regions
Firm total factor productivity (TFP)—the ability to generate greater outputs with lower inputs—is one of the key elements of eco-nomic growth. Considerable scholarly analy-sis has been devoted to measu ring productivity, especially since Robert Solow’s groundbreaking work (Solow 1957). To esti-mate the productivity of firms in lower-income economies, researchers have turned to analysis using survey-based data, often in the absence of comparable census data. The World Bank’s Enterprise Surveys, which pro-vide detailed firm-level data collected by the Bank’s Enterprise Analysis unit, is well suited for such an inquiry.
To estimate TFP, we begin with a Cobb-Douglas production function in the following form:
= ,
VAi A K Li iak ail (3A.1) where VAi is firm-level value added, a function of inputs of capital (Ki), and labor (Li).
Firms’ efficiency of production is mea-sured by the term Ai, which is the portion of output that cannot be directly attributed to the utilized inputs. We refer to the above model, or rather its version with natural loga-rithm applied on both sides, as VAKL. VA, K, and L are proxied using the questions available in the Enterprise Surveys. More pre-cisely, VA is proxied by the difference between the total annual sales of the estab-lishment (variable d2 in the data) and total annual cost of inputs (variable n2e); K is proxied by the replacement value of
machinery, vehicles, and equipment (variable n7a); and L is proxied by the total annual cost of labor (variable n2a).
To analyze differences in productivity across regions, regression analysis was used, including controls for sector of activity, firm size, and location, as follows:
α β γ
α σ ε
( )
= + ++ + +
log _
, TFP VAKL Loc country
s g
i i i
i
(3A.2) where TFP_VAKL is the TFP estimate obtained from the VAKL model for each firm; Loci is the firm location (either periph-ery or capital city); countryi are country dummies; a s are sector dummies; sg are size dummies (small, medium, and large); and ei is the discrepancy term.
This regression was run individually for each region to identify the effect of location and firm size on TFP, controlling for other factors.
Then, to explore the factors leading to the high importance of location in the Middle East and North Africa region, a second regression, consisting of a linear probability model was used to identify the increase in the probability for firms to face a constraint if they are located in the periphery instead of in the capital city. The equation was specified as follows:
α β γ
α σ ε
= + +
+ + + .,
Const Loc country s g
i i i
i
(3A.3)
where Consti is a dummy qualifying the con-straint as being either a major concon-straint or a minor constraint; Loci is the firm location (either periphery or capital city); countryi are country dummies; a s are sector dummies; sg are size dummies; and ei is the discrepancy term.
It is important to note that, in the case of the constraint associated with access to elec-tricity, the Loci was not defined as a dummy differentiating periphery and capital city but a dummy differentiating cities above 1 million and cities below 1 million.
Notes
1. The Gulf Cooperation Council (GCC) coun-tries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
The Mashreq subregion comprises the Arab Republic of Egypt, Iraq, Jordan, Lebanon, and the Syrian Arab Republic. The Maghreb subregion comprises Algeria, Libya, Morocco, and Tunisia.
2. “Periphery” refers to the peripheral areas outside of the capital city.
3. This typology comes from Weber (1958).
4. One of the original core objectives of the European Economic Community (EEC), set out in the 1957 Treaty of Rome, was the development of a common market offering free movement of goods, service, people, and capital.
5. WTO+ provisions include areas such as cus-toms regulations, export taxes, antidumping, countervailing measures, technical barriers to trade, or sanitary and phytosanitary standards.
6. Jaud and Freund (2015) estimate that nonpe-troleum exports were as low as 64 percent below what would be expected given the region’s characteristics, and imports were as high as 22 percent over what one would expect. In other words, the region seems to underexport and overimport.
7. Examples of service trade restrictions include limits or discrimination in licens-ing, constraints on foreign equity, or vari-ous requirements or limitations applied to foreign providers. Not all of these are explicitly designed to restrict foreign firms’
access; some apply to domestic firms as well and may be designed to ensure safety and quality. But de facto these often favor domestic firms.
8. The nature of service trade restrictions has not been studied as extensively as those for goods trade, but a recent effort generated a first overview for 103 countries (Borchert, Gootiiz, and Mattoo 2013). OECD and other high-income countries maintain restrictions in sectors such as professional services and some types of transportation, while some low- to middle-income countries are surpris-ingly open.
9. Recent financial crises have challenged the pre-vailing notion that free capital flows support low- and middle-income countries (Rodrik 2018). But this is mostly an argument about
the benefits of temporary capital account restrictions as a “second best” instrument to avert severe financial or macroeconomic imbalances.
10. In this chapter, North America refers to Canada and the United States.
11. No FDI data were available for Libya and Syria.
12. Migration statistics are difficult to collect.
These numbers are estimates from the World Bank Migration and Remittances Database 2017, which are largely based on data com-piled by the United Nations Statistics Division.
13. Form of government strongly correlates with freedom of information access. Of the 20 Middle East and North Africa economies, 14 are considered authoritarian, 4 are hybrid regimes, and 2 are flawed democracies. None is a full democracy (EIU 2018).
14. Each component of the Digital Adoption Index comprises several subindexes (World Bank 2016): The business component includes the share of firms with a website, the number of secure servers, download speeds, and 3G coverage. The people component includes mobile access and internet access at home. The government component includes core administrative systems, online public services, and digital identification.
15. Visa requirement data are from the Passport Index database, http://www.passportindex.org.
16. This subsection is based largely on Arvis et al.
(2018).
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