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To cite this article: Mushtaq Ahmad Malik & Tariq Masood (2021): A decomposition analysis of
total factor productivity growth in MENA countries: stochastic frontier analysis approach, Middle
East Development Journal, DOI: 10.1080/17938120.2021.1987147
RESEARCH ARTICLE
1. Introduction
Economic growth, as measured by the sustained increase in real Gross Domestic Product
(GDP), is considered as a major indicator of the economic wellbeing of a country. The con-
ventional theory of economic growth advocated labour and physical capital accumulation
as the two significant sources of growth in GDP. Any growth in GDP, neither attributed to
labour nor capital growth, were ascribed to productivity change. Solow’s (1957) neoclas-
sical growth theory measured productivity change as a residual and indorsed it exclusively
to technical change.1 According to the Solow model, an increase in total factor pro-
ductivity (TFP) or technical change is a major source of long-run economic growth. The
great virtue of Solow (1957) model is that it tried to whittle residual, which Abramovitz
(1956) labelled as a measure of our ignorance about the causes of economic growth.
The recent developments in production economics, however, acknowledge that technical
efficiency, allocative efficiency and scale efficiency also contribute to productivity growth.
Accordingly, the residual approach has been criticised for masquerading technical change
with technical efficiency, allocative efficiency and scale efficiency that lead to an overes-
timation of productivity growth ascribed to technical change. In this background, litera-
ture concerning productivity measurement and its decomposition into various
components began to flourish. More importantly, the development of the stochastic fron-
tier analysis (SFA) technique can circumvent masquerading effects of technical change,
technical efficiency, and scale efficiency on TFP. Contrary to the full efficiency assumption
of the neoclassical growth theory, SFA assumes economies do not fully utilise existing
technology because of various factors that lead to inefficiencies in production, which,
in turn, cause the economy to produce below the full efficiency level. SFA defines pro-
duction technology for a given economy using a stochastic production function where
output is expressed as a function of inputs, statistical noise and technical inefficiency,
which captures deviations from the frontier output (Carroll et al., 2011). Section three
below presents the intuition of the SFA approach.
The Middle East and North African region (henceforth, MENA)2 possess abundant
natural resources, prominent of which is oil and natural gas reserves. The region accounts
for approximately 61% and 45% of the world’s proven oil and gas reserves, respectively.
Economic theory argues that these factors contribute to economic growth in a positive
way. However, over the last three decades, the economic performance of the region
remained quite dismal and failed to generate high and sustained growth rates (Hakura,
2004). Most countries of the region continued to remain heavily dependent on oil reven-
ues and are vulnerable to significant fluctuations in the world energy market. For a
number of countries in the region, dependence on oil revenues has created a large
public sector with state-owned enterprises, causing crowding out of private sector devel-
opment and investment, high unemployment, pervasive corruption, poor economic pro-
spects for population, and rent-seeking (Yousef, 2004). The poor institutional quality,
legacy of political upheavals and wars, and civilian conflicts are also contributing
factors for the slow growth of countries across the region. Furthermore, the economies
of the MENA region compare poorly with East Asia, South Asia, Organisation of Economic
Cooperation and Development, and Latin America (Dasgupta et al., 2005). The past litera-
ture has mostly adopted ‘resource curse’ hypothesis to explain the dismal performance of
many resource-based economies (Sachs & Warner, 1995). It postulates a negative relation-
ship between natural resource wealth and economic growth. While analysing the impact
of oil resources on economic growth, Malik and Masood (in press) reported the existence
of a resource curse in the MENA region. Within a framework of the political economy of oil
and mineral resources, Al-Rawashdeh et al. (2013) proffer four channels for persistent
resource curse effect in the MENA region. They include corruption, lack of democracy,
foreign funds outflow, and military spending. These factors have adversely contributed
to total factor productivity growth and inhibited the overall growth performance of the
region.
