comment by HStencil ·
2020-07-06T20:53:28.233Z · EA(p) · GW(p)
At least until quite recently, there was a fairly uniform consensus in mainstream Anglo-American economics that the convergence thesis was true. I think this was mainly because it was based on fundamental theoretical insights that were believed to be relatively unimpeachable, like the Solow Model and the Stolper-Samuelson Theorem.
The Solow Model uses a formal representation of the idea that capital can be put to better use (yielding a higher economic return) in places where it is more scarce to demonstrate that, all other things being equal, places further from a given steady-state output level will grow toward that level faster than places nearer to it. In other words, ceteris paribus, places where capital stock is lower will grow faster than places where capital stock is higher because adding a marginal unit of capital in a capital-poor economy will generate a greater return than adding a marginal unit of capital in a capital-rich economy, where all the high-yielding capital investment opportunities have already been funded. (Bear in mind, though, that “ceteris paribus” is doing a lot of work in that sentence. You might reasonably claim that the traditional Solow Model holds constant nearly everything we ought to care about in trying to explain development outcomes.) To the extent that it’s true, though, in a world with open cross-border capital flows, one would expect capital to flood from low-return investment opportunities in wealthier countries to high-return investment opportunities in poorer countries. Alas, the evidence that this is actually taking place on a large scale is mixed at best, and other factors excluded from the neoclassical theories of international trade and finance likely play a large role in determining the global allocation of capital.
The productivity term in the Solow Model also often comes up in discussions of convergence. This term, representing an economy’s efficiency at deploying its factors of production to make things, is frequently treated—for the purpose of simplification—as a representation of an economy’s level of technological advancement alone. Traditional growth economists tend to treat rates of technological advancement as largely exogenous (whether this assumption is realistic is the subject of considerable debate). However, separate models of global technological advancement are typically built around the idea that it’s cheaper to copy a technology that was developed in another country and put it to use in one’s domestic industries than it is to develop a wholly new technology from scratch, thereby advancing the technological frontier. As a result, economists often conclude that countries not yet at the technological frontier will enjoy faster productivity growth than counties that are at the technological frontier, in accordance with the convergence paradigm.
The Stolper-Samuelson Theorem shows that when a national economy specializes in the production of a good in which it has a comparative advantage and then the relative price of that good rises on global markets, the return on investment in the factor of production that most contributes to making that good will rise. For example, if a country has a comparative advantage in making blue jeans, and it specializes in making blue jeans, and labor is the most important factor of production in making blue jeans, if the relative price of blue jeans on globals markets rises, then the return on investment in labor in that country will rise. This is equivalent to saying that the marginal product of labor in that country will rise, and in a competitive labor market, the price of labor (the wage) should equal its marginal product, so producer wages should rise with, for instance, a relative increase in global demand for blue jeans (which would push up the price).
There is vigorous debate over the extent to which the Stolper-Samuelson Theorem is applicable to world in which we live today. It requires making a number of assumptions in order for its conclusion to hold (constant returns to scale, perfect competition, an equal number of factors and products). One famous counterexample to Stolper-Samuelson was proposed Raúl Prebisch and Hans Singer and was embraced by the anti-trade left of the postwar years. Prebisch and Singer propose that because complex manufactured goods (like computers) exhibit greater income elasticity of demand than simple commodities (like wheat or coffee), if a country specializes in exporting wheat (consistent with its comparative advantage), and relies on imports from foreign manufacturers to get computers, as global incomes rise, it will suffer declining terms of trade (i.e. as time passes, each imported computer will cost more and more wheat). Today, the Prebisch-Singer Hypothesis, as it’s called, has received some degree of very qualified acceptance by mainstream economists. Its fundamental proposal that it doesn’t always make sense to treat comparative advantages as destiny is quite widely accepted, though more on the basis of Paul Krugman’s work in New Trade Theory (demonstrating, e.g., that comparative advantages can arise from economies of scale in addition to from initial actor endowments) than on the basis of Prebisch and Singer’s work. However, the specifics of the hypothesis are regarded as an extremely special case, an exception to what is generally true of developing countries. There are two main reasons for this. The first is that many developing countries specialize in the extraction of metals and minerals that are necessary inputs in making complex manufactured goods, like copper and silicon. These commodities likely violate Prebisch-Singer’s assumption that simple commodity goods necessarily exhibit lower income elasticity of demand than complex manufactured goods. The second reason is that many of the complex manufactured goods that the poorest countries import from wealthier countries actually probably increase those countries’ productivity in producing basic commodities (consider, for instance, the way organizations like Precision Agriculture for Development deliver scientific agricultural guidance to farmers throughout South Asia and Subsaharan Africa via their cell phones).
I’m not sure to what extent this theoretical background will be helpful to you as you think about convergence, but regarding the facts on the ground, with very few exceptions (like Botswana), almost all of the progress toward convergence in the last four decades has taken place in East Asia. While the “Asian Miracle” is very much real, it may itself prove to be a special case, specific to the region or the historical period in which it took place. As premature deindustrialization begins to take its toll on those countries that are not yet rich, there are, I think, a number of serious concerns about the continued viability of the export-led growth models that lifted countries like South Korea and Japan out of poverty. While the theoretical insights on which those models were based are robust, it remains to be seen to what extent they continue to apply in our 21st-century economy. Similarly, the traditional convergence thesis assumes increasing liberalization of international trade and capital flows, a premise that has grown increasingly untenable over the last five years.