Every Cloud Has a Silver Lining: Cleansing Effects of the Portuguese Financial Crisis*
| Author | Carlos Robalo Marques,Daniel A. Dias |
| Published date | 01 April 2021 |
| DOI | http://doi.org/10.1111/obes.12391 |
| Date | 01 April 2021 |
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©2020 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 83, 2 (2021) 0305–9049
doi: 10.1111/obes.12391
Every Cloud Has a Silver Lining: Cleansing Effects of
the Portuguese Financial Crisis*
Daniel A. Dias† and Carlos Robalo Marques‡
†Board of Governors of the Federal Reserve System and CEMAPRE, Washington, District
of Columbia 20551, USA (e-mail: daniel.dias@frb.gov)
‡Economic and Research Department, Banco de Portugal, Lisbon, 1150, Portugal
(e-mail: cmrmarques@bportugal.pt)
Abstract
Using firm-level data, this paper shows that the Portuguese financial crisis was a period
of intensified productivity-enhancing reallocation. Aggregate productivity gains, both in
manufacturing and services, came from relatively higher contributions of entering and
exiting firms and from reallocation of resources between surviving firms.At the micro level,
the crisis reduced the probability of survival for high- and low-productivityfir ms, but it hit
low-productivity firms disproportionately harder.We also found important heterogeneous
effects across economic sectors regarding input reallocation that underline the importance
of using data for the entire economy whenever similar studies are conducted.
I. Introduction
This paper studies the effect of the 2011—12 Portuguese financial crisis on productivity
dynamics. More specifically, we investigate whether this crisis had a cleansing effect by
improving the allocation of resources in the economyfrom low- to high-productivity firms,
or a scarring effect by exacerbating market imperfections and driving high-productivity
firms out of the market.
The empirical evidence on the effect of crises on productivity dynamics is mixed, with
conclusions varying across countries. For instance, Foster,Haltiwanger and Krizan (2001)
for the United States, and Casacuberta and Gandelman (2015) for Uruguay conclude that
crises have been times of productivity enhancing reallocation, while Nishimura, Nakajima
and Kiyota (2005) for Japan, Hallward-Driemeier and Rijkers (2013) for Indonesia, and
Eslava et al. (2015) for Colombia find scarring effects of recessions stemming from credit
market imperfections. More recently, Foster, Grim and Haltiwanger (2016) find that the
intensity of reallocation fell rather than rose in the United States during the Great Recession
JEL Classification numbers: D24, E32, L25, O47.
*The authors thank, without implicating, the Editor Jonathan Temple and two anonymous Reviewers for very
helpful suggestions. The analyses, opinions and findings of this paper represent the views of the authors, whichare
not necessarily those of Banco de Portugal, the Eurosystem, the Board of Governors of the FederalReserve System
or of any other person associated with the Federal Reserve System.
Cleansing effects of the Portuguese crisis 353
(2007—09) and that the reallocation that took place was less productivity-enhancing than
in prior recessions.
An important limitation of these contributions is that, due to data availability, the em-
pirical evidence is restricted to the manufacturing sector. In many countries, this sector
contributes less than 20% to GDP while the service sector contributes around 80%. More-
over, the two sectors have very distinct characteristics. Thus, if crises have materially
different effects on the two sectors, those studies that are only based on data from the
manufacturing sector may be providing a biased view of the effect of crises on aggregate
productivity dynamics.
Our paper contributes to the literature by bringing forward novelevidence on the conse-
quences of financial crises on resource reallocation and productivity,involving the various
sectors of the economy. Using micro-level data for the Portuguese economy, we investigate
how the patterns of resource reallocation changed during the Portuguese financial crisis in
terms of intensity and the extent to which it was productivity-enhancing and long-lasting.
More specifically,this paper addresses the following questions: Did the patterns of resource
reallocation change during the 2011-12 financial crisis? Were these changes productivity
enhancing and long-lasting? Were they common or different across broadly-defined sectors
(manufacturing vs. services)? Is there evidence of a negative effect of credit constraints on
productivity dynamics?
In order to answer these questions, we study the dynamics of two measures of pro-
ductivity - labour productivity computed from value added and total factor productivity
(TFP) computed from gross output – during the pre-crisis, crisis, and recovery periods.
Following the literature, we decompose productivity according to the contributions of
the different types of firms (surviving, entering, and exiting firms) and estimate regres-
sions on exit, entry, and input growth to evaluate the implications of the crisis on input
reallocation.
Our results suggest that the 2011—12 financial crisis in Portugal had an overall cleans-
ing effect on the Portuguese economy, and the same is true for the manufacturing and
service sectors individually. At the aggregate or macro level, we find that the contribu-
tion for productivity growth of the reallocation of resources increased, suggesting that the
crisis was a period of intensified productivity-enhancing reallocation. At the micro level,
we find that the crisis reduced the probability of survival for high- and low-productivity
firms but hit low-productivity firms disproportionately harder, in line with the cleansing
hypothesis. However, the protective effect of productivity - namely the negative effect
of productivity on the probability of exit - increased significantly more in relative terms
in manufacturing than in the service sector. In the manufacturing sector, new firms also
emerge as relativelymore productive during and after the crisis, in contrast with the service
sector.
From firm-level regressions, we also find that the crisis affected the reallocation of
labour and capital differently. We document a strengthening of the correlation between pro-
ductivity and employment growth but a weakening of the correlation between productivity
and capital growth. Again, these aggregate results reflect different sectoral developments.
In the manufacturing sector, the allocative efficiencyof employment and capital improved,
but in the service sector, especially in nontradable services, we document an attenuation
of the relationship between productivity and capital growth.
©2020 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
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