2
MENA region is also widely known as West Asia and North Africa (WANA). For our purpose it includes following 19
countries until stated otherwise: Algeria, Bahrain, Kuwait, Saudi Arabia, Iraq, Iran, Oman, UAE, Qatar, Morocco, Syria,
Turkey, Lebanon, Palestine, Jordan, Egypt, Libya, Tunisia, and Yemen. Israel is excluded since its economic issues are
different from others and it is following a different economic model.
MIDDLE EAST DEVELOPMENT JOURNAL 3
The present research measures and decomposes TFP growth into three components,
namely technical change, technical efficiency, and scale efficiency in MENA countries
using the SFA technique. Besides, the paper investigates sources of output growth
within the Solow framework. It adds to the literature on whether technological change,
technical efficiency and scale efficiency have any significant role in the growth process
of MENA countries. The rest of the paper is organised as follows. The next section presents
a brief review of the related literature on the measurement and decomposition of TFP
growth. Model specification, decomposition of TFP, and variables and data sources are
discussed in the third section. Section four reports results of various specification tests,
estimation of SFA models, efficiency levels, and presents a decomposition of TFP
growth. The final section provides concluding remarks and policy recommendations.
2. Review of literature
In the economic growth literature, besides labour and capital, TFP is regarded as a signifi-
cant source of growth, fluctuations in trend growth and cross-national income differen-
tials. Solow (1957) opined that TFP could be estimated as a ‘residual’, i.e. the difference
between the growth rates of measured output and inputs. Earlier studies on economic
growth, including Mankiw et al. (1992) and Hall and Jones (1999), decomposed economic
growth between factor accumulation and TFP using a growth accounting approach or
residual approach. According to these studies, factor productivity is a significant source
of growth in per capita output. However, these studies were criticised because TFP as a
residual incorporates the effects of other determinants of growth that are not captured
by labour or capital inputs. Using stochastic frontier production model, Kumbhakar and
Lovell (2000) considered estimation and decomposition of productivity into technical
change, technical efficiency, allocative efficiency, and scale efficiency. The study con-
cluded that ignoring the contribution of various (in)efficiencies may give misleading esti-
mates of TFP. The technique of SFA can circumvent masquerading effects of technical
change, efficiency change, and scale effects on TFP. Nishimizu and Page (1982), Bauer
(1990), Kim and Han (2001), and Liao et al. (2007) applied SFA production models to
decompose sources of growth into technical progress, technical efficiency and scale
efficiency. The SFA technique has been widely applied to evaluate the efficiency and pro-
ductivity of firms as the unit of analysis. For example, the empirical studies of Pitt and Lee
(1981), Kumbhakar et al. (1991), Battese and Coelli (1995), and Saputra (2014) presented
frontier models to evaluate the efficiency and productivity growth of firms in a particular
industry. While Deliktas and Balcilar (2005), Pires and Garcia (2012) and Afonso and
St. Aubyn (2013) have estimated and decomposed TFP change into technical efficiency
change, scale effects and technical change using SFA for a sample of cross-country pro-
duction data. Further, the application of the frontier efficiency analysis in the banking
industry has been extensively utilised. For example, over the period 2000–2005, Matousek
et al. (2008) examined the cost-efficiency of the Turkish banking system. Abdel-Baki (2011)
examined the impact of banking reform and regulation on the cost efficiency of the
banking sector in Turkey and Egypt.
The empirical literature has also widely adopted the data envelopment analysis (DEA)
approach to measure TFP growth. The basic idea behind the DEA involves the construc-
tion of a piecewise frontier that envelope the observed inputs and output combinations
4 M. A. MALIK AND T. MASOOD
using linear programming. However, DEA ascribes deviations from frontier output to
inefficiencies only. It makes no provision for the noise component that causes
observed output itself to shift above or below the frontier output. Furthermore, DEA is
a non-parametric technique that does not make it appropriate for statistical hypothesis
testing.
