# **Technical Efficiency**

Figure 3 shows the production frontier as estimated through the SFA for ECA for 2000 and 2016.<sup>10</sup> As it shows, not only did capital stock rise, but the frontier shifted upward over time.

<!-- Start of picture text --> 130<br>110<br>90<br>70<br>50<br>30<br>0 100 200 300 400 500 600<br>Capital per worker<br>Production frontier in 2000 Production frontier in 2016<br>Output per worker<br><!-- End of picture text --> Table 6 reports regression results for the baseline specification for the efficiency model.

First, the institutional environment of Capital per worker the country, which depends on the efficiency and the behavior of both Production frontier in 2000 Production frontier in 2016 public and private actors (proxied by the index of government effectiveness), is a **Figure 3. Production Frontier for ECA** determinant of productivity, robust across different model specifications and to the inclusion of more countries in the sample (Section 4; Annex 3).

Infrastructure, captured by the extent of energy consumption and Internet adoption or by infrastructure quality (WEF), is also critical for productivity, especially in the extended model (Section 4; Annex 3).

The results show that also the quality of education matters for the efficiency level at which an economy operates, as good health and education outcomes enhance the efficiency and productivity of each individual worker. The results are robust to enlargement of the sample (Section 4; Annex 3). Human capital has a central role in endogenous growth theory, either as an accumulative factor along with physical capital that affects income per capita, or by facilitating the production or absorption of new technologies. Several papers, starting with Barro (1997), have provided robust evidence of this positive link. More recently, researchers have instead shown that the impact may depend on the initial level of education (Krueger and Lindahl 2001; Bassanini and Scarpetta 2001) or on the distance from the technology frontier (Vandenbussche, Aghion and Meghir 2006).

Although labor market regulation and its rigidity matter slightly for productivity, the efficiency of product markets has considerable impact in several dimensions. First, as the literature has uncovered, in the product market reforms to enhance regulatory quality also enhance a country’s productivity—as does a business-friendly environment that encourages competition. A reduction in tax rates or a shift to a more open economy, as captured in the extended model by a lower customs burden, lower tariffs, or regulatory trade barriers, may have a positive effect on efficiency, although it is not always strong and statistically significant.

The literature on how trade openness affects productivity is vast and the results are not consistent. Most researchers look into the correlation between some measure of openness—such as trade relative to GDP or tariffs—and the growth of real GDP or real GDP per capita. Many have found a positive relationship between trade and growth, but Rodriguez and Rodrik (2001) questioned these findings, arguing that the indicators of openness used most commonly are either bad measures of trade barriers

> 10 For chart purposes, the model does not consider heterogeneity and heteroskedasticity.

16