The Evolution of TFP in Spain and Italy
Abstract
Using a growth-accounting framework for open and distorted economies with input-output linkages, I document that the evolution of aggregate TFP in Spain has been less dismal than previously thought. This is because distortions introduce a downward bias in traditional measures of Spanish TFP based on Solow’s residual. An unbiased measure of TFP—Hall’s residual— reveals that TFP in Spain started declining in 1995, not in 1988, and that it declined by 7, not 10, percentage points. To understand what is driving the decline of aggregate TFP, I decompose TFP into technical efficiency, domestic reallocation, and international trade. I find that the decline in Spanish TFP is mostly driven by declines in technical efficiency and negative reallocation effects. International trade had a large, positive impact on TFP. I show that despite declining TFP, welfare increased by 10 percentage points from 1995 to 2010. This is because Spanish households benefited from positive technological- and reallocation effects across the globe. Results for Italy can be found in the paper.
