Income Differences Across Countries

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Income Differences Across Countries
Pete Klenow
Stanford University
Society for Economic Dynamics
July 6th, 2006
Vancouver, Canada
1
2000 PPP Income per capita
90th/10th
25.6
75th/25th
8.8
S.D. of logs
1.16
Source: Penn World Table 6.1 (86 countries)
2
Source: Penn World Table
Tanzania
Ethiopia
Nigeria
Malawi
Pakistan
India
Indonesia
China
Egypt
Thailand
Brazil
Russia
Mexico
Malaysia
Argentina
South Korea
Israel
Italy
Great Britain
France
Germany
Sweden
Japan
Australia
Switzerland
Hong Kong
Canada
Norway
United States
Relative Income Per Capita 2000
100
90
80
70
60
50
40
30
20
10
0
3
Production function
α
1−α
Y = K ( AhL)
Y = PPP GDP
pop = population
L = hours worked
K = PPP physical capital
h = human capital per worker
A = a residual
4
A useful decomposition
α
⎤1−α
Y
L ⎡K
=
⎢
⎥
pop pop ⎣ Y ⎦
Ah
5
Point 1: Quality and Variety
Quality:
Perhaps 30% higher in rich vs. poor.
ICP: services are “comparison resistant”.
⇒ half is missed in PPP calculations.
Source: Hummels and Klenow (2005)
6
Price of Medical Care
4
2
CHE
BMU NOR
SWE
DNK
AUTUSA
FIN
GER
ATG
JAM
FRA BEL
YEM
ESP
NLD
TTO
LBN
ISR
JPN
IRL
NZL
BHR
PRTBHS
AUS ITA
GBR
GAB
QAT
NGA
ISL
CAN
SYR
GRC
OMN
BRB
BRA
HRV
SVN
HKG
ARG
URY
BWA
TURBLZ
KOR
SGP
EGY
KNA
GRD
CHL
VCT FJI
JOR
POL MEX
BEN
CIV
VEN
LCA
DMA
COG
ECU
MLI
PER MAR
EST
SEN
SVK
HUN
CMR
MDG
SWZPAN
TUN
RUS
LVA
CZE
BOL
KEN
THA
KAZLTU
PHL BGR
IDN
MUS
SLE
IRN
UKR
ROM
ZWE
UZB
ZMB
ALB
BLR
MDA
VNM
GEO
BGD
MWI
KGZPAK
GIN
ARM
AZE
LKA
NPL
TJK
TKM
Relative to the U.S. = 1
MKD
1
1/2
1/4
1/8
TZA
1/16
LUX
1/32
1/64
1/64
1/32
1/16
1/8
1/4
1/2
PPP GDP per worker (U.S. = 1)
Source: Penn World Table (114 countries in 1996)
1
2
7
Price of Education
4
NGA
2
CHE
Relative to the U.S. = 1
LBN
1
LUX
MKD
MWI
TZA
1/2
ZMBCOG
BEN
SLE
SEN
KEN
MLI
MDG
1/4
GAB
BWA
CMR
CIVGIN
ZWE
YEM
1/8
VNM
1/16
MDA
NPL
1/32
SYR
BHR
MUS
TUN
GRC
OMN
KOR
SVN
PRTBHS
TTO
FJI
KNA
HRVTHA
BLZ
LCA
HUN
DMA
JAM
TURPOL SVK
PER
ATG
ARG
CZE
MEX
CHL
VCT GRD IRNBRA
URY
PAK
EST
LVA
LTURUSPAN VEN
ECU
IDN
BOL LKA
PHL
ALB
UKR
KAZ ROM
BLR
BGR
UZB
BGD
AZE
KGZ
1/64
1/64
MARJOR
EGY
SWZ
GER
SWE
HKG
DNKUSA
AUT
JPNFRA
NOR
NLDBEL
FIN
QAT
BMU
GBR
ISL
ITA
CANIRL
NZL
ESP ISR
AUS SGP
BRB
GEO
ARM
1/32
1/16
1/8
1/4
1/2
PPP GDP per worker (U.S. = 1)
Source: Penn World Table (114 countries in 1996)
1
2
8
Point 1: Quality and Variety
Variety:
Perhaps 15% higher in rich vs. poor.
Suppose 2/3 (consumer portion) missed.
Taken together, factor of 30 rather than 24!
