Working Paper: CEPR ID: DP6013
Authors: Orsetta Causa; Daniel Cohen; Marcelo Soto
Abstract: The capital-output ratio is more than 40% lower in the poor countries than in the richest ones. Comparing TFP in manufacturing and in the economy at large, we show that the Balassa-Samuelson effect explains the bulk of this scarcity: TFP in manufacturing is indeed about 40% lower than TFP in the aggregate economy. This discrepancy is one for one translated into higher prices of equipment goods, which explains that capital is scarce in volume, but not in value terms. This quantifies our interpretation of the Lucas paradox. When focusing on manufacturing, a tradable sector for which relative prices differences should not be essential, the initial paradox is actually turned into an anti-Lucas paradox: it is in the poorest countries that the capital output ratio is higher.We argue that lack of productive infrastructure is essential in explaining this anti-paradox.We finally examine the role of institutional quality. We show that public capital under provision, as reflected in low levels of infrastructure stock, is the key channel through which poor institutions hamper capital accumulation
Keywords: Lucas Paradox; Total Factor Productivity
JEL Codes: O11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| poor infrastructure (H54) | lower capital accumulation (E22) |
| lower infrastructure quality (H54) | lower capital output ratios (D29) |
| weak institutions (O17) | lower capital output ratios (D29) |
| weak institutions (O17) | lower infrastructure quality (H54) |
| lower TFP in manufacturing (D24) | lower capital output ratios (D29) |
| lower TFP in manufacturing (D24) | higher relative prices of capital goods in poorer countries (F16) |