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Productivity growth is the driving force behind economic development. A large development accounting literature has shown that much of the difference in income per capita across countries can be explained by differences in total factor productivity (TFP) (see, e.g., Hall and Jones 1999, Caselli 2005). On top of its “direct” effect on output, TFP growth can have positive feedback effects on human and physical capital accumulation (Hsieh and Klenow, 2010). Thus, one of the central questions for research on growth and economic development is: What can be done to boost productivity?
Although productivity growth is a macroeconomic phenomenon, it results from a large number of micro-level changes, including the reduction of critical distortions that appear more prevalent in developing countries. In this paper, we review the existing evidence on these transformations and highlight priorities for future research.