Why Do Some Countries Produce So Much More Output Per Worker Than Others?

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Why Do Some Countries Produce So Much More Output
Per Worker Than Others?

• Robert E. Hall and Charles I. Jones

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Institutions Affecting Income Level
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Findings

• Many growth theory predictions can be considered
  in a CROSS-SECTION context by examining income
  levels across countries
• Large output per worker variation across
  countries ONLY PARTIALLY explained by differences
  in physical capital and educational attainment.
• Differences in SOCIAL INFRASTRUCTURE across
  countries cause LARGE DIFFERENCES in capital
  accumulation, educational attainment and
  productivity and thus LARGE DIFFERENCES in income
  across countries.
• Using distance from the equator and language
  data, they conclude that their finding that
  DIFFERENCES IN SOCIAL INFRASTRUCTURE CAUSE LARGE
  DIFFERENCES IN INCOME is robust to measurement
  error and endogeneity concerns.

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Hypothesis

• Differences in capital accumulation, productivity
  and output per worker are fundamentally related
  to differences in social infrastructure

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Why Levels?

• Levels capture differences in LR economic
  performance most directly relevant to welfare
• Easterly, Kremer, Pritchett and Summers Low
  correlation of growth rates across decades
  (suggest growth rates across countries may be
  mostly transitory)
• Growth regressions in Mankiw, Romer and Weil and
  Barro and Sala-i-Martin motivated by neoclassical
  growth model where LR growth rates are the same
  across countries/regions

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Output per Worker
Inputs, Productivity
Social Infrastructure
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Levels Accounting

• Three approaches. Use simplest Cobb-Douglas
  Approach

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Productivity and Output per Worker

• Figure I

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Table I
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Observations

• Output per worker in the five countries in 1998
  with highest levels of output per worker was
  31.67 times higher than in the five lowest
  countries most of this difference due to
  differences in productivity (a factor of 8.3)
• With no differences in productivity output per
  worker in the five richest countries would only
  be 4 times larger than in the five poorest
  countries

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Incentives

• The fundamental determinant of a countrys LR
  economic performance is its social infrastructure
  (the institutions and government policies that
  provide the incentives for individuals and firm
  in an economy)
• Incentives can encourage productive activities
  and predatory behavior
• Benefits of social control of diversion
• Productive units rewarded for the full account of
  their production

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Diversion

• Where social control of diversion is effective,
  individual units need not invest resources in
  avoiding diversion
• The suppression of diversion central element of
  favorable social infrastructure
• Some diversion (taxation) to carry out deterrence
  
• Rent-seeking (diversion in all countries and
  major diversion in advanced economies)
• Successful economies limit scope of rent-seeking

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ESTIMATING EFFECT OF SOCIAL INFRASTRUCTURE

• Measurement of Social Infrastructure
• Ideal wedge between private return to productive
  activities and social return to productive
  activities
• Practice Wedges not quantifiable. Must rely on
  proxies for social infrastructure and recognize
  potential for measurement error

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Government Antidiversion Policies)

• Index of GADP created by Political Risk Services.
  Rates 130 countries in 24 categories. Use the
  average of 5 categories
• Law and order
• Bureaucratic quality
• Corruption
• Risk of expropriation
• Government repudiation of contracts
• Index scale 0 to 1 (higher values for govts with
  more effective policies)

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Extent to which a country is open to
international trade

• Sachs and Warner 1995 index measures the fraction
  of years during 1950-1994 that the economy has
  been open
• 0, 1 scale
• 5 criteria for being open

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Structural Model
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Proxies

• They use proxies for social infrastructure
• Proxy related to TRUE social infrastructure
  through random measurement error

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Instruments

• Distance from equator (Absolute value of
  latitude in degrees divided by 90 to place it on
  a 0 to 1 scale)
• Extent to which primary languages of Western
  Europe spoken as first languages today
• 1. Fraction of a countrys population speaking
  one of the five primary Western European
  languages as a mother tongue (incl. English)
• 2. Fraction of population speaking English as
  mother tongue
• (Log) Predicted trade share of an economy
  (Frankel and Romer)

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IVs

• Positively correlated with social infrastructure
• Lack of correlation with error (Was European
  influence more intensively targeted toward
  regions of the world more likely to have high
  output per worker today?)

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Figure II
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Table II
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Observations

• A DIFFERENCE OF .01 IN SOCIAL INFRASTRUCTURE IS
  ASSOCIATED WITH A DIFFERENCE IN OUTPUT PER WORKER
  OF 5.14 PERCENT.
• TESTING THE OVERIDENTIFYING RESTRICTIONS OF THE
  MODEL restrictions not rejected
• TESTING FOR EQUALITY OF TWO VARIABLES OF SOCIAL
  INFRASTRUCTURE INDEX restriction not rejected
• MAIN RESULT ROBUST TO MORE LIMITED IVs AND USING
  ONLY 79 COUNTRIES (complete date set)

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HOW MUCH VARIATION IN TRUE SOCIAL INFRASTRUCTURE
ACROSS COUNTRIES?
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Observations

• Assuming no true simultaneity problem, (error
  uncorrelated with S) we can calculate the
  standard deviation of TRUE SOCIAL INFRASTRUCTURE
• Measured social infrastructure ranges from a low
  of .1127 in Zaire to a high value of 1.0000 in
  Switzerland.
• THE DIFFERENCES IN SOCIAL INFRASTRUCTURE CAN
  ACCOUTN FOR A 25.2 fold difference in output per
  worker across countries.
• Output per worker in the richest country (US) an
  din the poorest country in our data set (Niger)
  differ by a factor of 35.1

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• COUNTRIES MOST INFLUENCED BY EUROPEANS IN PAST
  CENTURIES HAVE SOCIAL INFRASTRUCTURES CONDUCIVE
  TO HIGH LEVELS OF OUTPUT PER WORKER AND HAVE HIGH
  LEVELS OF OUTPUT PER WORKER. This means that
  INFRASTRUCTURE IS A POWEERFUL CAUSAL FACTOR
  PROMOTING HIGHER OUTPUT PER WORKER.

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Reduced-Form Results

• RF equations document close relationship between
  instruments and actual social infrastructure.
• Combined, they explain a substantial fraction of
  the variance of the social infrastructure index
• The IVs are closely related to LR economic
  performance

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Table III
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Table IV
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Table V
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Observations

• Differences in social infrastructure are
  sufficient to account for the bulk of the
  observed range of variation in capital intensity,
  human capital per worker, and productivity.
• (Interpreted through an aggregate production
  function, these differences account for MUCH of
  the variation in output per worker)

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Table VI