20.4 Economic Convergence

Economic growth varies between high and low-income nations. High-income countries grow slower, relying on innovation. Low-income nations can grow faster by adopting existing tech and best practices from developed countries.

Convergence happens when low-income countries catch up to high-income ones. Factors like tech transfer, trade, and education help. But barriers like corruption or lack of infrastructure can slow it down. The speed depends on growth rate differences.

Economic Growth and Convergence

High-Income vs Low-Income Nations

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• High-income nations
  • Lower annual growth rates around 2-3% due to being closer to the technological frontier
  • Rely on innovation and developing new technologies to drive economic growth
• Low-income nations
  • Potential for higher annual growth rates ranging from 5-10%
  • Benefit from catch-up growth by adopting existing technologies and best practices from developed countries (technology transfer)
  • Growth driven by factors such as accumulating capital (machinery, infrastructure) and improving productivity

Convergence Factors

• Factors promoting convergence
  • Technology transfer and diffusion enable low-income countries to adopt existing technologies from high-income countries
  • Trade and globalization provide access to global markets, increase competition, and allow specialization based on comparative advantage
  • Human capital investment in education and skill development improves labor productivity
  • Institutional quality, including property rights protection and rule of law, supports economic growth
• Factors hindering convergence
  • Institutional barriers such as corruption and weak governance lead to inefficient resource allocation
  • Lack of infrastructure in transportation, communication, energy, and water supply hampers economic activities
  • Political instability and conflict deter investment and disrupt economic growth
  • Geography (landlocked countries) and dependence on primary commodity exports (natural resource curse) can limit economic progress

Convergence Speed

• Convergence speed depends on the growth rate differential, with larger differences leading to faster convergence
• Solow growth model implications
  1. Diminishing returns to capital: as capital accumulates, its marginal productivity declines
  2. Steady-state level of output per capita determined by savings rate, population growth, and technological progress
  3. Countries with similar characteristics converge to the same steady-state level
• Rule of 70 approximation
  • Time to double income = $70 / \text{growth rate}$
  • A country growing at 7% annually will double its income in about 10 years ($70 / 7 = 10$)
• Conditional convergence
  • Countries with similar characteristics (institutions, policies, human capital) converge to the same steady-state
  • Convergence is not guaranteed if underlying factors differ significantly between countries