convergence and economic growth

1. Macroeconomic Theory- ECN 5114 Topic: Convergence and Economic Growth AdrijanaSkoric GS26975 Irina Rakhimova GS27838

2. Table of content 1. INTRODUCTION 2. SUMMARY OF CORE ARTICLE 3.REVIEW OF OTHER ARTICLES/JOURNALS 4.COMPARISON OF FINDINGS 5.CONCLUSION 6.REFERENCES

3. INTRODUCTION The idea of convergence is the hypothesis that poorer economies per capita incomes will tend to grow at faster rates than richer economies. Economic growth is the increase of per capita gross domestic product (GDP) or other measure of aggregate income and can be either positive or negative. Poorer countries can replicate production methods, technologies and institutions currently used in developed countries The term "convergence" can have two meanings: (1) Sigma-convergence (2) Beta-convergence

4. INTRODUCTION(cont’d) This paper will summaries the core article from Barro and Sala-i-Martin “Convergence and Economic growth” as well as seven supporting articles from various economists of the world, where they analyzed convergence, economic growth, their factors and relationship. In the article,authors used neoclassical growth model,where the role of technological change became crucial, even more important than the accomulation of capital.(developed by Robert Solow and Trevor Swan in the 1950s).

5. INTRODUCTION (cont’d) The neoclassical model makes three important predictions: increasing capital relative to labor creates economic growth, since people can be more productive given more capital. poor countries with less capital per person will grow faster because each investment in capital will produce a higher return than rich countries with ample capital. because of diminishing returns to capital, economies will eventually reach a point at which no new increase in capital will create economic growth (steady state).

6. SUMMARY OF THE CORE ARTICLE Convergence and Economic Growth- Barro, Robert J. and Xavier Sala-i-Martin Concerned whether poor countries have tendency to grow faster than rich one U.S. provides clear proof that convergence exists Found for income and product across U.S states If economies are similar in respect to preferences and technologies-the poor economies grow faster than rich ones The basis-in neoclassical model is diminishing return to capital-which is capital share(L-alpha) Two measures of data-1. per capita personal income 2. per capita gross state product

7. Difference between GSP and personal income -capital income Personal income-corporate net income when individuals receive payment as dividens GSP- corporate profits and depreciation Authors have constructed the table of cross-state regressions for personal income B(beta) ranges from -0,122 for 1920-30 to 0,0373 for 1940-50 Sectorial composition variable-industrial mix would matter for the results if changes income shares among sectors with different productivity levels are related with levels of per capita income Since compositional effect for agriculture is held constant, industrial mix effects are not major element in the estimated convergence for state personal income

8. If we look at results with gross state product (GSP),changes in relative prices that interact with a states composition of production will occur Instability of B(beta) with GSP relates to the movement of oil prices Tendency of rich oil countries to grow at a higher rates can affect convergence pattern and lead to negative coefficient beta. The findings are showing that convergence appears in these sectors of production: For manufacturing over 4% per year Non-manufacturing less than 2% This results in that poor states grow faster not only in term of GSP,but also in term of labor productivity within different sectors of production In the analysis income versus product coefficient beta for income and GSP is nearly the same.

9. In addition, closed economies goods and technologies flow across the boarders ,the residence can borrow from other states and internal migration is possible, but U.S. state does not look like closed economy Barro and Sala-i-Martin extended neoclassical model by allowing international trade and global capital market The gap will occur between domestic product and income , and if technologies are the same, then an economies per capital stock will converge rapidly to those prevailing in other economies

10. However, if technologies are not the same ,divergence might occur Once the differences in technologies are allowed, diffusion of technology across economies have to be considered. Migration has a little impact on convergence In comparison across the countires,Barro used data of 98 countries from 1960-1985 Small tendency for rich countries to grow faster than the poor ones afetr 1960

11. REVIEW OF OTHER ARTICLES/JOURNALS In the article of Economic convergence and economic policies ( Jeffrey Sachs & Andrew Warner,1995,authors used Paul Romer theoretical growth model) the result was a strong tendency for rich countries to maintain or even increase their lead over poorer countries Three explanations were given: productive technology is intrinsically kind to the technological leader convergence is a fact of life poor countries have low long term potential

12. The contribution of this paper is to show the strength of convergence among all well-behaving countries. In addition, economic growth and economic convergence require efficient economic institutions (slow following countries require special corrective policies to provoke high-speed growth)and evidence is that convergent growth can be achieved by all or virtually all countries that follow a reasonable set of political and economic policies. But there are six countries that have failed to qualify ,and still they have achieved economic growth: Botswana, Cape Verde ,China, Hungary, Lesotho and Tunisia.

