1. Factory-Floor and Net Measures of Productivity, using Investment Climate Data Benn Eifert, Alan Gelb, Vijaya Ramachandran Benn Eifert, Alan Gelb, Vijaya Ramachandran Development Economics, World Bank Development Economics, World Bank July, 2005 July, 2005

2. How does the Business Climate impact on Productivity By reducing labor productivity? By reducing labor productivity? By reducing “factory-floor” productivity? By reducing “factory-floor” productivity? By influencing a range of “indirect costs”, some not normally included in productivity estimates, yet which affect profitability? By influencing a range of “indirect costs”, some not normally included in productivity estimates, yet which affect profitability?

3. Micro Evidence on Costs: ICA Surveys of Manufacturing Firms Surveys for 15 countries: 9 countries in Africa plus China, India, Morocco, Bangladesh, Bolivia, Nicaragua Surveys for 15 countries: 9 countries in Africa plus China, India, Morocco, Bangladesh, Bolivia, Nicaragua 7,000 firms, 2,700 in Africa, 6 industry categories 7,000 firms, 2,700 in Africa, 6 industry categories Surveys include data on firm sales, costs, etc; plus subjective questions Surveys include data on firm sales, costs, etc; plus subjective questions

4. II.Cross-Country Price Adjustments Use of PPP conversions plus relative prices of capital goods (costly in Africa) to adjust data. Use of PPP conversions plus relative prices of capital goods (costly in Africa) to adjust data. Implications: countries with “high prices” will appear to be less productive after adjustments; countries with costly capital goods will appear more productive after adjustments. Implications: countries with “high prices” will appear to be less productive after adjustments; countries with costly capital goods will appear more productive after adjustments. In practice, impact of adjustments does not radically change results In practice, impact of adjustments does not radically change results Potentially more accurate adjustments after the next rounds of PPP estimations Potentially more accurate adjustments after the next rounds of PPP estimations

5. Low Labor Productivity alone does not explain weak competitiveness in Africa… Labor productivity and unit costs in garments (Cadot-Nasir) Labor productivity and unit costs in garments (Cadot-Nasir) Shirts per Operator Unit Labor Costs Low-Income Africa 14$0.16 South Africa 15$0.65 China EPZ/India 18$0.23

6. Gross (factory-floor) TFP Ln (Y-M) – a ln (K) –b ln (L) – d ln (Z), correcting for price level differences: Ln (Y-M) – a ln (K) –b ln (L) – d ln (Z), correcting for price level differences: African countries show a wide range of gross TFP relative to China: African countries show a wide range of gross TFP relative to China: Senegal, Kenya 70-80% Senegal, Kenya 70-80% Uganda,Tanzania, Ethiopia,Nigeria 40-60% Uganda,Tanzania, Ethiopia,Nigeria 40-60% Zambia, Eritrea, Mozambique 30-35% Zambia, Eritrea, Mozambique 30-35%

7. Gross TFP Relative to China

8. Losses and Gross Productivity Low productivity in Africa is partly due to losses caused by power outages, logistics failures etc. Low productivity in Africa is partly due to losses caused by power outages, logistics failures etc. Losses from power outages alone equal 6% of sales in Kenya vs. 1% in China…for many African firms, power-related losses 10% of sales Losses from power outages alone equal 6% of sales in Kenya vs. 1% in China…for many African firms, power-related losses 10% of sales 1% losses is associated with 1% lower gross productivity 1% losses is associated with 1% lower gross productivity

9. Indirect Costs can have Substantial Impact Indirect costs can include: energy, transport, telcoms, water, security, bribes, etc; Indirect costs can include: energy, transport, telcoms, water, security, bribes, etc; In China, India, also Senegal, indirect costs are 13-15% of total costs; In China, India, also Senegal, indirect costs are 13-15% of total costs; In most other African countries, indirect costs are 20-30% of total costs, often higher than labor costs In most other African countries, indirect costs are 20-30% of total costs, often higher than labor costs

10. Defining “Net” Productivity Ln (Y-M-IC) –a.ln (K) –b.ln(L) – d.(ln (Z); Ln (Y-M-IC) –a.ln (K) –b.ln(L) – d.(ln (Z); Y-M-IC is “net value added” Y-M-IC is “net value added” Moving from gross to net TFP widens the productivity gap between Africa and comparators: Moving from gross to net TFP widens the productivity gap between Africa and comparators: Mid-range countries fall from 40-60% of China to 20-40%; Kenya from 70% to 40%, Zambia from 30% to 10% Mid-range countries fall from 40-60% of China to 20-40%; Kenya from 70% to 40%, Zambia from 30% to 10% Only Senegal continues to compare fairly well. Only Senegal continues to compare fairly well.

11. Gross and Net Productivity

12. Implications Wage costs are below indirect costs (plus losses..) in many countries….reducing indirect costs to 13% would boost profits more than halving labor costs: in many countries. Wage costs are below indirect costs (plus losses..) in many countries….reducing indirect costs to 13% would boost profits more than halving labor costs: in many countries. High indirect costs squeeze net value added and reduce employment potential, even in firms with high factory-floor productivity High indirect costs squeeze net value added and reduce employment potential, even in firms with high factory-floor productivity Effect of business climate variables may be felt in net productivity not necessarily on the factory floor. Effect of business climate variables may be felt in net productivity not necessarily on the factory floor.