Sources of Divergence

The principal cause of extraordinary variation in output per worker between countries today are differences in their corresponding steady-state capital-output ratios. Two secondary causes are, first is openness to creating and adapting the technologies which improve the efficiency of labor as measured by levels of development two generations ago and second is the level of education today.

Productivity of two generations ago is a good indicator of the level of technological knowledge that had been attained as of half a century ago. The level of education today captures country's ability to invent and obtain further technological expertise today. Inventing new and adopting foreign-born technological knowledge is simply not possible without education,

Together these factors-- determinants of capital-output ratios and two determinants of access to technology--together account for the bulk of differences between nations in their relative productivity levels.

The determinants of steady-state balanced-growth capital-output ratio play a very dominant role. A higher share of investment in national product is strongly correlated with relative levels of output per worker. No nation with an investment rate of less than 10% has an output per worker level even 20% of the U.S. No country with an investment share of less than 20% has an output per worker level greater than 75% of the United States level