Abstract
We revisit a classical question: what is the role of structural transformation in determining regional convergence? We do so by constructing a novel global dataset of regional GDPs and granular sectoral employment for more than 1000 regions and more
than 80 countries, which starts in 1980 and covers a large range of income spectrum. We document three main facts. First, we find that regional convergence within-countries decreases over time around the globe and stalls in the most recent decade despite
residual spatial inequality. Second, this decline in regional convergence is associated with structural transformation toward high-skill services. Third, high-skill service employment exhibits a higher regional concentration than manufacturing or agriculture. Through the lens of a spatial equilibrium model which embeds the standard drivers of structural change, we find a reinforcing interplay between structural change and spatial development. As an economy transforms toward services, regional convergence declines
because economic activity becomes more spatially concentrated due to agglomeration economies in the service sector. These spillovers increase economic growth which further accelerates structural change toward services and, in turn, widens spatial inequality.