Source: Hummels and Klenow (2002)
9
Point 2: L/pop
Prescott, Rogerson:
Explains income gap b/w U.S., Western Europe
Alwyn Young:
Explains 20% of growth in Asian Tigers, China
Parente, Rogerson & Wright:
Poor do more home work, less market work
10
Labor Force / Population
70%
JPN
CHN
60%
SGP
ZAR
50%
TZA
40%
30%
ISLCHE
DNK
THA
SWE
CAN
USA
HKG
NOR
JAM ROM
GBR
GER
CMR
FIN
AUS
COG
RWA
KEN
MOZ
BRB
UGA BENGHA
ZWE
NER
MLI
SEN
CAF
NZL NLD
PNG
GNB GMB LSO
CYP AUT
COL
MUS
PRT
FRA
URY
PRYTURPOL
TWN
PER
MWI
HTI
NPL
BEL
ARG KOR
LKA
GRC
TGO
HUN
ITA
PHL
ESP
IDN CRI
IND BOL
TTO
IRL
CHL
ISR
PAN
GUY
BRA
SLE
VEN MYS
FJIBWAMEX
ZAF
ZMB
TUN
DOMDZA
SLV
HND
ECU
IRN
EGY
GTM
PAK
SYR
JOR
BGD
20%
5
6
7
8
9
10
11
log income per worker
Source: ILO via Penn World Table (97 countries in 1996)
11
Source: WDI via Caselli (2005)
12
Source: ILO via Caselli (2005), 41 countries in 1996
13
Development Accounting
α
⎡ K ⎤1−α
Y = L ⎢ ⎥
pop
pop
⎢Y ⎥
⎣ ⎦
24
hA
1
14
L/pop: Open Questions
ILO data suspect?
10% of Asian growth, vs. Young’s 20%
Hours worked per agricultural worker?
Alternatively, count home production.
15
Point 3: K/Y
Richer countries have higher PPP I/Y (corr 0.6).
Estimate K/Y using perpetual inventory and an
initial stock guess.
⇒ richer countries have higher K/Y (corr 0.7).
16
K/Y
4
JPN
CHE
3
ROM
TZA
2
1
THA
POL
HUN
LSO
FIN NOR
SGP
FRA
AUT
KOR
GER
BEL
GRC ESP SWE
ISL
CAN
ITA
DNK
NLD
AUS
NZL
ISR
PRT
HKG
USA
CYP GBR
JAM
PER
MEX
ECU DZAPAN BRA MYS
GUY
GNB
IRN VEN
ARG
CRI TUR
ZWE
IRL
ZMB
PHL JOR
TWN
BWA
CHN
CHL
FJI
IDN
TUN
NPL COGHND
URY
DOM
BRB
COL ZAF TTO
PRY
PNG
LKA
MUS
PAK
MWI
SYR
IND BOL
CMR
MLI
CAF
KENBGD
TGO
SLV
NER GMB
GTM
SEN
BENGHA
RWA
EGY
SLE
MOZ
HTI
UGA
ZAR
0
5
6
7
8
9
10
11
log income per worker
Source: Penn World Table (97 countries in 1996)
17
Development Accounting
α
⎡ K ⎤1−α
Y
L
=
hA
⎢ ⎥
pop
pop ⎣ Y ⎦
N N 24
1
2
18
Forces driving K/Y variation
19
Forces driving K/Y variation
Saving rates?
20
Investment Rates at Domestic Prices
1996 % Investment Rate at
Domestic Prices
60
COG
TKM
50
THA
40
KNA
JOR
JAM
30
MLI
20
KEN
ZMB
BEN
TZA
10
NGA
MWI
MDG
SGP
CZE
ATG
HKG
GRD
BLZ
JPN
SWZ
VNM
EST
HUN
VCTDMA BWA TUN
AZE
TUR
ECU
CHL
LCA
PAN
RUS
LKA PHL
PRT
AUT
ROM GAB
MUS
LTU
NPL MDA
ISR NOR
IRN MEX SVN
BHR
BLR
KGZ UKR
LBN
NZL
HRV
ZWE
PER
QAT
GER
UZB
BGD
MAR POL BRA ARG
CHE
NLD
MKD
GRC ESP AUS
ARM PAK
LVA
GIN
SEN
BRB
OMN
CAN
ISL
IRL
BEL
USA
ITA
KAZ
DNK
FINFRA
GBR
YEM
VEN
SWE
CMR CIV BOL
EGY
TTO
BHS BMU
URY
GEO
FJI
ALB
TJK
SYR
KOR
SVK
IDN
LUX
BGR
SLE
0
1/64
1/32
1/16
1/8
1/4
1/2
1
2
1996 PPP GDP per worker (U.S. = 1)
Source: Penn World Table
21
Forces driving K/Y variation
Saving rates? NO
22
Forces driving K/Y variation
Saving rates? NO
Investment prices?
