Economic Convergence - Explained
What is Economic Convergence?
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What is Economic Convergence?
Convergence occurs when a country with smaller GDP grows (economically) faster than those of high-income countries.
Since economic growth in these countries has exceeded the average of the world’s high-income economies, these countries may converge with the high-income countries.
The low-income countries have GDP growth that is faster than that of the middle-income countries, which in turn have GDP growth that is faster than that of the high-income countries.
Several arguments suggest that low-income countries might have an advantage in achieving greater worker productivity and economic growth in the future.
A first argument is based on diminishing marginal returns. Even though deepening human and physical capital will tend to increase GDP per capita, the law of diminishing returns suggests that as an economy continues to increase its human and physical capital, the marginal gains to economic growth will diminish. For example, raising the average education level of the population by two years from a tenth-grade level to a high school diploma (while holding all other inputs constant) would produce a certain increase in output. An additional two-year increase, so that the average person had a two-year college degree, would increase output further, but the marginal gain would be smaller. Yet another additional two-year increase in the level of education, so that the average person would have a four-year- college bachelor’s degree, would increase output still further, but the marginal increase would again be smaller. A similar lesson holds for physical capital. If the quantity of physical capital available to the average worker increases, it will increase the level of output.
Low-income countries tend to have lower levels of human capital and physical capital, so an investment in capital deepening should have a larger marginal effect in these countries than in high-income countries, where levels of human and physical capital are already relatively high. Diminishing returns implies that low-income economies could converge to the levels that the high-income countries achieve.
A second argument is that low-income countries may find it easier to improve their technologies than high-income countries. High-income countries must continually invent new technologies, whereas low-income countries can often find ways of applying technology that has already been invented and is well understood.
Finally, optimists argue that many countries have observed the experience of those that have grown more quickly and have learned from it. Moreover, once the people of a country begin to enjoy the benefits of a higher standard of living, they may be more likely to build and support the market-friendly institutions that will help provide this standard of living.
Arguments That Convergence Is neither Inevitable nor Likely
If the economy's growth depended only on the deepening of human capital and physical capital, then we would expect that economy's growth rate to slow down over the long run because of diminishing marginal returns. However, there is another crucial factor in the aggregate production function: technology.
Developing new technology can provide a way for an economy to sidestep the diminishing marginal returns of capital deepening.
Improved technology means that with a given set of inputs, more output is possible.
Most healthy, growing economies are deepening their human and physical capital and increasing technology at the same time.
The argument that it is easier for a low-income country to copy and adapt existing technology than it is for a high-income country to invent new technology is not necessarily true, either. When it comes to adapting and using new technology, a society’s performance is not necessarily guaranteed, but is the result of whether the country's economic, educational, and public policy institutions are supportive. In theory, perhaps, low-income countries have many opportunities to copy and adapt technology, but if they lack the appropriate supportive economic infrastructure and institutions, the theoretical possibility that backwardness might have certain advantages is of little practical relevance.
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