On the structure of the present-day convergence



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On the structure of the present-day convergence


Andrey Korotayev
Laboratory of Monitoring of Risks of Sociopolitical Destabilization, National Research University Higher School of Economics, Moscow, Russia and System Forecasting Center,

Institute of Oriental Studies of the Russian Academy of Sciences,

Moscow, Russia, and

Julia Zinkina


Laboratory of Monitoring of Risks of Sociopolitical Destabilization, National Research University Higher School of Economics, Moscow, Russia
Abstract
Purpose – A substantial number of researchers have investigated the global economic dynamics of this time to disprove unconditional convergence and refute its very idea, stating the phenomenon of conditional convergence instead. However, most respective papers limit their investigation period with the early or mid-2000s. In the authors’ opinion, some of the global trends which revealed themselves particularly clearly in the second half of the 2000s call for a revision of the convergence issue. The paper aims to discuss these issues.
Design/methodology/approach – Several methodologies for measuring the global convergence/ divergence trends exist in the economic literature. This paper seeks to contribute to the existing literature on unconditional b-convergence of the per capita incomes at the global level.
Findings – In the recent years, the gap between high-income and middle-income countries is decreasing especially rapidly. The gap between high-income and low-income countries, meanwhile, is decreasing at a much slower pace. At the same time, the gap between middle-income and low-income countries is actually widening. Indeed, in the early 1980s GDP per capita in the low-income countries was on average three times lower than in the middle-income countries, and this gap was totally overshadowed by the more than ten-time abyss between the middle-income and the high-income countries. Now, however, the GDP per capita in low-income countries lags behind the middle-income ones by more than five times, which is largely the same as the gap (rapidly contracting in the recent years) between the high-income and the middle-income countries. This clearly suggests that the configuration of the world system has experienced a very significant transformation in the recent 30 years.
Research limitations/implications – The research concentrates upon the dynamics of the gap in per capita income between the high-income, the middle-income, and the low-income countries. Originality/value – This paper’s originality/value lies in drawing attention to the specific changes in the structure of global convergence/divergence patterns and their implications for the low-income countries.
Keywords Innovation, Development, Classification, Convergence, Systems theory, Globalization, Technological innovation, Global studies, Low-income countries, Middle-income countries, Catch-up Paper type Conceptual paper
Various aspects of convergence and the catch-up effect have attracted considerable scholarly attention, including the questions of unconditional (absolute) convergence vs conditional convergence; global convergence vs local or club-convergence;

This paper is an output of a research project implemented as part of the Basic Research Program at the National Research University Higher School of Economics (HSE) in 2014.



Structure of the present-day convergence



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Campus-Wide Information Systems


Vol. 31 No. 2/3, 2014
pp. 139-152
r Emerald Group Publishing Limited
1065-0741
DOI 10.1108/CWIS-11-2013-0064




CWIS 31,2/3


140


s-convergence vs b-convergence, etc. (for a systemic review see, e.g. Islam, 2003). This paper seeks to contribute to the existing literature on unconditional convergence of the per capita incomes at the global level. Indeed, basing on the tenets of the theory of convergence laid in the classic works of Gerschenkron (1952) and Solow (1956), one could regard the increasing globalization and world connectedness in the 1990s and the 2000s as sufficient grounds to expect convergence trends at the global level during this period. Contrary to such expectations, a substantial number of scientific papers investigated the global economic dynamics of this time to disprove unconditional convergence and refute its very idea, stating the phenomenon of conditional convergence instead (see the next sections). However, most of these papers limit their investigation period with the early or the mid-2000s. In our opinion, some of the global trends which revealed themselves particularly clearly in the second half of the 2000s call for a revision of the convergence issue. Indeed, “the recent wave of globalization has been spurred mainly by two factors: technological change – bringing about noticeable reductions in transport and information costs across countries; and policy decisions – pursuing tighter regional and supraregional integration schemes” (Villaverde and Maza, 2011, p. 952). Both these trends are likely to contribute to convergence, so in the current paper we pose two questions:






  1. whether any signs of unconditional convergence can be seen and, if so, what does its structure look like; and




  1. what impact the various recent global trends had upon the convergence trends.

