GROWTH, SECTORAL COMPOSITION, AND THE WEALTH OF NATIONS

This paper asserts that the endowments of production factors cause cross-country differences in GDP per capita by generating disparities in the sectoral composition. For that purpose, we characterize the dynamic equilibrium of a two-sector endogenous growth model with many consumption goods that are subject to minimum consumption requirements. In this model, economies with the same fundamentals but different endowments of capitals will end up growing at a common rate, although the long run level and sectoral composition of GDP will be different. Because the total factor productivity depends on sectoral structure, these differences in capital endowments will also generate sustained differences in the total factor productivities. Moreover, in our model the slope of the policy functions depends on the initial values of the capital stocks, which implies that the total factor productivities of economies with the same economic fundamentals may diverge along the transition.