B00IKDIKGK by M.L. Jhingan

Author:M.L. Jhingan [Jhingan, M.L.]
Language: eng
Format: epub
Published: 0101-01-01T00:00:00+00:00

The concept of conditional convergence is explained in Fig. 5 with reference to two countries, a poor country A and a rich country B. They have different initial stocks of capital per capita and different saving rates that lead to different steady state positions. The capital per capita stock of B country is greater than that of A country, kB > kA, and its saving function is also higher than that of A country, sf(k)B > sf(k}A. The steady state position of country B is determined by the intersection of the sf(k)B curve with 45° line at point SB and that of county A at points SA with the intersection of sf(k)A curve with the 45° line.

This shows that a rich country with higher saving rate and higher stock of capital per capita grows at a faster rate than a poor country with lower saving rate and lower stock of capital per capita.

EMPIRICAL EVIDENCE

Barro, Baumol, Dowrick and Nguyen, Barro and Sala-i-Martin and other economists have tested empirically the conditional convergence hypothesis on the basis of cross-sectional data.

The various findings look empirically at the different variables like rates of saving, population growth, etc. and the influence of various government policies, etc. as proxies to explain differences in steady state positions.

Barro has shown that countries that invest more tend to grow faster but the impact of higher investment on growth appears to be transitory because such countries will have higher income per capita, but not higher growth rate. This suggests that countries converge conditionally.

Barro and Sala-i-Martin in their empirical analysis of cross-section of countries based on different variables like eduction, population growth, government policies, etc. found that growth rates per capita differ enormously across countries over long periods of time. On the basis of data for 122 countries from 1965-85, they concluded that the dispersion of real GDP per capita across a group of economies tends to fall over time and that the cross-country data support the conditional convergence hypothesis.

Similarly, Dowick in his study of 113 countries between 1960-64 and 1984-88 found diverging growth paths of GDP per capita across countries. By decomposing observed growth rates of GDP per capita into four elements, he found that the richer countries, in terms of GDP per capita, have been growing faster than the middle-income countries, which in turn, have outplaced the poorest countries. This has been due to lower rates of investment and labour force participation in the poorest countries compared to richer countries. This supports the conditional convergence hypothesis.

Take the case of the “Asian Tigers” as the unusual example of the conditional convergence hypothesis. Alwyn Young has shown that there is a mystery about their rapid growth. Hongkong, Singapore, South Korea, and Taiwan had remarkably high growth between 1966-90. Their rapid growth is measured by increased inputs: labour via increase in participation rates, capital via high saving and investment rates, and human capital via substantial expenditure on education. With the rapid growth of these inputs, Young shows that the growth of output in these countries converges to those of rich advanced countries.

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