Question

What do studies of conditional convergence seek to understand, and how do they test whether conditional convergence holds?

Answer 1

Conditional convergence is the tendency that poorer countries grow faster than richer countries and converge to similar levels of income. It seeks to understand that the countries which were poorer in 1960, should have grown faster over the next 40 years than the countries which were wealthier in 1960.

Even if countries differ in their saving rates, population growth rates and production functions (due to unequal access to technology) they will converge to different steady state with different capital-labour ratios and different standards of living in the long run. If countries differ in the fundamental characteristics, the Solow model predicts conditional convergence.

This means that standards of living will converge only within groups of countries having similar characteristics. For example, if there is conditional convergence, a low income country with a low saving rate may catch up, one day or the other, a richer country that also has a low saving rate, but it will never catch up a rich country that has a high saving rate.

One reason for this is that poor countries have less capital per worker and thus higher marginal products of capital than do rich countries. So savers in all countries will be able to earn the highest return by investing in poor countries. Eventually, borrowing abroad will allow initially poor countries’ capital-labour ratios and output per worker to be the same as in initially rich countries.