The past literature on the sources of growth in MENA countries has more often
employed a growth accounting approach. Makdisi et al. (2006) extended the growth
accounting approach for eleven MENA countries for the 1960–1997 period to ascertain
the roles of factor accumulation and factor productivity in economic growth. Makdisi
et al. (2006) stated that the contribution of TFP in economic growth has been
lowest. The oil-dependent countries registered negative TFP growth, whereas few
non-oil and diversified economies of Egypt, Morocco, Tunisia, and Turkey registered
positive TFP growth. Pissarides and Ange Veganzones-Varoudakis (2006) discussed
labour markets and economic growth for selected countries of the MENA region
using the growth accounting approach. The study derived TFP as a residual while
incorporating human capital as a separate factor of production. TFP growth in all
the countries during the 1970–2000 period has been negative and compares poorly
with the African countries. These findings were corroborated by Abu-Qarn and Abu-
Bader (2007) through a study on the sources of growth in the MENA countries. The
growth accounting analysis indicated that the contribution of productivity to growth
during the 1960–98 period was negligible and even detrimental. In the debate on
factor accumulation versus productivity, Abu-Qarn and Abu-Bader (2007) pointed out
that factor accumulation is a significant source of economic performance in the
region. Bisat et al. (1997) examine the impact of investment and savings on the
long-run growth of the Arab economies for the 1971–1996 period. The study asserted
that improvements in the level and efficiency of investment, amount and sustainability
of savings are critical factors for increasing long-run growth performance. In the
growth accounting exercise, efficiency-related aspects of TFP were found to be low
and generally negative.
Loko and Diouf (2009) utilised a standard growth accounting approach for revisiting
the determinants of TFP growth in the Maghreb countries over the 1970–2007 period.
The study decomposed the growth of output per worker into the growth of TFP, physical
capital and human capital. TFP gains are found to depend on the rationalisation of the
public sector, attracting foreign direct investment, shifting resources from less productive
to more productive activities, and increasing the labour force participation rate of women.
The experience of three Maghreb countries (Algeria, Morocco and Tunisia) seems to be
encouraging that undertook economic reforms to achieve macroeconomic stability and
rising economic growth. Overall, the above-cited studies provide evidence that low TFP
growth in the MENA countries was a significant factor contributing to overall sluggish
growth performance. Quality of institutions, human capital, business environment,
bureaucracy, large share of public sectors in economic activity, and failure to improve
the efficiency of production processes over the years have negatively impacted TFP
growth in the MENA region. A good macroeconomic environment and institutions,
trade liberalisation, human capital development, and attractive business environment
form the core objectives for achieving higher productivity growth (Loko & Diouf, 2009).
MIDDLE EAST DEVELOPMENT JOURNAL 5
However, all of the above-cited works related to the MENA region approached the
problem of TFP measurement by employing a growth accounting approach. Nonetheless,
these exercises provided misleading estimates of TFP growth as their estimates confound
the effects of technical change, technical efficiency and scale efficiency. The present study
aims to fill the gap and uses the SFA as a more robust method to measure and decompose
TFP into technical change, technical efficiency and scale efficiency.
3
The observed output tend to lie beneath deterministic frontier, f (t, xit ; b) due to the presence of inefficiency effects. It
can lie above the frontier if and only if noise effect is positive and larger than inefficiency effects
i.e yit ≥ f (t, xit ; b) iff (vi − ui) . 0.
4
Cobb-Douglas production function requires estimation of only few parameters and is easy to interpret. However, Cobb-
Douglas production function assumes that input elasticities or returns to scale are same across all of the countries and
also assumes elasticity of substitution is equal to one. On the other hand, the translog production imposes no restric-
tions on returns to scale or substitution elasticities. More importantly it allows for estimating scale efficiency effects and
non-neutral technical change. However, translog function is susceptible to multicollinearity and degrees of freedom
problems.
