Labor Quality
In A Farewell to Alms: A Brief Economic History of the World (pdf file here), Gregory Clark identifies the quality of labor as the fundamental factor behind economic growth. Poor labor quality discourages capital from flowing into a country, which means that poverty persists. Good institutions never have a chance to develop.
As early as the 19th century, textile factories in the West and in India had essentially the same machinery, and it was not hard to transport the final product. Yet the difference in cultures could be seen on the factory floor. Although Indian labor costs were many times lower, Indian labor was far less efficient at many basic tasks.
For instance, when it came to “doffing” (periodically removing spindles of yarn from machines), American workers were often 6 or more times as productive as their Indian counterparts, according to measures from the early to mid-20th century. Importing Western managers did not in general narrow these gaps. As a result, India failed to attract comparable capital investment.
Wealthy countries face the most serious competitive challenges from other wealthy regions, or from nations on the cusp of development, and not from places with the lowest wages.
As late as the 18th century, most Europeans had not exceeded the standard of living in hunter-gatherer societies. Until recent times, the early advantages of Europe did not allow it to escape the Malthusian trap, in which rising populations periodically offset temporary gains in living standards.
The turning point came when England, and some other parts of Europe, managed a small but persistently positive rate of growth, starting around the 17th century. Pro-business values spread through English society. The explosion of technology came only in the late 19th century, well after many incremental gains.
The world’s poorest countries now have about one-fiftieth the per capita incomes of the wealthiest countries. The relative advantage of a highly disciplined and properly acculturated work force is greater for the more complex production processes of the modern world. The poorer countries remain stuck at the bottom as growing populations mean fewer resources for everyone else. Paradoxically, advances in sanitation and medical care, by saving lives, have driven down well-being for the average person. The population is rising in most of sub-Saharan Africa, but living standards have fallen below hunter-gatherer times and 40% below the average British living standard just before the Industrial Revolution.
An independent estimate by Rodolfo E. Manuelli and Ananth Seshadri, (”Human Capital and the Wealth of Nations”; pdf file here) suggests that if variations in the quality of labor across nations are taken into account, other productivity factors need differ by only 27% to explain differences in per capita income.
“Makes a Nation Wealthy? Maybe It’s the Working Stiff” by Tyler Cowen