TFP and global growth: Shaping cross-country income inequality, 1960–2019

Abstract

This study examines global economic growth and cross-country income inequality from 1960 to 2019 using a stochastic dynamic general equilibrium model. Total factor productivity (tfp), captured through the efficiency wedge, primarily drives global output growth and shapes income disparities. Distortions in capital and labour markets — represented by the investment and labour wedges — play secondary, context-specific roles, notably reducing growth in middle-income countries. Two major waves of global growth — post-war industrialization and globalizationdriven technological diffusion — can explain tfp predominance. Cluster analysis confirms the central role of tfp in both growth miracles and failures. Global shocks like the 1973 oil crisis and 2008 recession slowed growth, particularly in high-income countries, narrowing cross-country income disparities. Since the 2000s, tfp gains in emerging economies reduced inequality. These findings highlight the theoretical and policy relevance of tfp-centred growth models and the importance of policies promoting trade openness, institutional quality, and innovation to enhance tfp and foster inclusive growth and convergence.