Why should one expect to observe unconditional convergence?


The theory of convergence predominantly relies on the two classic works. First, in 1952 Alexander Gerschenkron in his “Economic Backwardness in Historical Perspective” essay showed that relative backwardness of a country can contribute to its development if supported by “adequate endowments of usable resources’’ and the absence of “great blocks to industrialization” (Gerschenkron, 1952, p. 6). Then, in 1956, Robert M. Solow published “A contribution to the theory of economic growth” pioneering the idea of the generality of unconditional convergence worldwide (Solow, 1956).
Two fundamental convergence-driving forces can be derived from these works. First, developing nations can draw upon the skills, production methods, and technology of more advanced countries. “As low-income countries draw upon the more productive technologies of the leaders, we would expect to see convergence of countries toward the technological frontier” (Samuelson and Nordhaus, 2005, p. 584).
Second, diminishing returns (to capital, etc.) are weaker in the developing countries than in the developed ones. Thus, “the diminishing returns to capital [implied by the Solow model] has another important implication: Other things equal, it is easier for a country to grow fast if it starts out relatively poor. This effect of initial conditions on subsequent growth is sometimes called the catch-up effect. In poor countries, workers lack even the most rudimentary tools and, as a result, have low productivity. Small amounts of capital investment would substantially raise these workers’ productivity. By contrast, workers in rich countries have large amounts of capital with which to work, and this partly explains their high productivity. Yet with the amount of capital per worker already so high, additional capital investment has a relatively small effect on productivity. Studies of international data on economic growth confirm this catch-up effect: Controlling for other variables such as the percentage of GDP devoted




to investments, poor countries tend to grow at faster rates than rich countries” (Mankiw, 2008, p. 258).


Additionally, Abel and Bernanke note that according to the Solow model, if the economy is open, the absolute convergence gets support of some additional economic forces. Since poorer countries have less capital per worker and therefore a higher marginal product of capital than the more affluent countries, investors from richer countries will be able to get greater profits by investing in poor countries. Therefore, foreign investment should provide a more rapid increase in capital stock in poor countries, even if the level of domestic savings in these countries is low (Abel and Bernanke, 2005, p. 234; for more detail see also Korotayev and de Munck, 2013; Korotayev et al., 2011a, b, 2012).
Why should one not expect to observe unconditional convergence at the global level?
However, the 1990s and the 2000s saw a wave of works showing no evidence for absolute convergence and stating the idea of conditional convergence instead. Thus, Barro viewed 98 countries in the period 1960-1985 and refuted the hypothesis of absolute convergence, stating that “the hypothesis that poor countries tend to grow faster than rich countries seems to be inconsistent with the cross-country evidence” (Barro, 1991, p. 407). Mankiw et al. also studied a sample of 98 countries, proved the absence of absolute convergence in per capita income during the period 1960-1985, and introduced the notion of conditional convergence, stating that “the Solow model predicts convergence only after controlling for the determinants of the steady state” (Mankiw et al., 1992, p. 422). Sala-i-Martin analyzed a set of 110 countries and only found evidence for conditional convergence, stating that “the cross-country distribution of world GDP between 1960 and 1990 did not shrink, and poor countries have not grown faster than rich ones. [y] in our world there is no absolute b-convergence” (Sala-i-Martin, 1996, p. 1034).
The phenomenon of conditional convergence found further supporting evidence in numerous studies with different conditioning variables (see, e.g. Caggiano and Leonida, 2009; Petrakos and Artelaris, 2009; Romero-Avila, 2009; Owen et al., 2009; Sadik, 2008; Frantzen, 2004; de la Fuente, 2003; Jones, 1997; Caselli et al., 1996; Sala-i-Martin, 1996; King and Levine, 1993; Levine and Renelt, 1992; Barro, 1991; De Long and Summers, 1991).
Currently there seems to be unanimous agreement among the researchers over the absence of absolute convergence of per capita income across the world; rather, absolute divergence and conditional convergence were observed in various cross-country studies (see, e.g. Sadik, 2008; Epstein et al., 2007; Seshanna and Decornez, 2003; Workie, 2003; Quah, 1996a, b, c; Lee et al., 1997; Bianchi, 1997; Sachs et al., 1995; Canova and Marcet, 1995; Durlauf and Johnson, 1995; Desdoigts, 1994; Paap and van Dijk, 1994).
Among the more recent works refuting the unconditional convergence hypothesis is the cross-country analysis of GDP per capita values between 1960 and 2000 by Acemoglu (2009); he maintains that “there is a slight but noticeable increase in inequality across nations,” i.e., divergence rather than convergence (Acemoglu, 2009, p. 6). Some works view the phenomenon of convergence in particular economic sectors. Thus, Rodrik finds evidence for unconditional convergence in manufacturing across 118 countries, but notes that “despite strong convergence within manufacturing, aggregate convergence fails due to the small share of manufacturing employment in low-income countries and the slow pace of industrialization” (Rodrik, 2013, p. 165).

