Productivity, Networks and Input-Output Structure

We consider a multi-sector general equilibrium model with IO linkages, sector-specifc productivities and tax rates. Using tools from network theory, we investigate how the IO structure interacts with productivities and taxes in the determination of aggregate income. Employing a statistical approach, we show that aggregate income is a simple function of the first and second moments of the distribution of the IO multipliers, sectoral productivities and sectoral tax rates. We then estimate the parameters of the model to fit their joint empirical distribution, allowing these to vary with income per capita. We find an important difference between rich and medium-low income countries. Poor countries have more extreme distributions of IO multipliers than rich economies: there are a few high-multiplier sectors, while most sectors have very low multipliers; in contrast, rich countries have more sectors with intermediate multipliers. Moreover, the correlations of these with productivities and tax rates are positive in poor countries, while being negative in rich ones. The estimated model predicts cross-country income differences extremely well, also out-of-sample (up to 97% of the variation in relative income per capita). Finally, we perform a number of counterfactuals. First, we "impose" the dense IO structure of the U.S. on low- and middle-income countries and find a large damaging effect, up to 80% of per capita income. Second, we assume that sectoral IO multipliers and productivities are uncorrelated and find that low-income countries would lose up to 50% of their per capita income while high-income countries ould gain.