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The future of economic convergence

01 Sep 2011-National Bureau of Economic Research (National Bureau of Economic Research)-pp 13-52
TL;DR: The question addressed in this article is whether the gap in performance between the developed and developing worlds can continue, and in particular, whether developing nations can sustain the rapid growth they have experienced of late.
Abstract: The question addressed in this paper is whether the gap in performance between the developed and developing worlds can continue, and in particular, whether developing nations can sustain the rapid growth they have experienced of late. The good news is that growth in the developing world should depend not on growth in the advanced economies themselves, but on the difference in the productivity levels of the two groups of countries - on the "convergence gap" - which remains quite large. Yet much of this convergence potential is likely to go to waste. Convergence is anything but automatic, and depends on sustaining rapid structural change in the direction of tradables such as manufacturing and modern services. The policies that successful countries have used to achieve this are hard to emulate. Moreover, these policies - such as currency undervaluation and industrial policies - will meet greater resistance on the part of industrial countries struggling with stagnant economies and high unemployment.

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Citations
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Journal ArticleDOI
Dani Rodrik1
TL;DR: The authors found that manufacturing industries exhibit strong unconditional convergence in labor productivity and showed that despite strong convergence within manufacturing, aggregate convergence fails due to the small share of manufacturing employment in low-income countries and slow pace of industrialization.
Abstract: Unlike economies as a whole, manufacturing industries exhibit strong unconditional convergence in labor productivity. The article documents this at various levels of disaggregation for a large sample covering more than 100 countries over recent decades. The result is highly robust to changes in the sample and specification. The coefficient of unconditional convergence is estimated quite precisely and is large, at between 2–3% in most specifications and 2.9% a year in the baseline specification covering 118 countries. The article also finds substantial sigma convergence at the two-digit level for a smaller sample of countries. Despite strong convergence within manufacturing, aggregate convergence fails due to the small share of manufacturing employment in low-income countries and the slow pace of industrialization. Because of data coverage, these findings should be as viewed as applying to the organized, formal parts of manufacturing.

617 citations

Journal ArticleDOI
TL;DR: In this article, a working definition of the middle-income trap is provided, and the threshold number of years for a country to be in the middle income trap is calculated, where a country that becomes lower-middle-income has to attain an average growth rate of per capita income of at least 4.7 percent per annum to avoid falling into the lower middle-classification.
Abstract: This paper provides a working definition of what the middle-income trap is. We start by defining four income groups of GDP per capita in 1990 PPP dollars: low-income below $2,000; lower-middle-income between $2,000 and $7,250; upper-middle-income between $7,250 and $11,750; and high-income above $11,750. We then classify 124 countries for which we have consistent data for 1950–2010. In 2010, there were 40 low-income countries in the world, 38 lower-middle-income, 14 upper-middle-income, and 32 high-income countries. Then we calculate the threshold number of years for a country to be in the middle-income trap: a country that becomes lower-middle-income (i.e., that reaches $2,000 per capita income) has to attain an average growth rate of per capita income of at least 4.7 percent per annum to avoid falling into the lower-middle-income trap (i.e., to reach $7,250, the upper-middle-income threshold); and a country that becomes upper-middle-income (i.e., that reaches $7,250 per capita income) has to attain an average growth rate of per capita income of at least 3.5 percent per annum to avoid falling into the upper-middle-income trap (i.e., to reach $11,750, the high-income level threshold). Avoiding the middle-income trap is, therefore, a question of how to grow fast enough so as to cross the lower-middle-income segment in at most 28 years, and the upper-middle-income segment in at most 14 years. Finally, the paper proposes and analyzes one possible reason why some countries get stuck in the middle-income trap: the role played by the changing structure of the economy (from low-productivity activities into high-productivity activities), the types of products exported (not all products have the same consequences for growth and development), and the diversification of the economy. We compare the exports of countries in the middle-income trap with those of countries that graduated from it, across eight dimensions that capture different aspects of a country’s capabilities to undergo structural transformation, and test whether they are different. Results indicate that, in general, they are different. We also compare Korea, Malaysia, and the Philippines according to the number of products that each exports with revealed comparative advantage. We find that while Korea was able to gain comparative advantage in a significant number of sophisticated products and was well connected, Malaysia and the Philippines were able to gain comparative advantage in electronics only.

