Conclusions

Development accounting is a powerful tool to getting started thinking about the sources of income differences across countries. As of now, the answer to the development­accounting question - do observed differences in the factors employed in production explain most of the cross-country variation in income - is: no, way no.

On the other hand, incomplete knowledge about certain key parameters that describe the relationship between inputs and outputs implies that the jury should be treated as being still out. For one thing, depending on the elasticity of substitution between capi­tal of different types, the observed wild heterogeneity in the composition of the capital stock by type of equipment could turn out to be a key proximate determinant of income differences. For another, depending on the elasticity of substitution between physical and human capital, we may find that all is needed for these factors to explain a large fraction of income inequality is a departure from Cobb-Douglas. Disaggregating the government sector out of the data may also potentially reduce the unexplained com­ponent of GDP There is no deep reason why we should not be able to make progress on these three fronts, so that my assessment of the future of this research enterprise is optimistic.

Acknowledgements

I thank John Duffy and Silvana Tenreyro for comments, and Mariana Colacelli, Kalina Manova, and Andrea Szabo for research assistance.

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