Accounting for Cross-Country Income Differences Revisited

Development accounting is the search for proximate sources of cross-country income differences. This article describes how knowledge in this field has evolved over the two decades since the influential work of Caselli (2005). There have been large advances in the measurement of production inputs (labor, physical capital, and human capital). These advances have raised the estimated contribution of inputs, mostly human capital, in development accounting. Our preferred estimate is that inputs account for 55–70 percent of gross domestic product (GDP) per worker differences, versus 30 percent using the classic specification. The literature has also made progress in moving away from Cobb-Douglas production functions and measuring factors such as management quality that were previously bundled into total factor productivity (TFP). Our review highlights the new implications of these advances, areas where future research would be beneficial, and the limitations of development accounting.