270 citations

Journal ArticleDOI
TL;DR: The author is a widely respected international specialist who mixes orthodox and unorthodox solutions according to how he perceives development policy has worked in the past as mentioned in this paper. In this article, he sh...
Abstract: The author is a widely respected international specialist who mixes orthodox and unorthodox solutions according to how he perceives development policy has worked in the past. In this article, he sh...

219 citations

Journal ArticleDOI
TL;DR: In this article, the authors analyze the phenomenon of rising powers from a historical materialist perspective and argue that the rise of new powers is leading to a hybrid governance order that is both transnationally integrated and less liberal.
Abstract: This article analyses the phenomenon of rising powers from a historical materialist perspective. It (1) elaborates the key concepts of historical structures of world order, state–society complexes and transnational class formation, and (2) applies them to Brazil, Russia, India, China and other so-called ‘rising powers’ to account for the nature and extent of the challenge they pose to the existing institutions of global governance. A double argument is advanced: first, the integration of rising powers into the historical structure of global capitalism has reduced traditional sources of great power conflict, and made rising powers heavily dependent on the existing institutional framework established by the liberal West. This facilitates their integration into the existing governance order. However, within the limits of the existing order, two factors lend a heartland–contender cleavage to the politics of global governance: the rising powers’ relatively more statist, less market-driven forms of state, and their subsequent failure to be integrated into emergent transnational capitalist class structures. Consequently, it is not the global governance order itself, but its most liberal features, that are contested by rising powers. The result is that, in contrast to realist pessimism and liberal optimism, the rise of new powers is leading to a hybrid governance order that is both transnationally integrated and less liberal.

127 citations

Journal ArticleDOI
TL;DR: In this article, the authors dissected the issues of convergence in financial performance dynamics in the African continent through the lenses of stock market capitalization, value traded, turnover, and number of listed companies.
Abstract: The author dissects, with great acuteness, the issues of convergence in financial performance dynamics in the African continent through the lenses of stock market capitalization, value traded, turnover, and number of listed companies. The empirical evidence is premised on 11 homogeneous panels based on regions (Sub-Saharan and North Africa), income levels (low, middle, lower-middle, and upper-middle), legal origins (English common law and French civil law), and religious dominations (Christianity and Islam). Findings provide partial support for the existence of absolute convergence in some dynamics. Only Sub-Saharan Africa reveals conditional convergence in relation to per capita number of listed companies. The speed of convergence for the most part is between 12% and 28% per annum. As a policy implication, countries should work toward adopting common institutional and structural characteristics that favor stock market development.

107 citations

References
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Posted Content
TL;DR: In this article, the authors examine the role that institutions, defined as the humanly devised constraints that shape human interaction, play in economic performance and how those institutions change and how a model of dynamic institutions explains the differential performance of economies through time.
Abstract: Examines the role that institutions, defined as the humanly devised constraints that shape human interaction, play in economic performance and how those institutions change and how a model of dynamic institutions explains the differential performance of economies through time. Institutions are separate from organizations, which are assemblages of people directed to strategically operating within institutional constraints. Institutions affect the economy by influencing, together with technology, transaction and production costs. They do this by reducing uncertainty in human interaction, albeit not always efficiently. Entrepreneurs accomplish incremental changes in institutions by perceiving opportunities to do better through altering the institutional framework of political and economic organizations. Importantly, the ability to perceive these opportunities depends on both the completeness of information and the mental constructs used to process that information. Thus, institutions and entrepreneurs stand in a symbiotic relationship where each gives feedback to the other. Neoclassical economics suggests that inefficient institutions ought to be rapidly replaced. This symbiotic relationship helps explain why this theoretical consequence is often not observed: while this relationship allows growth, it also allows inefficient institutions to persist. The author identifies changes in relative prices and prevailing ideas as the source of institutional alterations. Transaction costs, however, may keep relative price changes from being fully exploited. Transaction costs are influenced by institutions and institutional development is accordingly path-dependent. (CAR)

