SOME COUNTRIES PRODUCE SO MUCH MORE OUTPUT PER WORKER THAN OTHERS: Introduction 4

Some of the cross-country growth literature recognizes this point. In particular, the growth regressions in Mankiw et al. (1992) and Barro and Sala-i-Martin (1992) are explicitly motivated by a neoclassical growth model in which long-run growth rates are the same across countries or regions. These studies emphasize that differences in growth rates are transitory: countries grow more rapidly the further they are below their steady state. Nevertheless, the focus of such growth regressions is to explain the transitory differences in growth rates across countries.1 Our approach is different—we try to explain the variation in long-run economic performance by studying directly the cross-section relation in levels.

The purpose of this paper is to call attention to the strong relation between social infrastructure and output per worker. Countries with corrupt government officials, severe impediments to trade, poor contract enforcement, and government interference in production will be unable to achieve levels of output per worker anywhere near the norms of western Europe, northern America, and eastern Asia. Our contribution is to show, quantitatively, how important these effects are. website

We can summarize our analysis of the determinants of differences in economic performance among countries as:

Output per Worker <— (Inputs, Productivity) <— Social Infrastructure.

This framework serves several purposes. First, it allows us to distinguish between the proximate causes of economic success—capital accumulation and productivity—and the more fundamental determinant. Second, the framework clarifies the contribution of our work. We concentrate on the relation between social infrastructure and differences in economic performance. The production function-productivity analysis allows us to trace this relation through capital accumulation and productivity.

We are conscious that feedback may occur from output per worker back to social infrastructure. For example, it may be that poor countries lack the resources to build effective social infrastructures. We control for this feedback by using the geographical and linguistic characteristics of an economy as instrumental variables. We view these characteristics as measures of the extent to which an economy is influenced by Western Europe, the first region of the world to implement broadly a social infrastructure favorable to production. Controlling for endogeneity, we still find that differences in social infrastructure across countries account for much of the difference in long-run economic performance around the world.