In Search of Convergence

Aug 20, 2014 Ricardo Hausmann

For 200 years, the world’s rich countries grew faster than poorer countries. Why has that trend reversed during the past three decades, and what does the answer imply for development strategies?

CAMBRIDGE – One puzzle of the world economy is that for 200 years, the world’s rich countries grew faster than poorer countries, a process aptly described by Lant Pritchett as “Divergence, Big Time.” When Adam Smith wrote The Wealth of Nations in 1776, per capita income in the world’s richest country – probably the Netherlands – was about four times that of the poorest countries. Two centuries later, the Netherlands was 40 times richer than China, 24 times richer than India, and ten times richer than Thailand.

But, over the past three decades, the trend reversed. Now, the Netherlands is only 11 times richer than India and barely four times richer than China and Thailand. Spotting this reversal, the Nobel laureate economist Michael Spence has argued that the world is poised for The Next Convergence.

Yet some countries are still diverging. While the Netherlands was 5.8, 7.7, and 15 times richer than Nicaragua, Côte D’Ivoire, and Kenya, respectively, in 1980, by 2012 it was 10.5, 21.1, and 24.4 times richer.

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0 Comments on this paragraph, 14 in all 14 Comments on this article

Alberto Garcia-LLuis Valencia Jul 5, 2015

Las transferencias de conocimiento (know-how + know-do) la mayoría de las veces se centran simplemente en ventajas comparativas, igualar las condiciones de partida, reduciendo los costes de Investigación. Muchas veces detrás de esta estrategia no hay una visión estratégica clara, es decir aprender de los mejores, para elevar el conocimiento de partida y en ese momento retomar el testigo y liderar la innovación. Se parte de que la Innovación y la investigación generan ventajas competitivas efímeras, pero los que copian, no han entendido que la ventaja competitiva, la verdadera ventaja competitiva no es el hallazgo en sí, sinoel conocimiento+los valores+la actitud+ la busqueda de oportunidades , para Innovar. lo que se denomina Talento.
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Camila Franco Aug 27, 2014

This is the same idea behind "learning by doing" and what middle-low income countries have been doing last years. This is not a new idea.
The big deal for these countries is that there is non-economic inertia: institutional and political structures that keep the same economic model based on raw (low tech) exportations and those activist policies in different areas stay lagged.
In my opinion the hierarchy must be different, that means, policies focused on education, health, infrastructure and innovation.
On the other hand, policymakers should get over copy-experiences fetish, and to start stimulating the finding of ownpath to development.
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Nichol Brummer Aug 23, 2014

Distributed renewable energy should help many places jump ahead. No need for a grid and some large and complicated electricity plant if you want to provide reliable electricity. A lot can be done now very reliably with solar panels, or wind, and grids may be quite small. You can now have phone, internet connections, with TV, radio, a computer and electric light, all without an electric grid or even a fixed phone line.
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John Shin Aug 23, 2014

Imitate to Innovate is the story of Korea's fast-follower strategies which exemplify the efficacy of parsimonious progress.
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M A J Jeyaseelan Aug 23, 2014

There is actually no convergence. It is still the very same divergence process, which is at work. Rich getting richer is a very natural osmotic process, which occurs not only between economies but also among individuals and groups within an economy. In India for example, reservations in education and employment was used to uplift the under-privileged. But, the main result has been the emergence of a creamy layer among the underprivileged, which has managed to get richer and richer

In order to apply the science of osmosis to economic processes, one must however, understand the subtle difference in the definition of rich; in the context of osmosis rich will mean higher concentration of the concerned solute. So achieving higher growth is not case of acquiring all kinds of alphabets, that would help increase the chances of making different words as in game of scrabble. The focus has to be on enriching the concentration of the missing solute. Even in a scrabble game one would always miss the vowels most. So the poor countries will have to aim at achieving higher concentrations in areas like technology and capital. Education becomes particularly important for countries, which want to overcome the challenge of technology constraints.

The reason why I say that there is no convergence process is because, world trade has not yet become a win-win exchange. If countries like China are getting richer, there are countries like the US, which are getting poorer. In fact, what China is doing right now, is similar to what the US did prior to the Great Depression. China is keeping the aggregate demand in the US going by not extending credits to buyers as the US did, but by buying up a very large part of its public debt. The reason why China can hope to continue to use developed economies as milch cows for long and avoid dangerous depressions as a consequence is because of its labour surplus.

Even now, most developed countries are managing to take the sting out of wage the inflation by permitting the inflow of immigrant labour. Any country, which wishes to escape the ill effects of wage inflation must adopt an open door policy towards immigrant workforce, which adds to productivity and keep wages at a level, which does not erode the global competitiveness of its production facilities.

