Lecture 71 Macroeconomic Analysis 2003 Convergence or Conditional Convergence.
Transcript of Lecture 71 Macroeconomic Analysis 2003 Convergence or Conditional Convergence.
Lecture 7 1
Macroeconomic Analysis 2003
Convergence
or
Conditional Convergence
Lecture 7 2
Contents• Definition of Convergence and Divergence• Evidence of divergence among UK regions• Labour and capital mobility and convergence• Steady State in Autarky and Globalisation• Evidence for Conditional Convergence• Poverty Trap: why pigs cannot become elephants?• Does more trade lead to convergence?• Results of growth studies• Exercises
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Prediction of convergence underSolow Model: Catching up
High incomeIncomeY/P
Low income
Time
Growing apart
High income
Y/P
Divergence
Low ncome
Time
Meaning of Convergence and Divergence
Poor country should growat faster rate then a rich country
Experience of African countries
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Convergence Convergence
g g Time Time
Two concepts of Economic Convergence
1
lnln 2,
N
yyi
tti
t
Standard Deviation
Dispersion Measure
tY RRRt 10ln
LIHI11
Low income regions should grow faster than high income region
Mean Differerence
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1993 1994 1995 1996 1997 1998Ann. Growth rate %
United Kingdom 9,671 10,170 10,619 11,185 11,871 12,548 4.34
England 9,852 10,349 10,771 11,384 12,141 12,845 4.42
East Riding and North Lincolnshire
9,289 9,680 10,130 10,920 11,490 11,7593.93
Kingston Upon Hull, City of
9,319 9,787 10,325 10,886 11,538 11,8504.00
East Riding of Yorkshire 8,268 8,487 8,741 9,799 9,996 10,051 3.26
North and North East Lincolnshire
10,236 10,741 11,325 12,059 12,939 13,4024.49
London 14,110 14,798 15,251 15,885 17,158 18,566 4.57
Scotland 9,614 10,168 10,818 11,162 11,429 12,117 3.86
Northern Ireland5 7,610 8,114 8,654 8,964 9,507 9,754 4.14
Wales 7,978 8,393 8,900 9,240 9,562 10,063 3.87
Sigma Convergence
Standard Deviation 1,806 1,894 1,905 1,934 2,210 2,537
Evidence for Lack of Sigma and Beta Convergence in the Per capita Income among the UK Regions, 1993-1998
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MPKRMPKP
rp
rR
KRKP
Marginal productivity of Capital in Rich and Poor Countries and Capital Accumulation in Autarky
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MPKRMPKP
rp
rR
KRKP
RG
Marginal productivity of Capital in Rich and Poor Countries and Capital Accumulation After Globalisation
rP
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MPLRMPLP
wR’
LRLP
Marginal productivity of Labour in Rich and Poor Countries Before and After Globalisation
wR
LP’LR’
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Who Gain and Who Lose From Globalisation?
MPLR
MPLR’
MPLP
MPLP’wp
wp’
wR
wR’
MPKR MPKP
rp
rR
Capitalists in rich countries and workers in poor countries gain.
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Savers
Households, Corporations and Government
Intermediaries
Banks, Insurance Companies, Building Societies, Trusts, Stock and Bonk Markets
Intermediaries
Banks, Insurance Companies, Building Societies, Trusts, Stock and Bonk Markets
InvestorsSmall, Medium and LargePrivate, Public, Domestic and Foreign
InvestorsSmall, Medium and LargePrivate, Public, Domestic and Foreign
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1 1 and 10
10 and 1
K-Mobile
L-mobile
K-Mobile
L-mobile
K-Mobile
L-mobile
Convergence
yes yes no yes yes Yes
No convergence
no no yes no no no
iii LKAY
i
Factor Mobility and Convergence
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Factors Promoting Convergence
• Domestic factors– Saving – Investment– Population growth rate– Human capital– Technology– Development of
infrastructure – Sound economic policy– Homogenous and stable
society– Transparent rules and
regulations
• Global factors– Trade of goods and services– Inflow and outflow of
capital– Emigration or immigration
of skilled and unskilled labour
– Adoption of better technology
– Growth of the global economy
– Peace/Oil prices
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Country A Country B 5.05.0AAA LKY
1.0A
2.0As What is the capital stock in the steady state in A in Autarky? How much do workers get? How much do owners of capital get?
