Examining the Efficiency, Labor and Investment Wedges in Africa

Abstract

Cross-country differences in per capita income are known to be high among Sub-Saharan Africa’s economies (Nigeria, South Africa and Angola), and North Africa’s economies (Egypt, Algeria and Morocco). The aim of this paper is hence to examine the phenomenon of income discrepancies in Africa for periods 1990-2013 and then apply the combined methodologies of Development Accounting (Caselli (2005) and Konya (2013)) as well as Business Cycle Accounting (Chari, Kehoe and McGrattan (2007)) in a standard neoclassical, small open economy model. Our main finding is that although efficiency wedge plays an important role in explaining income differences in Africa, labor wedge and investment wedge are also important for understanding income differences in these economies.