Sunday, November 20, 2011

Crisis and creative destruction

Well, economic crisis does not necessarily mean exit of uncompetitive firms and entry of competitive ones. This is shown by Hallward-Driemeier and Rijkers in a new paper whose abstract is as follows:

Using 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.