Economic Growth and Convergence

Global Analysis through Econometric and Hidden Markov Models

Michał Bernardelli, Mariusz Próchniak, Bartosz Witkowski

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000407235
• Edition: 1
• Topic: Economics
• Subtopic: Macroeconomics
• Index: Economics

There are many different types of convergence within economics, as well as several methods to analyse each of them. This book addresses the concept of real economic convergence or the gradual levelling-off of GDP (gross domestic product) per capita rates across economies.

In addition to a detailed, holistic overview of the history and theory, the authors include a description of two modern methods of assessing the occurrence and rate of convergence, BMA-based and HMM-based, as well as the results of the empirical analysis. Readers will have access not only to the conventional econometric approach of ? convergence but also to an alternative one, allowing for the convergence issue to be expressed in the context of automatic pattern recognition. This approach is universal as it can be adapted to a variety of input data. The lowest aggregation level study investigates regional convergence through the case of Polish voivodships, where convergence towards the leader is tested. On a higher level of aggregation, the authors examine the existence of GDP convergence in such groups as the EU28, North Africa and the Middle East, sub-Saharan Africa, South America, Caribbean, South-East Asia, Australia and Oceania, or post-socialist countries. For each group, the real ? convergence is tested using the two above-mentioned approaches. The results are widely discussed, broadly illustrated, interpreted, and compared. The analysis allows readers to draw interesting conclusions about the causes of convergence or the drivers behind divergence. The book will stimulate further research in the field, but the research was conducted from the point of view of individual countries.

1 Real income-level convergence

The theoretical background

There exist many definitions of convergence in economics (Bernardelli, Próchniak and Witkowski, 2017). In general, we distinguish between nominal convergence and real convergence. The former means the levelling up of the nominal variables between countries, like price levels (inflation rates), interest rates, or exchange rates. The latter refers to the real variables – primarily gross domestic product (GDP).

Real convergence can be divided into two categories: cyclical and income- level convergence. Cyclical convergence means the tendency towards the equalization of business or growth cycles between economies. The term “growth cycle” was popularized by V. Zarnowitz. We deal with a growth cycle in which the expansionary phase means an acceleration of the economic growth rate. On the other hand, in the contractionary period, there is a decline in the growth rate (as opposed to the classical business cycle, in which the recession means a decrease in the GDP level).¹ Income-level convergence means the equalization of GDP per capita levels between the economies (countries or regions).

The theoretical background of the concept of income-level (or real) convergence (catching-up) is embodied in the models of economic growth. The models of economic growth are the theoretical models that describe the behaviour of the economy in a simplified way to find the answers to various questions related to the process of economic growth. They often are very advanced and complicated mathematical constructions that require very good mathematical knowledge.² The models of economic growth are generally divided into two broad categories: neoclassical models and endogenous models, belonging to the so-called new growth theory. In this book, we describe selected models of economic growth focusing on their explanation of the concept of convergence. For a detailed analysis of these and many other models of economic growth, see, e.g., Barro and Sala-i-Martin (2003) and Romer (2019).

1.1 The neoclassical growth theory

The first works related to economic growth date back to the 18th and 19th centuries. During this period, Adam Smith, Thomas Malthus, and David Ricardo, and many years later, Frank Ramsey, Allyn Young, Joseph Schumpeter, and Frank Knight provided many elements used in modern growth models (Barro and Sala-i-Martin, 2003, p. 16).

Here, we will not explore the old history but will focus on contemporary models of economic growth. Robert Solow (1956) was the first economist who formalized the analysis of economic growth. His model included the neoclassical production function and initiated an era of neoclassical models of economic growth. Neoclassical production function assumes, inter alia, constant returns to scale and diminishing marginal product of capital. To this day, the Solow model constitutes the basis for the contemporary theory of economic growth. But important works in this field appeared earlier.

Harrod (1939) and Domar (1946) tried to combine the Keynesian analysis with the elements of economic growth. According to th...