Algeria - A medium-term macroeconomic strategy for Algeria : sustaining faster growth with economic and social stability (Vol. 2 of 2) : Annexes

Report No. 26005-AL People's Democratic Republic of Algeria A Medium-Term Macroeconomic Strategy For Algeria Sustaining Faster Growth With Economic and Social Stability (In Two Volumes) Volume II: Annexes May 2003 Social and Economic Development Group Middle East and North Africa Region Document of the World Bank  FISCAL YEAR 2003 July I - June 30 Vice President: Jean-Louis Sarbib Sector Director Mustapha Nabli Country Director: Theodore Ahlers Sector Manager Pedro Alba Task Team Leader Anstomene Varoudakis This report was prepared by a team comprising: Sandeep Mahajan, Paul Moreno-Lopez, Shane Streifel, Aristomene Varoudakis (main authors), with significant contributions by Punam Chuhan, Emrle Finateu, Annette de Kleine, Christian Schmidt, Dimitri Vittas, and Leila Zlaoui To the report also contnbuted Najy Benhassine, Caroline Farah, and Robert Keyfitz. Extemnal contributions were provided by Daniel Astier, Ali Bayar, Ghazi Ben-Ahmed, and Said Ighilahriz. Manuel Felix and Ingnd Ivins provided research assistance. Peer reviewers were Craig Burnside and Shahrokh Fardoust. Guidance was provided by Mustapha Nabli (Sector Director and Chief Economist), Teodore Ahlers and Christian Delvoie (Country Directors) and Pedro Alba (Sector Manager) The counterpart team in Algena provided valuable comments in the discussion of the prelimunary report in September 2002 Support from the counterpart team in the provision of information is also gratefully acknowledged-particularly from Office National des Statistiques; Direction Generale des Etudes et de la Prevision, Direction Generale du Tresor; Minist6re de l'Energie; Banque d'Alg6ne; Caisse Nationale des Retraites. The team also benefited from advice/comments from Zoubida Allaoua, Ahmed Benbitour, Regina Bendokat, Philippe Callier (IMF), Paul Duran (IMF), Olivier Hassler, Abdelouahab Keramane, Alain Laurin, Michel Lazare (IMF), Djamal Mostefai, Rolando Ossowski (IMF), Setareh Razmara, Sergei Shatalov, Kutlu Somel, Mazen Soueid (IMF). Khalid Alouane, Isabelle Chaal, Marie-Hugette Osselyn, and Brigitte Wiss contributed to the production of the document.  Democratic and Popular Republic of Algeria A Medium-Term Macroeconomic Strategy for Algeria Table of Contents VOLUME 11 ANNEXES CHAPTER 1 - ANNEXES .......................................... 1 Annex 1.1: Background data on long-term growth and the quality of institutions .... 1 Annex 1.2: Methodology of growth accounting ......................................................... 7 Annex 1.3: Measuring macroeconomic volatility in Algeria ..................................... 9 Annex 1.4: A framework for assessing factors of long-term growth performance in Algeria ...........................................................1 1 Annex 1.5: Accounting for long-term "growth crashes" ............................................ 