Working Paper: NBER ID: w24960
Authors: Ping Wang; Tsznga Wong; Chong K. Yip
Abstract: Income disparity across countries has been large and widening over time. We develop a tractable model where factor requirements in production technology do not necessarily match a country's factor input profile. Appropriate assimilation of frontier technologies balances such multi-dimensional factor input-technology mismatch, thus mitigating the efficiency loss. This yields a new measure for endogenous TFP, entailing a novel trade-off between a country's income level and income growth that depends critically on the assimilation ability and the factor input mismatch. Our baseline model accounts for 80%-92% of the global income variation over the past 50 years. The widening of mismatch and heterogeneity in the assimilation ability account for 41% and 20% of the global growth variation, whereas physical capital accounts for about one third with human capital largely inconsequential. In particular, about 30% of the output growth in miracle Asian economies comes from narrowing the gap arisen from mismatch, and 94% of the growth stagnation in trapped African economies due to the widening mismatch. A country may fall into a middle-income trap after a factor advantage reversal that changes the pattern of mismatch.
Keywords: income disparity; technology assimilation; economic growth; factor input mismatch
JEL Codes: D90; E23; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| factor input-technology mismatch (O33) | income disparities (I24) |
| technology assimilation (O33) | efficiency loss from mismatch (H21) |
| technology assimilation (O33) | productivity (O49) |
| productivity (O49) | economic growth (O49) |
| narrowing the mismatch (C78) | output growth in miracle economies (O49) |
| widening mismatch (I24) | growth stagnation in trapped economies (O11) |
| reversal of factor advantages (F16) | middle-income trap (O11) |