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Asia and Pacific > India

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Cover IMF Working Papers
Resource Misallocation in India: The Role of Cross-State Labor Market Reform
Mr. Adil Mohommad
,
Charlotte Sandoz
, and
Piyaporn Sodsriwiboon
At the macro level, productivity is driven by technology and the efficiency of resource allocation, as outcomes of firms’ decision making. The relatively high level of resource misallocation in India’s formal manufacturing sector is well documented. We build on this research to further investigate the drivers of misallocation, exploiting micro-level variation across Indian states. We find that states with less rigid labor markets have lesser misallocation. We also examine the interaction of labor market rigidities with informality which is a key feature of India’s labor markets. Our results suggest that reducing labor market rigidities in states with high informality has a net positive effect on aggregate productivity.
Keywords:
Misallocation; India; Firm level; Structural reforms.; WP; price distortion; product market regulation; revenue TFP; balance sheet data; exit from informality; firm TFPR
Cover IMF Working Papers
Banks and Labor as Stakeholders: Impact on Economic Performance
Mr. Kenichi Ueda
and
Mr. Stijn Claessens
Traditionally, the impacts of the rights of financial institutions and workers on corporate performance have been analyzed independently. Yet, theory clearly indicates that the combination of relative powers of different stakeholders affects a firm overall performance. Using U.S. state level and state-industry level data, we investigate how output growth is affected by bank branch deregulation and employment protection occurring over 1972-1993. We find that financial liberalization positively impact overall state growth but greater workers' rights affects it ambiguously. At the industry level, however, employment protection promotes those industries that are more knowledge intensive, while the effect of financial liberalization does not differ across industries that vary in external financing dependency. The results hold controlling for changes in shareholders' rights, which itself is not significant. The findings suggest that financial liberalization operates mostly through an efficiency channel, better reallocating resources across sectors, while employment protection creates higher incentives and encourages more sector-specific, human capital investments. Overall, the results show that the strength of stakeholders' protection affects performance through efficiency channels and provide support for a stakeholders' view of corporate governance.
Keywords:
WP; output growth; minimum wage; public policy; firm performance