.
Second, s varies not only across industries, but also across time. Following
Tybout (2008), it would have been ideal to adjust TFPQ by this scalar to account
for cyclical fluctuations, but as we mentioned, we do not have prices for all the
sectors.
For our baseline estimates, we omitted the 1 percent tails of
log( Asi adj / A s ) , where adj M s 1 /( 1) , and log(TFPRsi / TFPR s ) across
industries. That is, we pooled all industries and omitted the top and bottom 1
percent of firms within each of the pools to eliminate outliers and to control for
possible measurement error. We then recalculated Ls, Ks and PsYs as well as
TFPR s and A s . We also calculated the Bolivian industry shares s = PsYs/PY.
5.1. Physical and Revenue Productivity in Bolivia

To understand TFP levels and growth during the market liberalization period in
Bolivia, it is important to analyze the distribution of the physical productivity
measure (TFPQ) and revenue productivity measure (TFPR). Figure 2 plots the
distribution of firm TFPQ relative to industry TFPQ for 1988, 1994 and 1998 (the
first years of each sub-period). The distributions are very similar showing long
and bumpy left tails, which means that a significant number of firms persisted in
the market with very low productivities.14
14
Figure A.1 of the appendix shows that this pattern is consistent across years.
Figure 2:
Distribution of TFPQ
1988
.3
.2
Density
.1
0
1/256 1/64 1/8 1 8

logAsi
kernel = epanechnikov, bandwidth = 0.3714
1994
.2
.15
Density
.1 .05
0
1/256 1/64 1/8 1 8

logAsi
1998
.2
.15
Density
.1 .05
0
1/256 1/64 1/8 1 8

logAsi
18
Figure 3:
Distribution of TFPR
1988
.8
.6
Density
.4 .2
0
1/64 1/8 1 8
logTFPRsi
1994
.5
.4 .3
Density
.2 .1
0
1/64 1/8 1 8
logTFPRsi
1998
.4
.3
Density
.2 .1
0
1/64 1/8 1 8
logTFPRsi

Figure 3 plots the distribution of firm TFPR relative to industry TFPR for
the same years as Figure 2. In the plots, industries are weighted by their value-
added shares. There is clearly more dispersion in 1994 than in 1988 and the
dispersion became even larger in 1998. This could be a sign that distortions
increased over time.15
In Table 3, we show several measures of dispersion for firms TFPQ and
TFPR relative to the corresponding industry levels: the standard deviation, the
75th minus the 25th percentiles, the 90th minus the 10th percentiles and the 50th
minus the 10th percentiles. The numbers in this table are consistent with greater
distortions in Bolivia than in the United States.
Standard deviation for TFPQ ranges from 1.5 to 2.78, which is larger than
Hsieh and Klenows (2009) result for the United States (0.79 to 0.85). The
difference between the 90th percentile and the 10th percentile ranges from 2.05 to
2.22 for the United States, while for Bolivia it ranges from 3.55 to 7.6. Dispersion
of TFPR ranges from 0.82 to 1.3, which is higher than the range reported for the
United States (0.41 to 0.49). The difference between the 75th percentile and the
25th percentile ranges from 0.74 to 1.52. This range is also above the range found
for the United States (0.41 to 0.53).
The results in Table 3 show two elements. First, the dispersion of TFPQ
indicates that the dispersion of physical productivity within sectors is greater in
some years than in others. This dispersion could not be attributed to the quality
and variety of a firms products, because the same sectors and almost the same
firms (at least the medium and large firms) are considered in each year. Second,
the greater and increasing dispersion of TFPR reflects the presence of increasing
distortions. For instance, the notably greater dispersion in 1998 should be
associated with more capital and/or output distortions in that year.
15
Figure A.2 of the appendix shows that dispersion apparently increased over time.
20
Table 3: Dispersion of TFPQ and TFPR

TFPQ
year 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
S.D. 1.57 1.50 1.81 1.54 1.84 1.98 1.79 2.35 1.71 1.61 2.55 1.72 2.78 2.03
75-25 2.09 2.29 2.53 2.42 2.67 2.97 2.58 3.09 2.32 2.25 2.97 2.45 5.72 2.66
90-10 4.36 4.08 4.42 3.55 5.00 5.39 4.94 6.24 4.31 4.32 7.17 4.64 7.60 4.61
50-10 2.92 2.39 2.70 2.20 3.22 3.53 2.90 3.84 2.40 2.20 5.12 2.44 4.97 2.66
TFPR
Year 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
S.D. 0.82 0.95 1.04 0.93 1.04 0.96 0.88 1.02 0.95 0.97 1.30 1.08 1.14 1.13
75-25 0.74 1.03 1.39 1.04 1.20 1.07 1.11 1.20 1.08 1.34 1.26 1.34 1.52 1.00
90-10 1.91 2.12 2.89 2.11 2.71 2.20 2.08 2.09 2.20 2.50 3.12 2.70 2.52 2.36
50-10 1.00 1.13 1.77 1.19 1.53 1.19 0.99 1.12 1.13 1.31 1.63 1.33 1.45 1.10
Note: Industries are weighted by their value-added shares

5.2. Reallocation Gains

The model presented in section 3 showed that TFPR is related to the ratio of
distortions (see equation 21). Therefore, we perform the same liberalization
exercise as Hsieh and Klenow (2009) to compute the TFP gains from reallocation,
i.e., the gains of removing the efficiency loss introduced by the output and capital
distortions, by fully equalizing TFPR across firms in each industry.
TFPs S M s A TFPR s 1 1
eff
si (27)
TFPs s 1 i 1 A s TFPRsi

