✓✓ Catch-Up Effect

The catch-up effect is a theory that all economies will eventually converge in terms of per capita
income, due to the observation that underdeveloped economies tend to grow more rapidly than
wealthier economies. In other words, the less wealthy economies will literally "catch-up" to the more
robust economies. The catch-up effect is also referred to as the theory of convergence.
✓✓ The catch-up effect, or theory of convergence, is predicated on a couple of key ideas.
One is the law of diminishing marginal returns—the idea that as a country invests and profits, the
amount gained from the investment will eventually decline as the level of investment rises. Each time
a country invests, they benefit slightly less from that investment. So, returns on capital investments in
capital-rich countries are not as large as they would be in developing countries.
This is backed up by the empirical observation that more developed economies tend to grow at a
slower, though more stable, rate than less developed countries. According to the World Bank, high-
income countries averaged 1.6% gross domestic product (GDP) growth in 2019, versus 3.6% for
middle-income countries and 4.0% GDP growth in low-income countries.
Underdeveloped countries may also be able to experience more rapid growth because they can
replicate the production methods, technologies, and institutions of developed countries. This is also
known as a second-mover advantage. Because developing markets have access to the technological
know-how of the advanced nations, they often experienced rapid rates of growth.

✓✓ Limitations to the Catch-Up Effect

Although developing countries can see faster economic growth than more economically advanced
countries, the limitations posed by a lack of capital can greatly reduce a developing country's ability
to catch up. Historically, some developing countries have been very successful in managing
resources and securing capital to efficiently increase economic productivity; however, this has not
become the norm on a global scale.
-----Economist Moses Abramowitz wrote about the limitations to the catch-up effect. He said that in
order for countries to benefit from the catch-up effect, they would need to develop and leverage what
he called "social capabilities." These include the ability to absorb new technology, attract capital, and
participate in global markets. This means that if technology is not freely traded, or is prohibitively
expensive, then the catch-up effect won't occur.
-----Another major obstacle to the catch-up effect is that per capita income is not just a function of
GDP, but also of a country's population growth. Less developed countries tend to have higher
population growth than developed economies. According to the World Bank figures for 2019, more
developed countries (OECD members) experienced 0.5% average population growth, while the UN-
classified least developed countries had an average 2.3% population growth rate.
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