Long-Run Catching-Up/Falling-Behind and Human Capital

Abstract

It has been recognized in the last 20-30 years that incomes rarely grow in a linear path over more than a decade. Some authors have analyzed changes in relative income – income normalized by a benchmark country’s income. We use the relative total factor productivity (TFP) data from the new generation of Penn World Tables (PWT) to compare the significance of catching up in inputs and TFP in explaining the convergence in relative income. We show that using truly long-run data and ignoring income fluctuations that last less than ten years has value. Using data as long as 64 years from one geographical region, Sub-Saharan Africa (to reduce parametric heterogeneity), we find growth miracles and failures may each last 20 to 30 years. We separate long-term catching-up (growth miracles) periods from long-term falling-behind (growth failures) periods for the same countries and examine proximate growth factors for the two. The main difference of the falling-behind periods from the catching-up periods is on the role of human capital. When human capital is contributing to income, countries are catching up in relative income- and TFP is about one-half as important as human capital. When it is not, they are falling behind - both in relative and in absolute income.

Keywords: Long-run income variability, Inter-country income differences, Proximate factors for growth, Human Capital

JEL Classification: J24, O40, O47, O55, O57