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Misallocation and productivity slowdown over two decades: evidence from Sri Lanka

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  • Ranpati Dewage Thilini Sumudu Kumari
  • Sam Hak Kan Tang
  • Shawn Xiaoguang Chen
  • Bei Li

Abstract

We investigate the effect of misallocation induced by firm-specific distortions on aggregate productivity and long-run TFP growth. Using a new firm-level dataset from Sri Lanka’s manufacturing surveys spanning over two decades and a standard model of misallocation, we show that when misallocation is eliminated, the aggregate manufacturing productivity could be boosted by 102% during 1994–2015. In addition, we find that the allocative efficiency exhibits a declining trend over time, and this rising misallocation could explain 55% of the manufacturing TFP growth slowdown in Sri Lanka. We further explore the underlying causes of the rising misallocation by quantitatively analysing the contributions of different types of firms and distortions in different markets. In the end, we qualitatively discuss potential fundamental sources in institutions and policies. Our results reveal that misallocation can be a mechanism underlying the growth slowdown of many emerging economies a decade after the liberalization reform since the late 1970s.

Suggested Citation

  • Ranpati Dewage Thilini Sumudu Kumari & Sam Hak Kan Tang & Shawn Xiaoguang Chen & Bei Li, 2021. "Misallocation and productivity slowdown over two decades: evidence from Sri Lanka," Applied Economics, Taylor & Francis Journals, vol. 53(38), pages 4417-4435, August.
    • Handle: RePEc:taf:applec:v:53:y:2021:i:38:p:4417-4435
    DOI: 10.1080/00036846.2021.1904111
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    1. Kumari, Ranpati Dewage Thilini Sumudu & Chen, Shawn Xiaoguang & Li, Bei & Tang, Sam Hak Kan, 2023. "Can land misallocation be a greater barrier to development than capital? Evidence from manufacturing firms in Sri Lanka," Economic Modelling, Elsevier, vol. 126(C).

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