An Investigation of Cross-Country Income Differences

Abstract

This paper investigates the nature of income inequality across nations. Several exercises, such as variance decompositions, simulations and counter-factual analyses are performed. We find that, although total factor productivity has a leading role in explaining the dispersion of output per worker, countries grew in the past –and, consequently, are poor in the present– for different reasons. Even after correcting for productivity differences, some nations remain poor mostly because of low schooling of the labor force and other because they impose too many distortions to capital accumulation. Policy recommendations have to take country differences into account, or else they have a high chance of being either wrong or ineffective.