Principles of Macroeconomics / Unit 4 MAC 0324 review, 2 to 3 minutes
Will Poor Countries Catch Up?
The idea
The case for convergence rests on two solid arguments. Capital earns more where it is scarce, so a given investment raises output more in a poor country than in a rich one, and diminishing returns should therefore slow the leaders while the followers accelerate. And a country that is behind can adopt technology already proven elsewhere, paying none of the cost of discovering it. Together these predict that the gap should close on its own. The case against is equally serious. The leaders are not standing still: new technology keeps shifting their production function upward, and ideas, unlike machines, can be used again and again at almost no extra cost, so they show little sign of running into diminishing returns. And technology does not transplant by itself. It needs the institutions, the skills and the rule of law that let it be used, which is why the same investment produces wholly different results in different places.
In practice
Worked example: the evidence cuts both ways and the comparisons are stark. Between nineteen sixty and nineteen eighty-five, capital per worker rose more than fivefold in both Gambia and Japan. Output per worker rose two percent in the first and two hundred and sixty percent in the second. Human capital expanded faster in Zambia than in Korea over a comparable period, and Korea grew several percentage points a year faster. The inputs went in; the growth did not follow. Meanwhile South Korea itself, starting among the poorest economies after its war, reached high income within four decades by combining universal schooling, investment of about a third of output, and technology acquired from abroad.
Where people slip
Three cautions. Convergence is not a law; it is a tendency that appears in some periods and some countries and not others, and treating it as automatic is the main error here. The evidence that inputs alone do not produce growth is the strongest single finding in this literature, and it is why economists have spent fifty years looking for what else is required without settling on one answer. And the honest conclusion is the uncomfortable one: the recipe is known in outline, capital, skills, technology and the institutions that reward all three, yet knowing it has not been enough to make it happen on request.
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