Barriers to Capital Accumulation and Aggregate Total Factor Productivity

I develop a growth model where output can be produced with a modern and a traditional technology. The traditional technology has a lower TFP and a lower share of reproducible capital than the modern technology. In this simple framework, barriers to capital accumu-lation affect the extent to which these technologies are used. Intuitively, barriers reduce the return to using the modern technology relative to the traditional technology because reproducible capital is a more important input in the modern technology. As a result, bar-riers to capital accumulation not only affect the capital to output ratio in the economy but also aggregate TFP. The theory thus connects two seemingly disparate research programs in the recent growth literature: models of factor accumulation and models of total factor productivity. The model economy is calibrated by interpreting the traditional technology as producing agricultural output and the non-reproducible factor as land. The theory implies that barriers to capital accumulation are associated with large agricultural shares. This novel implication of the theory is strongly supported by both cross-country data and time series evidence from a set of East Asian miracle countries. For a reasonable parameterization of the model, the required TFP differences needed to account for a reasonable disparity in the wealth of nations are reduced by a half relative to the standard growth model that abstracts from technology choice.