How Important Are Capital and Total Factor Productivity for Economic Growth?

Scott L. Baier, Gerald P. Dwyer Jr., and Robert Tamura
Working Paper 2002-2a
April 2002

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The authors examine the relative importance of the growth of physical and human capital and the growth of total factor productivity (TFP) using newly organized data on 145 countries that span more than one hundred years for twenty-four of these countries. For all countries, only 3 percent of average output growth per worker is associated with TFP growth. This world average masks interesting variations across countries and regions. Of the nine regions, TFP growth accounts for about twenty percent of average output growth in three regions and between ten and zero percent in the other three regions. In three regions, TFP growth is negative on average. The authors use priors from theories to construct estimates of the relative importance of the variances of aggregate input growth and TFP growth for the variance of output growth across countries. Across all countries, variation in aggregate input growth per worker could account for as much as 35 percent of the variance of the growth of output per worker across countries, and variation in TFP growth could account for as much as 87 percent of that variance. Much of the importance of the variance of TFP growth appears to be associated with negative TFP growth.

JEL classification: O47, O50, O57, O30, N10

Key words: economic growth, capital, human capital, total factor productivity, growth accounting

The authors thank the Federal Reserve Bank of Atlanta for research support in the later stages of this project. Work on this project began while Tamura was visiting the Hoover Institution. Shalini Patel provided research assistance and Linda Mundy provided secretarial assistance. Charles Jones and Peter Klenow provided helpful suggestions. Ayse Evrensel, Gerhard Glomm, Peter Rangazas, Paula Tkac, and Lawrence H. White provided detailed comments on an earlier draft. The authors also thank seminar participants at Clemson University, Emory University, Montana State University, Texas A&M University, the University of Georgia, and participants in sessions at Society for Economic Dynamics, Midwest Macroeconomics, and Western Economic Association meetings for helpful suggestions. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Scott L. Baier, Economics Department, 222 Sirrine Hall, Clemson University, Clemson, South Carolina 29634-1309, 864-656-4534, 864-656-4192 (fax),; Gerald P. Dwyer Jr., Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-7095, 404-498-8810 (fax),; or Robert Tamura, Economics Department, 222 Sirrine Hall, Clemson University, Clemson, South Carolina 29634-1309, 864-656-1242, 864-656-4192 (fax),