Catch-up and Convergence: Leaders and Followers

This paper was written for Economics 1339: Generating Wealth of Nations, a Harvard undergraduate course taught by visiting professor Jeffrey Borland.

Introduction

The convergence hypothesis at its most fundamental level posits that countries with lower productivity will tend to grow at faster rates than their more productive neighbors. This theory follows directly from the law of diminishing returns, which explains that the marginal output of a production factor progressively decreases as the factor is increased. Following this logic, a less productive country can exploit the same techniques utilized in more productive countries to achieve a greater output for any given level of input. While theoretically sound, the convergence hypothesis relies upon one key assumption that is not brought to bear in the real world – either no other determinants of productivity growth exist, or countries with varying productivities are equal in all other aspects. Empirical evidence runs contrary to both possibilities. For example, in the period from 1870 to 1913, America continued to increase its already well-established lead in productivity, while the average productivity level of laggard countries in Europe fell. Following the Second World War, however, Europe’s rapid growth and convergence with the United States seems to validate the hypothesis. These discrepancies imply the existence of other important determinants of growth. This paper seeks to examine the mechanisms by which convergence occurs to uncover the characteristics that explain why some laggard countries experience accelerated growth rates, why others with high productivity remain leaders, and why still others fail to ever catch up.

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