The ratio of actual TFP to efficient TFP is computed according to equation

27, and Table 4 provides percent TFP gains in each year from fully equalizing
TFPR across firms in each industry.
Table 4: TFP Gains from Equalizing TFPR within Industries

Year 1988 1989 1990 1991 1992 1993 1994
TFP gains 34.9 33.8 45.2 38.6 48.7 36.0 50.0
Rel. to U.S. -5.6 -6.4 1.6 -3.0 4.0 -4.8 5.0
Year 1995 1996 1997 1998 1999 2000 2001
TFP gains 42.4 65.2 75.6 98.4 92.7 47.3 46.5
Rel. to U.S. -0.3 15.6 22.8 38.8 34.9 3.1 2.5
The elimination of distortions (k and y) would boost aggregate

manufacturing TFP by approximately 54 percent on average in the whole period.
In the first generation reforms period and in the second generation reforms period,
the elimination of distortions would increase TFP by 39.5 percent and 58.3
percent, respectively, whereas in the post-reform period it would increase TFP by
71.2 percent. It is noteworthy that the reallocation gains display a zigzag shape
(35 - 65 percent) between 1988 and 1996, but then since 1996 the gains increase
up to 98.4 percent in 1998. It is also important to note that the potential gains in
TFP increased steadily during the second-generations reform period. This implies
that the structural changes or the policies that were implemented (described in
sub-section 2.2) induced a higher level of distortions that reached their peak in
1998, when the economy experienced a downturn (sudden stop).
The credit crisis that began in 1998 reduced the access to credit for private
firms. From 1990 to 1998, the loan portfolio to the private sector grew by 323
percent (from 1.1 billion dollars to 4.5 billion dollars); then, from 1998 to 2003,
the loan portfolio to the private sector decreased by 45 percent (from 4.5 billion
22
dollars to 2.5 billion dollars). Loans to the manufacturing sector contracted by 20

percent in the same period (from 713 million dollars to 606 million dollars). In
this context, 1998 represents the peak of the credit expansion and the beginning of
the credit crunch. At the beginning of the credit crunch, not all companies were
equally affected, which explains the greater difference in TFPR in 1998 and
therefore the fact that the largest potential gains would have occurred in that year.
Potential allocation gains in Bolivia are higher than those found in the
United States by Hsieh and Klenow (2009), possibly reflecting a greater level of
distortion in Bolivia. In 1998, the gains for the United States were 36.1 percent,
whereas the gains for Bolivia were 98.4 percent. However, this gap shrank by
2001: The gains for the United States decreased to 30.7 percent, and the gains for
Bolivia fell to 46.5 percent.
In Table 4, we also show the efficiency loss introduced by the output and
capital wedges in comparison to the United States in 199716. On average, the TFP
gains relative to the United States are on the order of 8 percent. These relative
gains present also a zigzag pattern, but notice that Bolivia would have
experienced productivity losses in comparison to the United States in some years.
Certainly, this result has to be considered with care because we are assuming a
constant United States efficiency; however, for 1997, hypothetically equaling the
United States efficiency might have boosted TFP by 22.8 percent.
During the 1994-1998 period, allocative efficiency declined by 24 percent
(1.05/1.35), or 5 percent per year. In the whole period (1988-2001) allocative
efficiency decreased by 8 percent. How do these implied TFP gains/losses from
reallocation compare with the actual manufacturing TFP growth observed in
Bolivia? In section 2, we estimated Bolivias industry TFP growth to be -1.34
percent per year from 1988 to 2001. Thus, our point estimate of allocative
efficiency decline of -0.56 percent per year would suggest that approximately 42
percent of the manufacturing TFP decrease could be attributed to suboptimal
allocation of resources.
16
We compare each years gains with 1997 gains in the United States because the year 1997
exhibited the highest productivity gain reported by Hsieh and Klenow (2009).
Figure 4:
Distribution of Firm Size
1988
.2
.15
.1
.05
0
1/64 1/8 1 8 64
x
kdensity VA_eff kdensity VA_actual
1994
.15
.1
.05
0
1/64 1/8 1 8 64
x
1998
.15
.1
.05
0
1/64 1/8 1 8 64
x
24
Figure 4 plots the efficient versus actual size distributions of firms in