23
1996 Price of Equipment
8
MKD
SYR
Relative to the U.S. = 1
4
GAB
NGA
COG
YEM
2
CIV
EGY
CHE
FIN
DNK
BMU
JOR
JPN
SWE
ATG
GER
SEN
AUS
QAT
LBN
BEN
GRC
FRA
IRLNOR
HRV
PRT NZL
AUT
UKR
RUS
GBR
NLD
ITA
GIN
ISL
HUN
MDA
SVN
THA
SVK CZE
BOL ALB
PERLTUEST
ESP OMN BEL
ECU
LVA
BGR
VEN
IRN
USA
URY
BWA
TUR
FJI
ARG
BRA
POL
ZMB
CHL
BLR
CAN
KEN
VNM
MEX
PAN
ISR
AZE
KAZ
MWI
KNA
MDG
CMR
ROM
BHR
LCA
GEO
SGP
TUN MUSBHS BRB
JAM
DMA
GRD
MAR
SLE
TTO
KGZ
TJK
KOR
HKG
MLI
ARM
IDN
VCT
SWZ BLZ
PHL
LKA
NPL
ZWE
PAK
BGD
UZB
1
TZA
1/2
LUX
TKM
1/4
1/64
1/32
1/16
1/8
1/4
1/2
1
2
1996 PPP GDP per worker (U.S. = 1)
Source: Penn World Table
24
Forces driving K/Y variation
Saving rates? NO
Investment prices? NO
25
Forces driving K/Y variation
Saving rates? NO
Investment prices? NO
Consumption prices?
26
1996 Price of Consumption
4
MKD
Relative to the U.S. = 1
2
1
1/2
TZA
1/4
CHE
JPN
SWE
NOR
DNK
BMU
FIN
FRA
GER
AUT
BEL
ISLNLDSGP
NGA
SYR
IRL
ISR
NZL
GBRAUS ITA
ESP
USA
GRC
CAN
HKG
PRT KOR
ATG
BHS
YEM
SVN
ARG
BRA
URY
BHR
LBN
LCA
HRV
JAM
KNA
DMA
CHL
FJI
PER
VEN TTO
ECUVCT GRD
BLZ
THA
PAN
JOR
MEX
QAT
TURPOL
COG
HUN
ZMB
OMN
EST
CZE
RUS GAB
BOL
LVA
IRN
MDGBEN
SVK
LTU
SEN
PHL
CIV
BWA
BRB
IDN
ALB
MAR
MLI
PAK
MWI
CMR
EGY
LKA
KAZ ROM
GEO
TUN MUS
BGD
KEN
BGR
AZE
UZB UKR
SWZ
ARM
BLR
ZWE
KGZ
VNM
GIN
SLE
MDA
NPL
TJK
LUX
1/8
TKM
1/16
1/64
1/32
Source: Penn World Table
1/16
1/8
1/4
1/2
1996 PPP GDP per worker (U.S. = 1)
1
2
27
Forces driving K/Y variation
Saving rates? NO
Investment prices? NO
Consumption prices? YES
28
K/Y: Open Questions
Why are richer countries better at making K?
Just a reflection of h differences?
Eaton & Kortum:
Quality differences mask import barriers?
29
Point 4: MPK
Lucas: why doesn’t capital flow from rich to poor?
Lately it has: S/Y is more correlated with Y/L (0.5)
than is I/Y (0.05 at domestic prices).
Why doesn’t capital flow to equalize MPK’s?
Caselli & Feyrer: It does!
30
Caselli & Feyrer MPK’s
α
Y
Naive MPK ≡
K
Corrected MPK ≡
α PY Y − land rents
PK K
31
Naive MPK
50%
SLV
PRY
CIV
40%
EGY
COG
30%
BOL
BDI
MUS
BW A
MAR
ZAF
URY
COL
ECU
TUN
PHL
VEN
JOR
20%
LKA PER
CHL
TTO
MEX
DZA
JAM
MYS
CRI
ZMB
IRL
SGP
PAN
PRT
10%
GRC
KOR
NZL
ESPGBR
JPNFIN
SW E
AUS
NLD
ISRCAN
DNK
AUT
FRA
NOR
ITA
BEL
USA
CHE
0%
0
10,000
20,000
30,000
40,000
50,000
60,000
PPP GDP per worker
Source: Caselli & Feyrer (2006), 52 countries in 1996
32
MPK Corrected for Prices, Land Rents
50%
40%
30%
20%
SLV
BW A
SGP
MUS
URY
10%
0%
MEXCHL
JOR
PHL PERMAR
PRY
ZAF
JAM
MYS
COL PAN TUN
LKA
EGY
VEN
BOL
TTO
CIV
ECU
CRIDZA
COG
ZMB
BDI
0
10,000
20,000
KOR
PRT
GRC
30,000
ISR
ESPGBR
JPNFIN
SW E
IRL
NLD
DNK
ITA
BEL
AUT
AUS
FRA
NOR
CAN
CHE
USA
NZL
40,000
50,000
60,000
PPP GDP per worker
Source: Caselli & Feyrer (2006), 52 countries in 1996
33
MPK: Open Questions
Why does K’s share rise with development?
