large industrial sector and into the market services that the central planners had repressed (Döhrn and Heilemann 1996; Raiser, Schaffer and Schuchhardt 2004).
Underlying both these sorts of productivity-driven convergence in transition economies is productivity growth and reallocation at the firm level. Inefficient state-owned industrial firms were expected to downsize; new private firms would spring up, filling market niches that were neglected by the central planners; firms would adopt proven Western technology, production methods, and product standards; both new private firms and privatized state-owned firms would see efficiency improvements driven by the incentives brought by private ownership.
The example of ownership structure as a source of productivity growth and convergence makes clear that the technology parameter incorporates much more than “technology” narrowly defined. Lucas (1988), Mankiw, Romer and Weil (1992) and others pointed to the importance of human capital accumulation for growth, and implicitly at the importance of institutions that generate human capital such as the education sector. More recently, research in conditional convergence has explicitly examined the role of institutions in determining both the level of productivity of an economy and the rate at which it endogenously generates growth, e.g., property rights and legal protection, the institutions of capitalism brought by European settlers to colonies in the 17th-19th centuries (Acemoglu, Johnson and Robinson 2001), international trade and globalization, regulation and competition, and others; see Acemoglu (2007) for a very recent and comprehensive survey. Broadly speaking, the consensus view in the literature is that of North (1990) and others that institutions matter hugely for economic growth and productivity, and debates today focus on which institutions matter and how, e.g., Rodrik (2006) argues against the “one-size-fits-all” view, suggesting instead that there are roles for policies, institutions and state interventions that are appropriate specifically for developing countries that are converging. China is the most-often cited example of a rapidly growing country that has adopted some of the institutions of developed capitalism (e.g., competitive markets, free entry) but not others (e.g., a legalistic approach to the protection of property rights). The convergence debate here is in effect returning to its