Although policymakers generally regard physical capital accumulation as a key driver of economic development, numerous studies identify total factor productivity (TFP) as the main determinant of living standards. A recent application of the conventional growth-accounting framework to medium-run output-per-worker growth accelerations in sub-Saharan African (SSA) countries attributes 86.7% of growth to TFP and only 11.5% to physical capital accumulation. We argue that the conventional assumption of zero learning-by-doing effects may misrepresent growth accelerations. Alternatively, we develop a two-regime learning-by-doing model and calibrate it for SSA countries. Under this framework, physical capital accumulation becomes the dominant source of growth accelerations (58.9%) relative to TFP's contribution (39.6%). We further show that simply increasing the capital elasticity in the conventional model cannot capture these quality effects. Evidence from Ethiopia and complementary panel estimates for SSA countries support regime-dependent learning-by-doing effects and a substantially larger contribution of physical capital accumulation to growth accelerations.
How can an institutional shock alter the economic value of productive capabilities? The shock can change the viability of activities in which capabilities are deployed, shifting derived demand and revaluing those capabilities. Capabilities are more exposed to revaluation when their economic value depends more strongly on the affected institutional conditions, while revaluation is amplified by high activity substitutability and low capability transferability. Demand shifts can generate labor-market disequilibrium when established deployment contracts faster than alternative productive capacity can expand. Adverse capability revaluation can also make institutions themselves an object of adjustment. Agents facing larger losses, limited labor-adjustment opportunities, and greater institutional-adjustment capacity are more likely to seek institutional restoration or modification. Institutional shocks can therefore set in motion a recursive process: they revalue capabilities and reorganize labor markets, while the resulting gains and losses create incentives for endogenous institutional adjustment.
This paper studies patterns of functional change, defined as the change in the value chain functions performed within the manufacturing sector and related business services. To this end, a novel measure for the sophistication of value chain functions, labelled FUNCY, is developed, establishing a hierarchy of value chain functions. From the FUNCY measure functional productivities in the manufacturing sector are derived. A decomposition analysis, comprising developing and developed countries over time (2003–2022), suggests that, in contrast to the well-studied phenomenon of structural change, developing countries experienced modest functional upgrading over the past two decades. These group-level results mask large heterogeneity in the functional change component at the country level. Functional upgrading is driven by shifts from fabrication activities towards value chain functions with higher functional productivity such as business services. However, ‘large jumps’ to high-productivity functions such as ICT services or R&D activities are extremely rare.
