SOME COUNTRIES PRODUCE SO MUCH MORE OUTPUT PER WORKER THAN OTHERS: Determinants of Economic Performance

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At an accounting level, differences in output per worker are due to differences in physical and human capital per worker and to differences in productivity. But why do capital and productivity differ so much across countries? The central hypothesis of this paper is that the primary, fundamental determinant of a country’s long-run economic performance is its social infrastructure. By social infrastructure, we mean the institutions and government policies that provide the incentives for individuals and firms in an economy. Those incentives can encourage productive activities such as the accumulation of skills or the development of new goods and production techniques, or those incentives can encourage predatory behavior such as rent-seeking, corruption, and theft.


Productive activities are vulnerable to predation. If a farm cannot be protected from theft, then thievery will be an attractive alternative to farming. A fraction of the labor force will be employed as thieves, making no contribution to output. Farmers will spend more of their time protecting their farms from thieves and consequently grow fewer crops per hour of effort.
Social control of diversion has two benefits. First, in a society free of diversion, productive units are rewarded by the full amount of their production—where there is diversion, on the other hand, it acts like a tax on output. Second, where social control of diversion is effective, individual units do not need to invest resources in avoiding diversion. In many cases, social control is much cheaper than private avoidance. Where there is no effective social control of burglary, for example, property owners must hire guards and put up fences.