OECD countries diverge on energy, finance, and income: new study reveals convergence clubs and policy lessons

Background and Motivation

As global efforts intensify toward sustainable economic growth and clean energy transition, the interplay between energy diversification, financial development, and per-capita income in advanced economies has gained critical importance. OECD countries, often seen as leaders in technology, finance, and environmental governance, present an ideal laboratory for examining whether these factors are converging or diverging in a globalised world. The longstanding theory of convergence suggests that lagging economies will catch up to wealthier peers, but do these patterns hold for energy and finance, especially amidst climate and technological shifts? China Finance Review International (CFRI) brings you a new article titled “Energy diversification, financial development and economic development: an examination of convergence in OECD countries”, which investigates these very questions using advanced econometric methods and panel data from 1997 to 2021.

Methodology and Scope

The study employs a combination of club convergence tests, Granger causality tests, and panel regressions to analyse the evolution and interrelationships of energy diversification, financial development, and per-capita income among 38 OECD countries over a 25-year period. By leveraging the Phillips and Sul log-t test, the authors identify whether all countries are converging to a single steady state or instead forming distinct “convergence clubs”—groups of countries with similar development paths. Granger causality and regression analyses are used to uncover the drivers and directionality of relationships between the three variables, with careful control for technological progress, capital formation, labour participation, trade, oil prices, and human development.

Key Findings and Contributions

• No Overall Convergence, But Convergence Clubs Exist: The study finds no evidence of all OECD countries converging to the same levels of energy diversification, financial development, or per-capita income. Instead, distinct convergence clubs are identified for each factor, with countries within each club growing more similar to each other.
• Bi-directional and Uni-directional Relationships: There is strong short-run bi-directional causality between all three variables. In the long run, financial development positively impacts both per-capita income and energy diversification, while energy diversification also supports financial development. A U-shaped effect of income on energy diversification is revealed, with a turning point at $67,112.8 per year.
• Role of Technology: Technological progress is a significant driver of per-capita income growth and energy diversification among OECD countries.
• Determinants of Convergence: Fixed capital, labour participation, trade, human development, and oil prices all play significant roles in shaping convergence within clubs.
• Novelty: This is the first comprehensive study to test the convergence of energy diversification, financial development, and per-capita income in OECD countries simultaneously, advancing the empirical literature on sustainable growth and financial systems

Why It Matters

The research provides critical insights for countries seeking to accelerate their transition to cleaner energy, deepen financial development, and enhance economic prosperity. As climate change and energy security become central to the global agenda, understanding why certain nations cluster together and what drives progress is crucial for targeted, effective policymaking. The emergence of convergence clubs suggests that global “one-size-fits-all” solutions may be less effective than tailored approaches that account for country-specific trajectories, resources, and institutional strengths.

Practical Applications

• For Researchers: Explore why countries form specific clusters and how technology diffusion impacts convergence. Apply advanced panel data techniques to study multi-dimensional convergence.
• For Financial Institutions and Investors: Design financial products for countries at different development stages. Use convergence club analysis to improve cross-country risk assessment and sustainable investment strategies.
• For Policymakers: Tailor policies to each country's level of energy and financial development. Promote technology sharing and international cooperation; strengthen support for green finance.
• For Businesses and Corporations: Factor in club-based trends when making investment decisions in energy and finance. Align strategies with evolving energy and financial policies to capture early opportunities in renewables.

Discover high-quality academic insights in finance from this article published in China Finance Review International. Click the DOI below to read the full-text original! Open access for a limited time!