1. Lecture 6: Conditional Convergence and Growth
L11200 Introduction to Macroeconomics 2009/10
Lecture 6: Conditional Convergence and Growth
Reading: Barro Ch.4 : p83-94
4 February 2010

2. Introduction Last time: Today
Solow model with no variation in s, n, δ, A between nations implies all countries (eventually) move to same GDP per capita and low GDP per capita nations grow faster: ‘absolute convergence’
Data appears to reject this
Today
Allow these factors to vary and introduce idea of ‘conditional convergence’

3. Conditional Convergence
How do the model’s predictions for growth change when we allow the factors to vary
E.g. economies have different saving rates
The economy with the lower saving rate will have lower steady state k*, y* compared to an economy with a higher saving rate
At any level of K(0), the economy with a higher saving rate will be growing faster

4. Other factors The same is true for n, δ and A
Higher n implies lower k*, y*
Higher δ implies lower k*, y*
Higher A implies higher k*, y*
And at any K(0), the economy with higher technology or lower depreciation / population growth will grow faster.

5. Implications for growth rates
This gives to implications
For a given K(0), the economy with the higher k* will have a faster growth rate
For a given k*, a decrease in K(0) raises the growth rate
We can write this as:

6. Implications for Convergence
This may explain the lack of absolute convergence
Economies don’t converge to the same GDP per capita levels, so growth rate doesn’t depend on level of GDP per capita
Maybe the economies with lower growth rates also have lower k*, y* steady states, so they are on a growth path to a different steady state.

7. Conditional Convergence
This is the idea of conditional convergence: each economy is converging to it’s own steady state k*, y* determined by it own s, n, δ, A
This can be tested if we have data on each of these factors
Data is available on each: so can plot relationship between per capita GDP and per capita GDP growth conditional on these covariates

8. Conditioning Variables
Graph actually hold more than just s, n, δ and A constant. It also controls for other factors which affect k*, y* not in our model:
Measures of extent of rule of law and democracy
Extent of openness to trade
Investment in health and education
Measure of inflation

9. Example I Europe after World War II:
Previously strong characteristics, but capital and labour had been destroyed by war
So steady state k*, y* are high, current k low due to effects of war
Post WWII fast growth in European economies – consistent with conditional convergence

10. Example II Sub-Saharan African nations are very poor
Absolute convergence predicts they should grow rapidly
But they don’t: because they have poor levels of saving and technological growth
Also (maybe more importantly) they have poor rule of law, governments, education programmes and health systems. All factors which influence k* and y*.

11. Summary of Progress We began with some questions:
Why are some economies more developed than other?
Why do GDP growth rates vary across nations?
What is the relationship between the level of GDP and the growth rate of GDP

12. Explaining the patterns
Absolute convergence: all economies have the same steady state. Smaller economies should grow faster, all should converge to same per capita GDP.
Limited evidence for this
Conditional Convergence: economies converge to own steady-state, conditional on structural factors
Much stronger empirical evidence

13. Long-Run Growth
Question still remains: why do we observe long-run persistent growth rates for U.K. and U.S.?
Conditional convergence predict economy moves towards steady state
So expect growth rate would slow over time
But growth rate is steady over time: continual, or long-run growth.

14. Summary
Conditional convergence more plausible model than absolute convergence
Better supported by the data
Explains lack of growth in poorly developed nations through structural factors
How to explain long-run growth?
Need a model in which economy can maintain high growth rate continually.