Economic growth and poverty traps in sub-Saharan Africa: The role of education and TFP shocks

• Technology (TFP) plays a key role in explaining cross-country income differences.
• The impact of TFP uncertainty shocks is larger in the sub-Saharan Africa than in the G7 world.
• The larger order of magnitude is influenced by a higher TFP volatility.

This paper investigates the “education-total factor productivity trade-off” in explaining income per worker differences between sub-Saharan (unlucky) and G7 (lucky) economies. First, we examine the dynamics of average years of schooling (i.e. education), capital per worker, income per worker, and total factor productivity (TFP) across sub-Saharan and G7 countries. We confirm that physical capital and education levels partially explain income per worker differences between lucky and unlucky economies. Second, we undertake a novel examination of the impact of technology shocks on income per worker, with the goal of understanding the role of technology variation in causing cross-country income per worker differences, and as a potential contributor to overall slow growth in the sub-Saharan region. In a vector autoregressive (VAR) framework, we show that the impact of “ad hoc” TFP shocks on income per worker is larger in unlucky economies than in lucky ones. We observe that average TFP volatility in the “unlucky world” is eight times higher than in the “G7 world”. We argue that the order of magnitude of the impact heavily depends on the level of the TFP volatility. Last, we suggest that the documented differences in the amount of physical capital and in the productivity of human capital between these two regions add conceptual support for the existence of poverty traps for sub-Saharan Africa.