The relationship between salary levels and
‘economic convergence
Introduction
In the Solow growth model, economic growth is fueled by the accumulation of physical capital up until this optimum level of capital per worker, which is the "steady state," where output, consumption, and capital are constant. The idea of convergence in economics, also known as the catch-up effect, is the hypothesis that poorer economies' per capita incomes will tend to grow at faster rates than richer economies. The model forecasts faster growth—often referred to as "catch up" growth—when the level of physical capital per capita is low. As a result, the per capita income of all economies should eventually converge. Because of declining returns, developing nations have the ability to grow more quickly than developed nations.
There are two definitions for the word "convergence" in economic growth literature. The first type, often known as "sigma-convergence," describes a decrease in the income disparity between economies. On the other hand, "beta-convergence" happens when developing economies expand more quickly than developed ones. When economies "beta-converge" but only if other factors (such as the investment rate and the population growth rate) remain constant, economists refer to this as "conditional beta-convergence." The growth rate of an economy is said to slow as it approaches its steady state, and this is when "unconditional
beta-convergence" or "absolute beta-convergence" is said to exist. Jack Goldstone asserts that "in the twentieth century, the Great Divergence peaked during the First World War and persisted until the early 1970s, then, after two decades of erratic swings, the Great Divergence began to decline in the late 1970s."
Types of convergence
1. Complete convergence: A higher average growth rate will result from a lower initial GDP.
This suggests that poverty will eventually go away "by itself." It does not clarify why certain countries have experienced decades of stagnant growth (e.g. in Sub-Saharan Africa)
2.Conditional convergence: Depending on the structural characteristics of a country, the income per worker converges to a long-run level that is unique to that nation.
The result is that structural factors—rather than beginning national income—determine the amount of GDP per worker over the long term. There is no need for an income transfer from richer to poorer countries, therefore foreign aid should concentrate on structure (infrastructure, education, financial system, etc.).
3.Club convergence: Various "clubs" or groups of nations with comparable growth trajectories can be seen. [13] The fact that many nations with low national incomes also have slow growth rates is crucial.
This contradicts the conditional convergence hypothesis and would imply that income transfers should be included in foreign aid and that initial income does have an impact on economic growth.
Important of convergence
Because the current gap in per capita income is so large, even if one assumes that low income countries will grow for the foreseeable future at much higher rates than high income countries, the gap will continue to grow for many decades before convergence occurs well into the next century, if not later.
In other words, by 2015, the rich countries will be so far ahead of the rest of the world that no one else will have a realistic chance of catching up, as Taiwan (China) and South Korea did in the years following World War II, with the exception of a small number of nations with incomes that are extremely close to those of the poorest rich country. The "dirty little secret of development economics" is this phenomena, which is the growing of income differences in the future despite higher growth rates in the poor nations today, according to Homer-Dixon (p. 189)
These growing gaps cause a number of issues. The first is the most obvious: it gets harder to jump the wider the space is. Chile has been admitted to the OECD, and Taiwan (China), Singapore, and Korea have all achieved it. However, these instances of upward mobility are extremely rare. According to Landes (1990), knowledge and expertise are a major restriction because they are difficult to obtain.
It was a very complicated process for Taiwan's human capital to develop as it entered the wealthy economy club. Although it appeared to be a disadvantage at the time, Taiwan was able to develop a sizable pool of qualified and experienced workers before its economy was prepared to absorb them thanks to the brain drain that occurred in the 1960s and 1970s, when about 50,000 of the brightest young Taiwanese went abroad (primarily to the United States) for university and advanced studies.
From 1985 onward, incentives drew them back to Taiwan as entrepreneurs, to found start-ups in the science parks, or to fill management, academic, and research positions. They brought not only their knowledge and experience, but also their networks of contacts and working relationships with top-tier international companies, allowing today's Taiwanese universities to educate its own manpower for ongoing domestic expansion.
These unofficial networks have promoted technology transfer, innovation, and solid entrepreneur relationships. They have been complemented by international offices of various institutes and research centers. According to Landes, training and higher education have frequently resulted in "the permanent loss of talent" in other nations.