1988, 1994 and 1998. Size is measured here as firm value added. Notice that the
hypothetical efficient distributions for all three years seem to be more dispersed
than the actual distributions are, although there is not a clear pattern. For instance,
it can be seen that there should be more concentration of firms in the right tail.
This result indicates that there should be more large firms.17
Table 5 displays how the sizes of initially large versus small firms would
change if TFPR were equalized in Bolivia and the United States for the year 1997
(the only year available for the United States). The rows are initial (actual) firm
size quartiles, and the columns are bins of efficient firm size relative to actual
size: 0-50% (the firm should shrink by half or more), 50-100%, 100-200%, and
200+% (the firm should expand by 50%, 100%, 200% or more).
Table 5: Percentage of Firms, Actual Size vs. Efficient Size in Bolivia and
United States (1997)
Size measured as Value Added
1997 0-50 50-100 100-200 200+
Bolivia
Top Size Quartile 5.7 5.1 6.6 7.7
2nd Quartile 5.1 4.7 7.7 7.4
3rd Quartile 5.3 7.3 6.4 6.0
Bottom Quartile 2.9 6.0 10.8 5.3
U.S.
Top Size Quartile 4.4 10 6.7 3.9
2nd Quartile 4.4 9.6 5.8 5.1
3rd Quartile 4.5 9.8 5.4 5.4
Bottom Quartile 4.7 12 4.3 4.1
These results corroborate what Figure 5 suggests: Firms of all sizes should
increase their plant size. In fact, 81 percent of Bolivian firms would increase their
size (measured as value-added) if TFPR were equalized. This is similar to the
United States case, where 82.1 percent of firms would increase their size. The
difference is that in the United States the most populous column is 50%-100% for
every size quartile, whereas in Bolivia the results are mixed. For instance in the
bottom size quartile (smallest firms) there is dominance of the 100-200 percent
column. This result indicates that micro firms should at most double in size. But
for the top size quartile (large firms) the last column dominates, which means that
large firms should at least double in size. In sum, there is a strong argument in
17
This result that the efficient distribution has a wider variance than the actual distribution is
consistent across years, as depicted in Figure A.3 in the appendix
favor of larger firms, because there is a negative size-TFPR dispersion relation. In

fact, Pack and Westphal (1986) and Pagano and Schivardi (2003) stress that large
enterprises are more capable to exploit economies of scale and to undertake the
fixed costs associated with research and development (R&D) with positive
productivity effects.
5.3. Robustness
In this section, we provide a number of robustness results. In particular, we vary
the elasticity of substitution and the sources of output and labor shares. Table 6
shows robustness checks for the proportion of TFP gains from equalizing TFPR
across plants within industries. The gains reported in column (1) correspond to
our baseline estimations and are the same as in Table 4.
In section 4, we stated that the panel does not reflect well the firms with
fewer than 10 employees; therefore, in column 2 of Table 6, we have used a
reduced sample that only includes firms with more than 10 employees. The results
show an important decrease of the productivity gains in the years where these
gains were higher. Notice that the productivity gains decrease from 98.38 to 37.18
in 1998. This indicates that most of the misallocation problems are concentrated
in the micro or small firms and that the effects of the economic downturn of 1998
affected more these size of firms than medium and large firms.
Then, in column 3, we increase the elasticity of substitution between firm
value added from 3 to 5 to verify if efficiency gains in Bolivia are sensitive to the
curvature parameter, as Hopenhayn and Neumeyer (2008) demonstrate. We find
that they are very sensitive in that the gains from liberalization increase by up to
40 percent. The higher is, the more slowly TFPR gaps are closed in response to
reallocation of inputs from low- to high-TFPR firms.
Finally, in columns 4 and 5, we repeat the baseline exercise of column 1
using Bolivian and United States labor and output shares, respectively. To
illustrate this effect, it is useful to see that, in 1998, which is the year of the credit
crunch, there was a decrease of 12.39 percentage points when using the Bolivian
shares and a decrease of 60.36 percentage points when using the United States
shares.
26
Table 6: TFP Gains of Equalizing TFPR (in percentages)

Gains
1+ employees 10+ employees 10+ employees 10+ employees 10+ employees
sigma=3 sigma=3 sigma=5 sigma=3 sigma=3
Year
US Labor Shares US Labor Shares US Labor Shares Bol. Labor shares US Labor Shares
Bol. Output Shares Bol. Output Shares Bol. Output Shares Bol. Output Shares US output shares
(1) (2) (3) (4) (5)
1988 34.95 32.60 49.10 29.33 37.88
1989 33.75 27.59 47.80 23.85 44.19
1990 45.20 43.82 58.25 31.89 47.38
1991 38.62 37.75 48.97 26.66 50.87
1992 48.66 40.57 72.01 39.66 39.74
1993 35.99 27.43 53.49 26.97 45.91
1994 50.00 46.00 76.66 36.33 44.16
1995 42.42 39.09 57.31 34.98 39.19
1996 65.20 56.73 95.28 51.73 45.76
1997 75.55 60.74 113.78 52.68 44.96
1998 98.38 37.18 140.94 85.99 38.01
1999 92.73 56.21 119.59 73.79 65.98
2000 47.34 45.31 67.74 37.15 28.06
2001 46.54 40.39 63.25 32.48 35.08

5.4. Measurement Error

The hypothetical productivity gains found in the previous sections could be a
result of measurement error in the Bolivian data. Certainly, it is not possible to
eliminate arbitrary measurement error, but we can test whether our results can be
attributed to measurement error. In this section, we explore the impact of classical
measurement error on firm revenue and inputs by regressing revenue on inputs
and vice versa.18
log(Psi Ysi ) 0 1 log(K si s L1si s ) is (28)
log(K si s L1si s ) 0 1 log(PsiYsi ) is (29)
We perform pooled regressions for all years, and all variables are
measured relative to the industry means, with industries weighted by value-added
shares. If the percent errors in revenue and inputs are uncorrelated, we would
expect lower coefficients in Bolivia. The results, reported in Table 7, show that
the elasticity of inputs with respect to revenue is 0.88 in Bolivia, relative to 1.01
in the United States. These coefficients suggest that the classical measurement
error might be adding 13 percent to the variance of log revenue in Bolivia. The
table also shows that the elasticity of revenue with respect to inputs is 0.88 in
Bolivia, and Hsieh and Klenow (2009) report that the corresponding U.S.
elasticity is 0.82, indicating that classical measurement error actually lower the
variance in Bolivia by 6 percent. By combining the two-way regressions, we can
state that greater classical measurement error could contribute to the higher
variance of TFPR in Bolivia because the sum of the two coefficients is equal to
1.76, whereas for the United States it is equal to 1.83.
Table 7: Regressions of Inputs on Revenue, Revenue on Inputs

