Are We Undercounting Reallocation's Contribution to Growth?

In India since 1990 many regulations that restricted the free flow of inputs across firms were eliminated. Since then there has been a strong surge in aggregate productivity growth of 7% per annum. Three recent studies have used two distinct methodologies to decompose the sources of growth, and all of them conclude that it has been driven by within-plant increases in technical efficiency and not between-plant reallocation of inputs. Given the nature of the reforms, where many barriers to input reallocation were removed, this finding has surprised researchers and been dubbed ``India's Mysterious Manufacturing Miracle.'' In this paper, we show that the methodologies used may artificially understate the extent of reallocation. One approach, using growth in value added, mistakenly counts a significant amount of reallocation growth arising from the movement of intermediate inputs as technical efficiency growth. The second approach, using the Olley-Pakes decomposition, is shown by Restuccia and Rogerson (2008) to potentially be negatively correlated with reallocation output. Using microdata on manufacturing from five countries-- India, the U.S., Chile, Colombia, and Slovenia-- we show that both approaches significantly understate the true role of reallocation in economic growth. In particular, reallocation of materials on average is responsible for over half of aggregate Indian manufacturing productivity growth since 2000, substantially larger than either the contribution of growth from the reallocation in primary inputs or the increase in output from plant-level technical efficiency gains.