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This document discusses theories of economic convergence and divergence between countries. It summarizes the Solow growth model theory of conditional convergence, where countries converge if factors like labor growth, savings rates, and productivity are equal. However, reality shows no correlation between initial income and subsequent growth. Endogenous growth theories incorporate factors like human capital and knowledge spillovers but also do not perfectly match empirical evidence. Critiques of the Solow model cite issues like social infrastructure, institutions, technology, and economic policies that can lead to divergence rather than convergence between countries in practice.
Term 1 presentation added
- 1. Are the worldincome and living standards converging or diverging? John Phelan, Nagib Ahmad Nuri, Ligita Visockyte 19th November 2012
- 2. What does thetheory tell us?
- 3. Solow Growth Model:Convergence Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
- 4. Solow Growth Model:Conditional Convergence Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
- 5. Conditional Convergence Countries willconverge IF… • Labour force growth rates • Savings rates • Total Factor Productivity …are all the same As opposed to Absolute Convergence where countries converge come what may
- 6. Exogenous vs EndogenousGrowth • Solow Model says growth comes from increases in TFP – but these are given exogenously, “manna from heaven” • IF increases in capital are generated within the model it is endogenous growth
- 7. Endogenous Growth: Human Capital,Constant Returns Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
- 8. Endogenous Growth WithConstant Returns – No Convergence Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
- 9. What do wesee in reality?
- 10. No correlation betweeninitial low income and subsequent growth (1970-2000)
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- 13. Why doesn’t thetheory match reality?
- 14. Disequalizing forces (1820to 1992) • Consistently better performance of European countries and their offshoots; • Relatively poor growth performance of China and India until late 20th century; • Divergence between Anglo-Saxon and the other European countries in the beginning of the 19th century; • Slow growth of Africa in the second part of the 20th century. (Bourguignon, Morrison)
- 15. Endogenous growth model •Spillover models (P. Romer; Barro and Sala I Martin; G. Mankiw, D. Romer, D. Weil): the level of technology determined locally by knowledge spillovers • Neo-Schumpeterian model (Arrow): emphasize the private sector activities that contribute to technological advance • Linear models: capture the fact that technological change comes from investments that people make, but do so at the cost of abandoning the fact that technology or knowledge is a nonrival good
- 16. Critique of Solowmodel • R. Hall and C. Jones: Social Infrastructure; • Rostow: government and institutions; • Abramovitz: technological congruence and social capability; • North: property rights; • Barro, and Sala-i-Martin: microeconomic foundations of investment.
- 17. Why Globalization doesnot equate Convergence • Bad economic policies; • Unfavorable circumstances and institutions; • Lack of formal education (R. Easterlin); • Relative inefficiency of labor (G. Clark); • Human capital complementarity (Lucas); • Lack of social capability (Abramovitz); • Stock of human capital (Benhabib and Spiegel ); • Closed economies (Sachs and Warner ).
- 18. Can’t tell… Issues thatbear on all the studies: • National accounts vs household surveys • Exchange rate (market exchange methods or PPP exchange rates) • Definition of global distribution • Estimation errors