13. It have been stressed that member countries of “convergence club” will experience convergence.Meaning of “ convergence club “ is a subset of countries for which convergence applies, while countries outside this “club” would not experience convergence. Five conclusions are derived: there is strong evidence of unconditional convergence for qualifying countries, andno evidence of unconditional convergence for non-qualifying countries. non-qualifying countries grew systematically more slowly than did the qualifyingcountries. each of the policy criteria played a role in determining average growth rates the role of the policy criteria remains in place after controlling for other growth factors poor policies seem to affect growth directly, controlling for other factors

14. Empirics for economic growth and convergence by Danny T. Quah has several findings: 1.The much- heralded uniform 2% rate of convergence could arise for reasons unrelated to the dynamics of economic growth 2.Usual empirical analysis can be misleading for understanding convergence 3.Some evidence shows that poor countries are getting poorer , rich getting richer and middle vanishes 4.Convergence is observed across U.S states

15. Paul Cashin and Ratna Sahay in their article of “Regional Economic Growth and Convergence in India” analysed regional economic growth and convergence over 1961–91, using data on 20 states of India. Their findings: the initially poor economies of India has grown faster than their initially rich counterparts. In India, it would take about 45 years to close half the gap between any state’s initial per capita income and the states’ common long-run level of per capita income. In an industrial country, it would take only about 35 years. There is little evidence that cross-state migration is an important cause of the convergence of real state per capita incomes in India.

16. In the article “The knowledge-based economy, convergence and economic growth evidence from European Union” by Stelios Karagiannis results are showing that the r&d investments coming from abroad enhance growth performance. The educational attainment level of human resources ,and the diffusion of ICT through IT investment cause a positive effect on economic performance of European Union’s members states. Only high income countries are able to benefit from foreign R&D spill overs whilein poor states they benefit from personal computer utilization and related investments together with innovative patents and venture capital investments. Over the long run these knowledge related investments are the key drivers of the productivity economic growth chain for the members states of EU.

17. In addition to this, in the article “Determinants of economic growth- the experts view”, George Petrakosand co-authors determined the factors which affect economic growth and convergence and indicated top 10 factors for developed countries as well as top 10 factors for developing countries. China and India exhibit by far the greatest potential for economic dynamism, while Europe receives a lower ranking, whereas the last positions are taken by countries and areas located in Africa.

18. Testing convergence and economic growth-S.Nahar and B. Inder The authors test for absolute convergence in 22 OECD countries Test procedure allows researchers to identify particular countries within the group which may not be converging and also proposes that convergence among set of similar countries is better thought as movement towards a group leader rather than movement towards a group mean Also, they highlighted the inappropriateness of tests of unit roots and co integration as an indicator of the presence of convergence. There is a strong evidence for convergence among this group of OECD countries between 1950-1998 Norway diverging from the mean per capita GDP,Singapore diverging in recent years ,and New Zealand consistently diverging from the U.S per capita GDP

19. Free trade, growth and convergence- Dan Ben-David and Michael B. Loewy Is focusing whether can trade liberalization have permanent effect on output levels and on steady state growth rates. Whether knowledge spillovers coming from trade, can have effect on income convergence and growth rates over the long run Trade liberalization generates a positive impact on the steady state growth of all trading countries Similar technological parameters exhibit similar per capita growth in the long run Identical tariff structures converge to the same steady state growth path

20. Unilateral trade liberalization has two effects: 1.level effect captured by the liberalizing country which enables that country to catch up or even go above wealthier countries 2.positive growth effect which affects all countries in the long run The faster the growth of poor countries did not come at the expense of wealthier countries

21. COMPARISON OF FINDINGS

22. Conclusion The strong evidence of convergence-2% We believe that all these findings are important and many countries in EU, as well as Asian and African countries have recently established or modified economic policies according to those wealthier country’s policies in order to grow at a higher level. Not appropriate to consider only few factors Different countries-different economic conditions and policies Many factors affect economic growth

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