Mismatch and Aggregate Productivity

Income disparity across countries has been large and widening over time. This paper develops a tractable model where factor requirements in production technology do not necessarily match a country's profile of factor endowments. Assimilation balances this multi-dimensional endowment-technology mismatch and reduces the efficiency loss. New measures to the TFP and relative factor disadvantage are derived. The model can generate a novel trade-off between income level and income growth, depending on the assimilation ability and the relative factor endowment differences of the country. With the endowment-technology mismatch, our assimilation model accounts for 80%-98% of the global income variation over the past 50 years. The widening of mismatch accounts for 40%-60% of the global growth variation, whereas capital and human capital account for about one third and zero. Approximately 30% of the growth performance in miracle Asian economies can be attributed to successful assimilation which narrows the mismatch, whereas almost 70% of growth stagnation in trapped African economies is due to the lack of assimilation which widens it. A country can fall into a middle-income trap after a reversal in the mismatch.