Plant Turnover and Structural Reforms in Colombia

Abstract

In a healthy economy, plant turnover increases aggregate productivity because efficient producers are more likely to survive. Given high entry and exit rates and the potential importance of turnover in accounting for aggregate productivity, in this paper we examine the determinants of plant exits and then examine how exits and other forms of output reallocation contribute to aggregate productivity. Using a unique plant-level longitudinal data set for Colombia for the period 1982-98, we examine the role of productivity and demand as well as input costs in determining plant exits. Moreover, given the important structural reforms introduced in Colombia during the early 1990s, we explore whether and how plant survival changed after these reforms. Our data permit measurement of plant-level quantities and prices, which allows us to decompose productivity and demand shocks and, in turn, to estimate the effects of these fundamentals on plant exit. We find that higher productivity, higher demand, and lower input prices decrease the probability of plant exit. We also find that the importance of physical efficiency and costs in determining exits increases after the introduction of structural reforms. Finally, a decomposition of aggregate productivity suggests that reallocation through entry and exit is important in accounting for the increase in aggregate productivity after the introduction of structural reforms. Copyright 2006, International Monetary Fund