Environmental factors in cross-country productivity growth: A conditional Malmquist Index

This paper presents a novel approach to measuring cross-country productivity growth by introducing a revised Malmquist Productivity Index designed to overcome the limitations of traditional methods. The proposed index mitigates the impact of outliers and incorporates key environmental factors, which can influence productivity comparisons across countries. This research: (i) analyses the productivity growth of 95 countries over two distinct periods, refining the original Malmquist index by combining the order-m methodology with a conditional approach; (ii) compares traditional and conditional Malmquist models to assess the differential effects of environmental variables on productivity estimates; and (iii) introduces a novel decomposition of the Malmquist index, the Environmental Variables Index Factor (EVIF), which quantifies the bias introduced by environmental factors. This study identifies that the exclusion of environmental variables systematically biases all components of the Malmquist index, including efficiency change and technological change. The findings indicate that the conditional model produces unbiased cross-country productivity estimates, particularly during periods of significant volatility in environmental factors.