15 Annex 1.5: Accounting for long-term "growth crashes" ............................................ 15 Annex 1.6: Simulating the impact of oil shocks with a Computable General Equilibrium model for Algeria ........................................................... 19 CHAPTER 2 - A NNEXES ................................... ............ 27 Annex 2.1: The privatization method and the quality of the overall business climate are key to successful restructuring ......................................................... 27 Annex 2.2: The political economy of reforms can make or break the transition ..... 30 Annex 2.3: The design of state bank restructuring is key to future profitability of banks and to success of reform program ................................................ 35 Annex 2.4: Trade liberalization in transition economies has been an important factor of market discipline ............................................................. 39 Annex 2.5: FDI and trade integration in transition economies ................................. 41 Annex 2.6: Reducing the cost of infrastructure services and basic inputs to the business sector ............................................................. 44 Annex 2.7: Recent reforms in Algeria's energy and hydrocarbon sectors ............... 49 Annex 2.8: Algeria's non-hydrocarbon exports ....................................................... 51 CHAPTER 3 - ANNEXES ... ............... ....................... 53 Annex 3.1: Macroeconomic stability and growth: The role of fiscal performance.. 53 Annex 3.2: A framework to assess medium-term fiscal sustainability . ................... 55 Annex 3.3: Medium-term hydrocarbon revenue projections for Algeria ................. 59 Annex 3.4: Oil stabilization and savings funds: Lessons from international experience .............................................................. 72 Annex 3.5: Trends in Algeria's foreign and domestic public debt ........................... 86 Annex 3.6: Rules for long-term fiscal sustainability with an exhaustible hydrocarbon revenue stream .......................................................... 90 Annex 3.7: Assessing the Net Present Value of Algeria's Hydrocarbon revenues.. 93 Annex 3.8: The role of institutional reforms: transparency, fiscal frameworks and fiscal rules .......................................................... 104 Endnotes-Annexes .................................................. 