Factor Allocation and Growth
A central challenge for developing countries is to promote growth by reducing the misallocation of factors of production—labor, capital and land. While there may not be such a thing as a perfectly efficient factor allocation, evidence shows that there are huge gains in growth from reducing factor misallocation. Growth requires more efficient firms to produce more output and use more factors of production. Our past work has shown that land allocation is barely better than random at best, and probably worse than random in India. Put differently, low productivity firms have better access to land and buildings than high productivity firms. Indeed, land and buildings misallocation appears to be at the root of much of the misallocation of output and it accounts for a large share of the observed differences in output per worker in the manufacturing sector.
Poverty is often measured using repeated cross-sectional surveys that provide a snapshot of the poverty status of a given household at a particular point in time. Such designs call for interviewing different respondents in each round, and because individuals or households are only observed once, we cannot always tell whether their poverty status is enduring or transitory.
Imagine yourself on a comfy seat like the ones they give to ministers. But do not get too cozy as you are about to make a difficult decision. Population is aging in your country, and there simply is not enough resources to finance the pension benefits of the retirees. What should you do?
The conventional wisdom suggests that you should increase the retirement age. The argument goes as follows. People live six years longer in retirement now than half a century ago. Therefore, using some of those additional years for work is not completely unfair. By increasing the retirement age, you could increase the number of contributors while decreasing that of beneficiaries at the same time. This should provide an effective remedy for the imbalances in pension system accounts.