6 M. A. MALIK AND T. MASOOD
(h), and non-neutral technical change, model (1) can be expressed as follows:
Time index t, interacted with other inputs, explicitly accommodates the possibility of non-
neutral technical progress. Technical progress is input j-using (saving) if b jt ( j = l, k, h) is
positive (negative), and technical progress is neutral if all b jt s are equal to zero. Ineffi-
ciency term, uit is free to vary over time. Estimation of parameters of the composed-
error translog frontier model (2) by ordinary least square (OLS) is biased because of the
non-zero mean of uit term.5 Two commonly used alternative methods are corrected
OLS and modified OLS. However, corrected OLS and modified OLS are deterministic
models and attribute all deviations to inefficiency term only, disregarding the effect of
the noise term. The SFA model is usually estimated by the maximum likelihood estimation
method, which requires distributional assumptions of the error term. Most often, the fol-
lowing assumptions are made:
1. vit N (0, s2v ), i.e. the noise term follows a normal distribution with zero mean and con-
stant variance
2. uit N+ (m, s2u ), i.e. the inefficiency term follows a half-normal distribution if m = 0 or a
truncated normal distribution if m = 0.6
3. Cov(vit uit ) = Cov(vit xit ) = Cov(uit xit ) = 0, i.e. vit and uit are distributed independently
of each other and the regressors.
where ui N+ (m, s2u ); h is an unknown parameter and represents the rate of inefficiency
change over time. T denotes the last period in the ith panel. The underlying model des-
ignates terminal year’s inefficiency, ui , as a benchmark. Before period T, inefficiency is
given as the product of terminal year’s inefficiency and exp{−h(t − T)}. If h < 0 (h > 0),
5
Method of Least squares is not consistent with the definition of production frontier, because this method estimates the
mean output rather than the maximum output given quantities of inputs. Moreover, method of least squares does not
take inefficiency into account at all, but assumes all deviations from the estimated line are of a purely random nature.
6
We can use Likelihood Ratio statistic to test H0: m = 0, half normal distribution of inefficiency effects against truncated-
normal, exponential or gamma. These assumptions results in a left-skewed distribution of total error term.
MIDDLE EAST DEVELOPMENT JOURNAL 7
inefficiencies will fall (increase) over time. In case h=0, technical inefficiency would remain
constant over the years, and the time-varying model (3) will be reduced to time-invariant
model. Although intuitionally simple, model (3) is impractical by construction as it
imposes a monotonic pattern of inefficiency for all countries. In other words, the
unknown parameter, h is assumed to be the same for all countries. Again the model pro-
duces a time-invariant ranking of the countries.7 We can use LR statistic to test the
hypothesis of time-invariant inefficiency by testing the null hypothesis of H0: h = 0.
While Battese and Coelli (1992) model allow for time-specific variability of ineffi-
ciency term in a monotonic behaviour, it fails to take care of time-invariant heterogen-
eity in production technology of the individual countries. These time-invariant
individual effects are assumed to be random over time. This assumption reflects that
the effects of time-invariant heterogeneity may be masquerading on inefficiency,
thereby leading to upward biased estimates of inefficiency. Greene (2005a) approached
this issue through a time-varying stochastic frontier model with country-specific inter-
cepts (ai ) as follows
lnyit = f (t, lnxit ; ai , b).exp (vit ) exp(−uit ) (4)
In this model, both individual-specific time-invariant unobserved heterogeneity (ai ) and
time-varying inefficiency effects (uit ) as well as noise effects (vit ) are explicitly con-
sidered. If ai are assumed to be fixed parameters independent of inefficiency(uit ),
then model (4) is known as a true fixed effects model (Greene, 2005a, b) and is
given as:
K
lnyit = ai + bk lnxit + vit − uit (5)
k=1
In the true fixed effects model, unobserved country-specific effects are directly cap-
tured in the production specification using country-specific dummy variables. On the
other hand, if ai are random country-specific effects that are assumed to follow a
normal distribution, then model (4) is known as true random effects model and is
given as:
K
lnyit = a + mi + bk lnxit + vit − uit (6)
k=1
as follows:
Multiply growth rates8 of inputs with labour, physical capital and human capital elas-
ticity, respectively, and adding them will provide the estimate of the rate of change in
factor accumulation:
+̇ +̇ ˙
kit lit hit
factor accumulation = ek el hl
kit lit hit
The total differential of the model (2) gives the equation for technical change, T, as
∂lnyit
TD = = bt + btt t + bkt ln (kit ) + blt ln (lit ) + bht ln(hit ) (10)
∂t
where, TD, − 0, shows technical change will shift production frontier downward,
.
