We revisitWestern Europe’s record with labor-productivity convergence and tentativelyextrapolate its implications for the future path of Eastern Europe. Thepoorer Western European countries caught up with the richer ones through bothhigher rates of physical capital accumulation and greater total factor productivity(TFP) gains. These (relatively) high rates of capital accumulation and TFPgrowth reflect convergence along two margins. One margin (between industries)is a massive reallocation of labor from agriculture to manufacturing and services,which have higher capital intensity and use resources more efficiently. The othermargin (within industries) reflects capital deepening and technology catch-up atthe industry level. In Eastern Europe the employment share of agriculture is typicallyquite large, and agriculture is particularly unproductive. Thus, there arepotential gains from sectoral reallocation. However, quantitatively, the betweenindustrycomponent of the East’s income gap is quite small. Therefore, the Eastseems to have only one real margin to exploit: the within-industry one. Coupledwith the fact that within-industry productivity gaps are enormous, this suggeststhat convergence will take a long time. On the positive side, however, EasternEurope already has levels of human capital similar to those of Western Europe.This is good news because human capital gaps have proved very persistent inWestern Europe’s experience. Hence, Eastern Europe does start out without thehandicap that is harder to overcome.[...]