The big boom before the great depression in the US actually drove up wage levels because of the limited availability of human resources to meet the growing demand from within and from higher imports resulting from the credits extended to poor countries at low interests. The wage inflation made both domestic consumption and import demand non viable. It was clearly a case of prices overshooting the available gross purchasing power.

What must be understood clearly is that there is an additional variable, which is relevant to the natural process of osmosis by which the rich get richer. If external pressure exceeds the osmotic pressure then the osmotic process will be reversed. Wage inflation can be an external pressure which disrupts the natural process of rich getting richer.

Without a ray of doubt, poor countries will have to find a way to connect with the global economy. One of the important channels for establishing such connectivity will certainly be to participate in the global value chains. As brought out by Hausmann, such participation will also need to be supported by 'activist policies in many areas, such as education and training, infrastructure, R&D, business promotion, and the development of links to the global economy'.

In generic terms, achieving growth by connecting to the global economy requires that there is net transfer of purchasing power from the rich countries to the poor countries. It need not be always in the form of increasing the level of participation in global production. Poor countries must also learn to take full advantage of raw materials, which they supply to the world. Just as most oil producing countries have done, poor countries can also use their raw materials strategically to create osmotic processes which result in a net transfer of purchasing power from the rich to the poor.
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jesus alfaro Aug 22, 2014

Excelente traducción al español
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Jonathan Lam Aug 21, 2014

gamesmith94134: In search of convergence

I think the convergence might be the "Z" factor of the circuitry of wealth that margin of affordability created the have and have not. As you said in the case of IBM and Lenovo that patent or know how is not significant to accumulation of wealth. In term of price and value, inequality was found on the labor capital that consumes. The accumulated wealth became a liability to growth if inflation and exchange rate are not comparative to external growth.

China have a better redistribution model that labor got a raise and spent it all; and American would have a bubble in the equity market that saving and subsidies are sacrificed to compensate the social developments that whined. China imported was favored by volume in second to the best; and the American best then limited by the margin of affordability. Convergence may not engraved in the trade policy as production is no longer incur with regional know how or material resources since we arrived at the communication age that is enforced by computer and hired hands.
Perhaps, you may imply labor capital that we did not allow to consume through the redistribution of wealth. It is just my point of view in another angle of circuitry of wealth that I called the "Z factors"
May the Buddha bless you?
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Jonathan Lam Aug 21, 2014

Gamesmith94134: Dr. Doom Warns Wall Street and Washington---- Heed Karl Marx's Warning!

• Gert van Vugt
The discourse in my opinion is almost unanimously tilted towards "saving the economy" and recovering from the crisis. Not just in the US, but in basically every industrialized country this is directly assumed as the way forward. However; I do not see how this follows from life, liberty, and the pursuit of happiness. Challenging the growth paradigm allows for two options to emerge:
1) redistribution of wealth and stimulus packages can kick-start demand driven consumption, and this proportionally creates sufficient jobs in due time, with a growing standard of living for all.
2) redistribution of work and profit, as well as deflation create a sustainable standard of living for all, where elimination of jobs due to technological and scientific progress introduces the end of work without falling standards.
Both solutions can be debated: the first depends on the assumption that consumer demands are infinite, although this is not what most data is showing. The second option is widely dismissed as causing a drop in the competitiveness of the economy, although empirical proof is unavailable up to date.
I understand that the second option is controversial in a country that still labels Marx's predictions as "wrong, of course", but I challenge intellectuals such as yourselves to be a bit more introspective.
•

Read more: http://globalspin.blogs.time.com/2011/08/16/dr-doom-warns-wall-street-and-washington-heed-karl-marxs-warning/#ixzz1VJL1bHUz

Gamesmith94134: Dr. Doom Warns Wall Street and Washington---- Heed Karl Marx's Warning!