unchanged or upward over time. Partial derivatives of equation (10) with respect to
labour and capital provides estimates of labour-augmenting and capital-augmenting
technical change. Further, the output-oriented measure of technical efficiency (TE) is
given by the ratio of observed output and frontier output, such as
with TE,−
0, shows that technical inefficiency decreases, remains invariant or increases
.
over time. Equivalently, equation (11) measures the degree to which the economy
moves towards or away from the frontier (catch-up effect). Taking the total derivative
of the deterministic part of the model (2), as follows:
=
˙ +̇ +̇ ˙
y kit lit hit
TD + ek el eh − u̇ (12)
y kit lit hit
shows that growth in the frontier output is affected by three factors, namely (1) technical
change, (2) factor accumulation, and (3) inefficiency effects. Using the Divisia output
index, total factor productivity growth is given by
−̇ −̇ −̇ ˙
y k l h
TFP growth = sk sl sh (13)
y k l h
where sk , sl , sh 9 are observed income shares of physical capital, labour and human capital,
8
Note that
r.k the dot
w.lover the variable
w.h indicates its rate of change over the years (annual change).
9
sk = , sl = and sh = , where r and w denotes the price of capital and labour respectively.
y y y
MIDDLE EAST DEVELOPMENT JOURNAL 9
+̇ +̇ ˙ ˙ −̇ ˙
kit lit hit k l h
TFP growth = TD + ek el eh − u̇ − sk − sl sh
kit lit hit k l h
3.2. Data
We employed a balanced panel consisting of annual time series for real GDP at chained
Purchasing Power Parity (in Million 2011 US $), physical capital, labour, and human capital.
The capital stock is the real amount of tangible fixed assets and has been constructed by
using a perpetual inventory method. The total number of persons engaged in economic
activity is used to estimate labour input. Human capital is based on average years of
schooling for the population above 15 years and an assumed rate of return as suggested
by Psacharopoulos (1994) and used in Malik and Masood (2020). As regards the data
sources, we employed the latest version of Penn World Tables 9(1) (Feenstra et al.,
2015). Even though Penn World Table reports data from 1950 onwards, most of the
MENA countries have continuous data only from 1970 onwards. Therefore, the sample
covers a time period of 1970–2016, for which data is available for 14 countries.10
Table 1 below describes major variables used in the empirical analysis.
10
Algeria, Bahrain, Egypt, Iran, Iraq, Jordan, Kuwait, Morocco, Qatar, Saudi Arabia, Syria, Tunisia, Turkey, and United Arab
Emirates (UAE). Among these, oil rich countries include Algeria, Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and UAE.
On the other hand, non-oil countries include Egypt, Jordan, Morocco, Tunisia, Turkey, and Syria.
10 M. A. MALIK AND T. MASOOD
function under the null and alternative hypotheses, respectively. The null hypothesis is
based on the restricted model, while the alternative hypothesis is based on the unrest-
ricted model. Under the null hypothesis, l follows χ 2 (or mixed χ 2) distribution with
degrees of freedom equal to the number of restrictions in the test.