Bolivia United
States
Inputs on revenue 0.88 1.01
Revenue on inputs 0.88 0.82
In addition, like Hsieh and Klenow (2009), we have assumed that the
serial correlation in measurement error for a given firm is lower than the true
correlation for revenues and inputs and that the true correlations are the same in
18
See Hsieh and Klenow (2009) for additional tests to assess measurement error.
28
Bolivia and the United States. Given this, we find that the growth rates in revenue
and inputs vary more in Bolivian firms than in United States firms.
Table 8: Dispersion of Input and Revenue Growth

Inputs Revenue
Bolivia I. II.
S.D. 1.12 1.45
75-25 0.47 0.94
United States III. IV.
S.D. 0.68 0.43
75-25 0.43 0.32
Table 8 presents the relevant statistics; these growth rates confirm that
TFPR is noisier in Bolivia.
5.5. Policies and Firms Characteristics

Even though TFPR dispersion in Bolivia is in some way related to measurement
error, we should be able to relate TFPR gaps to explicit policy changes and firms
characteristics, like size, geographical location, age or integration with
international commerce.
An advantage of our case study is that it is possible to connect specific
policy reforms or events with the TFP gains. We associate TFP gains with three
particular government policies that are emblematic of the market liberalization
period and that are directly or indirectly related to the manufacturing industry.
These policies, which have been explained in section 2, are: i) the Investment
Law (Law 1182 of September 17, 1990); ii) the Privatization Law (Law 1330 of
April 24, 1992); and iii) the Capitalization Law (Law 1544 of March 21, 1994).
To demonstrate the importance of these policies and how they are related to the
potential extent of misallocation, Figure 5 shows the evolution of TFP gains over
time, with vertical lines indicating the timing of these reforms.19
19
We included also a vertical line indicating the timing of the crisis.
Figure 5:
Evolution of TFP Gains and Reforms
120
Investment
Law
100
Capitalization
Law
80
Percent
60
40
Crisis
20
Privatization
Law
0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
After the passing of each of the three Laws it can be seen that TFP gains
systematically decrease the year after, but then increase after two years. Thus, in
trying to provide a link between policies and wedges, this result indicates that
these specific policies had only a positive but transitory effect after one year in
terms of improving allocative efficiency. On the other side, if we look at these
policies in a context of the whole package of reforms, we can interpret Figure 5 as
showing that it is during the second-generation reforms that allocative efficiency
started to decrease. In particular, it is since the mid of the second-generations
reform period (since 1995) that TFP gains raise significantly.
Next, we ask: Are there any differences among firms TFPQ and TFPR
that are related to size, geographical location, age or integration with international
commerce? We test some common beliefs related to productivity by performing
some basic regressions using firms log TFPQ and TFPR relative to the industry
means as our dependent variables. The results pooled for all years are shown in
Table 9.
20
20
In tables A.1 to A.4 of the appendix, we show the results for each year.
30
Table 9: Regressions of TFPQ and TFPR on Firm and Geographical Characteristics

Dependent variable log(TFPQ) log(TFPR)
(1) (2) (3) (4) (5) (6) (7) (8)
Small 0.4136*** 0.2683*** -0.0905 -0.1895***
[0.144] [0.097] [0.065] [0.063]
Medium 1.0717*** 0.8185*** -0.2340** -0.3741***
[0.236] [0.178] [0.103] [0.108]
Large 1.8833*** 1.6034*** -0.1790 -0.3128***
[0.291] [0.192] [0.114] [0.101]
Between 5 and 10 0.3440* 0.2739 0.1111 0.1618
[0.187] [0.193] [0.087] [0.108]
More than 11 0.4784** 0.0560 -0.0590 0.0029
[0.215] [0.168] [0.108] [0.113]
Export 0.8042*** 0.1930** 0.0460 0.0719
[0.143] [0.090] [0.066] [0.057]
Out of the Axis -0.3088** -0.0322
[0.124] [0.075]
Observations 9,861 8,021 9,051 7,525 9,861 8,021 9,051 7,525
R-squared 0.173 0.01 0.037 0.173 0.006 0.004 0.000 0.018
Robust standard errors in brackets
***p<0.01, **p<0.05,* p<0.1

Column (1) of Table 9 indicates that physical productivity is positively

correlated with size, defined as the number of employees per firm. Large firms are
the most productive, with a TFPQ more than 100 percent larger than that of micro
firms. Column (2) shows that older firms are more productive than young firms
(less than 5 years old), and there are also significant differences (at 10 percent)
between medium-aged and young firms. By regressing TFPQ on a dummy that
represents exporting firms (column 3), we see that firms that produce products for
export are 80 percent more productive than firms that do not. In column (4), we
present the regression of TFPQ against all of the firm characteristics, including a
dummy that captures the region where the firms are located. This dummy is
important for Bolivia because there are substantial differences between the
Departments of La Paz, Cochabamba and Santa Cruz, which are said to be located
in the axis, and the others. The results indicate that firms located in Departments
outside of the axis are 31 percent less productive. In this last regression for TFPQ,
we can see also that size is the determining characteristic that explains differences
in TFPQ among firms within the same sector.
The last four columns of Table 9 show the same results, but using TFPR
instead of TFPQ. For instance, column (8) shows that firms present significant
differences in TFPR according to the different size divisions. Although
differences in the levels of TFPR across groups can be instructive, there is much
more to learn from differences in within-group dispersion of TFPR across groups.
Therefore, in the following figure, we show the evolution of the standard
deviation of TFPR within the different groups for each year.
32
Figure 6:
TFPR Variation by Size TFPR Variation by Age
1.70
1.90
Small 1.60
1.70 Young
1.50
1.50 1.40
Middle-age
Micro
1.30 1.30
S.D.
S.D.
1.20
1.10
1.10
Medium
0.90
1.00
0.70
0.90
Large
0.50 Old
0.80
0.30 0.70
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
TFPRVariationbyExportingStatus TFPR Variation by Location

