Productivity Differences and the Stage of Development: Where are the Bottlenecks?

Adoption of better technologies is a crucial way for developing countries to close productivity gaps with leading economies. However, the possibility of growing through adoption depends decisively on the country’s absorptive capacity. We build a theoretical model of technology adoption that focuses on four factors that shape the absorptive capacity of countries, namely: i) quantity of education; ii) quality provided by the education system; iii) microeconomic flexibility that favors the entry and exit of firms; and iv) the overall institutional environment that enhances/impedes R&D activities. We calibrate the model for a sample of 78 economies. The United States is our benchmark leading economy. We disentangle the relative weight of each development factor in explaining per capita income differences and study patterns in relationships between the type of development barrier and the level of development. The effect on the steady-state gap of improving any of the aforementioned factors represents a trade-off between the initial gap and the value of the rest of the parameters. For instance, a relatively low level of market flexibility and quality of the education system are the main impediments that high-income economies face in closing the gap with the United States; the former explains almost forty percent of the gap for high-income countries, while the latter accounts for nearly twenty percent of this gap. A remarkable result is the small effect that individual reforms have on steady-state productivity in low-income countries. With the exception of R&D-favoring institutions, the remaining three factors are individually responsible for less than fifteen percent of the gap. This result is explained by a poor global economic environment that reduces the effect of each factor when implemented individually. In fact, there are significant nonlinearities between the level of development and the effects of individual reforms that are due to the strong complementarities between the different development factors. A high degree of development implies that the factors are at a high level, increasing the effects of particular reforms on steady-state productivity. However, it also reflects a small technology gap, which reduces their potential impact. The calibration shows that the effects are greatest for middle-income countries and lowest for low- and high-income countries.