Working Paper: NBER ID: w13469
Authors: Charles R. Hulten; Anders Isaksson
Abstract: Average income per capita in the countries of the OECD was more than 20 times larger in 2000 than that of the poorest countries of sub-Sahara Africa and elsewhere, and many of the latter are not only falling behind the world leaders, but have even regressed in recent years. At the same time, other low-income countries have shown the capacity to make dramatic improvements in income per capita. Two general explanations have been offered to account for the observed patterns of growth. One view stresses differences in the efficiency of production are the main source of the observed gap in output per worker. A competing explanation reverses this conclusion and gives primary importance to capital formation. We examine the relative importance of these two factors as an explanation of the gap using 112 countries over the period 1970-2000. We find that differences in the efficiency of production, as measured by relative levels of total factor productivity, are the dominant factor accounting for the difference in development levels. We also find that the gap between rich and most poor nations is likely to persist under prevailing rates of saving and productivity change. To check the robustness of these conclusions, we employ different models of the growth process and different assumptions about the underlying data. Although different models of growth produce different relative contributions of capital formation and TFP, we conclude that the latter is the dominant source of gap. This conclusion must, however, be qualified by the poor quality of data for many developing countries.
Keywords: Economic Growth; Total Factor Productivity; Capital Formation; Income Disparities
JEL Codes: O11; O47; O57
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| poor quality of data (C80) | TFP and economic growth (O49) |
| total factor productivity (TFP) (D24) | income per capita (D31) |
| capital formation (E22) | economic growth (O49) |
| total factor productivity (TFP) (D24) | economic growth (O49) |
| total factor productivity (TFP) (D24) | output per worker (E23) |
| total factor productivity (TFP) differences (O49) | economic disparities (I24) |
| capital deepening (E22) | economic growth (O49) |