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Why are some countries so much richer than others? Development Accounting is a first-pass attempt at organizing the answer around two proximate determinants: factors of production and efficiency. It answers the question "how much of the cross-country income variance can be attributed to differences in (physical and human) capital, and how much to differences in the efficiency with which capital is used?" Hence, it does for the cross-section what growth accounting does in the time series. The current consensus is that efficiency is at least as important as capital in explaining income differences. I survey the data and the basic methods that lead to this consensus, and explore several extensions. I argue that some of these extensions may lead to a reconsideration of the evidence.
The study focused on a cross-section of countries observed in the mid-1990s, so the conclusions from that effort are beginning to be a bit dated. In addition, signi cant revisions of the data underlying the 2005 paper have been published. Last but not least, in the intervening years become aware of ways in which the original methodology can be usefully improved and extended. Hence the present update and upgrade of the original paper. This paper focuses on data (mostly) from 2005 and improves on the original methodology in several dimensions. Development accounting compares differences in income per worker between developing and developed countries to counter-factual differences attributable to observable components of physical and human capital. Such calculations can serve a useful preliminary diagnostic role before engaging in deeper and more detailed explorations of the fundamental determinants of differences in income per worker. The research and policy agenda would then have to focus on technology, allocative efficiency, competition, and other determinants of the efficient use of capital. However because of limitations in thecoverage of the test results, author also present results where human capital is only measured from years of schooling and health. It turns out that, at least in my preferred calibration, the addition or omission of cognitive skills (as measured by test scores) does not greatly affect the quantitative results.
"... Papers presented at a conference held at the Stouffer Wailea Hotel, Maui, Hawaii, January 6-7, 1989. ... part of the Research on Taxation program of the National Bureau of Economic Research." -- p. ix.
I document a strong negative cross-country correlation between intergenerational earnings persistence and measures of tax progressivity - and level, and between intergenerational earnings persistence and public expenditure on tertiary education. To explain these correlations I then develop an intergenerational life-cycle model of human capital accumulation and earnings, which features, progressive taxation, public education expenditure, and borrowing constraints among the determinants of earnings persistence. I calibrate the model to US data and use it to decompose the contributions to earnings persistence from different model elements and to quantify how earnings persistence in the US changes as I introduce tax - and education expenditure policies from other countries. I find that individual investments in human capital account for 73% of the estimated intergenerational earnings persistence in the US. Taxation, through its impact on investments in human capital, can explain 50% of the variation between the US and 10 other countries, whereas borrowing constraints, which have received much attention in the literature, have a limited impact on earnings persistence.
The 32nd issue of the International Productivity Monitor is a special issue produced in collaboration with the OECD. All articles published in this issue were selected from papers presented at the First Annual Conference of the OECD Global Forum on Productivity held in Lisbon, Portugal, July ...
Should our research and policy advice be guided by a modern version of capital fundamentalism, in which capital and investment are viewed as the primary determinants of economic development and long- run growth? No. Capital accumulation seems to be part of the process of economic development, not its igniting source.
The permanent income hypothesis implies that frictionless open economies with exhaustible natural resources should save abroad most of their resource windfalls and, therefore, feature current account surpluses. Resource-rich developing countries (RRDCs), on the other hand, face substantial development needs and tight external borrowing constraints. By relaxing these constraints and providing a key financing source for public investment in RRDCs, temporary resource revenues might then be associated with current account deficits, or at least low surpluses. This paper develops a neoclassical model with private and public investment and several frictions that capture pervasive features in RRDCs, including absorptive capacity constraints, inefficiencies in investment, and borrowing constraints that can be relaxed when natural resources lower the country risk premium. The model is used to study the role of investment and these frictions in shaping the current account dynamics under windfalls. Since consumption and investment decisions are optimal, the model also serves to provide current account benchmarks (norms). We apply the model to the Economic and Monetary Community of Central Africa and discuss how our results can be used to inform the current account norm analysis pursued at the International Monetary Fund.
Improvement in human capital is often presumed important for state economic development, but little research links better education to state incomes. We develop detailed measures of worker skills in each state that incorporate cognitive skills from state- and country-of-origin achievement tests. These new measures of knowledge capital permit development accounting analyses calibrated with standard production parameters. Differences in knowledge capital account for 20-30 percent of the state variation in per-capita GDP, with roughly even contributions by school attainment and cognitive skills. Similar results emerge from growth accounting analyses. These estimates support school improvement as a strategy for state economic development.
Most macroeconomic models assume that aggregate output is generated by a specification for the production function with total physical capital as a key input. Implicitly this assumes that private and public capital stocks are perfect substitutes. In this paper we test this assumption by estimating a nested-CES production function whereas the two types of capital are considered separately along with labor as inputs. The estimation is based on our newly developed dataset on public and private capital stocks for 151 countries over a period of 1960-2014 consistent with Penn World Table version 9. We find evidence against perfect substitutability between public and private capital, especially for emerging and LIDCs, with the point estimate of the elasticity of substitution estimated closely around 3.