Abstract
AbstractUsing Indonesian manufacturing census data (1991–2001), this paper rejects the hypothesis that the East Asian crisis unequivocally improved the reallocative process. The correlation between productivity and employment growth did not strengthen, and the crisis induced the exit of relatively productive firms. The attenuation of the relationship between productivity and survival was stronger in provinces with comparatively lower reductions in minimum wages, but not due to reduced entry, changing loan conditions, or firms connected to the Suharto regime suffering disproportionately. On the bright side, firms that entered during the crisis were relatively more productive, which helped mitigate the reduction in aggregate productivity.
Highlights
While crises are periods of intensified adjustment, firm-level evidence on the impact of crises on resource allocation is limited
The protective power of productivity against exit was restored post-crisis, and the crisis appears to have weeded out the weakest potential entrants; while entry rates were lower during the crisis, those firms that entered were on average much more productive, which helped mitigate the loss in aggregate productivity
While crises are recognized to be periods of intensified adjustment and aggregate studies suggest that firm dynamics are a key determinant of the depth and duration of crises, firm-level evidence on their impact on the efficiency of resource allocation is scant
Summary
While crises are periods of intensified adjustment, firm-level evidence on the impact of crises on resource allocation is limited. Given the critical role of the reallocative process in facilitating recovery and growth, and the paucity of available firm-level studies on the impact of crises on resource allocation, empirically discriminating between these competing paradigms is important. Aggregate productivity growth decompositions help assess macro-level trends in the contributions of entry, exit and reallocation to productivity growth during and after the crisis. These decompositions are a prelude to firm-level analysis of exit and employment growth patterns, which assesses whether and how firm dynamics during the crisis were different from those operating in pre- and postcrisis periods We examine both the impact of the crisis on resource allocation and the reallocative process itself. By using firm-level data to examine the impact of a major crisis on resource allocation this paper combines and contributes to several strands of literature that have evolved fairly separately up until this point.
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