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and this productivity parameter. The earliest such models treated the technology parameter as exogenous and growing at a constant rate. Later developments treated technology as endogenous, and distinguished between generation of technology by R&D activity – typical of advanced market economies operating at or near the world technological frontier – and aggregate improvements in technology-driven “catching-up”, whereby low productivity countries are able to grow quickly by adopting technologies that have already been developed. It is the latter source of growth and convergence that underlay the early hopes and expectations that income levels in the formerly socialist economies would eventually converge to developed market economy levels. During the period of central planning, the socialist economies were initially able to grow rapidly, but the inherent inefficiencies of central planning implied lags in innovation and diffusion of technology, and meant this catching-up had ceased by the 1980s, generating an “equilibrium technological gap” (Gomulka 1986). Abandoning central planning would enable adoption of improved technology and management practices and enable the resumption of catching-up. This source of endogenous growth has a long intellectual prehistory: Veblen (1915) and Gerschenkron (1952, 1962) proposed and analyzed the “advantages of backwardness” in the process of European industrialization and growth.

A second macro-level of convergence and source of growth for the transition economies is in terms of endowments and the structure of economic activity. At the start of the transition, the countries of Eastern Europe and Central Asia looked very different from the market economies at similar levels of income: large but low productivity industrial sectors, small agricultural sectors that would be more typical of richer, industrialized countries, and small services sectors. The modeling framework here is that pioneered by Kuznets (1955, 1965) and Chenery et al. (1968, 1975): as market economies industrialize, their structure changes in various ways. In particular, as economies develop, the share of agriculture in GDP and employment falls and the shares of manufacturing and services increase. The sources of these changes in the size of sectors have been modeled by Rowthorne and Ramaswamy (1997) among others as driven by (exogenous) differences in productivity growth across sectors. Convergence by the former socialist economies in this context would generate growth by reallocating factors away from the excessively-


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