Question

Some low-income countries and middle-income countries around the world have shown a pattern of economic convergence with high-income countries. What is this? Illustrate with an example.

Answer 1

Economic convergence is a hypothesis that holds that poorer nation's par capita income grows at a faster rate than richer nation's per capita income, hence, over time poorer nation's per capita income tends to converge with the per capita income of richer nations.

Example: In 2016, the GDP (real) per capita growth rate for India (a lower-middle income country) was 5.88% while that of US (high income nation) was 0.78% (source: world bank data).

Attributions: This trend could be attributed by several factors:

• Law of diminishing returns: Increasing the level of human and physical capital has a diminishing marginal return effect. That is, the growth will increase with increasing capital (human+physical) investment but will be lesser than that obtained from previous level of investment. Richer nations already have a high level of investment. Further addition increases the oputut but with lesser degree. Lower income nations however get a higher marginal rate of return on investment.
• Other reason is, developing economies find it easier to follow a model set by the developed economies. They can simply adapt the already developed technologies by the developed economies whereas, developed economies have to keep working on developing new technologies for futher growth.