In this paper, we use an extended version of the neoclassical multi-country growth model to explore the efficiency in the allocation of physical capital across countries. In our framework, the observed marginal product of capital (MPK) can differ across countries because of two different factors: (a) differences in the countries' production functions, specifically output shares of mobile factors; and (b) differences in the distortions (wedges) in the use of capital across countries. We use the model to evaluate the importance of these two factors in accounting for the cross-country dispersion in the implied MPKs over the last 40 years and assess how efficiently capital is and has been allocated. Our findings indicate that in the last two decades the world has decidedly moved in the direction of efficiency. Moreover, we find that a realigment of capital to countries with higher TFP and capital-output shares accounts for a large fraction of the gains in efficiency. However, we find that even today, distortions (factor b) are still quantitatively significant and that the global output gains are would be significant if those distortions were eliminated. The gains are even larger in policy counterfactuals with capital accumulation. We also find a large degree of heterogeneity. For example, we find significant output loses for countries which heavily distort international trade and for countries with weak financial markets.