1.60 1.40
1.30
1.40
Non-export
Out of the Axe
1.20
1.20
1.10
S.D.
S.D.
1.00
1.00
0.80
0.90
Export In the Axe

0.60
0.80
0.40 0.70
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Note: Young firms can be identified only until 1995, because the question regarding the
time of starting year was kept in the survey only until that year.
The upper left panel of Figure 6 shows TFPR variation by size. During the
whole period, we can see that large firms have the smallest variance of TFPR. We
can also see that TFPR variation among micro and medium-sized firms almost
coincide in all the years except in 1995 where micro firms have a larger variance.
By comparing this graph with Table 4, we can see that the jump in TFPR
dispersion in 1998 is mainly explained by TFPR variation among small firms.
Therefore it is possible to affirm that the credit crunch affected mainly small firms
in the manufacturing sector. In general, we are able to conclude that size is an
important determinant of misallocation.
Hopenhayn and Neumeyer (2008) consider that firms age might be an
important covariate to consider when analyzing TFPR. One of the reasons for this
is that borrowing constraints are less likely to affect older firms because, as time
goes by, firms might be able to extend their reach and access more markets and/or
government purchases and tap into resources of better partners. The upper right
panel confirms that this was the case in Bolivia until 1996. Since 1997 there are
no clear differences in TFPR variation among middle-age and old firms, because
the liberalization of the financial markets and the building up of a microfinance
system, facilitated access to credit not only to small firms, but also to middle-
aged, young and informal firms.
The lower left panel shows that exporting status is an important
determinant of misallocation. Non-exporting firms have larger variance of TFPR
than exporting firms do. On the other hand, the gap in TFPR dispersion between
firms located in the axis and outside of the axis is distinguishable in some years,
but in other years not.21
6. Conclusions
A long stream of research has stressed that misallocation of inputs across firms
can reduce aggregate productivity in a country. In this paper, we used micro data
on manufacturing firms to analyze the possible role of such misallocation in
Bolivias manufacturing sector during the so-called market liberalization period
(1988-2001). We know that the extent of misallocation is worse when there is
greater dispersion of marginal products and therefore of TFPR.
We hypothetically reallocate resources by equalizing TFPR across firms
and within industries. We found that TFP would have risen by 39 percent during
the first generation reforms period, by 58 percent during the second generation
reforms period and by 71 percent during the post-reforms period. In addition, the
allocation of resources within sectors declined over time in a zigzag pattern and
reached its peak in 1998 during the credit crunch crisis. This result is corroborated
by the fact that TFP gains relative to the United States increased from 1.6 percent
in 1990 to 38.8 percent in 1998. We also show that it is from the implementation
of the second-generation reforms that there is a greater potential for TFP growth.
This implies that during this period there were major distortions in the economy,
which if eliminated would have contributed to a better allocation of resources and
to an increase on aggregate manufacturing TFP and output.
As emphasized in the literature, establishing a connection between wedges
and specific policies is very difficult. After finding some evidence that
measurement error contributes to TFPR dispersion, in a graphical analysis we
analyzed if there is a connection between TFP gains and the three most important
policies applied during the market liberalization period that are directly or
indirectly related to the manufacturing sector. These policies are the Investment
Law (1990), the Privatization Law (1992) and the Capitalization Law (1994). We
found that all of these policies had a positive but transitory impact on factor
allocation.
21
It is important to mention that, for the years 2000 and 2001, we were not able to identify if all
firms produced products for exporting; therefore, the results for those years consider only a small
number of firms.
34
But the main conclusion of this policy and TFP gains analysis is that the second-
generation reforms as a whole contributed the most to an increase in distortions.
We report evidence of rising misallocation from 1995 to 1998. One explanation
for this result could be that privatizations were performed until 1998 and most of
them were accompanied by some special benefits for the buyers. These special
benefits were linked to the low prices at which these companies were sold,
creating distortions in the manufacturing industry. Nevertheless, future work
should focus on causal tests of how specific policies affected firms productivity
as well as aggregate productivity.
We also analyzed some particular features of the Bolivian manufacturing
sector by relating TFPQ and TFPR to firm and geographical characteristics. The
results of a regression on multiple covariates show that the main characteristic
that explains physical productivity differences in Bolivia is firm size. Large firms
are the most productive. We also compared TFPR dispersion across groups
divided according to these characteristics and found that TFPR dispersion
correlates negatively with size and that old firms and exporting firms have less
TFPR dispersion. In conclusion size has a lot to do in explaining TFPR
differences and misallocation. First, by comparing the actual firm sizes to the size
observed if TFPR were equalized, we find that in Bolivia firms should enlarge.
And second, we observe that small firms have the largest variance of TFPR. In
fact they were most affected by the credit crunch crisis of 1998.
The application of the Hsieh and Klenow (2009) methodology allowed us
to estimate the reallocation gains of equalizing TFPR within sectors, but tells us
nothing about the gains across sector reallocation. Future work should focus on
computing these gains. In addition, it would be optimal to analyze in depth each
sector to infer the exact distortions that they confront. As Hsieh and Klenow
(2009), we also excluded the potential impact of distortions on firm entry and
exit, because of the constraints of the data, but this should be an important topic
for future research. In sum, Bolivias economy grew in this period, but not as
much as it was expected. We think resource misallocation could explain in part
this low growth.
Appendices
Figure A.1:
TFPQ
1988 1989 1990 1991
0.05.1.15.2.25
0 .1 .2 .3
0 .1 .2 .3
0 .1 .2 .3
Density
Density
Density
Density
1/256 1/64 1/8 1 8 1/256 1/64 1/8 1 8 1/256 1/64 1/8 1 8 1/256 1/64 1/8 1 8
logAsi logAsi logAsi logAsi
kernel = epanechnikov, bandwidth = 0.3714 kernel = epanechnikov, bandwidth = 0.3543 kernel = epanechnikov, bandwidth = 0.4199 kernel = epanechnikov, bandwidth = 0.3840
1992 1993 1994 1995

