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Differences in living standards around the world are substantial, with income per worker in the richest countries up to 60 times higher than in the poorest. Even as measures of the stock of physical and human capital have become more reliable over time, aggregate productivity still remains the biggest contributor to these striking income gaps. What, then, could explain these vast productivity differences across countries?

In this Policy Research Talk, World Bank economist Roberto N. Fattal Jaef will discuss the role of distortions in firms¡¯ business environment that reduce competition, innovation, and allocative efficiency. Following a micro-to-macro approach, Roberto will introduce a methodology that combines theory with firm-level data to infer entry barriers and allocative distortions. Applying this methodology to 21 countries, he finds that these type of distortions are pervasive in less developed countries and able to account for a significant fraction of the observed gaps in Total Factor Productivity.