Linking Cross-Country Disparity in the Long Run Growth Rates to the Initial Disparity in the Human Capital Distribution

Abstract

This paper aims to provide a theoretical explanation for understanding the cross-country disparity of long-run economic growth rates based on the diversity in the initial conditions. In particular, it argues that the disparity in the inequality of human capital and income, as well as the industry structure of the economy prior to the emergence of endogenous growth, plays an important role in determining its long-run growth rate. The initial distribution of human capital and the share of agriculture characterize the initial state of the economy. I present a model of endogenous growth that generates cross-country diversity of long-run growth rates of per capita income as functions of path dependent history of human capital distribution. The model’s predicted growth rate explains up to fifty-three percent of the observed variation in growth rates across countries. The results of the econometric estimation of the equilibrium restriction of the model on the data answer an important question regarding why two countries with the same average stock of human capital may have different total factor productivity (TFP). The results support the hypothesis that the diversity in the relative proportion of innovators due to differences in the historical distribution of human capital and the redistributive tax regimes induce significant heterogeneity in the level of TFP as well as its growth rates across countries.