Mr. Gert van Vugt,
You make the best description on the theory on the economical growth Paradigm that the economic change seems like Malthusian’s diminishing return, and I agree. However, Mr. Roubini makes his point on the social disruption reverse itself through the diminishing demand. If we can put away the elements like the Ponzi scheme and benefactors in social caused deficiency or defects to growth. Corruption by capitalism and the dependency by socialism among societies both caused failure in the economical and societal development.
Perhaps, we focus on the circuitry on the accumulation of wealth and consumable wealth that runs the economy. It seems both the capitalism and socialism ran short and proven wrong in the economical model or social model that became self-destructive; eventually, the economy runs from diminishing demand to diminishing return, or vice versa. So, if we use the living standard as the equilibrium position to the supply line of the circuitry of wealth balanced by both of the diminishing return and diminishing demand.
How about I call my paradigm on the wealth circuitry in economical and social growth that supports and balances both accumulated wealth and consumable wealth; and it created a “Z” shaped development running both on the diminishing demand and diminishing return; which is based on the assumption, the route above the standard of living equal in length with the one below the standard of living is in agreement of its living standard to sustain a viable growth, which contains;
• The base line as the diminishing return where the societies kept peace with its populace that consumable wealth that cause economical displacement like with its negative growth or no growth; it provides entitlement or social programs with non-productive individual citizens for example, 27% of its population on welfare with add-on with subsidies to sustain a standard of living.
• The top line as the diminishing demand that ended with accumulated wealth favors of concentrated wealth owned by individuals that ended with profitless, 1% holds 27% of the global or national wealth, plus those with extra wealth is not in production yields to no growth.
• And the diagonal line that connected to both ends is the support of the price and value in the middle is the standard of living which contains the most of the productive individuals who is moving up and down the ladder of growth.
If more of the wealth accumulated than the wealth consumed, then it causes saturation of the wealth. The diminishing demand under the standard of living agreement made the demand idle because of the shortage of consumption. In the process, the standard of living will go down to meet its demand after the deflationary measure to make it consumable. In reverse, the wealth consumed is over the wealth accumulated, as it is less profitable. Then, it triggers the inflationary measures to aggregate demand to accumulate more wealth in its diminishing return mode; eventually it will balance itself again with the agreement of the standard living with a viable growth.
It is not the supply and demand. It is rather the circuitry of wealth under the spells of the lower living standard that diminishing demand is being part of the deflationary measure. If the accumulated wealth became saturated, then it means the lower living standard that made the demand finite like lesser demand in loan of dollars in ECB.
I am certain I am not being introspective; I may twist the theory a little; but the proof of the lower living standard in Europe made it plausible.
May the Buddha bless you?
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Jose araujo Aug 21, 2014

Hausmann Colonial economics...

Sure Adam Smith and David Ricardo and many other at the time defended colonialis... caugh caughh... free trade, but I hoped mentalities changed.
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Paul Jefferson Aug 21, 2014

"Participating in global value chains is an alternative way to learn..." This benefits the emerging nations who learn, not the advanced nations who teach. And will the learners eventually become teachers? Or will they guard their value chains and keep them entirely domestic?

China is now an advanced manufacturing nation, thanks largely to it's low wages, and the technology it has acquired from around the world. But will Chinese firms allow USA-based firms to participate in the Chinese firms' value chains? That seems doubtful. We are going to learn that technology transfers can be exclusively one-way -- and permanent.

In any case, Chinese firms will have less incentive to allow international participation in their value chains as oil becomes increasingly scarce and transportation costs increase. High oil prices will make globalization less economically appealing, especially for heavy or bulky items. Here's a fascinating New York Times article on the topic, and it comes to an interesting conclusion:
http://www.nytimes.com/2008/08/03/business/worldbusiness/03global.html?pagewanted=all&_r=0
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slightly optimistic Aug 20, 2014

The reference to Michael Spence's 'Next Convergence' was apt. 'The Security Deficit' was the Nobel laureate's essay last month on this website. In light of recent events he suggested that the greatest threats to prosperity are political - "regional tensions, conflict, and competing claims to spheres of influence".
How these political disputes can be addressed will no doubt be discussed at the NATO summit next month in Wales.
- slightly optimistic Aug 21, 2014
  
  DC: Schumpeter warned us of creative destruction in economic competition. Security was a separate subject in his time, but recent events are leading to an intense - holistic - interest in NATO's future. To be decided at the summit?
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- Douglas Costello Aug 21, 2014
  
  This general area has also been examined as to why the developed countries continue to out perform the less developed and this article describes the path/process by which the less developed or wealthy countries can shift themselves economically and reduce this gap. Albania and the IBM/China examples describe the process but fail to acknowledge that the two countries concerned are developing the tacit knowledge to build these services or items on their own and avoid loosing the economic growth opportunities previously held by Italy and the US.
  
  IBM's quest for greater shareholder returns by outsourcing basic assembly eventually created an enterprise that became a direct competitor and eventually would cut them out of the activity the result being lower shareholder returns effectively a case of shooting oneself in the foot and likewise the Italian clothing firms.
  
  Sharing of tacit knowledge is not inherently wrong ethically but if you wish to maintain your own business such sharing will create a competitor. It is an interesting ethical issue.
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