Posted in Finance, Accounting and Economics Terms, Total Reads: 334
The idea of convergence is a hypothesis that per capita income of the poorer economies' will tend to increase at a faster rate than that in the economies of the richer countries. It is also called as catch-up effect. As a result, eventually, all the countries will converge with respect to the per capita income. There is more potential for growth in the developing countries as compared to that of developed countries since the returns in particular to the capital are weak in the capital-rich countries as compared to the countries with lesser amount of capital available. In addition to that, the technologies, the production methods & the institutions of the developed countries could be copied by those countries.
There are 2 types of convergence
The first kind refers to the reduction in the dispersion of the income levels across different economies. On the other hand, the second one occurs when economies of the poorer countries grow faster than those of the richer ones. It is said to have the "conditional beta-convergence" when the growth rate of a country declines as it approaches a steady state. It means that there is "beta-convergence" subject to the condition that other variables should be held constant. It is also known as the "absolute beta-convergence"
Limitations - Limitations of this theory include the fact that a country is poor does not guarantee that the convergence growth will be achieved. Another limitation is the assumption it is making that the technology is traded freely and is available in those developing countries which are trying to catch-up with the developed ones. Another problem which can prevent the growth of those smaller scale economies is the unavailability of capital, which is expensive to buy, especially given that the capital is in these countries scarce.