Convergence Scenarios:an Overview

Jonathan Temple(University of Bristol)

“Classical” Convergence

Approach represented by papers such as Barro and Sala-i-Martin (1992) and Mankiw, Romer and Weil (1992)Based on closed economy growth models in Solow/Swan traditionOr Ramsey/Cass/KoopmansAdds assumptions about world growth

Some Basics…

Predicts countries converge in growth ratesBut income levels differ in steady-stateThis is because steady-state determinants vary across countriesMost familiar: investment, population growthThese determinants treated as exogenous

A Key Strength…

A key strength of the approach is to recognise that, in principle……there is no reason why most countries cannot become richSo future may not look like the pastViewpoint differs from non-economists

Empirical Findings

Wide variety of convergence estimatesRecent work suggests rates are slowSo countries spend a lot of time away from steady-stateSome evidence suggests “clubs”But a lot of uncertainty (small N)…and asking wrong question?

This is the Wrong Approach…!

Bad approach for emissions scenariosEstimated convergence rate is (implicitly) an averageTaken across different countries/regionsRegressions weight countries equally Effectively small countries (sub-Saharan Africa) carry much more weight

The Wrong Approach, Part II

Approach treats countries as closedThese economies evolve independentlyFor empirical purposes, treats steady-state determinants as exogenousRules out feedback from growth How to relax these assumptions?

Possible Feedback Mechanisms

Endogenous world growthGeography and market accessDemographyEndogenous institutionsFinancial developmentEquipment pricesEnergy pricesFeedback from climate

Endogenous World Growth

Clear externalities in knowledgePowerful effects of scale in endogenous growth modelsWorld population of researchers expanding rapidly (India, China…?)Will only be offset if research process is becoming more difficult

Geography and Market Access

Recent work in trade emphasizes role of spatial location and market accessSuggests multiple equilibria at level of world regionsFast growth in specific regions will change patterns of market accessHence feedback from regional growth

Demography

Crucial for emissions scenarios to build in endogenous demographyOffsetting effects: rising longevity versus fertility transitionQuantity/quality trade-off models predict human capital accumulation riseImportance of policies in China, India

Endogenous Institutions

Work such as AJR (AER 2001) suggests institutions crucial to steady-state GDPStrong correlations between institution indices and levels of GDPEndogenous democratization……might reduce forecast dispersion?Less risk of civil war as income rises?

Growth and Finance

Much work links growth to financial developmentDevelopment of banks endogenous to income levelThen stock markets…Financial globalization relevant to convergence (e.g. FDI flows)

Equipment Price Effects

Why does real investment differ?Work such as Hsieh/Klenow suggests relative price of equipment crucialEvidence suggests this price much higher in poor countriesCan be expected to fall as part of convergence process?

Energy Price Effects

Price of energy unlikely to be independent of global convergenceMay feedback into world growthThis effect will also tend to reduce dispersion of emissions scenarios, relative to dispersion of GDP scenarios

Global Warming Feedbacks

Central point: endogenous climateSo different convergence scenarios may have feedbacks via climateFor example, agriculture, water stressChanges in infrastructure, global distribution of population, etc.

How to Model All These Effects?

Full structural model very complex…So best approach may be reduced-formAggregate major regionsConsider different convergence behaviour in each…But build in virtuous circle effects as a reduced-form