Extent and potential determinants of resource misallocation: A cross‐sectional study for developing countries

Abstract Distortions in the allocation of resources across establishments might account for significant differences in total factor productivity and output per capita across countries. This paper identifies and measures the effect of specific self‐reported firm‐level and objective country‐level distortions on resource misallocation and productivity in Latin America and Africa, using standardised data for several developing countries. The particular distortions we study were not considered in the previous empirical literature based on the Hsieh and Klenow ( The Quarterly Journal of Economics , 124, 1403–1448) methodology. In contrast to previous evidence, distortions affecting international trade are key factors generating resource misallocation. In particular, at firm level, an increase in the degree to which customs represent an obstacle increases the resource misallocation by 18.2%. At country level, an additional day it takes to export is associated with a 1.83% increase in the resource misallocation. Further, the median resource misallocation is 63% and 86% higher for Latin American and African countries, respectively, than the one for the United States. While most of the Latin American economies improved or maintained their situation in terms of resource misallocation, the opposite happened in the African economies. Finally, the median reallocation gain for the considered countries is 38.4% higher than the one of the US economy.