111   chapter 1 - annexes Annex 1.1: Background data on long-term growth and the quality of institutions Growth Rates of Output Components 1966.70 1971-75 1976-80 198195 1986-90 1991-95 1996-2000 1976-2000 GDPGrowth 6.5 6.5 6.2 4.8 08 03 3.2 31 Agriculture Sector Growth 2.1 10.9 4.8 2.9 3.6 4.5 3 9 3.9 Industuial SectorGrowth 11.1 2.2 7.0 4.1 1.1 -0.5 4.0 3.2 Non-Oil Industrial Sector 11.7 19.5 12.2 6.4 -1.6 -2.2 1.4 3 2 Oil Sector 11.1 -1.2 4.1 2.4 3 2 0.6 5 5 3 2 Services Sector Growth -7.4 20.5 5.2 5.9 0.9 1.0 2.2 3.0 Aggregate Consumption Growth 2.1 12.9 7.7 5.5 -1.8 0.9 1.2 2 7 Private Consumption 1.5 12.2 7.8 5.5 -1.8 0.6 11 2.6 Govemment Consumption 4 7 15.4 7.7 4.7 -2.1 5.3 2.8 3.7 Fixed Investment Growth .. 15.2 8.4 3.4 -5 0 -2 5 2 4 1.4 Private Investment .. .. .. -1.3 1.6 -0.9 -0.7 -0.3 Public Investment .. .. . 12.5 -12 7 -4.5 14 3 2 4 Exports Growth 7.6 2.5 0.6 5.0 3.5 0.8 5.8 3.1 Imports Growth 8.7 17.1 3.9 5 8 -8.1 -2.4 -1 4 -0 4 Real GDP Per Capita In constant dollars Average Annual Per-capita Growth Rates (International prices, base year 1985) 1971 1981 1991 1971-80 1981-90 1991-2000 1971-2000 Algeria 1676 2761 2720 3.15 -0.28 -0.08 0.93 Azerbaijan .. .. .. -7.11 .4.75 -5.29 Colombia 2234 2967 3297 3.11 1.28 0.78 1.72 Ecuador 1870 3205 2835 5.95 -0.39 -0.29 1.76 Egypt 1206 1722 1913 4.44 2.89 2.39 3.24 Gabon 3868 4504 3696 5.83 -1.16 -0.12 1.52 Hungary 3656 5147 4947 4.37 1.49 1.28 2.38 Indonesia 737 1480 2044 5.40 4.47 2.70 4.19 Mexico 4213 6467 6018 3.67 -0.22 1.89 1.78 Nigeria 1055 1515 1040 1.92 -1.67 -0.29 -0.02 Poland 3128 3973 3712 .. .. 3.60 3.60 Saudi Arabia 8756 13766 7673 5.22 -4.59 -0.58 0.04 Syria 2468 4664 3994 6.82 -0.93 2.41 2.76 Venezuela, RB 7589 7209 6621 -0.71 -1.63 -0.06 -0.80 MNAAverage 2596 4249 3571 5.50 -0.23 1.18 2.15 LMIC Average .. .. .. 3.21 2.24 2.31 2.59  Gross domestic Investment (% of GDP) 1971-80 1981-90 1991-2000 1971-2000 Algeria 41 94 32.90 28 22 34.35 Azerbaijan .. .. 28.12 28 12 Colombia 18.56 19.37 19 27 19 07 Ecuador 24.21 20.46 19.40 21.35 Egypt 24 41 28.78 20 27 24.49 Gabon 45 91 33.97 26.13 35.33 Hungary 35.17 26.63 24.63 28.81 Indonesia 22.45 28 92 26.38 25.92 Mexico 23.07 21.85 22 93 22.61 Nigeria 23.51 15.80 20.63 19.98 Poland . 30.34 21.36 24.73 Saudi Arabia 19.80 22.80 20 26 20.95 Syria 26.38 21.87 22 87 23.71 Venezuela, RB 33.80 19.67 18.85 24.11 MNA Average 24.72 25 81 23.55 24 73 LMIC Average 28.45 30.46 30.04 29.65 Human Capital Indicators Average Fertillty Rate Population growth (annual %) 1970-80 1980-90 1990-2000 1970-2000 1971-80 1981-90 1991-2000 1971-2000 Algeria 7.18 5.71 3.80 5.56 3.06 2.93 1.95 2.65 Azerbaijan 3.86 2.94 2.40 2.94 1.76 1.49 1.17 1.47 Colombia 4.67 3.45 2.80 3.60 2.32 2.07 1.90 2.10 Ecuador 5.64 4.33 3.41 4.48 2.88 2.54 2.09 2.50 Egypt 5.46 4.61 3.61 4.49 2.12 2.49 1.99 2 20 Gabon 4.33 4.77 4.67 4.56 3.17 3.01 2.74 2.97 Hungary 2.07 1.82 1.56 1.81 0.35 -0.32 -0.34 -0.10 Indonesia 4.99 3.67 2.79 3.76 2.33 1.84 1.66 1 94 Mexico 5.78 3.81 2.97 3.96 2.89 2.08 1.63 2.20 Nigena 6.90 6.52 5.71 6.36 2.90 3.02 2.77 2 90 Poland 2.25 2.24 1.69 2.05 0.90 0.69 0.14 0.58 Saudi Arabia 7.29 6.98 6.02 6.74 4.89 5.23 2.71 4.28 Syria 7.56 6.74 4.22 6.00 3.30 3.31 2.90 3.17 Venezuela, RB 4.71 3.79 3.12 3.89 3.42 2.56 2.15 2.71 MNA Average 6.92 6.10 3.81 5.35 3.08 3.24 2.80 3.05 LMIC Average 3.92 2.81 2.26 3.04 1.90 1.58 1 16 1.55 2  Life expectancy at birth, (years) Mortality rate, under-5 (por 1,000 live births) 1970-80 1980-90 1990-2000 1970.2000 1971-80 1981-90 1991-2000 1971-2000 Algeria 56.16 63.29 69 36 62.88 165.50 97.00 44.33 92.80 Azerbaijan 68 55 69.73 70.36 69.70 .. .. 