103073 These numbers clearly suggest that Turkey has reduced within-sector misallocation over time, more rapidly in the early 2000s and only slowly later. The timing of the improvements in misallocation and subsequent stagnation suggests that the reforms of the early 2000s helped improve resource allocation. The reform momentum after the 2001 crisis considerably expanded the role of the private sector in the economy, building on the creation of independent regulatory agencies between 1999 and 2002. The EU accession process, as well as successive IMF and World Bank supported programs, provided important anchors to the reform efforts in the first half of the decade. The institutional convergence with EU standards paid important economic dividends. 7 However, the reform momentum slowed significantly after 2007. From this analysis, we can conclude that one way to continue productivity growth in Turkey in the face of a slow-down of between-sector structural change is to continue and re-invigorate the reform program to reduce distortions. Leveling the playing field and making sure markets function effectively opens the door for more TFP growth from the reduction in misallocation of resources. How does Turkey's performance compare to other countries? To answer this question, we compared our measure for firm-specific distortions in Turkey in 2013 with similar measures for the United States, calculated from data for 1997, China for 2005, and India for 1994 from the literature. In Table 1, the dispersion of firm-specific TFPR is represented by its standard deviation (S.D.). The dispersion is highest in Turkey, which is followed by India, China, and the U.S. What is the potential for TFP growth from a reduction in misallocation? We measured how much aggregate manufacturing TFP in Turkey could increase if capital and labor were reallocated to equalize marginal products across firms within each four-digit sector to the extent observed in the United States. The United States is a critical benchmark, because there may be measurement error and factors omitted from the model that generate gaps in marginal products even in a comparatively undistorted country such as the United States. Table 1 shows that for Turkey, moving to 'U.S. efficiency' could have boosted TFP by 19.5 percent in 2013. We can safely assume that the U.S. productivity dispersion improved since 1997, and the gap and potential for improvement for Turkey accordingly is larger. Compared to the 1997 U.S. benchmark, Turkey's allocative efficiency improved by 7.6 percent from 2004 to 2007, or 2.5 percent per year. A determined implementation of second-generation reforms over the next few years could produce similar improvements, adding around 1.8 percentage points to aggregate manufacturing productivity growth in Turkey, assuming a moderate speed of convergence to U.S efficiency. This would constitute an important boost to manufacturing productivity growth, which nearly stagnated in recent years. Table 1: Cross-Country Misallocation Comparison Country Year TFPR Standard Deviation TFP Gains From Moving to 'U.S. Efficiency' United States 1997 0.49 China 2005 0.63 30.6 India 1994 0.67 59.2 Turkey 2013 0.76 19.5 References: 1. Foster, Lucia, John Haltiwanger, and Chad Syverson (2008}. Reallocation, Firm Turnover, and Efficiency: Selection and Productivity or Profitability. American Economic Review, 98 (2008), 394-425. 2. Hsieh, C.-T. and Klenow, P. J. (2009). Misallocation and manufacturing TFP in China and India. The Quarterly Journal of Economics, 124(4):1403-1448. 3. Nguyen, H., Yilmaz, A., Taskin, T. (2016). Forthcoming. 4. Restuccia, D. and Rogerson, R. (2008). Policy distortions and aggregate productivity with heterogeneous establishments. Review of Economic Dynamics, 11 (4):707-720. 5. World Bank (2014}. Turkey's Transitions. Washington, D.C.: World Bank Group. 7 Please see World Bank (2014) for a detailed discussion of reform progress through the 2000's, and implications for the Turkish economy.