The hypothesis of convergence between economies is that those countries with lower per capita incomes will catch up those with higher per capita incomes, in contrast to Endogenous growth theory. Endogenous growth theory rules that a country that has a consistently higher savings ratio than another will result in increasing divergence, despite this, economists have observed convergence between selected countries and the U.S between 1950 and 2000 (Lin, 2013) and mass convergence since, with over 90% of developing countries growing faster than the U.S from the turn of the millennium. For convergence to take place, the theory assumes that the necessary technology for growth is readily available in and freely traded with those lower income economies. Building on the writing of Ohkawa and Rosovsky (1974), Abramovitz (1986) includes that for convergence between two countries to take place, the developing country must have the ‘social capability’ for convergence; focusing on that country’s ability absorb and utilise available new technology and to attract foreign capital. This essay will first look at some of the causes of rapid acceleration in economic growth and then use the example of South Korea, representative of an Asian Tiger compared to the U.S to assess whether the convergence witnessed between these economies has been due to the U.S’ growth rate slowing down or South Korea’s rate accelerating.
When assessing the convergence between the national incomes of poor and rich countries, it is important to look at the factors driving the changes in the rate of economic growth. Neoclassical theory predicts that countries will naturally converge on their steady state of growth that is determined by their investment rate. The speed at which countries converge to this steady state level is determined by how close they are to that level in any given time period. Weil (2009, PP80-2) uses the Solow model to show that the further below its steady state a country is, the faster it will grow, this rate will then slow down and approach zero as the country reaches its steady state. While neoclassical theory predicts that countries will naturally converge to their own steady state, there is however no guarantee that this ‘steady state’ will be the same. For conditional convergence between two countries, they must have the same steady states, conditional to having the same savings ratio, rate of capital depreciation, production function and growth rate of effective labour. Assuming that countries have the same steady state, this piece will look at some of the causal factors of rapid growth accelerations.
It is highlighted that growth accelerations of a country tend to be correlated with factors such as increases in the level of investment, real exchange rate depreciations, changes to the political regime and external shocks (Pritchett et al, 2005). These factors hold different effects on the growth rate from the short to medium run, with the impact of external shocks typically holding in the short run but having a minimal effect in the long run. Although the findings (ibid.) from using the Penn World Tables data do show the presence of these correlations, they also find many cases of growth accelerations in the same time period studied that were unrelated to the four aforementioned factors. There is also significant evidence of growth accelerations being both highly unpredictable and frequent, with the probability that a country experiencing growth acceleration during any given decade being 25 percent regardless of the causal factors. Easterly et al. (1993) corroborate these findings, stating that accelerations are largely unpredictable and thus suggesting that the four factors should not be focused on as triggers of growth acceleration. Instead, accepting that the triggers of growth acceleration are often random, focusing on what determines the speed of growth acceleration is a more important factor to focus on when studying the convergence between the national income of countries. Abramovitz (1986) writes that for a poorer country to converge economically with a richer one, it must have the social capability, and the extent to which the poorer country is able to absorb and utilise new technology from the richer country, the faster its convergence will be. Lucas’ (2000) analogy, which calls on the reader to view countries of the world as athletes behind individual starting gates supports Abramovitz’ theory that what is important to the speed of growth of the poorer country is the rate at which it can utilise the technology available to them. Figure 1 shows the income paths of four given economies after their industrialisation, the diagram assumes that the first economy (UK) began its industrialisation in 1800 and has seen income grow at the constant rate α=0.2 since. The second assumption of the model is that any economy industrialising after the leader grows at a rate of α + a term proportional to the income gap between itself and the leader; β, due to technological transfer from the leader. The later that country begins to grow, the larger the initial income gap will be, and hence the larger the value of β and the faster its initial growth. These late industrialisers will eventually catch up to a level of income similar to the leader without ever surpassing it, as the country’s rate of growth will slow down the closer it comes to converging with the leader. This catch-up of the late industrialisers is shown in Figure 1 by the three curves below that of the UK.
As β is representative in the diagram of the new entrant’s faster proportional growth due to technological transfer from the leader, this model supports Abramovitz’ theory, suggesting that the better the country’s ability to utilise and absorb new technology from richer countries, the faster its convergence will be. I have chosen to use South Korea and the U.S as examples to assess whether the convergence between poorer and richer countries is due to the growth acceleration of those poorer countries or if it is in fact due to the richer countries slowing down. I feel South Korea is an appropriate example to consider convergence as it has had a similar growth path and convergence as the other ‘Asian Tigers’ and because of the recent time period of its convergence, there is a substantial amount of accurate data to detail its convergence. South Korea provides an interesting analytical study for the millennial as in recent history it has always been seen as an economic hub in East Asia, an OECD country and a significant donor of Official Development Assistance (ODA). However, as shown in Figure 2, South Korea only began its industrialisation and progress towards development in the late 1960s. As shown in the diagram, GDP per capita in South Korea in 1960 was $155.59 and increased only marginally to $156.07 in 1967, a fraction of the U.S’ GDP per capita that was $3,007 and $4,336 respectively (World Bank). Since 1967, South Korea’s GDP per capita has grown from 3.5% of the U.S’ level to close to 50%, highlighting the country’s strong convergence towards the US.
It is also evident from Figure 2 that the US has not experienced a slow down in its growth rate as its GDP per capita curve has continued its upward trend smoothly apart from the anomaly caused by the Great Recession of 2008. South Korea’s growth acceleration was in the 1960s and 70s largely driven by increased government incentives for labour-intensive manufactured exports. The economy remains heavily dependent on these exports, which explains the more volatile but faster growth path of its GDP per capita, with the dips on its curve representing the Asian crisis, Dotcom bubble and Great recession respectively. Returning to Lucas’ (2000) example, South Korea represents one of the later ‘industrialisers’ depicted by an acceleration path such as the fourth curve in Figure 1, which exhibits much faster growth than the leader, namely the U.S.
Using Figure 3 which shows the annual percentage change in GDP per capita growth between the two countries in comparison, it is clear that U.S, aside from the dips caused by various recessions has shown a relatively stable trend growth rate of around 2% throughout the time period. In the same time period, South Korea’s trend growth rate has been closer to 7% with the higher rate being explained in Lucas’ model by the country’s late industrialisation.
I have used South Korea as an example in the essay as it is a country that has shown a marked convergence in the last 60 years. As a testimony to its rapid growth, in 2008 it became the first country having once received ODA to become a major donor of ODA. South Korea’s convergence has also taken a similar trajectory to that of other countries that have moved from developing to ‘developed’ status, making it an appropriate microcosm of converging countries more generally. As presented using data from the World Bank and research from several economists, convergence in this case has been due to the poorer country’s growth rate accelerating which leads me to conclude that convergence, where it exists, does owe more to the acceleration of growth of the poorer country rather than the richer country’s growth slowing down.