# **1 Introduction**

Labor productivity in emerging market and developing economies (EMDEs) is less than one-fifth of the level in advanced economies, while in low-income countries (LICs), it is just 2 percent of advanced economy levels. The unconditional convergence hypothesis states that productivity catchup growth will tend to occur where productivity differentials exist and that they will decline over time. However, this type of convergence may fail to occur for reasons such as the existence of international barriers to technology transfer and differences in saving and investment behavior.<sup>1</sup> Conditional convergence is more restrictive, as catch-up productivity growth may depend on characteristics of economies beyond their initial productivity levels. For example, only economies with characteristics such as high institutional quality and education levels may be able to converge to the frontier.

The large productivity gap between EMDEs and the frontier implies that there is a potential for substantial income gains in EMDEs if either of these hypotheses holds.<sup>2</sup> Historically, productivity gaps have remained stubbornly ingrained, with the bulk of evidence pointing away from unconditional convergence (Johnson and Papageorgiou, Johnson and Papageorgiou). However, falling global poverty rates in recent decades are an encouraging sign that economies near the bottom of the distribution have been making productivity and income gains, helping reduce the proportion of the world’s population living in extreme poverty from 36 percent in 1990 to 10 percent in 2015 (World Bank, 2018b). Most of the fall is concentrated in South Asia and in East Asia and Pacific, the two regions with the highest rates of productivity growth among EMDEs.<sup>3</sup> Faster EMDE productivity growth in recent decades does not itself imply convergence towards the advanced economy frontier, which has also continued to expand. In addition, if the unconditional convergence hypothesis holds, the gains in productivity should be broad-based. More complex dynamics of productivity growth could instead support the convergence club hypothesis, with different clubs of economies converging toward different productivity levels depending on their characteristics.

Finally, productivity growth has already begun to slow following the global financial crisis in EMDEs and faces headwinds from the COVID-19 crisis. The COVID-19-driven global recession is occurring during a period of heightened debt vulnerabilities, while previous pandemics and other major natural disasters have been associated with prolonged declines in labor productivity growth and investment. Commodity prices have also collapsed, adding negative pressure on investment in the large number of commodity-reliant EMDEs, and will remain weak in the event the global recovery in output is drawn out. There are further risks to EMDE convergence if countries adopt inward-looking policies that result in the fragmentation of global trade—integration into global value chains has been a key vehicle for the adoption of more advanced production processes in EMDEs.

Against this backdrop, this chapter examines the following questions.

> 1See Annex A for further details of the theoretical underpinnings of the convergence hypothesis, implied by the models of Solow (1956) and Swan (1956).

> 2Cross-country differences in per capita income, which account for two-thirds of global income equality, largely reflect differentials in labor productivity (World Bank, 2018a).

> 3Over the same time-frame as the productivity-driven reduction in global poverty, global infant mortality has halved and secondary school enrollment has increased by 14 percentage points.

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