Income Convergence
Multiple paths

The neoclassical growth model predicts that the per capita incomes of all countries should converge in the long run, while more recent models of `endogenous growth' allow there to be more than one steady-state path. Baumol found that the incomes of the world's wealthier countries converge, weaker convergence exists among middle-income countries, and income gaps between the remaining countries seem to be growing in the long run. In Discussion Paper No. 922, Research Affiliate Dan Ben-David shows that the groupings in such studies are highly sensitive to the inclusion or exclusion of specific countries. Regressions of growth rates on initial income levels that yield negative coefficients are interpreted as indicating convergence, so cross-sectional tests are not very useful for assessing convergence/divergence within small groups of countries, for which the power of the tests will be quite low. Ben-David defines income convergence instead as a reduction in the average income differentials among group members and calculates annual series over 25 years. This facilitates sensitivity checks by allowing one, two or more countries to be included or excluded from any given group.

Ben-David partitions the world into groups of equal size and explores the behaviour of income differentials within each group by testing for convergence/divergence for every possible sub-grouping of countries. Repartitioning the world several times and repeating the experiment with the sub-groups for each of them confirms Baumol's findings of a `convergence club' among the world's wealthier countries and an increasing income gap with the majority of the remaining countries, but there has also been very significant <MI>downward<D> income convergence among the world's poorest countries. He then modifies the neoclassical framework to introduce the constraint that a minimum subsistence level of consumption is required to sustain life, and he shows that there are two steady states with divergence in between, which is consistent with these robust empirical results. In this framework, poor countries' consumption is initially at this subsistence level, and those whose endowments are sufficiently poor for their inhabitants to survive by depleting the capital stock will experience negative growth and may never escape this `poverty trap'.

Convergence Clubs and Diverging Economies
Dan Ben-David

Discussion Paper No. 922, February 1994 (IM)