The Dynamics of Total Factor Productivity and Institutions

This article examines the dynamics of Total factor Productivity (TFP). It uses Phillips and Suli¯s (2007) method to test for cross-country TFP convergence and the Arellano and Bover (1995) and Blundell and Bond (1998) system GMM estimator to examine the factors driving TFP growth. Data from 1960 to 2011 for 63 countries are utilized in the analysis. The convergence test provides strong evidence against global TFP convergence, but indicates the existence of TFP clubs. The empirical work also shows that initial conditions play a fundamental role on the dynamics of TFP: economies that started with lower TFP remained below initially better-positioned economies. This study finds evidence that institutional quality and openness are very important determinants of TFP growth. While better institutions promote technological progress and efficiency, globalization works as an important channel for knowledge and technological diffusion among nations, which fosters TFP growth.