[{"data":1,"prerenderedAt":-1},["ShallowReactive",2],{"doc-detail-113230-en":3,"doc-seo-113230-105":29,"detail-sidebar-cat-0-en-105":91},{"code":4,"msg":5,"data":6},0,"success",{"doc_id":7,"user_id":8,"nickname":9,"user_avatar":10,"doc_module":4,"category_id":11,"category_name":12,"doc_title":13,"doc_description":14,"doc_content":15,"file_id":16,"file_url":17,"file_type":18,"file_size":19,"view_count":20,"is_deleted":4,"is_public":20,"is_downloadable":20,"audit_status":20,"page_count":21,"language":22,"language_code":23,"site_id":24,"html_lang":23,"table_of_contents":25,"faqs":26,"seo_title":13,"seo_description":14,"update_tm":27,"read_time":28},113230,4398048950312,"Violet","https://ap-avatar.wpscdn.com/avatar/400002538284de19e3c?_k=1778320343897328908",8,"Research & Report","Allocative Efficiency between and within the Formal and Informal Manufacturing Sectors in Zimbabwe - Academic analysis","Resource misallocation can lower aggregate total factor productivity and weaken industrial development, especially in emerging economies where market frictions hinder efficient allocation. Common estimates often omit informal firms, even though they account for a large share of production and employment in countries like Zimbabwe, leading to biased assessments of productivity losses. This paper uses firm-level survey data to examine how distortions drive misallocation within and across formal and informal manufacturing sectors in Zimbabwe, applying the Hsieh and Klenow (2009) framework.","Pub lic Disclosure Authorized Pub lic Disclosure Authorized  \nThe World Bank Economic Review, 38(2), 2024, 251–273  \n[https://doi.org10.1093/wber/lhad034](https://doi.org10.1093/wber/lhad034)  \nArticle  \nAllocative Efficiency between and within the Formal and Informal Manufacturing Sectors in Zimbabwe Godfrey Kamutando and Lawrence Edwards  \nAbstract  \nResource misallocation has the potential to reduce aggregate total factor productivity and undermine industrial development. Aggregate productivity losses are found to be particularly pronounced in emerging economies where large market frictions impede efficient resource allocation. Available estimates, however, almost entirely exclude firms in the informal sector that in some countries, such as Zimbabwe, make up a high share of overall production and employment. The exclusion of informal firms can result in either an over-or under-estimate of the aggregate productivity losses from misallocation. This paper, therefore, uses firm-level survey data to analyze how market distortions contribute to the misallocation of resources within and between the formal and informal manufacturing sectors in Zimbabwe. Applying the approach developed by Hsieh and Klenow (2009) to firm-level microdata, the results reveal extensive resource misallocation in both the formal and informal manufacturing sector. Market shares of informal firms are found to be low relative to their productivity—an outcome associated with relatively large capital market distortions. Misallocation is also more pronounced among relatively productive firms, thus exacerbating aggregate losses in total factor productivity (TFP) . Estimates indicate that aggregated gains in TFP of 151.4 percent can be realized through efficient resource allocation.  \nJEL classification: C83, D24, L11, L60, O12, O17  \nKeywords: misallocation, total factor productivity, formal and informal sector, manufacturing, Zimbabwe  \n1. Introduction  \nDifferences in aggregate total factor productivity (TFP) have been shown to be a key explanatory factor behind the large differences in incomes and development across countries (Hall and Jones 1999; Hsieh and Klenow 2009; Asker, Collard-Wexler, and De Loecker 2014; Gopinath et al. 2017; David and Venkateswaran 2019) . Traditionally, these income gaps have been attributed to differences in technologies and factor input accumulation (such as labor and capital) (Hall and Jones 1999; Howitt 2000) . More recently, however, the contribution of resource misallocation in explaining the observed disparities in cross-country aggregate TFP has been emphasized (Hsieh and Klenow 2009; David and Venkateswaran  \nGodfrey Kamutando (corresponding author) is a Carnegie Developing Emerging Academic Leaders post-doctoral research fellow at the Policy Research in International Services and Manufacturing (PRISM), School of Economics, University of Cape Town, South Africa; his email is [godfrey.kamutando@uct.ac.za. Lawrence Edwards](godfrey.kamutando@uct.ac.za. Lawrence Edwards) is a professor at the University of Cape Town, South Africa, and the director of PRISM; his email is [lawrence.edwards@uct.ac.za. The](lawrence.edwards@uct.ac.za. The) research for this article was financed by the Growth and Labour Markets in Low-Income Countries Programme (“GLM | LIC”) (GA-C3-RA6-345) managed by the Institute of Labor Economics (IZA) and administered by the Southern Africa Labour and Development Research Unit (SALDRU) . The authors thank the editor Nina Pavcnik and three anonymous reviewers for their constructive comments. A supplementary online appendix for this article can be found at The World Bank Economic Review website.  \n􀀂C The Author(s) 2023. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / THE WORLD BANK. 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