28.81 28.81 Colombia 63.02 67.22 69.79 66.63 85.50 49.00 30.27 46.05 Ecuador 60.41 65.28 68.09 64.52 120.50 85.50 41 42 72.54 Egypt 53.22 59.04 65.16 59.13 205.00 130.00 66.29 105.92 Gabon 46.11 50.10 52.35 49.44 232.00 .. 90.75 126.06 Hungary 69.73 69.60 69.93 69.82 32.50 20.27 13.80 17.00 Indonesia 51.20 58.31 63.94 57.75 148.50 104.00 64.29 88.35 Mexico 64.14 68.81 71.93 68.22 92.00 60.00 40.05 60.83 Nigeria 44 29 47.40 48.82 46.89 198.50 166.00 145.33 166.60 Poland 70.43 70.87 72.00 71.14 36.00 21.85 16.07 18.20 Saudi Arabia 56.57 65.26 70.78 64.07 135.00 65.00 30.68 65.45 Syria 58.65 63.91 68.13 63.50 101.00 73.00 39.00 59.67 Venezuela, RB 66.84 69.75 72.29 69.60 51.50 34.50 25.32 35.79 MNA Average 54.36 61.39 69.10 64.02 114.79 70.95 50.96 69.19 LMIC Average 63.21 67.10 68.69 66.24 105.03 65.52 44.89 68.95 School enrollment, prlmary (% gross) School enrollment, secondary (% gross) 1970-80 1980-90 1990-1998 1970-1998 1971-80 1981-90 1990-1998 1970-1998 Algeria 87.76 96.07 105.07 99.79 21.38 48.42 62.30 51.16 Azerbaijan 115.30 115.78 111.17 112.19 94.53 93.72 84.50 86.53 Colombia 106.32 105.35 108.00 107.08 32.77 44.22 56.71 49.63 Ecuador 107.41 117.66 120.40 117.30 39.92 55.45 53.35 50.58 Egypt 70.24 84.11 96.44 89.54 39.72 62.69 76.38 65.96 Gabon .. .. 154.06 154.06 .. .. 54.67 54.67 Hungary 97.64 96.68 99.87 99.30 65.32 73.38 91.70 84.10 Indonesia 91.07 113.15 114.22 108.16 21.70 38.10 47.31 39.78 Mexico 112.40 117.29 114.19 114.04 35.55 52.81 59.77 53.93 Nigeria 67.61 101.26 92.38 86.65 10.39 25.62 29.49 24.69 Poland 100.42 99.68 98.53 99.22 70.27 78.92 91.18 84.30 Saudi Arabia 54.71 66.43 74.86 69.43 21.02 37.83 55.02 46.03 Syria 90.91 105.86 103.66 101.17 42.50 52.16 45.62 45.86 Venezuela, RB 95.94 95.06 93.93 94.72 33.50 26.65 35.58 33.96 MNA Average 76.85 84.77 88.96 86.04 31.95 46.04 51.57 46.75 LMIC Average 103.82 112.82 112.83 110.90 40.75 52.39 61.70 55.92 Illiteracy rate, adult total Average Years of Schooling (% of people ages 1S and above) 1970.80 1980-90 1990-2000 1970-2000 1970 1980 1990 2000 Algeria 70.6 54.0 40.1 55.9 1.6 2.7 4.3 5.4 Colombia 18.3 13.1 9.8 14.1 3.1 4.4 4.7 5.3 Ecuador 21.1 14.5 10.2 15.7 3.5 6.1 5.9 6.4 Egypt 63.8 56.0 48.8 56.7 .. 2.3 4.3 5.5 Hungary 1.6 1.1 0.8 1.2 8.1 9.1 8.9 9.1 Indonesia 35.9 24.5 16.6 26.3 2.9 3.7 4.0 5.0 Mexico 20.6 14.3 10.2 15.4 3.7 4.8 6.7 7.2 Nigeria 72.5 57.7 43.7 59.0 1.2 1.6 2.7 3.5 Poland 1.3 0.6 0.3 0.8 .. .. .. Saudi Arabia 56.2 39.5 28.7 42.5 .. .. .. Syria 51.3 39.6 30.2 41.1 2.2 3.7 5.1 5.8 Venezuela, RB 19.0 12.9 9.2 14.0 3.2 5.5 5.0 6.6 MNA Average 61.3 49.1 39.0 50.6 2.0 3.0 4.4 5.3 LMIC Average 34.8 25.2 18.2 26.1 .. .. .. 