Convergence and Poor Countries Growth Rates Acceleration or Rich Countries Growth Rates Slowing down - Example

DОЕS СОNVЕRGЕNСЕ, WHЕRЕ IT ЕХISTS, ОWЕ MОRЕ TО РООR СОUNTRIЕS’ GRОWTH RАTЕS АССЕLЕRАTING ОR RIСH СОUNTRIЕS’ GRОWTH RАTЕS SLОWING DОWN? Name Institution Tutor Date Introduction A dominant deliberation in development economics is the issue of economic convergence. A big question that arises is the whether there is an inclination for poor countries to experience more growth than developed nations and therefore resulting to convergence in the standards of living. Indeed various studies have been conducted in order to examine this fact. Some of studies disclose that convergence may actually be attained only after the poor countries attain a particular level of human capital or income. Other studies argue that increased returns is a key factor that may affect the existence of convergence. As this debates continue there is need to examine the issue of convergence more introspectively. This paper seeks to examine whether when convergence exists, it owes more to poor countries’ growth rates acceleration or rich countries growth rates slowing down? In one way it can be argued that when convergence exists, it owes more to the growth rates acceleration of poor countries as opposed to reducing the growth rate of rich countries. On the basis of the Salow model, a poor country is inclined to experience an increase in economic growth due to a higher marginal productivity of capital (Chou, 2002). The Salow Model begins with the premise that finished products or outputs are produced due to the combination of capital and labour (machinery and plant) as shown below. Output (Q), Equal to the product of: Productivity (Q/A) Hours per Employee (A/E) Employment Rate (E/L Labor-force Participation Rate (L/N) Working-age Population (N) Additionally, the theory postulates that when convergence occurs, all the nations having similar attributes such as technology, similar rates of saving and many other factors, will converge to a similar steady state (Smriti. 2015). This implies that poor countries are bound to attain a steady growth rate in the end. What is evident is that when convergence takes place, the growth rate of poor countries is bound to increase more. Additionally, convergence does not result to the slowing down the growth rate of the developed countries. This is because when a steady state is attained by both poor and rich countries during convergence, the poor countries experience an increased economic growth yet the developed nations do not experience any implicit effect. As demonstrated in the graph 1.0 below. Graph 1.0 Where convergence exists, it also owes more to the growth of poor countries because it facilitates the catching up effect and therefore increasing the growth of poor countries. The catching –up effect can historically be drawn from Gerchnkron (1952) who asserts that the growth prospects of a country can increase as a result of the effect. Additionally, Abramovitz (1986) effectively summarized the effect by stating that when the level of productivity is substantially high in one or more nations, when compared to other nations, there is a probability that the country in the other group can catch up with the process and develop a production approach that is more advanced from what they imitated from the developed nation. Consequently, the technology of the less developed nations is bound to experience a faster growth rate than that of the developed nations. A supporting factor is the idea that it is easier to imitate as opposed to invent or innovate (Masnick, 2010). Based on this analogy it can be stated that when convergence exists, it owes more to the growth rate acceleration of poor countries as opposed to a decline in the growth rate of rich countries. This is because even if convergence can bring about the imitation of technologies from the rich nation, nevertheless no impactful economic decline can be felt. Sachs and Warner (1995) conducted a study to examine economic convergence and economic policies. According to Sachs and Warner (1995) there have been numerous explanations provided by literature concerning the absence of convergence in poor countries. The two researchers however contend this fact. The study involved examining a total of 135 counties in Heston- Summers data series. The key factor of examination was the economic policies that the countries adopted during the 1970s and 1980s. The study examined the economic openness policy which include; countries must not impose excessive quotas on exports and imports and third they should also maintain a sensible convertible currency( which was judged in relations to the gap between the official exchange rate and the black market). Additionally, the study examined policy reforms in the selected sample group. The findings of the study disclosed that countries that had adopted sound economic policies and meet the conditions of those polices during the 1970s and 1980s displayed a tendency to experience economic growth more rapidly than developed nations and thereby converge. Some of the counties that demonstrated positive economic growth leading to convergence include Latin American countries such as Bolivia, Argentina and Peru. In Africa countries such as Botswana and Mauritius also demonstrated positive result. Kemal (2012) argues that we live in an economic system that is integrated. This basically implies that what happens in one section of the globe also influences what happens in another section. For instance the recent financial crisis that affected the developed nations also affect the developed nations (Centre for International Governance, 2009). The existence of integration has therefore led to a new form of convergence. For the previous one hundred years the percentage of growth in developed nations has depended on that of the developed nations. When the developed world economies experience economic growth, the developing nations also experience some level of growth. On the other hand when development in the developed world slows down the developed nations also slow down. What is evident is that this linkage supports the analogy that when convergence takes place it actually does steer the economic growth of poor countries. On