data are not available at the firm level. Differences in revenues per unit sold may reflect differences in productivity but also differences in quality. The problem may be more severe for tech companies, where product innovation frequently takes place. With these caveats in mind we set up our analysis.

Abstracting from entry and exit dynamics, there are two main sources of productivity growth. The first source is within-firm productivity growth, i.e., firms become more productive thanks to better technology or management practice. This more conventional understanding has been the subject of a long-standing literature and dominated much of policy discussions. However, recent views focus on the benefits of a second channel involving the reallocation of inputs from less to more productive firms as an important component of aggregate productivity growth. Policies associated with allocative efficiencies emphasize correcting or reducing market distortions. We focus on this source of productivity improvement, examining resource allocation across sectors, and across firms within a narrowly-defined industry.

This paper documents the evolution of productivity in developing EAP in the recent decades and identifies the sources of productivity growth. <mark>EAP’s productivity has been gradually catching up with the frontier (United States), with China leading the pack. Productivity growth is driven by sustained within-sector productivity growth. Reallocation of labor to sectors with higher productivity, such as industry and services, also contributed to productivity improvements. Nevertheless, resource misallocation remains. Firm-level evidence from four EAP countries (Indonesia, Malaysia, Philippines and Vietnam) suggests that resource misallocation across firms within a sector is large, albeit declining over time. Private domestic firms and firms with higher productivity face larger distortions.</mark> The rest of the paper is organized as follows. Section 2 provides an overview of the aggregate trends for EAP productivity, using country-level data. Focusing on labor, one of the factors of production driving the results in Section 2. Section 3 employs newly available sector-level information and examines how labor movement is linked to labor productivity differential across sectors over the last ten years. This allows us to examine if labor has moved from sectors with low productivity to sectors with high productivity, i.e., better resource allocation across sectors. The allocation of resources within an industry has implications for aggregate productivity; Section 4 digs deeper into this using manufacturing data for four developing EAP countries (Malaysia, Philippines, Indonesia and Vietnam). It first presents evidence on misallocation and its dynamics and then explores possible determinants.

# **2. Aggregate trends for EAP’s productivity**

Notwithstanding significant volatility and heterogeneity, developing EAP total factor productivity (TFP) is gradually catching up to the frontier (the United States) since 2000 (Figure 2 ). In the aftermath of the 1997-1998 East Asian financial crisis, a sharp drop in aggregate productivity is observed in many EAP countries. Since then, the recovery process has been gradual and slow. Yet, there is heterogeneity in the speed of convergence across countries. On the one hand, China and Malaysia have fully recovered and high catch-up speed has increased since the crisis. On the other hand, relative TFP is below the pre-crisis levels in Indonesia and, to 4