International Productivity Differences Research Articles

Technology adoption, capital deepening, and international productivity differences

I document that cross-country differences in capital intensity are much larger in the agricultural sector than in the nonagricultural sector. To explain this fact, I build a model featuring technology adoption with fixed costs among heterogeneous farmers. More productive farmers operating larger farms pay the fixed cost and adopt a modern capital-intensive technology, while less productive ones choose a traditional labor-intensive technology. The model is calibrated using historical data on farmer adoption of mechanized technology in postwar America. This calibrated model is then employed to perform cross-country comparisons. Incorporating a technology adoption channel not only allows the model to predict substantial differences in agricultural capital intensity between rich and poor countries that an otherwise identical model would fall short in generating, but also improve explanatory power for cross-country agricultural productivity differences by 1.5-fold.

Misallocation and aggregate productivity across time and space

AbstractProductivity is at the core of the large differences in income per capita across countries. What accounts for international productivity differences? I discuss cross‐country differences in the allocation of inputs across heterogeneous production units—misallocation—as a potential factor in accounting for aggregate productivity. Policies and institutions generating misallocation are prevalent in poor and developing countries and may also be responsible for differences in the selection of operating producers and technology used, contributing substantially to aggregate productivity differences across countries.

Exogenous and Endogenous Growth Models: a Critical Review

The main divisions of the theoretical economic growth literature that we study today include exogenous and endogenous growth models that have transitioned through a number of notions and criticisms. Proponents of exogenous growth models argue that technological progress is the key determinant of long‑run economic growth as well as international productivity differences. Within the endogenous growth models, there are two notions that are propagated. The first postulates that capital used for innovative purposes can exhibit increasing returns to scale and thus account for the international productivity differences we observe today. The key determinants include knowledge, human capital, and research and development. The second argues that factors that affect the efficiency of capital, and hence cause capital flight, can also explain international productivity differences. These factors that affect the efficiency of capital include government spending, inflation, real exchange rates, and real interest rates. Our study results reveal that there is still no agreement on the dominant theoretical economic growth model amongst economists that can fully account for international productivity differences. We conclude that the future of theoretical economic growth is far from over and more work needs to be done to develop more practical structural economic growth models.

THE EFFECTS OF INTERNATIONAL FINANCIAL INTEGRATION IN A MODEL WITH HETEROGENEOUS FIRMS AND CREDIT FRICTIONS

This paper examines the consequences of international financial integration in a two-sector standard incomplete markets model with occupational choice under risk and financial constraints affecting entrepreneurial activity. We endogenize international productivity differences and discuss the implications of international integration for the macroeconomy, inequality, and welfare. Lending countries are characterized by tighter domestic constraints and experience an increase in gross national product, whereas the gross domestic product effect is ambiguous. We conclude that international integration is beneficial only for economies where there are substantial financial constraints on entrepreneurial activity. Otherwise, a majority of households suffer, due to the unequal distribution of welfare gains and losses across the heterogeneous population.

Untitled Land, Occupational Choice, and Agricultural Productivity

The prevalence of untitled land in poor countries helps explain the international agricultural productivity differences. Since untitled land cannot be traded across farmers, it creates land misallocation and distorts individuals' occupational choice between farming and working outside agriculture. I build a two-sector general equilibrium model to quantify the impact of untitled land. I find that economies with higher percentages of untitled land would have lower agricultural productivity; land titling can increase agricultural productivity by up to 82.5 percent. About 42 percent of this gain is due to eliminating land misallocation, and the remaining is due to eliminating distortions in individuals' occupational choice. (JEL J24, J43, O13, P14, Q12, Q15, Q24)

Barriers to ‘industrialisation’ for interwar British retailing? The case of Marks & Spencer Ltd

Research on international differences in retail productivity has highlighted formidable environmental barriers to the ‘industrialisation’ of mass retailing as a driver of declining British interwar productivity growth in this sector (and in services more generally). We examine evidence for such barriers, using a case study of a firm that built its interwar expansion strategy on ‘American’ retail methods – Marks & Spencer (M&S). We find that, rather than facing barriers to the adoption of American mass retail practices, M&S reaped major productivity gains from this process. This adds further evidence to an emerging literature rejecting the barriers to industrialisation thesis for retailing.

