The concept of Economic convergence
The concept of Economic convergence has had a significant influence on the elements of growth empirics, capital stock, per capita output, human capital and income per capita in the global economy. According to the convergence hypothesis also referred to as the “catch up effect”, all economies will tend to converge at the same equilibrium in terms of per capita income depending on specific variables. There are two distinct versions of conversions: Conditional (β-convergence) and unconditional (σ-convergence) (Roy, 2016).
Conditional convergence hypothesis
The Conditional convergence hypothesis states that even if countries differ in their initial capital-labor ratio, population growth rates, saving propensities and production capabilities, they will still converge at the same growth rate but with different capital-labor ratios and varied standards of living influenced by the structural complexities of the country. Conditional convergence is therefore influenced by a country’s economic growth path in terms of GDP per worker, the financial systems and the saving rates. Subsequently, countries with similar characteristics will converge at the same growth rate. The convergence of developing and the developed nations is therefore dependent on similar structural functionalities that impact on the optimal economic growth of such nations (Paulo, 2016).
Unconditional convergence theory
On the other hand, the theory of unconditional convergence (absolute convergence) states that the low-income and the developed nations will converge at the same capital-labor ratio, consumption per capita, output per capita and consumption per capita and the same growth path despite the fact that the specific countries have different structural characteristics. The hypothesis implies that the escalated levels of marginal productivity in the developing nations will result in absolute convergence at the global economy (Roy, 2016). The poor nations will ultimately catch up with the developed nations since they will have a higher marginal capital output and their production functionality would have been enhanced.
Explain why each occurs in an appropriate version of the Solow model
The theories of conditional and unconditional convergence are clearly elaborated in specific versions of the Solow model. The model mainly evaluates vital aspects of the GDP that influences the long-term economic growth of a country. Some of the variables that have been integrated in the model include elements of: capital accumulation, technological progress, aspects of the labor force and how they impact on the global economic output. Additionally, Solow model also elaborates on the significance of knowledge and aggregate output in attaining a steady-state of economic progression.
The model predicts conversion at the same steady state K in countries that have similar level of investment, knowledge, labor outputs and rate of depreciation. The black curve signifies the output per worker in terms of production functionality. The output of a worker is therefore dependent on the amount of capital the specific worker has. On the other hand, the red curve is the investment per worker in a nation. The line specifies the savings rate per worker which is subsequently equated to the levels of investment. Having calculated the investment rates, one can determine the amount of capital that is added to the economy on an annual basis (Rodrick, 2013).
Solow Model: The "I" on hash mark represents equilibrium income, the "S" represents equilibrium Saving. I-S=C, or consumption. N = growth in labor, G = growth in technology, and δ = depreciation.
The green line stands for the rate of depreciation per worker. The depreciation rate is usually considered to be constant and therefore the line indicates the amount of capital that needs to be replaced on annual basis in order to break even. In global economies where the red curve exceeds the green line, it indicates that the nation is constantly investing in new capital stock in order to replace the worn-out elements. According to the model, the key determinant of the steady state of capital stock is the rate of savings in a nation. In a steady state, an increase in saving rates results in an increase in investment and capital stock which subsequently offsets the extent of market depreciation (Rodrick, 2013).
Conditional convergence in Solow model
The Solow model predicts incidences of conditional convergence under specific scenarios. In situations where countries have similar characteristics, example in terms of saving rates, there is a high possibility that that the poor economy will catch up with the developed nation. Countries that have a low GDP per worker tend to grow exponentially due to favorable trading conditions and availability of well-defined market structures that have been developed by the predecessors. Controlling structural variations and growth characteristics in the different economies will therefore result in conditional convergence. The output per worker and capital-labor ratios will be uniform on the global platform resulting in favorable competition.
Absolute convergence in Solow model
Absolute convergence can also occur in specific economies as depicted by the Solow model. The model predicts that all countries will tend to converge at the same level of income per worker assuming all external factors remain constant. The low-income nations will grow at a faster rate mainly because of a higher capital in terms of marginal product. However, the aforementioned scenario is not likely to occur since countries have unique initial growth rates, structural characteristics, levels of investments and savings. The aspect of variance in terms of population growth also makes it impossible to attain uniform standards of living at the global scale as predicted by the model.
Economic performance of the BRIC nations
Does the economic performance of the BRIC nations support either idea of economic convergence?
Yes, the economic performances of the BRIC nations support the hypothesis of conditional convergence. BRIC is an acronym for the four emerging global economies; Brazil, Russia, India and China which have experienced tremendous economic growth over the past decade. Despite the fact the BRIC nations have distinctive structures in terms of human investment, technological gains, physical capital and trade policies, the have all exhibited a positive trajectory of convergence in terms of growth rate. Previous economic giants like America, Germany, Japan, France and Italy have subsequently experienced a slow growth rate in the present competitive market.
According to the recent projections released by the International Monetary Fund (IMF), in the next five years, India, China and the US will contribute to 54% of the global growth which will be measured at purchasing power parity (PPP) of 52%. In terms of contribution to world’s growth in the exchange rate sector, the BRIC economies will account for 45% of the overall projections. The aforementioned statistics are a clear indicator of the vital economic strides that have been made by the emerging nations. The nations have minimal investments in terms of human and physical capital which results in a higher marginal effect when compared to the high-income economies (Ramanujam, 2016).
Additionally, BRIC nations have had the advantage of utilizing improved technologies and subsequently saving on cost since they have learnt from the experience of the high-income countries. With the addition of South Africa in 2010, the five nations had a combined GDP of US$18.6 trillion which translates to 23.2% of the gross world product at the beginning of 2018 (Glas, 2015). The financial and commercial prospects of the BRIC nations clearly support the theory of conditional convergence. The global shift in emerging markets is a strong indicator that complexities of investment physical capital, population growth and technological innovations can result in optimal population growth in the developing nations.
Bibliography
Glas, A., 2015. Catching up of emerging economies: the role of capital goods imports, FDI inflows, domestic investment and absorptive capacity. Journal of Applied Economic Letters, 7 September.
Paulo, G., 2016. he structuralist revenge: economic complexity as an important dimension to evaluate growth and development. [Online]
Available at: https://bibliotecadigital.fgv.br/dspace/handle/10438/17575
Ramanujam, N., 2016. The BRIC Nations and the Anatomy of Economic Development: The Core Tenets of Rule of Law. 25 November.Issue https://doi.org/10.1515/ldr-2016-0013.
Rodrick, D., 2013. Unconditional Convergence. 1 February.
Roy, S., 2016. Glimpsing the End of Economic History? Unconditional Convergence and the Missing Middle Income Trap. Center for Global Development Working Paper No. 438, 29 October.
