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Thursday 24 Aug 2017 | 11:03 | SYDNEY
Thursday 24 Aug 2017 | 11:03 | SYDNEY

The limits of 'the Great Convergence'



9 July 2014 15:45

Economic convergence — the potential for poorer countries to catch up with the richer countries — may be the most important economic narrative of the post-World War II era. More than a billion people have shifted out of extreme poverty, largely by adopting technology and techniques already practised in the advanced economies. Convergence is not, however, an automatic process, like water finding its level. Not all poor countries will experience convergence, and even those that do will not necessarily catch up all the way. A new OECD report sets out this story in detail.

Some previously poor countries have made it all the way to equaling (or even exceeding) per-capita incomes in wealthier OECD countries. Singapore and Hong Kong have clearly done so, and South Korea and Taiwan have gone most of the way. But some of the great success stories among the emerging economies still have a long way to go; despite three decades of stunning growth, China is still well behind. 

The OECD report asks this question: if these countries continued to grow as they have over the past decade or so, which ones would reach the average per-capita income level of the OECD countries by 2050? The graph above gives the answer: those countries below the 45-degree line are closing in on the OECD countries fast enough to overhaul them by 2050; those above the 45 degree line (the majority) aren't growing fast enough to do this.

Of course this is just one aspect of the story.

For a start, these countries may not go on growing at the same rate in the future. China can't sustainably return to its 10% rate, while others might do better than they have so far. In any case, what's the big deal about equaling the OECD? Quite a few countries are not far from the 45-degree line and will get a good distance towards closing the gap. They might well regard that as 'near enough'.

Yet there is a huge difference between catching up to where OECD countries already are and pushing out the frontiers to where no country has gone before. 

How fast the rich countries grow from now on will depend on the pace of technological advancement, innovation and a whole raft of other unknowns. Some economists argue that the rate of future growth for advanced countries will be substantially slower than before.

For emerging economies, however, the prospects are clearer, and perhaps easier. The technology that can take them to higher income already exists. They just have to copy it. It's a matter of learning the techniques, applying them, educating the labour force and, above all, putting in place the necessary infrastructure and institutions. No easy task, but what has been done before can be done again. This graph shows how much potential there is for increasing productivity by closing some of the gap with the US.

The OECD is concerned that productivity increases derived from shifting people out of low-productivity industries (agriculture, for example) to higher-productivity industries (manufacturing) will soon be used up. It will be necessary to learn how to do things better within each industry. This is harder. But anyone who has sat in a Jakarta traffic jam or battled with the city's slow internet (only 15% of Indonesians have internet) knows the potential for dramatic improvement in the way business is done. Moreover, those who have experienced the world-class standards of a Jakarta five-star hotel know that it can be done.

Perhaps the most original message the report delivers is how much room there still is for the emerging economies to become more globally integrated (which is good for everyone's productivity). By 2060 non-OECD countries will account for three-quarters of world trade.

The promise of convergence was not that every poor country would become rich. Rather, the message was that it was possible to close the gap dramatically. That seems obvious enough now, but that was not the conventional wisdom in the post-World War II decades. Gunnar Myrdal's Asian Drama: an Enquiry into the Poverty of Nations was representative, and deeply pessimistic. The OECD report carries traces of this old-fashioned gloom (look at the title of that first graph above). But it also acknowledges that the path to higher living standards is open for the taking.

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