1 Convergence and Divergence in the Global Economy University of Hull

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3 Figure 16.5a USA; GDP per capita, international 1990 G-K dollars Charles G. M. van Marrewijk

4 Figure 16.5b France, share of income invested

5 Figure 16.6 Steady state equilibrium in the neoclassical growth model

6 Figure 16.7 ‘Explained’ growth & Solow residual. (a) USA ‘explained’ economic growth (%)

7 Figure 16.7 ‘Explained’ growth & Solow residual. (b) USA actual growth & Solow residual

8 Figure 16.8 Log income per capita I, 1990 G-K $

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10 Figure 16.9 Log income per capita II, 1990 G-K $

11 Figure 16.9 Log income per capita II, 1990 G-K $

12 Figure Evolution of N t and x t over time

13 Figure Evolution of agglomeration, the Herfindahl index

14 Figure Dynamics of city size; cities 3, 6, and 9

15 Figure Economic structure in France and the USA,

16 Figure Economic structure in France and the USA,

17 Figure Economic structure in Brazil, China, and India,

18 Figure Economic structure in Brazil, China, and India,

19 Figure Economic structure in Brazil, China, and India,

20 Meaning of Convergence and Divergence A poor country should grow at faster rate than a rich country as it has higher marginal productivity of capital. Evidence from African Countries shows divergence.

21 Two concepts of Economic Convergence Reduction in the standard deviation over time Dispersion Measure: variance of growth rates should decline over time Low income regions should grow faster than high income regions. Mean Difference

22 MPK R MPK P rprp rRrR KRKR KPKP Marginal productivity of Capital in Rich and Poor Countries and Capital Accumulation in Autarky

23 MPK R MPK P rprp rRrR KRKR KPKP RGRG Marginal productivity of Capital in Rich and Poor Countries and Capital Accumulation After Globalisation rPrP

24 MPL R MPL P w R’ LRLR LPLP Marginal productivity of Labour in Rich and Poor Countries Before and After Globalisation wRwR L P’ L R’ Rich Country Poor Country

25 Who Gain and Who Lose From Globalisation? MPL R MPL R’ MPL P MPL P’ wpwp w p’ wRwR w R’ MPK R MPK P rprp rRrR Capitalists in rich countries and workers in poor countries gain.

26 Factor Mobility and Convergence

27 Factors Promoting Convergence Domestic factors –Saving –Investment –Population growth rate –Human capital –Technology –Development of infrastructure –Sound economic policy –Homogenous and stable society –Transparent rules and regulations Global factors –Trade of goods and services –Inflow and outflow of capital –Emigration or immigration of skilled and unskilled labour –Adoption of better technology –Growth of the global economy –Peace/Oil prices

28 Autarky and Saving and Capital (Gartner (2003:262) has similar example)

29 Impacts of Globalisation in Output and Income What is the capital stock in the steady state in A and B if there is a free mobility of capital?

30 Evidence of Convergence Among OECD economies They rate growing at about the same rate

31 Lack of Evidence of Convergence among Low Income Countries and Convergence among newly emerging economies: Average Annual Growth Rate of Per Capita Income (%) and Its level in 1960 Conditional Convergence

32 Results from Cross Country Growth Studies -1 A low initial level of income is associated with higher growth rate in subsequent periods when other variables are held constant. Growth rates are higher when the ratio of investment to GDP is higher. Growth rates are higher in countries which have larger stock of human capital per capita. These are reflected in terms of enrolment in the primary and secondary schools. Population growth rates are negatively associated with growth rates.

33 Results from Cross Country Growth Studies -2 Countries with distorted markets have lower growth rates. Distortions occur in exchange rates and prices or by impediments to a free and fair trade. Countries with efficient financial system have higher growth rates. Size of the financial markets is measured as a ratio of liquid assets to the GDP. Countries with political instability have lower growth rates. Frequency of revolutions, wars and coups are used to measure political instability.

34 The Facts of Growth – The Long Run O. Blanchard

35 The Facts of Growth – The Long Run (Real GDP at Purchasing Power Parity) Annual Growth RateReal Output per Capita Output per Capita (%)(1992 dollars) Ratio of Real Ouput Per Capita /1950 France ,15019, Germany ,35620, Japan ,82019, United Kingdom ,87019, United States ,17025, Average ,87220,8043.5

36 Convergence Ch. van Marrewijk

37 The Facts of Growth – The Long Run Observations Strong growth Growth rates have decreased since the mid 1970s % (GDP/capita doubles every 16 years) % (GDP/capita doubles every 37 years) Convergence in output/capita across countries???

38 The Facts of Growth – The Long Run Convergence in Output/Capita – The OECD

39 The Facts of Growth – The Very Long Run Looking across two millennia From the end of the Roman Empire to 1500, no output per capita growth in Europe Small growth in output per capita (0.1%/year and 0.2%/year 1700 to 1820) Modest growth (U.S. = 1.5%) The high-growth of the 1950s and 1960s is unusual Leaders in output/capita change frequently: Italy  Netherlands  U.K.  US

40 The Facts of Growth – The Long Run Looking Across Lots of Countries – Convergence ???

41 The Facts of Growth – The Long Run Looking Across Countries – A Closer Look