ACCOUNTING FOR THE STOCK OF HUMAN-CAPITAL - SELECTED EVIDENCE AND POTENTIAL IMPLICATIONS

Given the observed distribution of output and labor across countries, most capital flows should be from rich to poor countries. As is shown for a limited sample of countries, accounting for differences in the s tock of human capital substantially reduces the implicit cross-country rate of return differentials. Additionally, accounting for human capi tal externalities based on independent empirical evidence, turns aroun d the predicted rate of return differentials in favor of rich countrie s. Hence, the world economy may converge to a rather unequal distribut ion of incomes as long as human capital accumulation is neglected as t he key variable limiting economic development.