5.6 3  Macroeconomic Indicators Total trade (imports+exports) Foreign direct Investment, net Inflows (% of GDP) (% of GDP) 8197140 1981-90 1991-2000 1971-2000 1971T10 1981-90 1991-2000 1971-2000 Algeria 63.72 48.50 52.70 54.97 0.47 0.00 0.02 0 16 Azerbaijan .. .. 94.70 94.70 .. .. 12.08 12.08 Colombia 30.01 28.58 36.30 31.63 0.35 1.38 2.30 1.34 Ecuador 50.89 50.26 58.71 53.29 2.29 0.60 3.06 1.98 Egypt 53.97 55.53 49.58 53.02 1.25 2.59 1.21 1.68 Gabon 107.42 94.96 87.08 96.48 3.07 1.90 -2.17 0.93 Hungary 80.53 75.14 84.16 79.94 0.00 0.00 4.92 1.64 Indonesia 43.99 47.16 59.52 50.22 0.71 0 44 0.67 0.61 Mexico 19.44 30.86 51.67 33.99 0.81 0.98 2.32 1.37 Nigeria 38.47 44.14 81.89 54.83 1.28 2.02 4.13 2.48 Poland .. 50.16 52.09 51.92 .. 0.15 2.91 2.66 Saudi Arabia 99.58 86.57 75.34 87.16 .. Syria 52.05 43.92 67.09 54.35 0 00 0.33 0.71 0.35 Venezuela, RB 48.25 45.80 50.25 48.10 -0.34 0.25 2.88 0.93 MNA Average 67.86 72.69 75.44 72.00 0.75 1.11 1.56 1.14 LMIC Average 27.77 35.97 55.76 39.84 0 50 0.51 2.49 1.41 General government flnal consumptlon expenditure Overall budget deficit, Including grants (% of GDP) (% of GDP) 1971-80 1981-90 1991-2000 1971-2000 1971-80 1981-90 1991-2000 1971-2000 Algeria 15 23 17 29 16.51 16.34 -7.41 -7 90 -0 30 -5.20 Azerbaijan . .. 16.25 16.25 .. .. -4.60 -4.60 Colombia 9.14 9 98 15 90 11.67 -0.81 -1.99 -2.58 -1.76 Ecuador 12.78 11.89 9.94 11.53 -1.07 -0.97 048 -0.74 Egypt 22 42 15 80 10.31 16.17 -15.73 -9.10 -0 78 -8.29 Gabon 14.12 18.35 14.19 15 55 -6.59 0 16 -1 65 -2.86 Hungary 10 18 10 37 10.98 10 51 . -1.23 -4.07 -2.65 Indonesia 9.26 10.05 7.57 8.96 -2.61 -1 45 0.02 -1.35 Mexico 9 85 9.15 10 39 9.80 -3.69 -8.45 0 30 -4.11 Nigeria 11 70 14.19 13.44 13.11 -1.97 -5.01 .. -3.07 Poland 19.29 18.49 18 56 . -1.44 -1 32 -1.36 Saudi Arabia 17 27 33 42 29 35 26 68 Syria 20 03 19.60 12.92 17.52 -6 35 -2.71 -0.45 -3.35 Venezuela, RB 11.52 10.77 7 53 9.94 -0 11 .-0 92 -1.71 -0.91 MNA Average 19.27 21.43 18 01 19 57 -7 15 -6.74 -2.37 -5.42 LMIC Average 11.52 13 31 13 19 12 67 .. -1 99 Inflation, consumer prices (annual %) Average Annual Terms-of-Trade Growth (%) 1971-80 1981-90 1991-2000 1971-2000 1971-80 1981-90 1991-2000 1971-2000 Algeria 8 52 9 74 18 78 1212 17.06 -5 92 -1 40 3 41 Azerbaijan . 459 27 459 27 -3 91 -3.91 Colombia 21 28 23 72 20 50 21 83 2 36 -1 26 0.30 0.47 Ecuador 12 66 37 52 43 79 31 32 215 -4 48 -2 90 -1 70 Egypt 9 47 16 96 9 11 11.85 1 57 -6 68 1 03 -1 45 Gabon 11 92 6 03 4 25 7 75 11 72 -5 07 -4 62 0 86 Hungary 5 14 10.93 20 25 12.60 -2 82 -0 60 0 91 -1 03 Indonesia 17.49 8 61 14 11 13 40 15 89 -0 54 1 37 6 04 Mexico 16 80 69 08 18 69 34 86 4 21 -3.55 -0 47 0 08 Nigeria 15 29 22 81 30 60 22 90 22 32 -4 35 -1.32 5 79 Poland 4.69 107 67 28 43 46.93 . . 