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A new trend in the global productivity convergence

Recent data indicates that global productivity levels are converging, despite past trends showing a widening gap between rich and poor countries.

Not long ago, it still seemed that rich countries kept getting richer through strong productivity growth, while those poor at the beginning of the 19th century seemed to lack productivity growth or could not sustain it for long periods. A largely tested hypothesis in economics stated that productivity growth would eventually spread to the poorer countries from the rich through capital and technology diffusion.

Although certain nations like Finland, Japan, and the Asian Tigers demonstrated clear examples of economic catch-up, broader analysis with more countries revealed that statistical tests did not support the notion of poorer countries generally catching up. While economic convergence appeared among some groups, such as the OECD and EU, globally, the productivity gap between wealthy and impoverished nations continued to widen.

Recent country-level productivity data indicates that global productivity levels have started to converge since 2000. Updated datasets show that a significant portion of the world has converged since the 1970s, except African countries. Similar findings have been observed by other researchers.

The convergence hypothesis and growth theories

The convergence hypothesis originated from the Solow-Swan growth model, which suggests that convergence results from more intensive capital use. Newer growth models, inspired by Schumpeterian ideas, propose that technological growth occurs when new, more productive technologies replace older, less efficient ones. These models can explain why productivity continues to grow in some countries while stagnating in others. Factors such as the quality of a country’s institutions can ultimately account for differences in productivity growth.

Economic growth models typically reflect the growth patterns seen in developed Western countries following the industrial era, known as modern sustained growth. A key question is why this growth began in Western countries before spreading elsewhere. Before industrialisation, Western countries also experienced stagnation and slow technological and population growth. This period is often called the Malthusian Growth Era, and it was named after Thomas Malthus, who first theorized about economic growth during this time. More recently, the unified growth theory was developed to explain the shift from the Malthusian regime to modern sustained growth.

Put in the unified growth theory, as the level of technology slowly increases, demand for highly educated employees, or in other words, human capital, increases. At a certain point, this will lead to a self-feeding spiral, where the level of technology increases, which increases demand for human capital, and so on. This leads to sustained economic growth. According to the unified growth theory, the timing of the transition from Malthusian growth to sustained economic growth can be explained by geographical and institutional factors.

Reasons for the gap between poor and rich countries

The reasons for the early start of modern economic growth in Western countries remain debated. Some argue that geographical conditions played a key role. For instance, it is noted that Eurasia had most of the cultivable plants and animals, providing a foundation for hunter-gatherers to shift towards agriculture and develop civilizations. Others suggest that the development of institutions was crucial for sustained economic growth. Evidence supports the idea that robust institutions have been the primary drivers of modern economic growth.

Research has recently proposed that genetic diversity may explain why modern growth began in Western countries. It is argued that genetic diversity decreases the further populations are from Africa, the cradle of humankind and that intermediate levels of genetic diversity have benefited societal development.

Figure 1. Cross-country convergence
Credit. Empirical Economics

How the future looks like

Recent data indicates that the productivity gap between rich and poor countries has begun to close. This suggests that many regions may be transitioning to sustained economic growth, with factors boosting productivity from wealthy to poorer nations. At the same time, productivity growth in Western countries has slowed for reasons that are not yet clear, making it easier to catch up.

The uncertainty in global economic development is compounded by recent crises, including COVID-19, war in Europe and the Middle East, global trade tensions and related protectionism, climate change, and high inflation. These factors make it difficult to predict whether the trend of global productivity convergence will continue. Nevertheless, long-term forecasts from the OECD and the World Bank suggest that developing countries will continue to grow faster than developed ones, supporting the idea of global convergence.

Are productivity levels converging globally? In recent times, yes. But it is still debatable why.

Sakari Lähdemäki

Exceptions to the rule

Finally, while there seems to be a tendency for the poorer countries to converge towards the rich countries, it is still debatable what factors ultimately cause this. However, most agree that institutions matter a lot. Furthermore, while the convergence tests now suggest that many poor countries tend to catch up, there are exceptions. 

According to Penn World Tables 10.0, one country, namely Venezuela, recently experienced an extreme drop in GDP. Depending on how GDP is measured, between 2013-2019, the GDP of Venezuela dropped by 67-99 percent. This is such a huge movement that it affected the test outcomes for the whole world’s sample. Therefore, I decided to consider this country an outlier because this type of development is extremely rare among developing countries worldwide. 

After all, the convergence hypothesis asks whether poor countries tend to converge toward rich countries in general. It is always possible that there are some exceptions, for example, North Korea, for which Penn World Tables 10.0 doesn’t even have data. Therefore, Venezuela is a reminder that even if there is a pull toward higher productivity levels, bad shocks, and policies can send you back to the start.

Toward a fairer global community

Finally, robust institutions seem to provide foundations for sustained modern growth. However, another important factor that can be affected by policy is the population’s education level, or, in other words, human capita. For example, human capital is the key factor that transitions from the Malthusian era to modern sustained growth. Furthermore, not only participating in research and development at the global technology frontier but also implementing existing technology requires a sufficient level of education. Moreover, some suggest that human capital leads to institutional improvements. Therefore, to achieve a fairer global community, the global development of education has a key role to play.

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Journal reference

Lähdemäki, S. (2024). Cross-country convergence: to be or not to be, that is the question. Empirical Economics, 1-37. https://doi.org/10.1007/s00181-024-02561-8

Sakari Lähdemäki holds a PhD in Economics from the University of Turku. He works as a researcher at Etla Economic Research. His research interests encompass economic growth, macroeconomics, productivity, and industry and firm-level studies.