26,011 citations

Book
20 Mar 2012
TL;DR: Acemoglu and Robinson as discussed by the authors argue that incentives and institutions are what separate the have and have-nots, and that if they work hard, they can make money and actually keep it, the key to ensuring these incentives is sound institutions.
Abstract: In the West are the 'haves', while much of the rest of the world are the 'have-nots'. The extent of inequality today is unprecedented. Drawing on an extraordinary range of contemporary and historical examples, Why Nations Fail looks at the root of the problems facing some nations. Economists and scientists have offered useful insights into the reasons for certain aspects of poverty, such as Jeffrey Sachs (it's geography and the weather), and Jared Diamond (it's technology and species). But most theories ignore the incentives and institutions that populations need to invest and prosper: they need to know that if they work hard, they can make money and actually keep it - and the key to ensuring these incentives is sound institutions. Incentives and institutions are what separate the have and have-nots. Based on fifteen years of research, and stepping boldly into the territory of Ian Morris's Why the West Rules - For Now, Daron Acemoglu and James Robinson blend economics, politics, history and current affairs to provide a new, persuasive way of understanding wealth and poverty. And, perhaps most importantly, they provide a pragmatic basis for the hope that those mired in poverty can be placed on the path to prosperity.

4,454 citations

ReportDOI
TL;DR: This paper measured sizable gaps in marginal products of labor and capital across plants within narrowly defined industries in China and India compared with the United States, and calculated manufacturing TFP gains of 30%-50% in China, and 40%-60% in India.
Abstract: Resource misallocation can lower aggregate total factor productivity (TFP).We use microdata on manufacturing establishments to quantify the potential extent of misallocation in China and India versus the United States. We measure sizable gaps in marginal products of labor and capital across plants within narrowly defined industries in China and India compared with the United States. When capital and labor are hypothetically reallocated to equalize marginal products to the extent observed in the United States, we calculate manufacturing TFP gains of 30%–50% in China and 40%–60% in India.

1,995 citations

Journal ArticleDOI
01 Jan 2009
TL;DR: In this article, the authors show that undervaluation of the currency (a high real exchange rate) stimulates economic growth, particularly for developing countries, and they present two categories of explanations for why this may be so, the first focusing on institutional weaknesses, and the second on product market failures.
Abstract: I show that undervaluation of the currency (a high real exchange rate) stimulates economic growth. This is true particularly for developing countries. This finding is robust to using different measures of the real exchange rate and different estimation techniques. I also provide some evidence that the operative channel is the size of the tradable sector (especially industry). These results suggest that tradables suffer disproportionately from the government or market failures that keep poor countries from converging toward countries with higher incomes. I present two categories of explanations for why this may be so, the first focusing on institutional weaknesses, and the second on product-market failures. A formal model elucidates the linkages between the real exchange rate and the rate of economic growth.

1,453 citations

Book
01 Jan 2007
TL;DR: In this article, the authors present a practical approach to growth strategies for the twenty-first century and discuss the role of institutions for high-quality growth in economic growth and global governance of trade as if development really mattered.
Abstract: Acknowledgments ix Introduction 1 PART A: ECONOMIC GROWTH Chapter 1. Fifty Years of Growth (and Lack Thereof): An Interpretation 13 Chapter 2. Growth Diagnostics 56 Chapter 3. Synthesis: A Practical Approach to Growth Strategies 85 PART B: INSTITUTIONS Chapter 4. Industrial Policy for the Twenty-first Century 99 Chapter 5. Institutions for High-Quality Growth 153 Chapter 6. Getting Institutions Right 184 PART C: GLOBALIZATION Chapter 7. Governance of Economic Globalization 195 Chapter 8. The Global Governance of Trade As If Development Really Mattered 213 Chapter 9. Globalization for Whom? 237 References 243 Index 257

1,393 citations