In their recent NBER paper, Chang-Tai Hsieh and Peter J. Klenow tried to quantify the extent of resource misallocation in the manufacturing sectors of China and India. According to the authors, if capital and labour were reallocated to eqalize their marginal products, the Total Factor Productivity would increase by 25-40% in China and 50-60% in India.
What does this mean for CEE manufacturing? If economic policies of these countries continue to apply the traditional approach to foreign investment (subsidies), it is questionable whether the returns on FDI in these countries together with the benefits of fiscal competition for manufacturing firms will continue to be motivating. While already facing a labour shortage, Central Europe has tough manufacturing competitors in China and India.
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Thanks to František Lipták for this post.
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