Introduction

Policies and Institutions that Distort Resource Allocation in Sub-Saharan Africa 4

Introduction

Institutions and economic policies may introduce distortions in the decision-making processes of production units (farms and firms) in Sub-Saharan Africa. In turn, these distortions in resource allocation across the different production units may affect not only the quantities they produce but also the economy’s aggregate level of output and productivity. The aggregate productivity losses associated with these distortionary policies and institutions, therefore, are transmitted through three distinct and interdependent channels (Restuccia and Rogerson 2017): • The technology channel, which affects the productivity of various production units • The selection channel, which affects the number of operating production units1 • The misallocation channel, which drives the allocation of capital and labor among operating production units away from an efficiency benchmark.

These three channels are not independent: any policy or institution that misallocates resources can potentially generate additional effects through both the selection and technology channels.

This chapter (a) examines various policies and institutions that affect the productivity of farms and firms; (b) evaluates their (static) impact on resource misallocation; and (c) assesses, to the extent possible, their dynamic effects through distorted occupational choices or inefficient technological decisions. Specifically, this chapter discusses a comprehensive, but by no means exhaustive, set of potentially distortionary policies and institutions (summarized in table 4.1) that are classified by three potential sources of misallocation (Restuccia and Rogerson 2017): • Market imperfections. The analysis discusses (a) credit market imperfections (that is, restricted access to finance due to the lack of collateral); (b) lack of land titling, affecting the allocation of land; and (c) information frictions, affecting producers that are not connected to markets or farmers who have inadequate information on weather forecasts. • Statutory provisions. Also discussed are size-dependent policies—more specifically, tax provisions and regulations that depend on features of the different production units (say, size and age) as well as trade policies that protect specific categories of goods.