The effects of external and internal shocks on total factor productivity

Abstract

This paper examines structural changes that occur in the total factor productivity (TFP) within countries. It is possible that some episodes of high economic growth or economic decline are associated with permanent productivity shocks; therefore, this research has two objectives. The first one is to estimate the structural changes present in TFP for a sample of 77 countries between 1950 (1960) and 2000. The second one is to identify possible explanations for breaks. Two sources were analyzed: (i) episodes in political and economic history; (ii) changes in international trade - a measure of absorption of technology. The results suggest that about one-third of the TFP time-series present at least one structural break. Downwards breaks are more common, indicating that after a break the TFP has much difficulty to recover. When we investigated factors related with structural change, developed countries presented a break near the first oil shock while the developing countries' breaks are more spread along the decades. Thus, external strikes seem to be more relevant for developed countries. However, for each country and break date, it was possible to find an event close to the break date endogenously detected. Last, the relevance of international trade, measured by trade share percentage of GDP, seems to be limited to explain abrupt changes in TFP. © 2010 The Board of Trustees of the University of Illinois.