GLOBAL PRODUCTIVITY
CHAPTER 4
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Pace of conditional convergence. Consistent rates of convergence have also been found when controlling for country characteristics. The “rule of 2 percent” was coined after a common rate of annual income convergence across U.S. states, and separately countries, was identified when controls for factors such as educational levels and political stability were included (Barro and Sala-i-Martin 1992). Most studies have found results within a range of 1 to 3 percent per annum (Durlauf, Johnson, and Temple 2005). An annual convergence rate of 2 percent implies that half of any initial difference in productivity levels will disappear after 35 years. Evolution of conditional convergence rate. The results of a conditional convergence regression, containing typical country characteristics used in the literature, show that lower initial incomes were associated with higher productivity growth in each decade since the 1980s.11 The convergence rate is estimated to have increased over time, peaking at 1.5 percent per year over the past decade, which if sustained would halve the productivity gap in just under 50 years (figure 4.3, panel D). Previous studies, including recent tests for club convergence, have documented similar rates of conditional convergence but have yet to document the acceleration in pace in recent decades (Johnson and Papageorgiou 2020). The panel specification, covering all decades, shows an annual convergence rate of 1.3 percent, within the range of 1-3 percent found in surveys of the literature of growth regressions on income per capita (annex 4C).12 Conditional or unconditional convergence rates? Unconditional convergence rates have recently turned positive but remain very low, requiring over 100 years to close just half of the average productivity gap. Estimates conditional on other characteristics, such as the level of education and investment, suggest that convergence rates have been much faster and rising in recent decades. However, the conditional convergence concept is less useful as a generalized measure of convergence progress among EMDEs, because it suggests that economies may be on many different productivity paths dependent on their characteristics. A deeper examination of which economies are experiencing fast rates of convergence because of their characteristics can be explored through club convergence analysis.
Convergence clubs Club convergence definition. In general, the β-convergence framework underlying the unconditional and conditional convergence results faces limitations in distinguishing between multiple attraction points that may exist for productivity levels in different economies. Even in cases where the coefficient is negative, economies may not be 11 See annex 4C for further details. Regression includes controls for average levels of education, trade openness, the Economic Complexity Index of Hidalgo and Hausmann (2009), commodity exporter status, the level of investment as a share of output, and a measure of political stability. 12 Most of these studies have performed these exercises on PPP-adjusted measures of income per capita. This alternative measure results in estimates of a convergence rate of 1.7 percent using the same specification. However, PPP adjustment may be inappropriate for measuring growth in output per worker. Many economies have substantially faster productivity growth rates measured using time-varying PPP adjustments compared to national accounts measures (annex 4F).
