How important are dual economy effects for aggregate productivity?

Area of Science:

• Development Economics
• Macroeconomics
• Econometrics

Background:

• Development accounting highlights TFP differences as a driver of income disparities.
• The dual economy model posits that agricultural labor over-allocation reduces aggregate productivity.

Purpose of the Study:

• To quantify the impact of factor misallocation on cross-country income and TFP variations.
• To integrate development accounting with the dual economy model for a nuanced analysis.

Main Methods:

• Utilized a two-sector economic decomposition framework.
• Incorporated sector-specific human and physical capital stock data.
• Analyzed cross-country data on factor marginal products and income levels.

Main Results:

• Factor misallocation explains 30-40% of cross-country income per capita variation.
• Misallocation accounts for up to 80% of aggregate TFP variation.
• Evidence of significant differences in marginal products within developing countries supports the misallocation hypothesis.

Conclusions:

• Factor market inefficiencies are a substantial contributor to global economic disparities.
• Targeting factor misallocation presents a significant opportunity for development policy.
• The study underscores the importance of sector-specific data in understanding macroeconomic phenomena.