Convergence

Definition

Convergence is the process by which economies with lower levels of per capita income tend to grow at faster rates compared to economies with higher levels of per capita income, ultimately leading to a narrowing of income disparities between them. This concept is central to understanding the dynamics of economic growth and development across different countries and regions.

5 Must Know Facts For Your Next Test

1. Convergence is a key concept in the study of economic growth and development, as it helps explain the patterns of income distribution and growth across countries.
2. The neoclassical growth model, developed by economists such as Robert Solow, provides the theoretical foundation for the convergence hypothesis.
3. Empirical studies have found evidence of conditional convergence, where economies converge to their own steady-state levels of per capita income based on their structural characteristics.
4. Factors that can influence the rate of convergence include differences in savings rates, population growth, technological progress, and institutional quality across countries.
5. Convergence has important policy implications, as it suggests that poorer countries have the potential to catch up to richer countries through appropriate policy interventions and institutional reforms.

Review Questions

• Explain the concept of convergence in the context of economic growth and development.
  • Convergence refers to the phenomenon where economies with lower levels of per capita income tend to grow at faster rates compared to economies with higher levels of per capita income. This process leads to a narrowing of income disparities between countries over time. The convergence hypothesis is a central tenet of the neoclassical growth model, which predicts that economies will converge to their own steady-state levels of per capita income based on their structural characteristics, such as savings rates, population growth, and technological progress.
• Distinguish between absolute convergence and conditional convergence, and discuss the implications of each for economic growth.
  • Absolute convergence refers to the situation where all economies, regardless of their initial conditions, converge to the same steady-state level of per capita income in the long run. In contrast, conditional convergence describes the phenomenon where economies converge to their own steady-state levels of per capita income, conditional on their structural characteristics. Empirical evidence suggests that conditional convergence is more prevalent, as countries' growth paths are influenced by factors such as savings rates, population growth, and technological progress. The implications of these concepts are that poorer countries have the potential to catch up to richer countries, but the pace and extent of convergence will depend on the specific conditions and policies in each economy.
• Analyze the role of policy interventions and institutional reforms in promoting economic convergence between countries.
  • The convergence hypothesis suggests that poorer countries have the potential to catch up to richer countries, but this process can be accelerated or hindered by policy interventions and institutional reforms. Policies that encourage higher savings rates, investment in human capital, and technological progress can foster faster rates of convergence. Similarly, improving the quality of institutions, such as property rights, the rule of law, and the efficiency of the financial system, can create an environment that is conducive to economic growth and convergence. Governments in developing countries can play a crucial role in implementing these types of policies and reforms to promote convergence and reduce income disparities with more developed economies. Ultimately, the interplay between economic fundamentals and policy choices will determine the pace and extent of convergence across countries.

Related terms

Conditional Convergence: The phenomenon where economies converge to their own steady-state levels of per capita income, conditional on their structural characteristics such as savings rate, population growth, and technology.

Absolute Convergence: The situation where all economies, regardless of their initial conditions, converge to the same steady-state level of per capita income in the long run.

Neoclassical Growth Model: A theoretical framework that predicts the process of convergence, where economies with lower initial capital per worker will grow faster and eventually catch up to those with higher initial capital per worker.