Abstract
We construct a broad panel with 84 countries over the period 1970-2014 with data from the Penn World Tables (PWT) 9.0. We apply the tools of development accounting to our panel. However, we depart from the traditional Cobb-Douglas hypothesis and Hicks-neutral technological change, and assume a Constant Elasticity of Substitution production function, which allows for a constant but non-unitary elasticity of substitution, and for non-neutral technological change. For different values of the elasticity of substitution, and different representation of technological change, we find that the cross-country variation in GDP per worker that can be accounted for by factor inputs is decreasing over time until the mid-2000s, when it reverses its decreasing trend. In addition, our estimates suggests that in the more recent period the proportion of the cross-country variation in GDP per worker explained by factor inputs is around 20%. Finally, we obtain similar results with broad panels from PWT versions 8.1 and 7.0, corroborating our initial findings.
Highlights
The current consensus in the Development Accounting literature establishes that the breakdown technology vs. inputs is “50-50”
The Cobb–Douglas (CD) production function is the number one choice to represent the aggregate technology in development accounting exercises
If factor shares vary across countries, the CD assumption may not be the best representation for the aggregate technology
Summary
The current consensus in the Development Accounting literature establishes that the breakdown technology vs. inputs is “50-50”, (see Caselli, 2005, for instance). If the elasticity of substitution differs from unity and factor-efficiency is non-neutral, as the empirical evidence suggests, performing development accounting exercises relaxing these two constraints may change the consensus view, and, may change any policy implications derived from the exercise. These two restrictions—unitary elasticity of substitution and factor neutrality—can be relaxed by assuming a Constant Elasticity of Substitution (CES) production function as representative of the aggregate technology. We perform a series of development accounting exercises for a broad panel of countries assuming a CES aggregate technology that allows for different values of the elasticity of substitution and factor non-neutrality in technological progress.
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