Colombia: Selected Issues

This Selected Issue paper discusses unpacking low productivity in Colombia and presents evidence from firm-level data in Colombia. Colombia’s Total Factor Productivity (TFP) has fallen and stagnated over the past three decades, although the factors behind this broad-based decline have differed across sectors. Using firm-level data, we show that while the mining TFP declines were dominated by lower within-firm productivity, in the case of manufacturing and agriculture positive reallocation effects played a buffering role. Across the board, the lack of entry of new productive firms contributes to missing TFP growth. Decomposition results show that the dynamics of TFP and their compositions are heterogeneous across sectors. Misallocation of factors of production appears to pose a sizable growth cost for Colombia, though progress in reducing misallocation has been made in recent years. It should be emphasized that the paper does not identify the causes of misallocation, which could be industry- and firm-specific bottlenecks, such as taxes, adverse incentives, access to financing, labor market rigidities, red tape, or policy uncertainty. Policies to improve misallocation could be derived from studies that explore the causes of misallocation and industry-specific problems. In general, such policies should be based on the principles of leveling the playing field, encouraging investment, and removing distortions.