Explaining economic growth. . - Precis - Technological Diffusion, Conditional Convergence, and Economic Growth - book review

Monthly Labor Review,  March, 2002  

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Economic growth occurs due to increases in the inputs of production--such as labor, capital, and materials--and increases in efficiency of input use (which is often referred to as total factor productivity or TFP). A question that arises is which of these, input or TFP, is more responsible for income differentials across countries.

In "Technological Diffusion, Conditional Convergence, and Economic Growth," (NBER, Working Paper Number 8713), David E. Bloom and Jaypee Sevilla (both of Harvard University) and David Canning (of Queen's University of Belfast) tackle this question. They note that microeconomic studies often suggest that income differentials across countries are explained mostly by differences in TFP. However, in some macroeconomic studies, inputs appear to have more of a role; such studies may "pick up externalities to physical and human capital that appear at the aggregate level but do not affect private returns."

In their study, Bloom, Sevilla, and Canning focus on modeling the dynamics of TFP. Their model allows for technology diffusion and for differentials in TFP in the long run across countries due to differences in geography and institutions.

The researchers estimate their model using data from the Penn World Table (which displays national accounts time series for many countries) and the International Labor Organization, among other sources. They do not find evidence for externalities at the aggregate level. As they observe, this "puts the emphasis in explaining cross-country differences in income levels on how and why TFP varies across countries." Their results indicate that there is systematic variation in steady-state TFP across countries related to their geography and institutions, but that convergence to steady-state levels via technological diffusion is slow.

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