Why Development Levels Differ: The Sources of Differential Economic Growth in a Panel of High and Low Income Countries

46 Pages Posted: 5 Oct 2007 Last revised: 30 Nov 2007

See all articles by Charles R. Hulten

Charles R. Hulten

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER)

Anders Isaksson

United Nations Industrial Development Organization

Date Written: October 2007

Abstract

Average income per capita in the countries of the OECD was more than 20 times larger in 2000 than that of the poorest countries of sub-Sahara Africa and elsewhere, and many of the latter are not only falling behind the world leaders, but have even regressed in recent years. At the same time, other low-income countries have shown the capacity to make dramatic improvements in income per capita. Two general explanations have been offered to account for the observed patterns of growth. One view stresses differences in the efficiency of production are the main source of the observed gap in output per worker. A competing explanation reverses this conclusion and gives primary importance to capital formation. We examine the relative importance of these two factors as an explanation of the gap using 112 countries over the period 1970-2000. We find that differences in the efficiency of production, as measured by relative levels of total factor productivity, are the dominant factor accounting for the difference in development levels. We also find that the gap between rich and most poor nations is likely to persist under prevailing rates of saving and productivity change. To check the robustness of these conclusions, we employ different models of the growth process and different assumptions about the underlying data. Although different models of growth produce different relative contributions of capital formation and TFP, we conclude that the latter is the dominant source of gap. This conclusion must, however, be qualified by the poor quality of data for many developing countries.

Suggested Citation

Hulten, Charles R. and Isaksson, Anders, Why Development Levels Differ: The Sources of Differential Economic Growth in a Panel of High and Low Income Countries (October 2007). NBER Working Paper No. w13469. Available at SSRN: https://ssrn.com/abstract=1019468

Charles R. Hulten (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Anders Isaksson

United Nations Industrial Development Organization ( email )

Vienna International Centre
P.O. Box 300
A 1400 Vienna
Austria

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