Convergence Scenarios: an Overview Jonathan Temple (University of Bristol)

Classical Convergence Approach represented by papers such as Barro and Sala-i-Martin (1992) and Mankiw, Romer and Weil (1992) Based on closed economy growth models in Solow/Swan tradition Or Ramsey/Cass/Koopmans Adds assumptions about world growth

Some Basics… Predicts countries converge in growth rates But income levels differ in steady-state This is because steady-state determinants vary across countries Most familiar: investment, population growth These determinants treated as exogenous

A Key Strength… A key strength of the approach is to recognise that, in principle … … there is no reason why most countries cannot become rich So future may not look like the past Viewpoint differs from non-economists

Empirical Findings Wide variety of convergence estimates Recent work suggests rates are slow So countries spend a lot of time away from steady-state Some evidence suggests clubs But a lot of uncertainty (small N) … and asking wrong question?

This is the Wrong Approach…! Bad approach for emissions scenarios Estimated convergence rate is (implicitly) an average Taken across different countries/regions Regressions weight countries equally Effectively small countries (sub-Saharan Africa) carry much more weight

The Wrong Approach, Part II Approach treats countries as closed These economies evolve independently For empirical purposes, treats steady- state determinants as exogenous Rules out feedback from growth How to relax these assumptions?

Possible Feedback Mechanisms Endogenous world growth Geography and market access Demography Endogenous institutions Financial development Equipment prices Energy prices Feedback from climate

Endogenous World Growth Clear externalities in knowledge Powerful effects of scale in endogenous growth models World population of researchers expanding rapidly (India, China … ?) Will only be offset if research process is becoming more difficult

Geography and Market Access Recent work in trade emphasizes role of spatial location and market access Suggests multiple equilibria at level of world regions Fast growth in specific regions will change patterns of market access Hence feedback from regional growth

Demography Crucial for emissions scenarios to build in endogenous demography Offsetting effects: rising longevity versus fertility transition Quantity/quality trade-off models predict human capital accumulation rise Importance of policies in China, India

Endogenous Institutions Work such as AJR (AER 2001) suggests institutions crucial to steady-state GDP Strong correlations between institution indices and levels of GDP Endogenous democratization … … might reduce forecast dispersion? Less risk of civil war as income rises?

Growth and Finance Much work links growth to financial development Development of banks endogenous to income level Then stock markets … Financial globalization relevant to convergence (e.g. FDI flows)

Equipment Price Effects Why does real investment differ? Work such as Hsieh/Klenow suggests relative price of equipment crucial Evidence suggests this price much higher in poor countries Can be expected to fall as part of convergence process?

Energy Price Effects Price of energy unlikely to be independent of global convergence May feedback into world growth This effect will also tend to reduce dispersion of emissions scenarios, relative to dispersion of GDP scenarios

Global Warming Feedbacks Central point: endogenous climate So different convergence scenarios may have feedbacks via climate For example, agriculture, water stress Changes in infrastructure, global distribution of population, etc.

How to Model All These Effects? Full structural model very complex … So best approach may be reduced-form Aggregate major regions Consider different convergence behaviour in each … But build in virtuous circle effects as a reduced-form