AAAA KLsK 5.05.0
AA KK 1.0102.0 5.0
400AK
200AY
5.05.0BBB LKY
1.0B
0Bs What is the capital stock in the steady state in B in Autarky? How much do workers get? How much do owners of capital get?
BB KK 1.0100.0 5.0
0BK 0BY Becomes a beggar country.
Autarky and Saving and Capital (Gartner (2003:262) has similar example)
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Country A Country B KKK BA
Country A saves for both countries. It receives rental income from country B.
KKKK 1.0105.0102.0 5.05.0
22515 2 K 15010225 5.05.05.0 AA LKY
GNP in country B = GDP+Investment Receipts GNPA = 150+75 = 225 Capitalists gain and workers lose in country A.
KKK BA Country B does not save but can borrow capital from country A.
15010225 5.05.05.0 BB LKY Country B need to pay capital income to Country A. GNP in country B = GDP- Investment Payments GNPB = 150-75 = 75 Country B gains from the capital transfers.
Impacts of Globalisation in Output and Income
What is the capital stock in the steady state in A and Bif there is a free mobility of capital?
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Evidence of Converngence in Europe
0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
4.500
0 5000 10000 15000 20000 25000 30000
Per capita income in 1960
An
nu
al g
row
th r
ate
of
pe
r ca
p in
com
e gr
Power (gr)
Evidence for Beta-Convergence in Europe: Growth Rate of Per Capita Income and Its level in 1960
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GDP per capita (constant 1995 US$) 1960 2000 Y00/Y60 growth rate (1960-2000)
Austria 10596 32763 3.092016 2.822Belgium 10335 30830 2.983067 2.732Denmark 16287 38521 2.365138 2.152Finland 9769 32024 3.278125 2.968France 10611 29811 2.809443 2.582Greece 3818 13105 3.432425 3.083Hungary 1514 5425 3.584302 3.191Ireland 5462 27741 5.079002 4.063Italy 6606 20885 3.161663 2.878Luxembourg 15772 56372 3.574182 3.184Netherlands 11999 30966 2.580715 2.370Norway 11322 37954 3.352235 3.024Portugal 2735 12794 4.678735 3.858Spain 4620 17798 3.852798 3.372Sweden 13165 31206 2.370376 2.158Switzerland 26245 46737 1.780796 1.443United Kingdom 9496 21667 2.281698 2.062
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1960 angrrateCentral African Republic457 -0.746708 1960 agrrateChad 290 -0.713465 China 112 4.989179Ghana 450 -0.2145 Hong Kong, China3008 5.214552Haiti 547 -0.997717 Ireland 5462 4.062741Madagascar 383 -1.106759 Korea, Rep. 1325 5.720737Nicaragua 638 -0.785382 Japan 8399 4.186912Niger 386 -1.606578 Malta 1177 5.404178Senegal 670 -0.238649 Portugal 2734 3.858026Sierra Leone 223 -1.041848 Singapore 2676 5.890155Venezuela, RB 3720 -0.299503 Thailand 465 4.492804Zambia 648 -1.256572
Lack Evidence of Convergence among Middle and Low Income Countries:Average Annual Growth Rate of Per
Capita Income (%) and Its level in 1960
Conditional Convergence
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A low initial level of income is associated withhigher growth rate in subsequent period when othervariables are held constant.
Growth rates are higher when the ratio of investmentto GDP is higher.
Growth rates are higher in countries which havelarger stock of human capital per capita. These arereflected in terms of enrolment in the primary andsecondary schools.
Population growth rates are negatively associatedwith growth rates.
Results from Cross Country Growth Studies -1
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Results from Cross Country Growth Studies -2
Countries with distorted markets have lower growthrates. Distortions occur in exchange rates and pricesor by impediments to a free and fair trade.
Countries with efficient financial system have highergrowth rates. Size of the financial markets ismeasured as a ratio of liquid assets to the GDP.
Countries with political instability have lower growthrates. Frequency of revolutions, wars and coups areused to measure political instability.
