A hot controversy is raging among growth economists about the ultimate causes of cross-country differences in per worker (or pro capita) income level. There is no general consensus about whether rich countries are so because they employ a greater amount of physical and human capital or because they use better technologies and employ factors of production more efficiently. This question is sometime refered to as the “A vs. K”2 or “idea gaps vs. object gaps” debate (Romer, 1993).
Whereas Mankiw, Romer and Weil (1992), Barro and Sala-i-Martin (1995) and Young (1995) argue that something like 80 percent of differences in development are explained by factor accumulation (their findings have been dubbed “a neoclassical revival”), Hall and Jones (1999), Klenow and Rodriguez-Clare (1997), Caselli (2005), Gundlach, Rudman and Woessmann (2002), Easterly and Levine (2001), among many others, have found instead that technological differences are the main causes of the uneven levels of development across countries.
The issue of the relative role of factor inputs and technology is strictly related to the validity of neoclassical growth theory, which assumes that technology is a public good freely available to all countries and, as a consequence, concludes that cross-country differences in development levels are due to a different degree of factor accumulation.
Fundamental policy implications derive from this debate on the causes of development. In fact, if factors are important, then policies to encourage investments in physical capital or in education should be implemented, whilst if a crucial role is played by technology or efficiency then policy interventions should be aimed at stimulating transfers of knowledge and of technology and the adoption of the most efficient productive, organizational process.
The main aim of this paper is to apply the “development accounting” methodology used recently by Caselli (2005), Klenow and Rodriguez-Clare (1997) and Gundlach, Rudman, Woessmann (2002) in cross-country development analysis to evaluate to what degrees the wide differences in output per worker existing across Italian regions, for the period 2000-2004, can be attributed to different levels of accumulation of physical and human capital or to different levels of efficiency (Total Factor Productivity or TFP).
While recently some works have estimated regional TFP levels and have pointed out its wide variability and the correlation between TFP and labour productivity (Aiello and Scoppa, 2000; Marrocu, Paci and Pala, 2000; Di Liberto, Mura and Pigliaru, 2004), the decomposition of differences in output per worker into the contributions made by physical capital, human capital and Total Factor Productivity is new for Italian regions.
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