Lecture 2 (Optional) Why Do Some Countries Produce

WhyDoSomeCountriesProduceSoMuchMoreOutputPerWorkerThanOthers?RobertE.Hall;CharlesI.JonesTheQuarterlyJournalofEconomics,Vol.114,No.1.(Feb.,1999),pp.83-116.StableURL:=0033-5533%28199902%29114%3A1%3C83%3AWDSCPS%3E2.0.CO%3B2-STheQuarterlyJournalofEconomicsiscurrentlypublishedbyTheMITPress.YouruseoftheJSTORarchiveindicatesyouracceptanceofJSTOR'sTermsandConditionsofUse,availableat://@jstor.org.:222007WHYDOSOMECOUNTRIESPRODUCESOMUCHMOREOUTPUTPERWORKERTHANOTHERS?*Outputperworkervariesenormouslyacrosscountries.Why?Onanaccount-ingbasisouranalysisshowsthatdifferencesinphysicalcapitalandeducationalattainmentcanonlypartiallyexplainthevariationinoutputperworker-wefindalargeamountofvariationintheleveloftheSolowresidualacrosscountries.Atadeeperlevel,wedocumentthatthedifferencesincapitalaccumulation,productiv-ity,andthereforeoutputperworkeraredrivenbydifferencesininstitutionsandgovernmentpolicies,whichwecallsocialinfrastructure.Wetreatsocialinfrastruc-tureasendogenous,determinedhistoricallybylocationandotherfactorscapturedinpartbylanguage.In1988outputperworkerintheUnitedStateswasmorethan35timeshigherthanoutputperworkerinNiger.InjustovertendaystheaverageworkerintheUnitedStatesproducedasmuchasanaverageworkerinNigerproducedinanentireyear.Explainingsuchvastdifferencesineconomicperformanceisoneofthefundamentalchallengesofeconomics.Analysisbasedonanaggregateproductionfunctionprovidessomeinsightintothesedifferences,anapproachtakenbyMankiw,Romer,andWeil[I9921andDoughertyandJorgenson[19961,amongothers.Differencesamongcountriescanbeattributedtodifferencesinhumancapital,physicalcapital,andproductivity.Buildingontheiranalysis,ourresultssuggestthatdifferencesineachelementoftheproductionfunctionareimportant.Inparticu-lar,however,ourresultsemphasizethekeyroleplayedbyproductivity.Forexample,considerthe35-folddifferenceinoutputperworkerbetweentheUnitedStatesandNiger.Differentcapitalintensitiesinthetwocountriescontributedafactorof1.5totheincomedifferences,whiledifferentlevelsofeducationalattainmentcontributedafactorof3.1.Theremainingdiffer-ence-afactorof7.7-remainsastheproductivityresidual.ApreviousversionofthispaperwascirculatedunderthetitleTheProductivityofNations.ThisresearchwassupportedbytheCenterforEconomicPolicyResearchatStanfordandbytheNationalScienceFoundationundergrantsSBR-9410039(Hall)andSBR-9510916(Jones)andispartoftheNationalBureauofEconomicResearch'sprogramonEconomicFluctuationsandGrowth.WethankBobbySinclairforexcellentresearchassistanceandcolleaguestoonumeroustolistforanoutpouringofhelpfulcommentary.Datausedinthepaperareavailableonlinefrom:whydosomecountriesinvestmorethanothersinphysicalandhumancapital?Andwhyaresomecountriessomuchmoreproductivethanothers?Thesearethequestionsthatthispapertackles.Whenaggregatedthroughtheproductionfunction,theanswerstothesequestionsadduptoexplainthedifferencesinoutputperworkeracrosscountries.Ourhypothesisisthatdifferencesincapitalaccumulation,productivity,andthereforeoutputperworkerarefundamentallyrelatedtodifferencesinsocialinfrastructureacrosscountries.Bysocialinfrastructurewemeantheinstitutionsandgovernmentpoliciesthatdeterminetheeconomicenvironmentwithinwhichindividualsaccumulateskills,andfirmsaccumulatecapitalandproduceoutput.Asocialinfrastructurefavorabletohighlevelsofoutputperworkerprovidesanenvironmentthatsupportsproduc-tiveactivitiesandencouragescapitalaccumulation,skillacquisi-tion,invention,andtechnologytransfer.Suchasocialinfrastruc-turegetsthepricesrightsothat,inthelanguageofNorthandThomas[19731,individualscapturethesocialreturnstotheiractionsasprivatereturns.Socialinstitutionstoprotecttheoutputofindividualproduc-tiveunitsfrom