No abstract

Estimates for the U.S. suggest that at least in some sectors productivity enhancing reallocation is the dominant factor in accounting for producitivity growth . An open question, particularly relevant for developing countries, is whether reallocation is always productivity enhancing. It may be that imperfect competition or other barriers to competitive environments imply that the reallocation process is not fully efficient in these countries. Using a unique plant-level longitudinal dataset for Colombia for the period 1982-1998, we explore these issues by examining the interaction between market allocation, and productivity and profitability. Moreover, given the important trade, labor and financial market reforms in Colombia during the early 1990's, we explore whether and how the contribution of reallocation changed over the period of study. Our data permit measurement of plant-level quantities and prices. Taking advantage of the rich structure of our price data, we propose a sequential mehodology to estimate productivity and demand shocks at the plant level. First, we estimate total factor productivity (TFP) with plant-level physical output data, where we use downstream demand to instrument inputs. We then turn to estimating demand shocks and mark-ups with * We thank Alberto Serrano, Juan Manuel Contreras and Pablo Medina for excellent research assistance, Alvaro Suárez and José Eduardo Granados at DANE for providing access to data, the staff in charge of the AMS for answering our queries on methodological issues regarding the data, and participants at various seminars at DANE for their comments and suggestions. We thank the participants of the IASE conference in plant-level price data, using TFP to instrument for output in the inversedemand equation. We examine the evolution of the distributions of TFP and demand shocks in response to the market reforms in the 1990's. We find that market reforms are associated with rising overall productivity that is largely driven by reallocation away from low-and towards highproductivity businesses. In addition, we find that the allocation of activity across businesses is less driven by demand factors after reforms. We find that the increase in aggregate productivity post-reform is entirely accounted for by the improved allocation of activity.JEL Classification Codes: E23, L16, L60, O14, O24, O54.

and participants in the CEPR conference on "Globalization and the Organization of Firms", as well as members of the Board of Governors of Banco de la República de Colombia, for valuable comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.

We present a model of the Political Budget Cycle in which voters and politicians have preferences for different types of government spending. Incumbents try to influence voters by changing the composition of government spending, rather than overall spending or revenues. Rational voters may support an incumbent who targets them with spending before the election even though such spending may be due to opportunistic manipulation, because it can also reflect sincere preference of the incumbent for types of spending voters favor. Classifying expenditures into those which are targeted to voters and those that are not, we provide evidence supporting our model in data on local public finances for all Colombian municipalities. Our findings indicate both a pre-electoral increase in targeted expenditures, combined with a contraction of other types of expenditure, and a voter response to targeting.

A quantitative model brings together theories linking international trade to quality, technology, and demand for skills. Standard effects of trade on importers and exporters are magnified through domestic input linkages. We estimate the model with data from Colombian manufacturing firms before the 1991 trade liberalization. A counterfactual trade liberalization is broadly consistent with post-liberalization data. It increases skill intensity from 12 to 16 percent, while decreasing sales. Imported inputs, estimated to be of higher quality, and domestic input linkages are quantitatively important. Economies of scale, export expansion, and reallocation of production are small and cannot explain post-liberalization data. (JEL F14, F16, J24, L60, O14, O19, O33)