The Missing Food Problem: Trade, Agriculture, and International Productivity Differences

Agriculture in poor countries has low productivity, high employment, and negligible trade flows relative to other sectors. These facts motivate a multisector, open-economy view of international productivity differences. With a quantitative multicountry model featuring nonhomothetic preferences, multiple interrelated sectors, distorted labor markets, and costly trade, I find: trade amplifies the negative effect of labor market distortions; trade costs—large for poor countries, especially in agriculture—significantly contribute to international productivity differences; and explicitly modeling agriculture reveals additional channels through which poor countries may gain from trade. (JEL F41, J24, J43, O13, O19, Q11, Q17)

Measuring the Construction Industry’s Productivity Performance: Critique of International Productivity Comparisons at Industry Level

AbstractThe authors review work on international comparisons of construction productivity performance by providing an in-depth critique of the existing literature and highlighting the existing methodological challenges. Using studies and data on the United Kingdom’s relative construction productivity performance as an exemplar, it is suggested that any investigation of international productivity differences in construction at the industry level is highly problematic because these productivity estimates do not compare like for like. Data definitions and coverage differ substantially across countries. In addition, deflators and exchange rates used to convert output into a common currency are unreliable. While the new standard industrial classifications 2007 could provide a better basis of cross-country productivity comparisons and further research on deflators, conversion rates, labor inputs, and capital stock estimates could improve the robustness of international comparisons, there are conceptual limitati...

Bilateral trade and the environment: A general equilibrium model based on new trade theory

This study develops a trade–environment model based on new trade theory and emphasizes the role of international productivity differences in quantifying environmental consequences of trade. I introduce environmental policy and factor endowment differentials into a multi-country general equilibrium model of bilateral trade with random productivities and trade barriers. I calibrate the model for the OECD countries by estimating trade barriers and productivity parameters so as to match bilateral manufacturing trade shares. The calibrated model is used to analyze impacts of free trade and two types of environmental harmonization policies. I find that full trade liberalizations help to lower OECD pollution emissions by 32%, and about half of the decline in pollution is due to international productivity differences. I also show that harmonization of environmental taxes across the OECD countries is predicted to be more effective than the harmonization of pollution quotas in reducing aggregate pollution while under both policies trade impacts are relatively small.

The Size Distribution of Farms and International Productivity Differences

We study the determinants of differences in farm size across countries and their impact on agricultural and aggregate productivity using a quantitative sectoral model featuring a distribution of farms. Measured aggregate factors (capital, land, economy-wide productivity) account for one-quarter of the observed differences in farm size and productivity. Policies and institutions that misallocate resources across farms have the potential to account for the remaining differences. Exploiting within-country variation in crop-specific price distortions and their correlation with farm size, we construct a cross-country measure of farm-size distortions which together with aggregate factors accounts for one-half of the cross-country differences in size and productivity. (JEL D24, J24, J43, L11, O13, Q12, Q18)

Do Business Visits Cause Productivity Growth?

The production and diffusion of knowledge have increasingly been seen as potential causes of the observed international differences in total factor productivity and, in turn, as possible sources of economic growth. This paper presents the results of a causality study between business visits and multifactor productivity using a unique database that covers 30 sectors for 17 countries over the period 1998-2007. The results suggest that there is a causal link in some of the most innovative sectors from business visits to productivity. Business visits emerge as a fundamental channel for the spread of knowledge.

International Productivity Differences, Trade and the Distributions of Factor Endowments

AbstractThis paper presents a model of task assignment and worker matching to explore how the distributions of labor endowments within countries influence aggregate productivity and international trade patterns. Higher moments of the skill distribution have complex relationships with the organization of the labor force. First, labor endowments skewed toward high abilities exhibit positive assortment of workers across tasks, while countries with distributions of ability skewed towards low abilities exhibit underemployment. Second, greater dispersion improves aggregate productivity in countries that experience underemployment, but worsens productivity where there is assortative assignment. Furthermore, the shape and size of factor endowments are shown to jointly determine a global pattern of comparative advantage. Countries are more likely to export their abundant factors when labor markets organize heterogenous workers effectively. These predictions receive empirical support from Organization for Economic Co‐operation and Development (OECD) countries using measures of diversity constructed from educational attainment.

Union wage demands with footloose firms and agglomeration forces

This paper considers the wage demand of a sector-level monopoly union facing internationally mobile firms. A simple two-country economic geography model describes how firms relocate in response to international differences in production costs and market size. In contrast to standard models, the union fully takes into account the international mobility of firms. If international differences in labour productivity and market size are small, lower foreign wages or lower trade costs necessarily lead to lower union wage demands. Otherwise, lower foreign wages or trade costs may reduce the sensitivity of the remaining firms in the home country to wage changes, leading to higher union wage demands.

