The role of allocative efficiency in a decade of recovery

The Chilean economy experienced a decade of sustained growth in aggregate output and productivity after the 1982 financial crisis. This paper analyzes the role of allocative efficiency on total factor productivity (TFP) in the manufacturing sector by applying the methodology of Hsieh and Klenow (2009) to establishment data from the Chilean manufacturing census. We find that a reduction in resource misallocation accounts for about 40 percent of the growth in manufacturing TFP between 1983 and 1996. In particular, a reduction in the least productive plants' implicit output subsidies is the primary reason for the reduction in resource misallocation during this period. Moreover, these plants enjoyed above industry-average growth in physical productivity, contributing to the overall improvement in efficient TFP after the financial crisis. Our evidence suggests that Chile's banking reform during the early and mid-1980s is likely to have played an important role in the observed improvement in allocative efficiency.