THE ROLE OF CAPITAL AND PRODUCTIVITY IN ACCOUNTING FOR INCOME DIFFERENCES SINCE 1913

Daniel Gallardo‐Albarrán,Robert Inklaar

doi:10.1111/joes.12374

Daniel Gallardo‐Albarrán, Robert Inklaar

Open Access

https://doi.org/10.1111/joes.12374

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Abstract

AbstractThis paper studies the proximate determinants of differences in output per worker across countries since 1913. We provide a new long‐term perspective by developing a novel dataset with information on produced capital for 33 countries that covers most of the global income distribution. Using development accounting analysis, we find a large shift in the proximate determinants of cross‐country income inequality during the 20th century. The contribution of produced capital to cross‐country income variation declined from 29% to 11%, while that for productivity rose from 47% to 72%. Thus, the current predominant role of productivity in accounting for income differences is quite exceptional from a historical perspective. We draw on these findings to review various strands of the literature and offer some hypothesis about the rising relative importance of TFP for comparative economic performance. We conclude that differences in technological adoption rates and efficiency are the primer drivers of the decreasing relative importance of capital deepening for cross‐country income inequality, rather than factor input mismeasurement.

Highlights

Large income differences between rich and poor countries and the availability of relevant data for most countries around the world has led to a thriving literature aiming to account for those income differences
We find a large shift in the proximate determinants of crosscountry income inequality during the 20th century
The contribution of produced capital to crosscountry income variation declined from 29% to 11%, while that for productivity rose from 47% to 72%

Summary

Introduction

Large income differences between rich and poor countries and the availability of relevant data for most countries around the world has led to a thriving literature aiming to account for those income differences. The basic model is extended, for instance, to account for additional types of capital (Chen, 2018; Freeman et al, 2020) or to take an alternative approach to measuring human and productive capital (Lagakos et al, 2018; Inklaar et al, 2019), to assess whether these extensions help account for a greater fraction of income differences. Overall, these studies indicate that differences in productivity are the dominant factor accounting for cross-country income variation (Jones, 2016). For a better understanding of how the current large income differences opened up, it is important to study what can account for income gaps at earlier points in time

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