Productivity, Factor Accumulation and Social Networks: Theory and Evidence

The paper analyses how barriers to communication across social groups affect economy-wide productivity and factor accumulation. Using a dynamic model of an economy that includes a reproducible capital stock (physical or human) and effective labour, social barriers to communication are shown to have a negative effect on total factor productivity (TFP), per capita consumption and the accumulation of reproducible capital. Propositions from the model are tested using cross-country data from over a 100 countries. The results obtained from OLS and instrumental variables estimation, and with an exhaustive set of robustness tests, support the hypothesis that social barriers to communication, as measured by linguistic diversity, reduce TFP. Some evidence is also found to support the idea that the effects of social barriers to communication may be mitigated by improvements in mass communications. In addition, changes in the stocks of human and physical capital are found to be negatively related to social barriers to communication, after controlling for the initial levels of income and human or physical capital. The theory and empirical results together help explain the persistence of cross-country differences in TFP and provide insights as to how economies may initiate productivity 'catch up'.