Most economists view technological differences as an important part of the large disparities in per capita income across countries. For example, Paul Romer (1993, p. 543) argues that many nations are poor, in large part, “…because their citizens do not have access to the ideas that are used in industrial nations to generate economic value.” (see also Prescott, 1998). This view receives support from a number of recent studies, such as Klenow and Rodriguez (1997), Caselli et al. (1997), and Hall and Jones (1998), which find significant “total factor productivity” (TFP) differences across countries. Large crosscountry differences in technology are difficult to understand, however.
Ideas, perhaps the most important ingredient of technologies, can flow freely across countries, and machines, which embed better technologies, can be imported by less developed countries. This compelling argument has motivated papers such as Mankiw, Romer and Weil (1992), Mankiw (1995), Chari, Kehoe and McGrattan (1997), Parente, Rogerson and Wright (1998) and Jovanovic and Rob (1998) to model cross-country income differences as purely driven by differences in factors rather than in technology.
In this paper, we argue that even when all countries have access to the same set of technologies, there will be large productivity differences among them.1 The center-piece of our approach is that many technologies used by less developed countries (LDCs/the South) are imported from more advanced countries (the North) and, as such, are designed to make optimal use of the prevailing factors and conditions in these richer countries.
To the extent that these conditions are different in the South, the technologies developed in the North may be inappropriate for the LDCs. For example, the OECD economies prefer to develop new crops suitable for a temperate climate, while many LDCs would be unable to use these and instead need crops suitable to the tropics. Although there are many dimensions in which technological needs of the South differ from those of the North, including climate, geography, and culture, we focus on differences in skill scarcity, which we believe to be important in practice. The North is more abundant in skills and tends to develop relatively skill-complementary (skill-biased) technologies, but these are only of limited use to the LDCs.
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The main result of our paper is that the mismatch between technologies developed in the North and the skills of the South’s labor force will lead to productivity differences between the North and the South even in the absence of any barriers to technology transfer. The South must use unskilled workers in tasks performed by skilled workers in the North. Since the technologies imported from the North are not suited to the needs of the unskilled workers performing these tasks, the South will have low productivity, even once we control for the contribution of physical and human capital to output. This mismatch between technologies and skills in the South will also naturally amplify the differences in per capita income.
It is also important to investigate whether the differences in productivity and output per worker predicted by our model could be sizeable.