Being far behind makes it challenging to enact sensible policies. Because of the strength of communications technologies, the people of poor countries may easily and correctly assess how far behind the rest of the world, in especially the wealthy economies of the industrial world, they are. This is probably going to lead to inflated expectations of catching up, which will drive governments to favor a populist approach rather than the methodical, gradual, and occasionally challenging path taken by the few successful people.
Governments may find it challenging to enlist the public in the pursuit of prudent, cogent policies when the gap is so enormous that closing it in a generation or two is little more than a pipe dream. Landes uses the noun "late" to denote late entry into the development process, reflected by a low per capita income, and claims that "Lateness is the parent of terrible government"
Additionally, there are strong incentives for people to cross international borders due to the widening income gaps between nations and the globalization of ideas, knowledge, access to information, and awareness of other people's living standards.
If to this we add the likely future impacts of climate change on vulnerable populations (developing economies are far more dependent on agriculture, which will be hard hit by climate change) and the kind of chaos and generalized upheavals we have seen in recent years in a growing number of countries (for example, Syria, Iraq, Yemen, Afghanistan, Mali, Venezuela, to name a few), then those incentives are amplified and migration risks becoming an even bigger challenge.
A segmentation of the world into two major zones, one with either high wealth or at least positive economic growth and the other with about 60 countries with a combined population of more than 1 billion people, has several drawbacks, according to some economists (such as Paul Collier).
According to Collier, a major goal of economic growth is to give the general public optimism that, in the not-too-distant future, their children would have access to the same chances as children in Germany, Sweden, and other wealthy nations. The World Bank bases a large portion of its work on the concept of convergence, which holds that the rich countries will gradually adopt the same institutions and policies that have helped them achieve levels of wealth and prosperity unmatched in the last few thousand years of recorded history.
If the numbers are high enough to strain the infrastructure and budgets of wealthy countries, it poses a significant challenge for the receiving countries and may deprive the sending countries of vital human capital. The World Bank's present emphasis on shared prosperity is crucial, which is why it matters so much for development results as well as having clear security and political implications that go well beyond just closing income gaps.
Limitations
Poorness is not a guarantee that a nation will experience catch-up growth. To take advantage of catch-up growth, Moses Abramovitz emphasized the necessity for "Social Capabilities." These include the capacity to adopt new technologies, draw in funding, and take part in international marketplaces. Abramovitz contends that these conditions must be met in order for an economy to experience catch-up growth, which explains why there is still divergence in the modern world.
The hypothesis moreover presupposes that technology is openly traded and accessible to underdeveloped nations trying to catch up. Because money is scarce in many nations, it can also be difficult or expensive for these economies to access, which might hinder catch-up growth. Due to the high cost of acquiring the most efficient technology, this frequently traps nations in a cycle of poor efficiency.
The leading developed nations and the following developed nations are distinguished by their different production strategies, though the gap between them is small enough to allow the latter to catch up. As long as the lagging nations can learn something from the leading ones, the process of catching up continues.
Conclusion
In the field of economics and finance, there are several trends and tools. Some of them speak about conflicting forces, such convergence and divergence. Divergence typically denotes the movement of two things apart, whereas convergence denotes the movement of two forces simultaneously.
Divergence and convergence are terms used to describe the directional relationship of two trends, prices, or indicators in the fields of economics, finance, and trade. However, as the broader definitions suggest, these two phrases refer to the motion of these interactions. While convergence shows how two trends are moving toward one another, divergence shows how they are moving apart.
Due in large part to the assumption that convergence will occur in a typical market, technical traders are much more concerned about divergence than convergence. Divergence is a common technique used by many technical indicators, particularly oscillators. The bands (high and low) that fall between two extreme values are mapped out. After that, they create trend indicators that operate within those constraints.
Divergence is a phenomenon that is sometimes taken to indicate that a trend is fragile or possibly unstable. Divergence is a tool used by traders who incorporate technical analysis into their trading techniques to determine an asset's underlying momentum.