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A Second Look at Convergence

Despite some evidence, rapid convergence is alive and well for many countries.

Homi Kharas | Brookings Institution

In a recent article called “Economic Convergence: The Headwinds Return”, The Economist magazine called the rapid convergence of income levels between developing countries and the United States an aberration.

It presented data showing that the difference between income per capita growth in developing countries and in developed countries had peaked around 2008 and had since become steadily smaller. When China is excluded from the calculations, the difference becomes smaller still.

So should we dismiss convergence as a trend whose time is past? I would argue that this would be premature, and that convergence is still a feature of our time.

The different conclusion is not because of different data–both of us use the IMF’s World Economic Outlook series for GDP per capita at purchasing power parity terms, and its forecasts until 2019—but a different approach to convergence.

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Each country has its own specific issues that drive growth, especially in the short-term.

Different Perspectives

The Economist article looks at all developing countries taken together as an aggregate as the relevant unit of convergence. But by doing this, it basically only looks at a few developing and emerging countries. The largest seven developing countries, Brazil, China, India, Indonesia, Mexico, Russia and Turkey, account for two-thirds of the GDP of the 153 developing countries monitored by the IMF.

Only two of these economies are classified as lower middle-income countries, four as upper middle-income economies and Russia is a high income economy. The significance of this is that one should expect the pace of convergence to slow as countries become richer, so by using an aggregate measure of GDP per capita that gives overwhelming weight to a small number of mostly upper middle income countries biases the results downwards.

The other point to make is that each country has its own specific issues that drive growth, especially in the short-term. Brazil, India, Indonesia and Turkey were identified by Morgan Stanley as part of the “fragile five” club likely to be affected by nervousness and risk aversion in global capital markets as unconventional monetary policy is unwound.

But these effects should disappear over the longer-term, and indeed the IMF forecasts a rebound in convergence rates in its projections of country growth up to 2019. This would suggest that it is the current rather poor growth performance in these countries that should be viewed as the aberration, not their long-term growth potential.

Breaking it Down

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Figure 1

An alternative way of looking at convergence is to look at individual country experiences. Figure 1 shows for this decade and each of the preceding three decades the growth performance of all developing and advanced economies, classifying them into three different performance categories:

  • poor (those that actually suffered a decline in per capita income over a decade)
  • middling (those with per capita growth between 0 and 3.5% per year)
  • and superior (those with per capita growth over 3.5% per year).

The pattern is striking. Looking first at advanced countries, almost all have incomes expected to remain in the middling group, between 0 and 3.5% per year growth. Four are expected to see negative growth in this decade for the first time in forty years. Only 2 are expected to see superior performance of rapid (over 3.5%) growth.

By contrast, there are only 9 emerging market and developing countries that are likely to have negative growth over the current decade compared to 52 that had growth declines in the 1980s.

Most EMDCs will have income growth in the 0-3.5% band, but around fifty are expected to have growth this decade of over 3.5%, about the same as in the first decade of this century and three times more than in the 1980s.

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Think about convergence as the opportunity for developing countries to grow far more rapidly than advanced countries.

So let’s think about convergence for what it really represents: the opportunity for developing countries to grow far more rapidly than advanced countries.

It seems that many countries will be able to take advantage of this opportunity, those shown here with likely superior growth performance. Some will become stuck because of bad policies – a situation that my colleague Indermit Gill and I termed the “middle income trap.” And a few (but thankfully fewer than ever before) will be riven by conflict and natural disasters and fail to grow at all.

My interpretation of this data is that rapid convergence is alive and well for many countries, with little evidence that it is losing steam as a force for those able to harness its power. Long-term (decadal) growth prospects for most developing countries are improving, not worsening. Taken as a group, EMDCs now account for over half of global GDP and are still increasing their world market share by about 0.7 percentage points each year. goldbrown2

This article first appeared on October 2, 2014 on the World Bank blog and was republished with permission.

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Homi Kharas is the Lead Author and Executive Secretary of the Secretariat supporting the High Level Panel advising the U.N. Secretary General on the post-2015 development agenda. He is a Senior Fellow and Deputy Director in the Global Economy and Development program of the Brookings Institution in Washington, D.C.

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