Predicting the Economic Future Through Convergence: The Case of China

But economics does come close to these other disciplines in its mapping of individual decisions and economic growth. Models of economic growth, in particular, will look familiar to physicists, as they sometimes appear to mimic the motion of particles influenced by forces like gravity. These models, which became popular during the 1980s and have endured since then, are usually called “neoclassical” because they draw heavily on “classical” mathematical and statistical techniques developed much earlier, in the 1920s.

From the neoclassical models arose perhaps the only relationship that economics has been able to establish between the prospects for growth of different countries. That is not to say that the models gave birth to a law. Rather, they suggested a relationship that, when tested in the real world, appears to hold true: convergence.

The idea of convergence began with the simplest models, in which there was little to distinguish between economies. In these models, it looked as though every economy was on the same path of growth. Some had a head start, and these were the wealthy ones. The others, however, would catch up to the leaders eventually. In fact, the further behind they were, the more quickly they would close the gap. As time passed, the workers in every economy would be heading toward the same average level of productivity, and thus, in a world of competitive markets, the same wages and material standards of living.

Plenty of observable evidence indicated that this theory might be right. Countries that lagged far behind the leaders — the poorest ones — could make dramatic leaps forward by making basic improvements in public health, education, and infrastructure, which would eventually allow them to move their people off the land and into cities, where they could take advantage of the economies of scale implicit in industrial production. Moreover, the laggards could copy technologies from the leaders rather than having to develop them on their own, leapfrogging through economic time. As they began to compete head-to-head with the leaders in the highest-value markets, however, their progress would naturally slow.

So economists re-examined the theory of convergence. They decided that the basic idea could still be correct, but with a caveat: countries’ living standards could converge in the long term, but only if they had similar economic foundations. This new theory, called conditional convergence, has endured in the mainstream of economics, in large part because of the strength of the empirical evidence that supports it. Early calculations showed that, controlling for population growth and the rate of investment in capital goods, per capita income in a sample of 121 countries did appear to converge over time (Mankiw, Romer, and Weil 1992). A later study showed that, conditional on their ability to export, East Asian economies seemed to converge towards similar income levels; those with lower standards of living tended to grow faster (Fukuda and Toya 1995). Despite the dramatic changes in the Chinese economy since the late 1970s, there are still vast differences between China and these wealthier economies that are likely to hold China back.

Yet this simple form of convergence didn’t seem to be happening in many parts of the world. African countries, for example, actually lost ground to the rich West in the second half of the twentieth century. And some countries that appeared to be catching up to the West for a few decades, like Japan, hit a wall before they reached the same standards of living, falling inexplicably short of the target. Indeed, as the theory of convergence became canonical in economics textbooks during the 1980s, bestselling books predicted that Japan would pass the United States to become the world’s greatest economic power. That never happened, and today few economists would predict that it ever will.

*Read the whole article here.

About the Author

Victor Jimenez
London contributor at, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.

Be the first to comment on "Predicting the Economic Future Through Convergence: The Case of China"

Leave a comment