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Convergence in economics is the hypothesis that poorer economies' per

capita income will tend to grow at faster rates than richer economies. As a
result, all economies should eventually converge in terms of per capita
income. The theory is based on the idea that the growth rate will slow as an
economy approaches the steady state level of capital per worker. Absolute
convergence predicts that poor countries will grow more quickly regardless
of their eventual steady state level of output.

Types of Convergence :
a) Absolute Convergence: Lower initial GDP will lead to a higher average
growth rate. The implication of this is that poverty will ultimately disappear
'by itself'. It does not explain why some nations have had zero growth for
many decades (e.g. in Sub-Saharan Africa)
b) Conditional Convergence: A country's income per worker converges to
a country-specific long-run level as determined by the structural
characteristics of that country. The implication is that structural
characteristics, and not initial national income, determine the long-run level
of GDP per worker. Thus, foreign aid should focus on structure (infrastructure,
education, financial system etc.) and there is no need for an income transfer
from richer to poorer nations.
c) Club Convergence: It is possible to observe different "clubs" or groups
of countries with similar growth trajectories. Most importantly, several
countries with low national income also have low growth rates. Thus, this
adds to the theory of conditional convergence that foreign aid should also
include income transfers and that initial income does in fact matter for
economic growth.

Are living standards of developing and developed


countries converging ?
There are two important reasons for developing countries would Catch-Up
by growing faster on average than developing countries. They are :
i) Poorer countries can replicate the production methods,
technologies, and institutions of developed countries. So the time taken for

improving the techniques , paying for the initial mistakes can be avoided
and they can move to high productivity techniques of production.
ii) The marginal product of capital and profitability of
investment will be lower in developed countries than in developing countries.
Developing countries have the potential to grow at a faster rate than
developed countries because diminishing returns are not as strong as in
capital-rich countries. For this higher return on investment, fund flows to
developing countries either from their domestic sector or from foreign
investors.

These two factors ensure a high growth rate in developing countries


compared to developed countries. On the other hand , a small growth in
developed countries indicate a larger volume then a high percentage growth
in developing economy. The base of developed countries , with which we
compare the percentage, is way higher then developing countries.

Below an article at the St. Louis Federal Reserve Bank is explained which
explores this theory
Only a few countries have been able to catch up with the high per capita
income levels of the developed world and stay there. By American living
standards (as representative of the developed world), most developing
countries since 1960 have remained or been trapped at a constant lowincome level relative to the U.S. This low- or middle-income trap
phenomenon raises concern about the validity of the neoclassical growth
theory, which predicts global economic convergence. Specifically, the Solow
growth model suggests that income levels in poor economies will grow
relatively faster than developed nations and eventually converge or catch up
to these economies through capital accumulation. But, with just a few
exceptions, that is not happening.
Heres a chart showing examples of nations that are and arent
converging with the United States.

The figure above shows the rapid and persistent relative income growth
(convergence) seen in Hong Kong, Singapore, Taiwan and Ireland beginning
in the late 1960s all through the early 2000s to catch up or converge to the
higher level of per capita income in the U.S. In sharp contrast, per capita
income relative to the U.S. remained constant and stagnant at 10 percent to
30 percent of U.S. income in the group of Latin American countries, which
remained stuck in the middle-income trap and showed no sign of
convergence to higher income levels. The lack of convergence is even more
striking among low-income countries. Countries such as El Salvador,
Mozambique and Niger are stuck in a poverty trap, where their relative per
capita income is constant and stagnant at or below 5 percent of the U.S.
level.

Examples :
There are many examples of countries which have converged with developed
countries which validate the catch-up theory. Based on case studies on
Japan, Mexico and other countries, Nakaoka studied social capabilities for
industrialization and clarified features of human and social attitudes in the
catching up process of Japan in Meiji era (1868-1912).In the 1960s and 1970s
the East Asian Tigers rapidly converged with developed economies. These
include Singapore, Hong Kong, South Korea and Taiwan - all of which are
today considered developed countries. In the post-war period (19451960)
examples include West Germany, France and Japan, which were able to
quickly regain their prewar status by replacing capital that was lost during
World War II

Limitations :
i) The fact that a country is poor does not guarantee that catch-up growth
will be achieved. Moses Abramovitz emphasised the need for 'Social
Capabilities' to benefit from catch-up growth. These include an ability to
absorb new technology, attract capital and participate in global markets.
According to Abramovitz, these prerequisites must be in place in an economy
before catch-up growth can occur, and explain why there is still divergence in
the world today.

ii) The theory also assumes that technology is freely traded and available to
developing countries that are attempting to catch-up. Capital that is
expensive or unavailable to these economies can also prevent catch-up
growth from occurring, especially given that capital is scarce in these
countries. This often traps countries in a low-efficiency cycle whereby the
most efficient technology is too expensive to be acquired. The differences in
productivity techniques is what separates the leading developed nations
from the following developed nations, but by a margin narrow enough to give
the following nations an opportunity to catch-up. This process of catch-up
continues as long as the following nations have something to learn from the
leading nations, and will only cease when the knowledge discrepancy
between the leading and following nations becomes very small and
eventually exhausted.

iii) According to Professor Jeffrey Sachs, convergence is not occurring


everywhere because of the closed economic policy of some developing
countries, which could be solved through free trade and openness. In a study
of 111 countries between 1970 and 1989, Sachs and Andrew Warner
concluded that the industrialized countries had a growth of 2.3%/year/capita,
open economy developing countries 4.5% and closed economy developing
countries only 2%.

iv )Robert Lucas stated the "Lucas Paradox" which is the observation that
capital is not flowing from developed countries to developing countries

despite the fact that developing countries have lower levels of capital per
worker.