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Productivity Differences and the Stage of Development: Where are the Bottlenecks?

  • J. Rodrigo Fuentes
  • Verónica Mies

Adoption of better technologies is a crucial way for developing countries to close productivity gaps with leading economies. However, the possibility of growing through adoption depends decisively on the country’s absorptive capacity. We build a theoretical model of technology adoption that focuses on four factors that shape the absorptive capacity of countries, namely: i) quantity of education; ii) quality provided by the education system; iii) microeconomic flexibility that favors the entry and exit of firms; and iv) the overall institutional environment that enhances/impedes R&D activities. We calibrate the model for a sample of 78 economies. The United States is our benchmark leading economy. We disentangle the relative weight of each development factor in explaining per capita income differences and study patterns in relationships between the type of development barrier and the level of development. The effect on the steady-state gap of improving any of the aforementioned factors represents a trade-off between the initial gap and the value of the rest of the parameters. For instance, a relatively low level of market flexibility and quality of the education system are the main impediments that high-income economies face in closing the gap with the United States; the former explains almost forty percent of the gap for high-income countries, while the latter accounts for nearly twenty percent of this gap. A remarkable result is the small effect that individual reforms have on steady-state productivity in low-income countries. With the exception of R&D-favoring institutions, the remaining three factors are individually responsible for less than fifteen percent of the gap. This result is explained by a poor global economic environment that reduces the effect of each factor when implemented individually. In fact, there are significant nonlinearities between the level of development and the effects of individual reforms that are due to the strong complementarities between the different development factors. A high degree of development implies that the factors are at a high level, increasing the effects of particular reforms on steady-state productivity. However, it also reflects a small technology gap, which reduces their potential impact. The calibration shows that the effects are greatest for middle-income countries and lowest for low- and high-income countries.

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Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 430.

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Date of creation: 2013
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Handle: RePEc:ioe:doctra:430
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  1. Stephen L. Parente & Edward C. Prescott, 1997. "Monopoly rights: a barrier to riches," Staff Report 236, Federal Reserve Bank of Minneapolis.
  2. Acemoglu, Daron & Zilibotti, Fabrizio, 2000. "Productivity Differences," CEPR Discussion Papers 2498, C.E.P.R. Discussion Papers.
  3. Peter Howitt, 2000. "Endogenous Growth and Cross-Country Income Differences," American Economic Review, American Economic Association, vol. 90(4), pages 829-846, September.
  4. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
  5. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
  6. Todd Schoellman, 2012. "Education Quality and Development Accounting," Review of Economic Studies, Oxford University Press, vol. 79(1), pages 388-417.
  7. Barro, Robert J. & Lee, Jong Wha, 2013. "A new data set of educational attainment in the world, 1950–2010," Journal of Development Economics, Elsevier, vol. 104(C), pages 184-198.
  8. Bartelsman, Eric & Haltiwanger, John C. & Scarpetta, Stefano, 2009. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," IZA Discussion Papers 4578, Institute for the Study of Labor (IZA).
  9. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306, June.
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