Convergence

Abstract:     
Conventional economic wisdom predicts that free and competitive international trade should cause economies GDP to converge over the long run. Empirical evidence of sixteen developed countries suggests that the countries did converge in terms of labour productivity over the period of 1870 to 1973, and that the lower the initial level of labour productivity the higher the subsequent growth. However, when this data set was enlarged to include countries that in 1870 appeared to have promise of economic development, no convergence was explicit. Among all the nations there is also no evidence that the poorer countries are catching up. Indeed over the past 100 years the income gap between poorer and richer countries increased by over eight-fold. It is therefore argued that for convergence to take place there must exist necessary 'social capacity' that allows countries to adopt the best-practise technologies of the leading economies. Convergence is also impeded by institutional and labour market environments that maintain low wage regimes.

Keywords: Convergence, International trade, Free trade, Competition, Social capacity, Technology

JEL Classification: C00, C10, F10, F15, J20

Accepted Paper Series