The first null hypothesis tests the Cobb–Douglas model against the translog model (the
CD is nested within the translog model). The null hypothesis of the test assumes the
Cobb–Douglas model is appropriate, while the alternative hypothesis assumes the trans-
log model is a more appropriate specification of the model (1). Method of least squares is
employed for this purpose. Table 2 shows that the LR test value of 462.56 is greater than
the tabulated values of χ2(11) at 5% significance level. Thus Cobb–Douglas functional
form is rejected in favour of non-linear translog production frontier.
The second null hypothesis tests for the absence of technical inefficiency11 i.e. H0 : s2u = 0
against the alternative H1 : s2u . 0. This test can be performed as a likelihood ratio test. Here
we compare the parameter estimates in an OLS model, the null hypothesis where there is no
difference between the countries in terms of efficiency, with the estimates of the truncated
version of stochastic frontier model (time-varying decay model), the alternative hypothesis
where there is a difference; we can compare OLS with SFA. The test has asymptotic chi-
square distribution for which the critical values are given by Kodde and Palm (1986). If the
null hypothesis is accepted, we can conclude that there is no evidence of inefficiency in
the data and the frontier model reduces to a standard production function. The results, as
per Table 2, show that the LR test value of 209.73 is greater than the critical value of χ2(1)
at 5% significance level and we, therefore, reject the null hypothesis. Furthermore, we can
also test whether or not the stochastic frontier specification of the model (2) is valid. We esti-
mate the model under the alternative hypothesis in which s2u . 0; that is, we estimate the
model as the SFA model. Column two in Table 3 reports the estimation results of the stochas-
tic frontier model using Battese and Coelli (1992). The estimate of g = 0.7549 is high,
meaning that much of the variation (about 75%) in the composite error term is due to the
technical inefficiency component. It shows the importance of incorporating inefficiency
effects into production function to account that deviations of actual output from the frontier
result from inefficiency and noise effects.
The null hypothesis that there is no technical change (H0 :bt = btt = bkt =
blt = bht = 0), and the null hypothesis that technical change is Hicks neutral
(H0 :bkt = blt = bht = 0) are both rejected at the 5% significance level. Furthermore, the
null hypothesis that bkt = 0 (Harrod neutral model) and blt = 0 (Solow neutral model)
are also rejected at the 5% significance level. It suggests the existence of non-neutral tech-
nical progress in MENA countries as a whole. This observation is confirmed by the fact that
estimates of bt , btt , bkt and blt are found to be statistically significant (see Table 3).
The fourth null hypothesis, that technical inefficiency term is time-invariant (H0 :h = 0)
is rejected as the value of the LR test statistic is greater than the critical value of χ2(1) at 5%
significance level. It implies that the time-varying decay model is preferred. As a further
check, in Table 3, the estimate of h for Battese and Coelli (1992) model is −0.031 and stat-
istically significant at 1% significance level. It implies that technical inefficiency is not time-
invariant, given the time-varying specification of the stochastic frontier model defined by
11
The test uses the parametrisation of Battese and Corra (1997), in which the percentage of total variation in the output
from the frontier level due to inefficiency can be found from g = s2u / s2 where, s2 = s2u + s2v .
12 M. A. MALIK AND T. MASOOD
equation (3). This result reveals that the average inefficiency decreases over the 1970–
2016 sample period at a rate of 3.1% per annum.
To check for the presence of cross-country unobserved heterogeneity, fourth column
of Table 3 reports estimates of the ‘true’ effects model of Greene (2005a, b). The value of
theta (u) in TRE model accounts for cross country unobserved heterogeneity. The table
shows that the estimate of u is statistically significant at 1%. This result confirms that
Green’s (2005a, b) true effects model is more appropriate among time-varying models.
