Industrial structure, regional productivity and convergence: The case of Norway and Sweden

Are less productive regions catching up with more productive regions? In this paper we investigate the importance of regional industry structure for regional productivity convergence. We use county data for the Scandinavian Peninsula. Norway and Sweden are similar in many respects and the Scandinavian Peninsula therefore represents an attractive natural laboratory with one country inside and another outside the European Union. The data cover five-year intervals from 1980 to 2000 for Norway and from 1985 for Sweden. We find strong productivity convergence between Norwegian counties and weak divergence between Swedish ones. The effect of the industry structure on the spatial distribution of productivity appears to be small in magnitude, but it is qualitatively important. Moreover, the role played by the changing composition of production in the process of economic growth seems to differ over time. By implication, considerable caution should be exercised when undertaking convergence studies based on the commonly used one-sector growth model. More complex models allowing for differences in industry structure, and possibly also other potentially important factors such as wealth effects and transitional dynamics, should be considered.