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Economic Convergence Acrross Major Industrial Countries
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Pe
r C
ap
ita In
com
e in
19
95
US
do
llars
France
Italy
Japan
United Kingdom
United States
Japan had lower income in the beginning and had an astonishing growth rate from 1960 to 1990 and it overtookall OECD countries in per capita income
France, Germany UK and USAshow significant process of convergence
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Disparity in GNP Per Capita at Purchasing Power Parity,2001 (US $): A Lot of Divergence
0
5000
10000
15000
20000
25000
30000
35000
GNP at Purchasing Pow er Parity,2001
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Evidence for Convergence of Output Gap Among Major Industrail Countries (IMF)
-10
-8
-6
-4
-2
0
2
4
6
Pe
rcen
t o
f G
DP
FRANCE
GERMANY
JAPAN
UNITED KINGDOM
UNITED STATES
Output gap% =100*[(Trend GDP-Actual GDP)/Actual GDP]
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Growth Rates against the Initial P er Capita Income 97 Countries
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
0 5000 10000 15000 20000 25000 30000
Per capita income in 1960
Grates
Evidence for Conditional Convergence Across All Countries
Low income countries grow slowerthan middle income countries, which grow faster than high income countries.
Conditional Convergence
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Investment and Saving in OECD Countries: average 1980-2000(WDI2002)
0.00
5.00
10.00
15.00
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25.00
30.00
35.00
0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00
Investment ratio
i/y
s/y
P ower (s/y)
Why the investment rate is not the same across all OECD Countries? Feldstien-Horioka Puzzle
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Openness and Growth: Evidence from the OECD Countries 1980-2000
0.00
1.00
2.00
3.00
4.00
5.00
6.00
0.00 50.00 100.00 150.00 200.00 250.00
Ratio of Trade Volume to GDP
Ave
rage
ann
ual g
row
th r
ate
of
py
Series1
Poly. (Series1)
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Conditional convergence1. There is no relation between initial GDP (most studies take
1960 as the base year) and the growth rates if bothdeveloped and developing economies are taken together.
2. Many studies suggest evidence for convergence amongOECD countries(so called rich country club), states of theUS, provinces of Canada and prefectures of Japan.
3. There are arguments suggesting that developingeconomies have different steady state than of developedeconomies.
Why?
Story of squirrel and elephant.
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MPK
e cost
Capital stock
Productivity of capital does not only depend upon the
amount of capital but depends upon amount of
human capital.
Countries with lower human capital are in danger of
being caught in poverty trap.
Marginal product of capital is less than the cost ofcapital and capital stock gradually diminishes beforepoint e. Cost is less than MPK after e more capital isaccumulated.
Poverty Trap
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Is this caused by the barriers to adopt a good technology? Or by Lauddites?
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Can a Penguin become a Cat or a Pig become an Elephant?
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y
k1k0Poor SS
k2Poverty TH
Increasing Return, Poverty Threshold and Stability of the Steady State
y=f(k)
I =(n+d)k
sya
b
o
Big Push
Points b and o are unstable steady states
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Critical Capital Stock for Control in Population Growth Rate
ky
L
Yy
L
Kk
sksyS
kLnLi
KssKH
kHnHi
yH
yL
a
b
nH > nL
PovTHLow ss trap
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Increase in public and private saving Development of human capital Removal of distortions in investment Institutional reform (rule of law) Macroeconomic stability Carefully designed redistribution policy Social security reform
Economic Growth Policies
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Policy Issues:Tax, Saving and Consumption
• What is the impact in consumption and saving in the above model– If there is a 20 percent tax on interest income?– If there is a 20 percent subsidy in it?– What sort of tax system is better for increasing the
ratio of saving? Does a higher rate of VAT promote saving or consumption?
– Does a higher rate of tax on labour income encourage or discourage saving?
– Does a higher rate of tax on pension income increase saving or consumption?
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Exercises
• Calculate annual growth rates between 1960 and 2000 across G7 and for countries with growth miracles and growth disasters
• Calculation of positive externality and economic growth (Spill-over Effects).
• Closing the productivity gap
• Conditional convergence