International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper analyzes productivity in the Eastern Caribbean Currency Union by exploring two complementary exercises. It computes total factor productivity by extending standard growth accounting frameworks with (1) the impact of natural disasters on the stock and productivity of physical capital; (2) human capital accumulation; and (3) the impact of out-migration on labor and human capital. The paper also analyzes labor productivity, including across economic sectors. The results indicate that the historical deceleration in growth was driven mostly by the declining contribution of total factor productivity, which resulted in stagnation in the aftermath of the global financial crisis. Labor productivity measures show that labor is largely allocated in the sectors with relatively lower productivity.
There is little empirical research on whether Balassa-Samuelson effects can explain the long-run behavior of real exchange rates in developing countries. This paper presents new evidence on this issue based on a panel data sample of 16 developing countries. The paper finds that the traded-nontraded productivity differential is a significant determinant of the relative price of nontraded goods, and the relative price in turn exerts a significant effect on the real exchange rate. The terms of trade also influence the real exchange rate. These results provide strong verification of Balassa-Samuelson effects for developing countries.
industrial countries, one potential problem is that a substantial portion of the agriculture sector (and possibly of the manufacturing sector) in developing countries may consist of traditional activities producing nontraded goods. Another problem is that the quality of labor is likely to vary considerably in developing countries, and our laborproductivitymeasure (based on employment figures unadjusted for quality changes) does not account for this variation. 12 We are unable to address these issues because of data limitations. However, we explore below certain
International Monetary Fund. Western Hemisphere Dept.
deceleration in growth was mostly driven by the declining contribution of TFP, resulting in stagnation in the aftermath of the Global Financial Crisis (GFC). Laborproductivitymeasures show that labor is largely allocated in the sectors with relatively lower productivity. A simulation exercise indicates that a continuation of these trends would imply potential output growth in the range of 1.5-2.5 percent in the ECCU .
A. Historical Trends in Output and Factors of Production
1. Output growth in the ECCU has lagged behind growth in emerging markets and developing
productivity and total factor productivity. Productivity reflects the efficiency of combining resources to produce output. It is usually measured by calculating the ratio of a weighted index of output to a weighted index of inputs. Labor productivity is calculated as the ratio of value-added GDP to homogenous labor hours. Because laborproductivitymeasures output per unit of labor instead of output per unit of all inputs combined, growth in labor productivity may reflect growth in output due to the improved efficiency of all inputs (including labor) and an increase in the
developing countries, and our laborproductivitymeasure (based on employment figures unadjusted for quality changes) does not account for this variation. 13 We are unable to address these issues because of data limitations. However, we explore below certain implications of these measurement problems for the estimation of the empirical model.
To undertake panel-data tests of the Balassa-Samuelson relations, we assume that long-run parameters are the same across our developing country set (D). 14 Thus, we set θ i X = θ X and γ i = γ for i € D
We examine the effect of non-zero, long-run foreign asset positions on consumption dynamics in response to productivity shocks in a two-country, dynamic, general equilibrium model, with different discount factors across countries populated by overlapping generations of households. We then compare the model results to those of a VAR for the United States versus the rest of the G-7. In the data, we find that permanent worldwide productivity shocks lead to net foreign asset and consumption dynamics that are consistent with interpreting the United States as the impatient economy in our model and are not consistent with symmetric models with equal discount factors.
sector GDP deflator ( P ),
rgdp t = gdp t / P t ,
and then divided rgdp by the 1995 PPP exchange rate ( PPP 1995 ) :
Z t = rgdp t / P P P
This is the laborproductivitymeasure we use in the empirical analysis.
Rest-of-the-G-7 labor productivity—We constructed rest-of-the-world labor productivity by computing rgdp, then converting this variable for those countries that make up the rest-of-the-G-7 into U.S. dollars by using PPP 1995 . Finally, we added over these countries and divided this sum by the
International Monetary Fund. Asia and Pacific Dept
and Walsh (2011) construct a laborproductivitymeasure excluding mining and utilities, and show that the decline in productivity in the 2000s was broad-based: “…the decline in labour productivity in the mining and utilities sectors accounts for less than 10% of the decline in overall market sector productivity growth over the past decade” . While mining and utilities TFP growth turned negative, it fell to zero in the manufacturing sector, and halved in the services and agriculture sectors. For the manufacturing sector, the productivity slowdown over the last cycle