0.23 -0 36 Saudi Arabia 12 84 -0 13 0 98 4 56 Syria 10 71 22 62 6 35 13 23 4 03 -1 20 -5 99 -1.54 Venezuela, RB 8 51 24 93 33 49 22 31 8 61 1 50 -0 05 2 65 MNA Average 10.59 10.36 7 58 9 51 1.79 -1.38 -1 94 -0 46 LMIC Average .. . . -1 69 -0 30 -0 65 4  Institutional Indicators International Country Risk Guide (ICRG) Ratings (Scaled to a Score of 1-10) Bureaucracy Quality Law and Order Corruption Democratic Accountability 1986-88 1998-2000 1980-88 1998-2000 1986-88 1998-2000 1986-88 1998-2000 Algeria 2.27 3.33 3.80 3.38 8.67 3 33 3 38 3 52 Azerbaijan . 1 67 * 6.80 . 3.33 4 07 Colombia 5.00 3 33 1.67 2 87 5.00 3 08 6 67 5 00 Ecuador 3 33 3.33 6 87 5.19 5.00 5.00 6.67 6.67 Egypt 3 33 3 33 4 44 6 67 3.33 3 33 6 67 3 33 Gabon 5 00 3.33 3 33 5 00 3 33 1 67 3 33 5 09 Hungary 5 00 6 67 8 33 9 07 6.67 8 29 8 33 10 00 Indonesia 0 00 4 35 3 33 3 61 019 2 36 5 00 4.21 Mexico 2.31 5 00 5.00 3 56 5.00 4 35 5 65 8.56 Nigeria 1 76 0 83 1 67 5.00 3.33 1 94 5 32 3 61 Poland 1.67 5.00 6.87 7 55 6 67 6 48 3 33 10 00 Saudi Arabia 5 00 3.33 6 67 8.33 4.44 3 33 3 33 0.00 Syria 1 67 1.67 3.33 833 333 6.02 333 1 67 Venezuela, RB 3 33 1.67 6 67 6 67 5.00 5 00 8 33 7.45 MNA Average 3,45 286 4.09 7 46 4 17 4.76 4 17 3 64 Voice and Politicai Government Regulatory Rule of Control of Accountability Stability Effectiveness Quality Law Corruption Algeria -1 19 -1.27 -0.81 -0 79 -0 97 -0 62 Azerbaljan -0 70 -0.70 -0.95 -0.14 -0 78 -1 05 Colombia -0 41 -1.36 -0 38 0.02 -0 77 -0 39 Ecuador -0 14 -0 80 -0 94 0.00 -0 76 -0 98 Egypt -0.65 0 21 0.27 0.13 0.21 -0 16 Gabon -0 40 -0.44 -0 45 -0 12 -0 44 -0 58 Hungary 1 19 0 75 0.60 0.88 0.76 0 65 Indonesia -0 40 -1.56 -0 50 -0.43 -0 87 -1 01 Mexico 0 12 0.06 0 28 0 58 -0 41 -0 28 Nlgeria -0.44 -1 36 -1 00 -0 39 -1 13 -1.05 Poland 1 21 0.69 0 27 0.41 0 55 0 43 Saudi Arabia -1 07 0 51 0 00 -0 11 0.19 -0.35 Syria -1 40 -0.28 -0 81 -0 66 -0 52 -0 83 Venezuela -0 34 -0 33 -0 81 -0 30 -0 81 -0 59 MNA Average -0 64 0 07 0 07 0 16 0.10 -0.09 Source: Kaufman, Kraay, Zoldo-Lobaton (2002), Governance Matters II Updated Indicators for 2000/01" World Bank WP. Algeria Relative to Rest of World on Governance Indicators: The accompanying graphs show the percentile rank of Algeria on each governance indicator, either as a blue bar (in the Bar Chart) or as a thick line (in the Diamond Chart). In the Bar Chart, the statistically likely range of the indicator is shown as a thin red line. For instance, a bar of length 75% with the red lines extending from 60% to 85% has the following interpretation: An estimated 75% of the countries rate worse and an estimated 25% of the countries rate better than the country of choice. However, at the 90% confidence level, only 60% of the countries rate worse, while only 15% of the countries rate better. In the Diamond Chart, the basic indicator contour (shown as a thick line) is framed by two thin lines (an outer one and an inner one) which define the shaded range depicting the 90-percent confidence interval for that country's relative ranking on each indicator. Thus, in both charts, higher values imply better governance ratings. 