0.05.1.15.2.25
0.05.1.15.2
0.05.1.15.2
0.05.1.15.2
Density
Density
Density
Density
1/256 1/64 1/8 1 8 1/256 1/64 1/8 1 8 1/256 1/64 1/8 1 8 1/256 1/64 1/8 1 8
1996 1997 1998 1999

0.05.1.15.2.25
0.05.1.15.2.25
0.05.1.15.2
0.05.1.15.2
Density
Density
Density
Density
1/256 1/64 1/8 1 8 1/256 1/64 1/8 1 8 1/2561/64 1/8 1 8 1/256 1/64 1/8 1 8
2000 2001
0 .05 .1.15
0.05.1.15.2
Density
Density
1/256 1/64 1/8 1 8 1/256 1/64 1/8 1 8

logAsi logAsi
kernel = epanechnikov, bandwidth = 0.7336 kernel = epanechnikov, bandwidth = 0.5039
36
Figure A.2:
TFPR
1988 1989 1990 1991
0 .2 .4.6 .8
0 .2 .4 .6
0 .2 .4 .6
0 .1.2.3.4
Density
Density
Density
Density
1/64 1/8 1 8 64 1/64 1/8 1 8 64 1/64 1/8 1 8 64 1/64 1/8 1 8 64
logTFPRsi logTFPRsi logTFPRsi logTFPRsi
1992 1993 1994 1995
0 .2 .4 .6
0.1.2.3.4.5
0 .2 .4 .6
0 .1.2.3.4
Density
Density
Density
Density
1/64 1/8 1 8 64 1/64 1/8 1 8 64 1/64 1/8 1 8 64 1/64 1/8 1 8 64
1996 1997 1998 1999

0.1.2.3.4.5
0 .1 .2 .3.4
0 .1 .2.3 .4
0 .1.2 .3.4
Density
Density
Density
Density
1/64 1/8 1 8 64 1/64 1/8 1 8 64 1/64 1/8 1 8 64 1/64 1/8 1 8 64
2000 2001
0 .2 .4 .6
0 .1 .2.3.4
Density
Density
1/64 1/8 1 8 64 1/64 1/8 1 8 64

logTFPRsi logTFPRsi
kernel = epanechnikov, bandwidth = 0.2978 kernel = epanechnikov, bandwidth = 0.1894
Source: Authors calculations.

Figure A.3: Distribution of Firm Size in Bolivia by Year
Actual vs Efficient
1988 1989 1990 1991
.2
.2
.2
0 .1.2.3
.15
.15
.15
.1
.1
.1
0.05
0.05
0.05
1/64 1/8 1 8 64 1/641/8 1 8 64 1/641/8 1 8 64 1/641/8 1 8 64

x x x x
kdensity VA_eff kdensity VA_actual kdensity VA_eff kdensity VA_actual kdensity VA_eff kdensity VA_actual kdensity VA_eff kdensity VA_actual
1992 1993 1994 1995

0.05.1.15
0.05.1.15
0.05.1.15
0.05..115.2
1/641/8 1 8 64 1/641/8 1 8 64 1/641/8 1 8 64 1/641/8 1 8 64

x x x x
1996 1997 1998 1999

0.05.1.15
0.05..115.2
0.05..115.2
.2
..115
0.05
1/641/8 1 8 64 1/641/8 1 8 64 1/641/8 1 8 64 1/641/8 1 8 64

x x x x
2000 2001
0.05.1.15
.1
0.05 .2
.15
1/641/8 1 8 64 1/641/8 1 8 64
x x
kdensity VA_eff kdensity VA_actual kdensity VA_eff kdensity VA_actual
Table A.1: Productivity for Exporters (vs. Non-exporters)

Note: *** significant at 1%; ** significant at 5%; * significant at 10%
38
Table A.2: Productivity by Size


