Convergence Theory

Definition

Convergence theory is a concept in economics that suggests less developed countries will eventually catch up to more developed countries in terms of economic growth and standard of living. It proposes that as countries develop, their per capita incomes and productivity levels will converge towards those of the most advanced economies.

5 Must Know Facts For Your Next Test

1. Convergence theory suggests that as less developed countries acquire new technologies and increase their capital stock, their productivity and incomes will rise, eventually catching up to more advanced economies.
2. The speed of convergence depends on factors like the rate of technological diffusion, the ability to absorb new technologies, and the pace of capital accumulation.
3. Empirical evidence on convergence is mixed, with some studies finding evidence of conditional convergence but not absolute convergence across countries.
4. Critiques of convergence theory argue that factors like institutional quality, geography, and path dependence can prevent less developed countries from catching up to the leaders.
5. Convergence theory is closely linked to the Solow growth model, which predicts that economies will converge to a steady-state level of income per capita.

Review Questions

• Explain how the convergence theory relates to the relatively recent arrival of economic growth.
  • The convergence theory suggests that less developed countries will eventually catch up to the economic growth and living standards of more advanced economies. This relates to the relatively recent arrival of economic growth in that many developing countries have experienced rapid economic development and industrialization in the past few decades, converging towards the productivity and income levels of the global leaders. The theory proposes that as these countries acquire new technologies, build up their capital stock, and integrate into the global economy, their growth rates will accelerate and they will narrow the development gap with the most prosperous nations.
• Describe the key differences between absolute and conditional convergence and how they apply to the context of economic growth.
  • Absolute convergence refers to the idea that all economies will converge to the same steady-state level of income per capita, regardless of their initial conditions and structural characteristics. In contrast, conditional convergence suggests that countries will converge to their own unique steady-state level of income, which depends on factors like technology, institutions, and policies. In the context of economic growth, absolute convergence would imply that all countries will eventually reach the same high level of income and productivity, while conditional convergence allows for the possibility that some countries may be trapped at lower levels of development due to their specific economic and institutional environments. The empirical evidence on convergence is mixed, with some studies finding support for conditional convergence but not absolute convergence across countries.
• Evaluate the role of the Solow growth model in explaining the convergence theory and its implications for the relatively recent arrival of economic growth.
  • The Solow growth model is closely linked to the convergence theory, as it predicts that economies will converge to a steady-state level of income per capita. The model suggests that as countries accumulate capital and experience technological progress, their growth rates will slow down and they will approach their steady-state levels. This relates to the relatively recent arrival of economic growth in that the Solow model can help explain why some developing countries have experienced rapid growth in recent decades, as they were able to rapidly increase their capital stock and adopt new technologies, allowing them to converge towards the productivity and income levels of more advanced economies. However, the model also highlights the importance of factors like population growth and technological progress, which can influence the steady-state level and the speed of convergence. Therefore, the Solow growth model provides a useful framework for understanding the convergence theory and its implications for the uneven patterns of economic development observed globally.

Related terms

Conditional Convergence: The idea that countries will converge to their own steady-state level of income per capita, which depends on their own structural characteristics, rather than a common steady-state.

Absolute Convergence: The hypothesis that all economies will converge to the same steady-state level of income per capita regardless of their initial conditions and structural characteristics.

Solow Growth Model: A neoclassical economic model that predicts the convergence of economies based on diminishing returns to capital and technological progress.