We derive a measure of the degree of inefficiency of the production structure of any economy by castig its optimal sectoral composition as the outcome of a portfolio allocation problem, in the spirit of Koren and Tenreyro (2004). We use the framework to construct measures of inefficiency using sectoral data for 194 countries, document the patterns of inefficiency by region, income group etc., and investigate which countries might have reasons to pursue \"industrial policies\" to improve on the allocation of economic activity across sectors. We then undertake an exploratory analysis of the empirical content of our measure of inefficiency, and find that it correlates negatively with measures of good institutions and governance, broadly in line with the evidence in Hall and Jones (1999).
Berriel, T.; Bonomo, M.; Carvalho, C. Deindustrialization and Economic Diversification. Presented at Joint RES-SPR Conference on &#8220;Macroeconomic Challenges FacingLow-Income Countries,&#8221; Washington, DC, January 30&#8211;31, 2014. International Monetary Fund, Washington DC, USA (2014) 19 pp.
Deindustrialization and Economic Diversification