Heckscher–Ohlin theory when countries have different technologies

Rethinking the foundations of Heckscher–Ohlin theory when countries have different technologies, this paper shows how to make the proper adjustments for international productivity differences. The central tool is a factor conversion matrix that computes the local factor content of foreign Rybczynski effects. Factor-specific productivities are a special case of these more general linear relationships.

National Leadership and Competing Technological Paradigms: The Globalization of Cotton Spinning, 1878–1933

Using the records of British firms that supplied nearly 90 percent of world trade in cotton spinning machinery, we track the evolution and diffusion of spinning technology over more than 50 years. In contrast to scenarios in which modern technologies supplant older methods, we observe two paradigms in competitive coexistence, each one supporting ongoing productivity growth through complementary improvements in machinery, organization, and workforce skills. International productivity differences were magnified under the skill-based mule, British spinners being the world's best. Global diffusion of ring spinning was driven by advances in fiber control, a “directed” technological response to the expansion of world trade.

The Roots of Global Wage Gaps: Evidence from Randomized Processing of U.S. Visas

This study uses a unique natural experiment to test a simple model of international differences in workers' wages and productivity. Large differences in wages across countries could arise from several sources. These include barriers to trade in outputs, differences in technology, differences in workers, or differences in the other factors of production accessible in different countries. To measure the relative importance of these sources in one setting, this study exploits the randomized processing of U.S. visas for a group of Indian workers who produce software within a single multinational firm. In this setting, international barriers to trade in outputs, barriers to technology transfer, and all observable or unobservable differences between workers are extremely low. The results indicate that location outside of India causes a sixfold increase in the wages of the same worker using the same technology to produce a highly tradable good. Under plausible assumptions about competition in the industry, this suggests that country-of-work by itself is responsible - in this industry - for roughly three-quarters of the gap in productivity between workers in India and workers in the richest countries. These findings have implications for open questions in labor, growth, international, and development economics.

Heckscher-Ohlin Theory When Countries Have Different Technologies

Rethinking the foundations of Heckscher-Ohlin theory when countries have different technologies, this paper shows how to make the proper adjustments for international productivity differences. The central tool is a factor conversion matrix that computes the local factor content of foreign Rybczynski effects. Factor-specific productivities are a special case of these more general linear relationships.

Can International Productivity Differences Alone Account for the US Current Account Deficits?

AbstractAn influential explanation for the recent rise in the US current account deficit is the boom in US productivity. As US productivity surged in the mid‐1990s, capital was attracted to the US to take advantage of the higher real returns. Using a two‐country general‐equilibrium model, this paper quantitatively shows that the gap in productivity growth between the US and the “rest of the world” cannot explain the US current account deficits, especially in the 1980s and the 2000s. This is because on a GDP‐weighted basis, the “rest of the world” actually had higher productivity growth during these periods, and standard macroeconomic models would predict an outflow of funds from the US to the rest of the world, and a consequent US current account surplus. We show that changes in global financial integration can help explain this anomaly in US current account behavior.

International Productivity Differences and the Roles of Domestic Investment, FDI and Trade

This paper calculates Theil's entropy index to measure the extent of productivity differences across 92 countries for the period from 1970 to 2003. While there is evidence of increasing differences in productivity across these countries, we observe different patterns when we group the countries by income levels. These differences seem to be decreasing among middle income developing and developed countries, whereas they seem to be widening among low and high income developing countries. The results of our multivariate time series analysis also suggest that FDI increases productivity differences among low and high income developing countries, whereas GDI reduces these differences among low income countries in the long-run. Granger causality test results indicate that while an increase in GDI leads to a decline in growth of trade, a higher growth of trade appears to be important for attracting FDI to middle income countries. Furthermore, a reduction in productivity differences and a higher FDI growth lead to higher growth of trade in developed countries.

Can International Productivity Differences Explain U.S. Current Account Deficits?

An influential explanation for the recent rise in the U.S. current account deficit is the boom in U.S. productivity. As U.S. productivity surged in the mid-1990s, capital was attracted to the U.S. to take advantage of the higher real returns. Using a two country general equilibrium model, this paper quantitatively shows that the gap in productivity growth between the U.S. and the of the world cannot explain the U.S. current account deficits, especially in the 1980s and the 2000s. This is because on a GDP-weighted basis, the of the world actually had higher productivity growth during these periods, and standard macroeconomic models would predict an outflow of funds from the U.S. to the rest of the world, and a consequent U.S. current account surplus. We show that changes in global financial integration can help explain this anomaly in U.S. current account behavior.