Table A.3: Productivity by Age
Years 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
TFPQ
Between 5 and 0.5713** 0.2603 0.3915 0.3715 0.5284 0.8313** 0.0727 0.8358 0.2301 0.1547 0.1348 0.0000 0.0000 1.1155
[0.241] [0.157] [0.328] [0.444] [0.398] [0.409] [0.273] [1.024] [0.244] [0.476] [0.336] [0.000] [0.000] [1.074]
More than 11 0.4651*** 0.2737* 0.6452** 0.3274 0.6624* 0.7052* 0.2407 0.8430 0.4329 0.1966 0.3492 0.4481* 1.8523** 0.0000
[0.139] [0.144] [0.275] [0.308] [0.397] [0.402] [0.222] [0.918] [0.336] [0.406] [0.370] [0.251] [0.925] [0.000]
Observations 699 719 790 581 716 737 698 539 500 455 496 444 293 354
R-squared 0.019 0.006 0.030 0.019 0.024 0.035 0.004 0.017 0.005 0.009 0.003 0.007 0.066 0.029
TFPR
Between 5 and 0.3187** 0.1495 0.1526 0.4869** 0.1674 0.2320 0.1590 0.4407 0.4307** 0.4438 0.8778*** 0.0000 0.0000 0.2618
[0.130] [0.139] [0.184] [0.240] [0.240] [0.197] [0.132] [0.472] [0.165] [0.314] [0.175] [0.000] [0.000] [0.486]
More than 11 0.0619 0.1325 0.0188 0.1943 0.0412 0.0351 0.2470* 0.2130 0.3340** 0.1360 0.5889*** 0.0716 0.4376 0.0000
[0.098] [0.114] [0.120] [0.226] [0.202] [0.198] [0.129] [0.428] [0.152] [0.270] [0.142] [0.158] [0.282] [0.000]
Observations 699 719 790 581 716 737 698 539 500 455 496 444 293 354
R-squared 0.015 0.010 0.002 0.013 0.002 0.008 0.008 0.014 0.008 0.056 0.018 0.001 0.017 0.003
40
Table A.4: TFPQ and TFPR with Multiple Covariates
Years 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
TFPQ
Small 0.4267* 0.3452 0.1564 0.1625 0.2990 0.2953 0.5195* 1.3034** 0.0397 0.3474 0.6798** 0.4608* 0.5454 1.2489**
[0.252] [0.239] [0.214] [0.186] [0.323] [0.225] [0.302] [0.550] [0.320] [0.354] [0.333] [0.265] [0.950] [0.463]
Medium 0.4730* 0.5070* 0.7299*** 0.4795* 1.1817*** 0.9530*** 1.2146*** 1.9675*** 0.7003*** 0.1255 0.0522 1.0633*** 1.6278** 0.0000
[0.264] [0.285] [0.192] [0.245] [0.328] [0.224] [0.383] [0.663] [0.239] [0.351] [0.348] [0.309] [0.750] [0.000]
Large 1.4613*** 1.5587*** 1.6798*** 1.5107*** 1.6514*** 1.7461*** 1.7527*** 2.5597*** 1.4951*** 0.9895*** 0.9503*** 1.6647*** 2.2164*** 1.0011***
[0.257] [0.296] [0.215] [0.260] [0.299] [0.233] [0.429] [0.704] [0.323] [0.357] [0.285] [0.323] [0.601] [0.297]
Between 5 and 0.5075*** 0.2245 0.2829 0.5697* 0.1808 0.5923* 0.1152 0.4119 0.4901* 0.4906 0.9279*** 0.0000 0.0000 0.0000
[0.185] [0.163] [0.270] [0.293] [0.359] [0.330] [0.220] [0.617] [0.250] [0.459] [0.348] [0.000] [0.000] [0.000]
More than 11 0.2809* 0.0269 0.2097 0.0146 0.1877 0.2288 0.1797 0.1424 0.2394 0.2234 0.6350* 0.0129 1.0210** 0.0193
[0.144] [0.140] [0.231] [0.225] [0.316] [0.286] [0.176] [0.524] [0.304] [0.419] [0.322] [0.253] [0.400] [0.798]
Export 0.4210*** 0.1313 0.1476 0.3220* 0.0294 0.1991 0.2788* 0.4343* 0.1717 0.4699** 0.2206 0.3031 0.2089 1.1167**
[0.129] [0.143] [0.209] [0.166] [0.304] [0.160] [0.157] [0.238] [0.165] [0.189] [0.199] [0.303] [0.437] [0.494]
Out of the Axis 0.3030 0.1717 0.1727 0.3692* 0.3732 0.4486*** 0.5091* 0.6675*** 0.2663 0.0390 0.2093 0.0041 1.5044 0.2059
[0.208] [0.158] [0.129] [0.185] [0.255] [0.135] [0.296] [0.248] [0.190] [0.197] [0.297] [0.217] [1.254] [0.837]
Observations 699 719 790 581 716 737 698 539 498 455 496 444 80 73
R-squared 0.167 0.151 0.189 0.196 0.184 0.232 0.200 0.298 0.170 0.203 0.189 0.143 0.205 0.126
TFPR
Small 0.0204 0.0929 0.2934** 0.5821*** 0.2175 0.1471 0.0992 0.2446 0.3780 0.7712*** 0.7501*** 0.2053 0.2016 0.6337
[0.146] [0.212] [0.115] [0.140] [0.170] [0.192] [0.151] [0.219] [0.238] [0.221] [0.270] [0.193] [0.558] [0.557]
Medium 0.3617** 0.4704** 0.3477** 0.5347*** 0.0599 0.3772** 0.2851* 0.0356 0.5857*** 1.0428*** 0.9168*** 0.4425** 0.1834 0.0000
[0.165] [0.213] [0.162] [0.169] [0.199] [0.146] [0.153] [0.187] [0.219] [0.173] [0.304] [0.188] [0.416] [0.000]
Large 0.2535* 0.3145 0.1066 0.3859** 0.2446 0.3490** 0.3815** 0.0210 0.4639** 0.9371*** 0.7605*** 0.3767* 0.1894 0.3385
[0.151] [0.258] [0.193] [0.154] [0.150] [0.175] [0.176] [0.242] [0.227] [0.176] [0.276] [0.211] [0.312] [0.429]
Between 5 and 0.3519*** 0.1783 0.1602 0.4564* 0.1876 0.2263 0.1514 0.3743 0.4307** 0.4546 0.9274*** 0.0000 0.0000 0.0000
[0.130] [0.134] [0.190] [0.231] [0.242] [0.186] [0.120] [0.388] [0.164] [0.288] [0.201] [0.000] [0.000] [0.000]
More than 11 0.1371 0.0421 0.0355 0.1467 0.0188 0.0063 0.1893 0.1884 0.3746** 0.0469 0.6690*** 0.0017 0.2797 2.4960***
[0.108] [0.131] [0.136] [0.230] [0.207] [0.187] [0.129] [0.347] [0.167] [0.231] [0.164] [0.163] [0.285] [0.147]
Export 0.2274** 0.0891 0.0301 0.2195** 0.0228 0.1206 0.1561 0.1186 0.0558 0.2647** 0.0654 0.1924 0.0299 0.6432**
[0.094] [0.112] [0.091] [0.100] [0.168] [0.084] [0.117] [0.123] [0.123] [0.125] [0.151] [0.160] [0.193] [0.242]
Out of the Axis 0.1147 0.0400 0.0547 0.2061 0.1320 0.0912 0.0609 0.1939 0.0149 0.2008** 0.2423 0.1250 0.5940 0.6177***
[0.121] [0.141] [0.105] [0.134] [0.145] [0.075] [0.151] [0.165] [0.124] [0.100] [0.167] [0.162] [0.570] [0.172]
Observations 699 719 790 581 716 737 698 539 498 455 496 444 80 73
R-squared 0.053 0.040 0.020 0.054 0.012 0.026 0.027 0.034 0.026 0.137 0.055 0.021 0.046 0.232

