Why Development Levels Differ:
The Sources of Differential Economic Growth in a Panel of
High and Low Income Countries
Charles R. Hulten
University of Maryland and NBER
Research and Statistics Branch
United Nations Industrial Development Organization (UNIDO)
We would like to thank the participants at the NBER Summer Institute 2006, as well as Nobuya Haraguchi, for helpful comments and suggestions. Any remaining errors are our own.
The designations employed, descriptions and classifications of countries, and the presentation of the material in this document do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations Industrial Development Organization (UNIDO) concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries, or its economic system or degree of development. The responsibility for opinions expressed rests solely with the authors, and publication does not constitute an endorsement by UNIDO of the opinions expressed. Although great care has been taken to maintain the accuracy of information herein, neither UNIDO nor its Member States assume any responsibility for consequences which may arise from the use of the material. This document may be freely quoted or reprinted but acknowledgement is requested. This document has been produced without formal United Nations editing. The views expressed in this document do not necessarily reflect the views of the Secretariat of the United Nations Industrial Development Organization. Terms such as “developed, “industrialised” and “developing” are intended for statistical convenience and do not necessarily express a judgment. Any indication of, or reference to, a country, institution or other legal entity does not constitute an endorsement.
Average income per capita in the countries of the OECD was more than 20 times larger in 2000 than that of the poorest countries of sub-Sahara Africa and elsewhere, and many of the latter are not only falling behind the world leaders, but have even regressed in recent years. At the same time, other low-income countries have shown the capacity to make dramatic improvements in income per capita. Two general explanations have been offered to account for the observed patterns of growth. One view stresses differences in the efficiency of production are the main source of the observed gap in output per worker. A competing explanation reverses this conclusion and gives primary importance to capital formation. We examine the relative importance of these two factors as an explanation of the gap using 112 countries over the period 1970-2000. We find that differences in the efficiency of production, as measured by relative levels of total factor productivity, are the dominant factor accounting for the difference in development levels. We also find that the gap between rich and most poor nations is likely to persist under prevailing rates of saving and productivity change. To check the robustness of these conclusions, we employ different models of the growth process and different assumptions about the underlying data. Although different models of growth produce different relative contributions of capital formation and TFP, we conclude that the latter is the dominating source of gap. This conclusion must, however, be qualified by the poor quality of data for many developing countries.
The question of why economic growth differs among countries question has been asked over and over again, with increasingly better data and ever more sophisticated analytical techniques.1 However, the answer remains elusive despite the many advances and growing insights into the problem. Average income per capita in the countries of the OECD was more than 20 times larger in 2000 than that of the poorest...
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