Sectoral Productivity, Structural Change and Convergence

Abstract

The concept of convergence, defined either narrowly, through productivity or income per capita, or broadly, across a range of economic variables, has become fundamental to the way we assess, analyze and project economic growth in developing economies. To the extent that economic growth projections are designed to reflect empirical behavior, there is a need to identify relationships between and within key projection variables. To date the empirical analysis of convergence has been controversial. There is a strong argument that economic growth should be projection at a detailed sectoral level (see McKibbin et al (2009)). In practice, data limitations mean that industry level relationships are difficult to uncover and macroeconomic aggregate behaviors are often imposed on disaggregated data. The analysis in this paper attempts to uncover the key cross country trends in sectoral level productivity data. Whilst productivity convergence is evident in some sectors, generally service sectors, it is not evident in others. In part, aggregate convergence trends across developed economies appear to be driven by structural change. We generalize this result and argue that a combination of convergence and structural development assumptions could improve the empirical relevance of economic growth projection models.