Caselli & Coleman, Hansen & Prescott
No single MPK?
Banerjee & Duflo.
34
Point 5: Schooling and h
Higher attainment in rich countries (corr 0.9).
Can estimate h using Mincerian formulation
(log of h is linear in schooling).
1 more year of schooling ≈ 10% higher h
35
Years of Schooling
15
12
9
6
ZAR
3
TZA
NORUSA
NZL CAN
SWE
AUS
KOR
CHE
GER
FIN
POL
ISR
DNK
ROM
HKG
JPN
NLD
BEL
GBR
CYPIRL
HUN
ARGGRC
ISL
TWN
BRB
PAN
FJI
AUT
PHL
FRA
TTO
PER
URY
CHL
MEX
ESP ITA SGP
VEN MYS
LKAJOR
CHN ECU PRY
THA
GUY
ZAF
BWA
CRI
MUS
PRT
SYR
ZMB
BOL
ZWE
COG
EGY
JAM DZAIRN
COLTUR
SLV TUN
DOM
IND
IDN
HND
BRA
LSO
KEN
PAK
GHA
CMR
UGA
GTM
TGO
MWI
HTI
PNG
CAF
BGD
RWA
SLEBENNPLSEN
GMB
MOZ
NER
MLI
GNB
0
5
6
7
8
log income per worker
9
Source: Penn World Table and Barro-Lee (97 countries in 1996)
10
11
36
Development Accounting
Y
L
=
pop
pop
N N
24
1
α
⎡ K ⎤1−α
h
⎢ ⎥
N
Y
⎣ ⎦ 2
A
2
37
Development Accounting
Y
L
=
pop
pop
N N
24
1
α
⎡ K ⎤1−α
h
A
⎢ ⎥
N N
Y
⎣ ⎦ 2 6
2
38
Point 6: MPH
Single Mincerian return in all countries?
Psacharopoulos & collaborators:
higher Mincerian return in poor countries
Banerjee & Duflo:
when well-measured, similar across countries
39
Mincerian returns vs. schooling
30
JAM
25
20
BWA
MAR
15
TWN
GTM
CIV
BRA
10
FRA
NPL
TUN
LKA
5
ZAF
COL
PAN
KOR
PHL SGP
CHL PRY ECU
KEN
ARG
URY
DOM
GHA SDN
PER
IDN
HKG
VNM
KWT
MYS
RUS
ISR GBR
EST
HUN
ETH
0
2
4
6
8
10
12
14
16
Years of attainment
Source: Banerjee and Duflo (2005); 38 countries, various years
40
Mincerian returns vs. schooling (better data)
30
25
20
15
GTM
PAK
COL
KEN
10
SDNNPL
GHA
UGA
CMR
5
PAN
KOR
JPN
SGP
PHL
CHN
CHL
ECU
PRY
THA
BOL ZAF
IND ZMB
ARG
USA
FRA
URY
VEN
MYS
DOM
CAN
PRT
CRI
FIN
PER
AUS
GER
SLVEGY
CHE
AUTGRC
LKA ESP
IDN
POL
GBR
NLD
HKG
ZWE
NOR
CYP
SWE
HUN DNK
NICBRA
ITA
0
2
4
6
8
10
12
14
16
Years of attainment
Source: Banerjee and Duflo (2005); 59 countries, various years
41
Limits to the Mincerian Approach
Manuelli & Seshadri / Erosa, Koreshkova, Restuccia:
ln hi = f ( si , yi , ai ), y = inputs, a = ability
d ln hi ∂f ∂f ∂yi ∂f ∂ai
=
+
+
∂si ∂yi ∂si ∂ai ∂si
dsi
But x-country = x-individual?
42
x-country vs. x-individual
Country TFP differences
∂yi
∂yi
x-individual
⇒ x-country
∂si
∂si
Even more so with public schools?
∂ai
∂ai
x-individual
Yet perhaps x-country
.
