The Role Of Capital And Productivity In Accounting For Income Differences Since 1913

This paper studies the proximate determinants of differences in output per worker across countries since 1913. We provide a new long‐term perspective by developing a novel dataset with information on produced capital for 33 countries that covers most of the global income distribution. Using development accounting analysis, we find a large shift in the proximate determinants of cross‐country income inequality during the 20th century. The contribution of produced capital to cross‐country income variation declined from 29% to 11%, while that for productivity rose from 47% to 72%. Thus, the current predominant role of productivity in accounting for income differences is quite exceptional from a historical perspective. We draw on these findings to review various strands of the literature and offer some hypothesis about the rising relative importance of TFP for comparative economic performance. We conclude that differences in technological adoption rates and efficiency are the primer drivers of the decreasing relative importance of capital deepening for cross‐country income inequality, rather than factor input mismeasurement.