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The B.E.

Misallocation and Manufacturing TFP in

Carlos Gustavo Machicado Juan Cristobal Birbuet

KEYWORDS: TFP, market structure, manufacturing

Published by De Gruyter, 2012 1

is more productive than firm B and therefore has a higher TFPQ

2. Structural reforms in Bolivia

Published by De Gruyter, 2012 3

influence of the State on production and promoting private-sector initiatives. The

2.1 First-generation reforms (1985-1993)

provisions guaranteeing job security. However, the employment rights established

2.2 Second-generation reforms (1994-1997)

Published by De Gruyter, 2012 5

2.3 Post-reform years (1998-2001)

2.4 The macroeconomic effects of the NEP

Published by De Gruyter, 2012 7

In addition, technological innovations concentrated in the hydrocarbons, financial

3. The Model: Distortions and Productivity with Monopolistic

By minimizing costs, we obtain:

Aggregate industry output Ys is itself a CES aggregate of Ms differentiated

Each differentiated product is produced according to a typical Cobb-Douglas

A firms profits are given by:

si (1 Ysi ) Psi Ysi wLsi (1 Ksi ) RK si (5)

1 (1 Ysi ) s Psi Ysi

1 (1 Ysi )(1 s ) Psi Ysi

Published by De Gruyter, 2012 9

Equations (6) and (7) imply also:

In addition to the allocation of labor:

and the firms output:

To obtain aggregate TFP as a function of the misallocation of capital and labor,

For the analysis, it is relevant to show that firm-specific distortions can be

Published by De Gruyter, 2012 11

where Y2 and K2 represent the variances of ln(1-Ysi) and ln(1+Ksi), respectively,

Published by De Gruyter, 2012 13

appear in both sub-periods, they were given different identification numbers in

Table 2: Entry and Exit of Firms

Published by De Gruyter, 2012 15

5.1. Physical and Revenue Productivity in Bolivia

Published by De Gruyter, 2012 17

1/256 1/64 1/8 1 8

1/256 1/64 1/8 1 8

1/256 1/64 1/8 1 8

Source: Authors calculations

Source: Authors calculations

Published by De Gruyter, 2012 19

Table 3: Dispersion of TFPQ and TFPR

Published by De Gruyter, 2012 21

5.2. Reallocation Gains

The ratio of actual TFP to efficient TFP is computed according to equation

Table 4: TFP Gains from Equalizing TFPR within Industries

The elimination of distortions (k and y) would boost aggregate

dollars to 2.5 billion dollars). Loans to the manufacturing sector contracted by 20

Published by De Gruyter, 2012 23

kdensity VA_eff kdensity VA_actual

kdensity VA_eff kdensity VA_actual

kdensity VA_eff kdensity VA_actual

Source: Authors calculations

Figure 4 plots the efficient versus actual size distributions of firms in

Published by De Gruyter, 2012 25

favor of larger firms, because there is a negative size-TFPR dispersion relation. In

Table 6: TFP Gains of Equalizing TFPR (in percentages)

Published by De Gruyter, 2012 27

5.4. Measurement Error

log(Psi Ysi ) 0 1 log(K si s L1si s ) is (28)

Machicado & Birbuet (2012)

Machicado & Birbuet (2012)