5  * Algeria Coftrol of Corruption Rule of Law,- Regulatory Framework Government Effectiveriess Political StabilitylLack of Violence ,L Voice and Accountability 0 25 50 75 100 Pesrceago of Countries With Lowe Score Voice and Accountability EAlgenia,, Political Stability/Lack of Control of ~ - - - - Violence CorruptionX , / Rule of Law - Govemnionnt .-- ~~Effect-iveness Regulatoiy Frmnework The governance indicators reported in these charts reflect the statistical compilation of perceptions of the quality of governance of a large number of survey respondents in industrial and developing countries, as well as non-governmental organizations, commercial risk rating agencies, and think-tanks during 1997 and 1998. They in no way reflect the official position of the World Bank, its Executive Directors, or the countries they represent. As discussed in detail in the accompanying papers, countries' relative positions on these indicators are subject to large margins of error that are clearly indicated in the charts above. Source: Composite Governance Indicators Dataset, Governance Research Project by Daniel Kaufinann, Aart Kraay and Pablo Zoido - Lobaton, as described in 'Aggregating Governance Indicators' and 'Governance Matters' research papers (PRWP #2195 and #2196). To access the complete dataset, as well as the accompanying papers, please return to www.worldbank.org/wbi/governance/gov data.htm . 6  Annex 1.2: Methodology of growth accounting Here we develop a growth accounting framework to estimate the contributions of capital (physical and human), labor, and total factor productivity (TFP) toward determining long-term growth. We develop two measures of TFP, both as residuals from aggregate production functions. For the first measure, we use the standard neoclassical CRS Cobb-Douglas production function, Y, = AIKtOL/-a where Y is the aggregate output, K and L are capital and labor inputs into production, a is the share of capita stock in output under perfect competition, and A is the first TFP measure. Consistent with individual country studies, a is set equal to 0.4 here. By dividing both sides by L, we get the per-worker output function: yt = A,k:a; y = Y/L, and k = K/L. Let A = TFP 1. The growth rate of TFP 1 may then be written as g(TFPI) = g(y) - a*g(k), where g(X) indicates the annual growth rate of variable X. The second TFP measure is obtained by adjusting for the quality of the labor force-or the human capital yt = A,kt(hd'" where ht is a measure of human capital based on education stocks and returns on education.' Following Ghosh and Kraay (2000), we define h = e