3414736_035 - Center for Social & Economic Research...

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Center for Social & Economic Research Economic Convergence and Economic Policies Jeffrey Sachs Andrew Warner Harvard University Warsaw, April 1995
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Materials published in this series have a character of working papers which can be a subject of further publications in the future. The views and opinions expressed here reflect Authors' point of view and not necessary those of CASE . Paper was sponsored by Stefan Batory Foundation . CASE Research Foundation, Warsaw 1995 ISBN 83-86296-30-5 Editor: CASE - Center for Social & Economic Research 00-585 Warszawa, Bagatela 14 tel/fax (48-2) 628 65 81; tel/fax (48-22) 29 43 83
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Economic Convergence and Economic Policies - 3 - CASE Foundation I. Introduction Many of the crucial debates in development economics are encapsulated in the question of economic convergence . Is there a tendency for the poorer countries to grow more rapidly than the richer countries, and thereby to converge in living standards? Or instead, are there tendencies for the "rich to get richer, and the poor to get poorer," so that the gap between rich and poor nations tends to widen over time? An enormous professional debate over this issue has been underway during the past decade, instigated by several theoretical and empirical insights. Paul Romer (1986) provided a major spur to the debate by introducing a theoretical growth model with increasing-returns-to-scale production technology, which results in a strong tendency for rich countries to maintain or even increase their lead over poorer countries. Romer stressed that the more standard technology assumptions of the Solow growth model lead to the presumption that the poorer countries would experience faster growth. Romer noted that his theoretical model with increasing returns to scale seemed to be broadly consistent with the cross-country growth experience of the post-war era, in which there was no discernable trend for the poorer nations to converge with the richer nations 1 . Romer's point about the absence of convergence is evident in Figure 1. We graph on the x-axis the 1970 level of per capita income of several dozen developing countries, and on the y-axis the growth of per capita income between 1970-89 2 . If convergence predominated in the data, then we would find a negative relationship between initial income in 1970 and subsequent growth between 1970 and 1989. No such tendency is found overall in the world economy during this time period. Many poor countries, particularly those in Sub-Saharan Africa, not only fail to grow faster than the rich countries; they in fact experience negative per capita growth, so that the gap between these countries and the rich countries widens significantly. Romer's theoretical model and empirical insight set off a decade-long debate
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This note was uploaded on 10/05/2010 for the course POSC 182 taught by Professor Schuelenberg during the Spring '08 term at UC Riverside.

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3414736_035 - Center for Social & Economic Research...

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