∂si
∂si
43
h: Open Questions
Production function for h?
Accumulation at home, on the job?
Externalities?
Sources of h variation across countries?
44
Point 7: Immigrants and h
Immigrants provide useful info on h.
Different source countries, one market.
Hendricks: U.S. Census data for 1990
45
Immigrants vs. Natives in the U.S.
Earnings Relative to Natives (same age, education, sex)
160%
140%
JPN
ZAF
120%
100%
80%
YUG
PRT
TUR
SYR
ARG
GRC
CZE
HUN
LKA
TWN
KEN INDROMIDN
URY
BRB
BRA
EGY
MYS
SOV
POL
TTO
IRN
JOR
CHL
PAN
JAM
VEN
GUY
IRQ
CRI
DMA
THA
ECUCOLBLZ
PAK
FJI
BGD
BOL DOM
CHN
PER
KORMEX
PHL
GTM
SLV
ETH HTI
HND
GHA
NGA
NIC
DNK GBR SWE
CHE
NORAUS
FRA BEL
NZL AUT
CAN
IRL
ITA
GER
NLD
ISR
ESP
HKG
PRI
60%
40%
20%
45º
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Real GDP per worker relative to the U.S. in 1990
Source: Hendricks (2002); 74 countries in 1990
46
Source: Hendricks (2002)
47
Development Accounting
α
⎡ K ⎤1−α
Y
L
=
h
A
⎢ ⎥
N
pop
pop
Y
⎣ ⎦ N N 2−4
24
1
2
48
Development Accounting
α
⎡ K ⎤1−α
Y
L
h
A
=
⎢ ⎥
N N
pop
pop
Y
⎣ ⎦ N N 2−4 3−6
24
1
2
49
Point 8: Technology and A
Same technology in all countries?
TFP gaps exist even within countries.
Firms may have to invest in adoption.
Why can’t FDI eliminate any differences?
See Chad Jones’ recent paper.
50
Source: Parente and Prescott (2005)
51
Technology and A: Open Questions
Data on barriers and investments?
Channels for international diffusion?
Right model?
Parente & Prescott
Howitt
Klenow & Rodriguez-Clare
52
Points 9 & 10: Misallocation and A
Perhaps less efficient allocation of K and L
within poor countries.
Maybe no higher average MPK, but more
dispersion of MPK’s within poor countries.
Parente & Prescott
Schmitz
Restuccia & Rogerson
53
Point 9: Agriculture and A
Within agriculture, K and land less
efficiently allocated in poor countries?
Between agriculture and rest of economy,
L less efficiently allocated in poor countries?
Restuccia, Yang, & Zhu
Gollin, Parente & Rogerson
Caselli Handbook
54
Source: Caselli (2005)
55
Source: Caselli (2005)
56
Productivity in Agriculture
Ag.
Non-ag.
S.D. of log Y/L
1.47
0.57
90th/10th
45
4.2
Source: Caselli (2005), 80 countries in 1985
57
Counterfactual Calculation
S.D.
90th/10th
Actual log Y/L
1.1
22
With U.S. emp. shares
0.6
4
Source: Caselli (2005), 80 countries in 1985
58
Ag. vs. Non-ag.: Open Questions
Model of transition with Y/L gaps?
Lucas, Hansen & Prescott
Gaps reflect h differences?
Caselli & Coleman, Jeong & Kim
Gaps reflect home production?
Parente, Rogerson & Wright
59
Point 10: Manufacturing and A
Big TFP gaps across plants within industries.
TFP gaps may imply MPK and MPL gaps.
If so, large potential gains from reallocation.
60
TFP Dispersion within 4-digit industries
90th/10th
75th/25th
U.S.
1.9
1.3
China
5.6
2.5
India
5.7
2.4
Source: Syverson (2004) for the U.S.,
Hsieh and Klenow (2006) for China and India.
61
Potential A Gains from Reallocation
Melitz model (monopolistic competition
between firms with different productivity).
Reallocate K and L to equalize MPK and
MPL across plants.
Result: China and India could double A.
Source: Hsieh and Klenow (2006)
62
Mfg. Misallocation: Open Questions
Right model to gauge gaps and gains?
Gaps tied to observable distortions?
More measurement error in poor countries?
63
Recap of Development Accounting
α
1−α
Y
L ⎡K ⎤
h
A
=
⎢
⎥
N N
pop
pop
Y
⎣
⎦
N N 2−4 3−6
24
1
2
64
Plenty of Open Questions
Quality and Variety
Magnitude and sources of h differences
Externalities
Extent and sources of misallocation
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