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GLOBAL PRODUCTIVITY
CHAPTER 4
productivity growth underperformance, such that a minority of economies, but a majority of the population, has seen productivity gaps decline since the 1970s. Since the GFC, this surge in productivity growth has declined in several EMDE regions. In addition, historically, sustained convergence to the frontier is rare. In the following section, formal statistical tests of the convergence hypothesis are undertaken to assess the speed of convergence, before delving into more complex examinations of club convergence.
Testing for convergence and its pace Countries with lower initial levels of productivity have only recently begun to outperform productivity growth in high-productivity economies on a broad basis, suggesting the presence of unconditional convergence. This has occurred in recent decades at a slow pace but does not hold over the entire sample. Convergence potential may be hindered by unfavorable characteristics in some economies that hold back productivity growth, such as poor human capital or lack of infrastructure, a phenomenon dubbed “conditional convergence” (Barro and Sala-i-Martin 1992). This section explores the pace of unconditional and conditional convergence in a more formal statistical framework. Unconditional convergence Unconditional convergence can be assessed using a beta-convergence regression, which posits that productivity growth depends on its initial level: yi T – yi 0 = c + βyi 0 + ϵi T , where y is the natural log of output per worker at both time T and the initial period 0 under consideration and the disturbance term ϵiT captures shocks to productivity in country i that are unrelated to convergence drivers of productivity growth. The hypothesis that β < 0 implies that lower initial productivity produces faster cumulative growth (between time 0 and time T ). When all countries have access to the same technology, those with higher marginal returns to capital—in other words, capital-scarce poorer economies—should benefit from greater capital accumulation and higher growth. The coefficient β can then be converted to an annual rate of convergence, the percent fall in the average productivity gap that is estimated to have occurred each year.7 Literature. Early estimates of β-convergence found little evidence of its existence, often instead finding that initial income was positively related to the subsequent rate of growth (Barro 1991; Baumol 1986; Dowrick 1992).8 More recent tests for unconditional This is computed as (–1) ∗ ln (β + 1) /T, where T is the number of years under consideration, as in Barro and Sala-i-Martin (1992). 8 Barro (1991) and Barro and Sala-i-Martin (1992) apply the unconditional convergence testing procedure to U.S. states and the Organisation for Economic Co-operation and Development; Sala-i-Martin (1996) applies the procedure to Japanese prefectures and regions in five European Union countries. All studies have found little evidence of unconditional convergence. 7