the other hand, it can be argued that when convergence exists it influences a decline in the growth rate of rich countries. The flying geese pattern that was devised by the Japanese scholar Kaname, Aamatsu in the 1930s, he discloses the fact that when convergence takes place it actually results to a decline in the economic growth of developed nations (Akamatsu, 1961:1962). The flying geese model anticipates to enlighten the process of catching up in terms of industrialization of the later economies through three key approaches which include; Intra- industry aspect such as product development in a certain developing country, inter-industry aspects which involves the development of industries in a certain developing country and international aspect which entails the transfer of industries from developed to poor countries. (Fujita,et al,2011). Lin, (2013) examines how poor countries can catch up using the flying geese patterns. He argues that historically, convergence has actually occurred and the implication has been a decline in the economic growth of developed nations. Lin, (2013) discloses that prior to the eighteenth century, all counties were actually poor, agrarian and stagnant. The industrial revolution that emerged in Britain instigated the beginning of a new era. In the initial eight decades of the eightieth centaury Britain’s economic growth was very high and she was the world’s leading economy by an accelerating an average of 0.7 to 0.8 % annually. In the 19th century, Britain’s economic growth increased even more averaging from 2.8% annually from 1781 to 1913. Additionally, the output per every worker doubled from 1840 to 1911. Other economies such as the United States and Eastern European countries followed the footsteps of Britain by implementing a rapid system of industrial revolution. Convergence therefore took place. Asian economies such as; Singapore, Japan and China followed suit. As indicated in Figure 1.0 the Asian countries utilized the flying geese patterns model through structural transformation in order to increase their economic growth. The Asian countries also gained a level of sustained growth just like the western countries. It can actually be argued that the convergence that emerged over the centuries resulted to a decline in the economic growth of rich countries. For instance; the United States gained more economic growth and even become a world economic poor leaving Britain behind, yet initially Britain rules the world economy. Figure 1.0 The increase in globalization has greatly benefited the economic performance of poor countries (Kavalski, 2015). Many poor countries are able to enjoy the fruits of globalization such as increased trading activities, adoption of better technology, inflow and outflow of capital and the immigration of skilled and unskilled labour (Grinin, 2012). What is evident is that when convergence exists as a results of globalization the growth rates of poor countries increases. On the other hand, the growth rate of developed nations is lowered due to the pressure from developed nations to use globalization to expand their economies. For instance Wild and Wild (2012) disclose the fact that emerging markets have constantly reduced the economic progress of developed nations. Figure I.0 below demonstrates that poor nations experience faster growth when converging. This can basically be attributed to the increased use of the benefits derived from globalization. Figure 1.0 According to Kemal (2012) economies have entered a new era of new convergence which begun in the 1990. This period was characterized by developing economies and the capital income of some poor countries expanding faster than those of the developed nations. The new convergence depicts that with time, convergence will result to a faster growth in poor countries while developed nations experience economic decline. Conclusion The above discussion provides an introspective perspective concerning the impacts of convergence. The paper argues that convergence can bring about an increase in the economic growth of poor nations. Some of the arguments raised include; the catching up effect, the ideas propagated by the Salow model, economic integration, the flying geese patterns and policy changes. On the other hand, the paper argues that convergence can result to the decline in the growth of developed nations. What is evident is that convergence does have implications on both the poor and developed nations. Reference Abramovitz, M. (1986). Catching up effect, forging ahead and falling behind. Journal of Economic History. 66(2). Akamatsu, K. (1961). A Theory of Unbalanced Growth in the World Economy. In: Weltwirtschaftliches Archiv, Hamburg, no.86, pp.196-217. Akamatsu, K. (1962): A Historical Pattern of Economic Growth in Developing Countries. In: The Developing Economies, Tokyo, Preliminary Issue No.1, pp.3-25. Chou, K. (2002). Convergence: Do Poor Countries Tend to Catch Up with the Rich? Australian Economic Review. 35(2). p.1. Centre for International Governance. (2009). The Effect of the World Financial Crisis on Developing Countries: An Initial Assessment. CIG. Fujita, M, Kuroiwa,, I, Kumagai, S(2011). The Economics of East Asian Integration: A Comprehensive Introduction to Regional Issues. Edward Elgar Publishing. Gerchenkron, A. (1952). Economic Backwardness in Historical perspective. University of Chicago. Kemal, D. (2012). Convergence, Interdependence, and Divergence. Finance & Development. 49(3), p1. Kavalski, E.(2015). Encounters with World Affairs: An Introduction to International Relations. Ashgate Publishing. Masnick, M. (2010). Innovation By Imitation: Study Shows That Success Comes From Imitation. Techdirt. Sachs, J and Warner, A. (1995). Economic Convergence and Economic Policies. National Bureau of Economic Research. Smriti. C. (2015). The Solow-Swan Model of Economic Growth – Explained. SiteMap. Grinin, L, Ilyin, I and Korotayev, A.(2012). Globalistics and Globalization Studies. Sage. Lin, J. (2013). How Poor Countries Can Catch Up: Flying Geese and Leading Dragons in Against the Consensus .Reflections on the Great Recession. Cambridge University Press. Wild, J and Wild, J. (2012). International Business: The Challenges of Globalization. Pearson Prentice Hall. Read More