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However, most of the papers cited above, including the most recent ones, commonly limit the time of their investigation with the early or the mid-2000s. In our opinion, some of the trends which revealed themselves particularly clearly in the global world in the second half of the 2000s call for a revision of the convergence issue. Moreover, it was not only the middle-income countries that expressed positive signs of fast growth, but also the least developed ones, many of them in Sub-Saharan Africa (SSA). The promising macroeconomic trends are minutely described in the latest African Economic Outlook “Since the ‘lost’ 1980s and early 1990s Africa’s economic performance has improved significantly and the continent has started to catch-up. From 1996 to 2010, Africa’s average annual GDP growth amounted to about to 5% and per capita GDP increased year by year by an average of 2.5%. As a result, in 2010 Africa’s level of per capita income surpassed its 1995 level by 46%. The catching-up of African economies has been widespread with the exception of a few countries” (AfDB, OECD, UNDP, ECA, 2013, p. 22). Both the middle-income and the low-income countries generally did better during the global 2008-2009 financial economic crisis than their high-income counterparts (see, e.g. World Bank, 2013, NY.GDP.PCAP.PP.KD). So, all things considered, the latest years present particular interest in searching for unconditional convergence at the global level.



Two questions deserve attention:


  1. whether any signs of unconditional convergence can be seen and, if so, what does its structure look like; and




  1. what (if any) impact the globalization trends had upon the convergence trends.

Any signs of unconditional convergence? Recent dynamics of the gap in per capita GDP


Let us first view the dynamics of the gap in GDP per capita between the high-income OECD countries and the low-income countries for the past three decades (see Figure 1).
One can see that the gap between the high-income OECD countries and the low-income countries kept growing until 2000. All in all, during the 1981-2000 this gap increased very significantly, from 25 times in 1981 to almost 40 times (however, one should note here that, though the gap was still widening in the late 1990s, it was at a much slower pace as compared to the previous years). In the 2000s the gap started to contract rather fast, decreasing from 40 to 30 times during only 12 years. Abstractly speaking, if this trend and pace are kept, the gap will essentially disappear in about 30 years – though, of course, there are strong doubts that the low-income countries (“the bottom billion” as coined by Collier, 2007) will manage to keep up the current fast pace of catching-up to the high-income countries in GDP per capita.
Let us now turn to the dynamics of the gap in GDP per capita between the high-income OECD countries and the middle-income countries in the past three decades (see Figure 2).
Thus, the gap between the high-income and middle-income countries kept growing up to 1990, approaching the value of 10 (which means that the GDP per capita in the high-income countries exceeded that in the middle-income countries by an order of magnitude). After 1990 one can observe a rather pronounced trend for a decline in this gap. However, during the 1990s the gap was declining rather slowly, going down from the value of 9.25 to 8.7 in ten years. In the 2000s the gap continued declining at a much accelerated pace, going down from 8.7 to 5.4 during 12 years (2000-2012). If this pace











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