Dual Economies and International Total Factor Productivity Differences: Channelling the Impact from Institutions, Trade, and Geography

Abstract

This paper provides a framework that decomposes aggregate total factor productivity (TFP) into a component reflecting relative efficiency across sectors, and another component that reflects the absolute level of efficiency. A development accounting analysis suggests that as much as 85% of the international variation in aggregate TFP can be attributed to variation in relative efficiency across sectors. Estimation results show that recent findings highlighting the importance of strong protection of property rights, financial development and geographical advantage for the level of TFP, can be explained by their impact on relative efficiency.

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