Question

Briefly explain the theory behind convergence and why we argued that the evidence for this theory is mixed.

Answer 1

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In economics, the theory of convergence is stated as a hypothesis in which one clearly believes that underdeveloped or developing economies have a higher possibility of growth primarily because they have a lower rate of diminishing returns when compared to developed economies.

Over the years, developed countries such as the United States have largely been able to manage a growth rate of 2% whereas those of countries such as India and China have been as high as 5-10% at times.

The hypothesis further states, that given the current scenario in which improving the technology and human resource capital for developing countries is relatively easier, they would ultimately converge or become one with developed ones over a period of time.

The theory many believe however is mixed in approach. Countries today have become interconnected and are more dependent upon one another. The initial gain which smaller countries had in terms of increasing the expenditure on human capital has been outweighed by the investment in technology which the developed countries have made. Also, catching up is not that easy for developed economies due to the interconnected nature of World Economics.

The mixed responses to the approach thus state, that even though developing countries are able to catch up and increase their production, yet developed ones also have great opportunities of equal growth if they increase their technological expenditure and can gain from outsourcing their demand.

For example if countries increased their expenditure on human resources and improved the quality of manpower the effects of globalization would be such that this man power could be hired across the globe. Thus decreasing the effect of convergence hypothesis.

Please feel free to ask your doubts in the comments section if any.