1. Club Convergence And Imitation in Endogenous Growth Models: The Case of East Asia In the last class we argued that poor countries can grow fast through technical progress or adaptation In today’s class, I would like to address two important questions: 1) Why do we find “convergence clubs” in which per capita income levels seem to have converged to that of reach countries for a select group of countries and regions? 2) To what extent endogenous growth models can deliver an explanation of convergence clubs based on imitation?

2. 1) Convergence clubs: The Example of the East Asia A well-known report by the World Bank (1993) focuses on the recipes for success of 8 East Asian countries: Hong Kong, Indonesia, Japan, Malaysia, South Korea, Singapore, Taiwan, and Thailand 1965 – 1990: Growth in those countries (6 -7 per cent per annum on average) was faster than all other regions in the world Fast growth in that group of (geographically closed) countries was then attributed to many factors, but most importantly to the following..

3. Unlike many equally poor countries that followed import-substitution industrialization (ISI), East Asia followed an export-led strategy, and, in particular, the World Bank report suggests: “…the relationship between exports and productivity growth may arise from exports’ role in helping economies adopt and master international best practice technologies. High levels of labor force cognitive skills permit firm-level adoption, adaptation, and mastery of technology. Thus, exports and human capital and human capital interact to provide a rapid pace of productivity growth…” However, in this report there was no explicit attempt to explain the experience of the East Asian miracle in “regional or neighborhood effects”

5. Interestingly, though, the entire region seems to have drawn earlier to the developed world by prospects of mutually beneficial exchange of goods, capital, and ideas. Now, different parts of East Asia are being pulled towards by the same motives and modes. The result is rapid regional integration in the exchange of goods, capital, and ideas, which rivals those in the European Union and in North America By 2010 more than 95% of the region’s population will be reaching the standards of middle income countries Intraregional trade and investment flows in East Asia have grown faster than its trade and financial links with the rest of the world

6. 2) Convergence clubs in endogenous growth theories In a nutshell: Poor countries that are endowed with good educational systems are not just capable of generating their own ideas (last class), but are also capable of imitating technologies that are invented in rich countries (today’s class). A bit of math should help, but is not compulsory for this course

11. Now: Poverty has decreased in East Asia

12. But there is growing concern about income inequality Next class: Acemoglu et al (2006). See course web site