Institutions and Total Factor Productivity Convergence

Abstract

The paper examines the effect that institutions have on Total Factor Productivity (TFP) growth. This is done by creating a TFP gap between the leader and each of the following countries. The global leaders used are the USA and an average of OECD members. The coefficient on the gap measures each country's ability to learn or absorb new technology from the more advanced leader. The results show that institutions do not seem to have as significant a role in TFP growth as other literature has suggested. The most influential variables are country-specific factors: this would indicate that a one size fits all model will not help developing nations to catchup. When institution variables were added to the model they manage to only explain 31 per cent of TFP difference. This implies that there is still a large portion of TFP growth that is random and not explicable using current economic models.