The next step is to check whether true fixed effects or true random effects model is con-
sistent with our data. To this end, the Hausman (1978) test is usually employed. The test
maintains the null hypothesis that random effects model fits the data well. The fifth
MIDDLE EAST DEVELOPMENT JOURNAL 13
hypothesis in Table 2 above shows that the χ2 statistic comparing all the coefficients has a
small p-value (0.000). Therefore, we can reject the random effects model for being incon-
sistent in favour of a fixed effects model. Again, given that the MENA region includes both
oil exporters, oil importers, as well as labour surplus and deficient countries, the true fixed
effects model takes such kind of heterogeneity into account.
Sixth null hypothesis relates to the distributional assumption of the inefficiency term
between the half-normal and truncated normal distribution. We can test the null hypoth-
esis of H0: m=0, implying that half-normal distribution is more appropriate against the
alternative of truncated normal distribution. The test can be performed as a LR test.
Here we compare parameter estimates of the true fixed effects model under half-
normal distribution for inefficiency, the null hypothesis, with the estimates of true fixed
effects model under truncated normal distribution for inefficiency, the alternative hypoth-
esis; the half-normal model is nested in the truncated model. From Table 2, we found that
half-normal distribution is rejected in favour of the truncated normal model as LR test
value is greater than the critical value at 5% significance level.
In the next section, we will discuss input elasticities, efficiency levels and finally,
measurement and decomposition of TFP using true fixed effects model under the
assumption that inefficiency effects follow truncated normal distribution.
productivity. It shows how output varies in response to changes in all inputs. Table 4
shows that increasing returns to scale are prevalent across the region. We also tested
the null hypothesis that the region has constant returns to scale technology using the
Z-test against the alternative hypothesis that technology is not constant returns to
scale. The null hypothesis is rejected at 1% significance level. Thus production function
exhibits increasing returns to scale as depicted in Table 4.
Table 5 presents the results of the sources of output growth in each country. Growth in
output is decomposed into growth owing to labour, physical capital, human capital, and
TFP. Overall output growth increased at an average rate of 5.07% per annum. A substan-
tial portion of this growth has been driven by physical capital growth of 4.93%. Labour
and human capital inputs registered a growth of 0.69% and 0.13%, respectively. More-
over, TFP growth indicates the degree to which frontier output grows over time while
keeping inputs constant. For the MENA region as a whole, average annual TFP growth
is around 0.846%. It implies that during the sample period of 1970–2016, MENA countries
registered a shift in frontier output. Further, the same picture is present across the oil
country and non-oil country groups. The result supports the findings of Christopoulos
and McAdam (2019) that TFP growth is also the main source of output growth in the
Arab region. Thus, over the sample period of 1970–2016, for MENA region, output
growth was essentially due to growth in factor accumulation, while TFP remained low
though positive. However, most of the non-oil countries reported TFP growth above
the regional average. Jordan enjoyed a real growth rate of 6.36% and also enjoyed the
highest TFP growth of 1.07% during the entire period in the region. On the other hand,
oil-producing countries of the region reported TFP growth below the regional and
non-oil countries average. Therefore, Table 5 shows that differences in TFP growth
might explain large differences in output growth across the countries in the region.
These results contradict the studies of Makdisi et al. (2006), Pissarides and Ange Vegan-
zones-Varoudakis (2006) and Abu-Qarn and Abu-Bader (2007) that employed a residual
approach to measure TFP growth and reported negative TFP growth for the MENA
region as a whole.
