Convergence (Economic)

Published Apr 7, 2024

Definition of Convergence (Economic)

Convergence in economics refers to the hypothesis that poorer economies’ per capita incomes will tend to grow at faster rates than richer economies. As a result, all economies should eventually converge in terms of per capita income. In detail, it assumes that with the appropriate policies and institutional arrangements, developing countries have the potential to catch up with the economic development levels of advanced economies over time. This theory is based on the premise that there are diminishing returns to capital in wealthier countries, leading to slower growth rates, whereas in poorer countries, the opposite is true.

Example

A classic example of economic convergence can be observed in the case of South Korea. Post the Korean War, South Korea was one of the poorest countries in the world, with a GDP per capita comparable to levels found in the poorer countries of Africa and Asia. However, through significant investments in education, infrastructure, and technology, alongside fostering a conducive policy environment for economic growth, South Korea transformed into a high-income country. This rapid economic development significantly closed the gap between South Korea and more developed countries, exemplifying the concept of convergence.

Another example is seen in the rapid growth of China since the economic reforms in the late 20th century. Initially, China’s GDP per capita was significantly lower than that of Western countries. Through extensive reforms, opening up to international trade, and investments in human and physical capital, China has shown remarkable rates of growth, thus converging towards the income levels of more developed economies.

Why Economic Convergence Matters

Understanding economic convergence is crucial for policy-making and long-term planning for both developing and developed countries. For emerging economies, the convergence theory implies that adopting certain policies—such as improving education and health infrastructure, promoting technological advancements, and maintaining stable economic policies—can lead to higher growth rates and an improved standard of living. For advanced economies, the theory suggests that innovation and productivity improvements are vital for maintaining economic leadership and avoiding stagnation.

Economic convergence also highlights the potential for reducing global inequality. By understanding and facilitating the conditions under which convergence can occur, international organizations and governments can better address disparities in wealth and development.

Frequently Asked Questions (FAQ)

What are the conditions necessary for economic convergence to occur?

For economic convergence to happen, several conditions are often considered necessary. These include access to technology, stable political and economic environments, sound macroeconomic policies, investment in human capital (education and health), and the ability to absorb and innovate upon existing technologies. Furthermore, institutional quality, such as property rights and rule of law, plays a significant role in determining whether a country can take advantage of the catch-up growth opportunity.

Is economic convergence guaranteed for all developing countries?

Economic convergence is not guaranteed for all developing countries. While the theory suggests that poorer economies have the potential to grow faster than wealthier ones, success depends on a variety of factors, including the implementation of effective economic policies, the quality of institutions, and the country’s openness to trade and investment. Additionally, external factors such as geopolitical risks, global economic conditions, and environmental challenges can influence a country’s growth trajectory.

How is economic convergence measured?

Economic convergence can be assessed through various indicators, with GDP per capita being the most common measure. By comparing GDP per capita growth rates of developing countries with those of developed countries over time, economists can gauge whether convergence is occurring. Another approach is to look at productivity levels, technological adoption, and improvements in health and education outcomes as proxies for a country’s convergence towards higher living standards.

Can divergence happen instead of convergence?

Yes, in some cases, divergence, rather than convergence, can occur. Divergence refers to the process where income gaps between countries widen over time rather than narrow. This can happen due to reasons such as political instability, poor governance, lack of access to markets, or failure to invest in human and physical capital. The divergence phenomenon underscores the importance of conducive policies and institutions in ensuring that countries are able to catch up with the more developed economies.