This document summarizes research on economic convergence and growth. It reviews a core article by Barro and Sala-i-Martin that found evidence of convergence across U.S. states, with poorer states growing faster than richer ones. The document also reviews several other studies on factors influencing convergence and growth, such as policies, technology diffusion, education levels, and trade liberalization. Many findings support the idea that convergence exists, though some studies also found evidence of increasing divergence among certain countries or regions.

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

2. Table of content1. INTRODUCTION2. SUMMARY OF CORE ARTICLE3.REVIEW OF OTHER ARTICLES/JOURNALS4.COMPARISON OF FINDINGS5.CONCLUSION6.REFERENCES

3. INTRODUCTIONThe 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 countriesThe 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 ARTICLEConvergence and Economic Growth- Barro, Robert J. and Xavier Sala-i-MartinConcerned whether poor countries have tendency to grow faster than rich oneU.S. provides clear proof that convergence existsFound for income and product across U.S statesIf economies are similar in respect to preferences and technologies-the poor economies grow faster than rich onesThe 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 incomePersonal income-corporate net income when individuals receive payment as dividensGSP- corporate profits and depreciationAuthors have constructed the table of cross-state regressions for personal incomeB(beta) ranges from -0,122 for 1920-30 to 0,0373 for 1940-50Sectorial 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 incomeSince 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 occurInstability of B(beta) with GSP relates to the movement of oil pricesTendency 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 yearNon-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 productionIn 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 economyBarro and Sala-i-Martin extended neoclassical model by allowing international trade and global capital marketThe 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 occurOnce the differences in technologies are allowed, diffusion of technology across economies have to be considered.Migration has a little impact on convergenceIn comparison across the countires,Barro used data of 98 countries from 1960-1985Small tendency for rich countries to grow faster than the poor ones afetr 1960

11. REVIEW OF OTHER ARTICLES/JOURNALSIn 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. Quahhas several findings:1.The much- heralded uniform 2% rate of convergence could arise for reasons unrelated to the dynamics of economic growth2.Usual empirical analysis can be misleading for understanding convergence3.Some evidence shows that poor countries are getting poorer , rich getting richer and middle vanishes4.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. InderThe authors test for absolute convergence in 22 OECD countriesTest 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 meanAlso, 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 1950-1998Norway 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. LoewyIs 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 runTrade liberalization generates a positive impact on the steady state growth of all trading countriesSimilar technological parameters exhibit similar per capita growth in the long runIdentical 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 countries2.positive growth effect which affects all countries in the long runThe faster the growth of poor countries did not come at the expense of wealthier countries

21. COMPARISON OF FINDINGS

22. ConclusionThe 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 factorsDifferent countries-different economic conditions and policiesMany factors affect economic growth

23. THANK YOUQUESTIONS AND COMMENTS WILL BE APPRECIATED