MIDDLE EAST DEVELOPMENT JOURNAL 15
Table 6. TFP and its components in per cents: average annual percentage change
Country TD TE Scale Eff. TFP Unexplained
Algeria −0.0318 0.8639 0.0415 0.8787 −0.0051
Bahrain 0.0132 0.8482 0.0670 0.9218 0.0065
Egypt 0.0217 0.8779 0.0053 0.9124 −0.0075
Iran −0.0322 0.8063 0.0543 0.8323 −0.0039
Iraq −0.0141 0.7819 0.0322 0.8098 −0.0098
Jordan 0.0320 0.8680 0.1738 1.0705 0.0032
Kuwait −0.0029 0.7258 0.0638 0.7748 0.0119
Morocco −0.0323 0.8855 0.0612 0.9205 −0.0061
Qatar 0.0144 0.8333 −0.1075 0.7320 0.0082
Saudi Arabia −0.0004 0.8474 −0.0092 0.8394 −0.0016
Syria 0.0289 0.8677 −0.4246 0.4774 −0.0054
Tunisia −0.0070 0.8662 0.0231 0.8879 −0.0056
Turkey −0.0008 0.8766 0.0236 0.9047 −0.0053
UAE −0.0041 0.8486 0.0416 0.8826 0.0035
MENA −0.0011 0.8427 0.0033 0.8461 −0.0012
Oil-countries −0.0072 0.8194 0.0230 0.8339 0.0012
Non-oil countries 0.0071 0.8736 −0.0230 0.8623 −0.0045
TD = technical chsnge, TE = technical efficiency, Scale Eff. = scale efficiency, TFP = total factor productivity.
Source: authors own compilations.
In Table 6, we present TFP growth and its decomposition into technical progress, tech-
nical efficiency and scale efficiency. Technical efficiency denotes catch-up effects towards
the production frontier. All countries are assumed to have access to the same technology.
For each country in the sample, total factor productivity change is the summation of tech-
nical progress, technical efficiency and scale efficiency. These numbers are the averages
calculated for the overall sample period of 1970–2016. The careful examination of
Table 6 reveals certain interesting results. There was an average annual increase in TFP
of 0.8462% over time. Technical change has a negative impact on TFP growth, implying
an inward shift of the frontier. But the results indicate that the MENA region is character-
ised by average annual technical efficiency of around 0.84%. It suggests that, on average,
the aggregate output can increase further by 16% without increasing the input level.
These results indicate that improvements in efficiency are the most important factor in
improving the TFP growth across the MENA region over time. These results are in line
with Christopoulos and McAdam (2019). Figure 1 shows the distribution of calculated
efficiencies. The figure shows that most of the countries have efficiency values
between 0.85–9.5. It implies that the countries produce between 0.85 and 0.95% of the
maximum attainable output. As for the scale efficiency is concerned, most of the countries
in the region show a positive contribution of scale efficiency in TFP growth which,
although small in magnitude, still improves the overall rates of TFP.
So far as sub-periods are concerned, Table 7 presents changes in TFP and its com-
ponents over the past four decades. The positive growth in TFP during the 1970s
across the countries was due to rapid growth in technical efficiency, whereas technical
change recorded negative growth. Further, the scale efficiency is found to be positive
(though small in magnitude) across the region with the exception of Egypt, Saudi
Arabia, Syria, and UAE. The slowdown in TFP growth experienced during the 1980s was
due to a significant decline in technical efficiency and technical change. The scale
efficiency is found to be negligible during the 1990s. In most countries, the recovery of
the 1990s is associated with an improvement in technical efficiency, technical change
16 M. A. MALIK AND T. MASOOD
and scale efficiency. Moreover, during the 2000s, TFP registered positive growth due to
rise in technical efficiency across the countries, but scale efficiency registered a negative
change. These findings suggest that at an aggregate level, the MENA region is character-
ised by positive TFP, contribution of various components in TFP growth has been mixed
over these past four decades with the exception of technical progress that registered
negative growth.
17
18 M. A. MALIK AND T. MASOOD
Declarations
Compliance with Ethical Standards: Our paper contains no matter that is scandalous,
obscene, fraud, plagiarism, libellous, or otherwise contrary to law. We followed the pub-
lication ethics.
Conflict of Interest: The authors declare that they have no conflict of interest.
Ethical Approval: This article does not contain any studies with human participants per-
formed by any of the authors.
Disclosure statement
No potential conflict of interest was reported by the author(s).
ORCID
Mushtaq Ahmad Malik http://orcid.org/0000-0003-0978-174X
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