The developing world (as a whole) is growing much faster than the developed world (as a whole), and their real levels of per capita income (especially if valued at Purchasing Power Parity) are indeed converging, not diverging.

This is only to be expected on theoretical grounds: developing economies can grow faster, because they mainly grow by catching up with production possibilities (i.e. technology) already available, while in developed countries (which are already closer to the frontier of existing technology) growth mainly happens through the adoption of new technological improvements as they appear, and just a little amount of catch up.

Of course, not all developing countries catch up at the same rate: just compare the growth of South and North Korea, or in a less extreme contrast, China and India.. Actualization of the growth potential in specific countries requires a sound institutional environment and the sustained enactment of policies that encourage investment and technological progress, which is not always the case, in both developed and developing economies.

The above refers to long term trends in development. Those trends are always affected by the oscillations of the economic cycle and its periodic crises (a trait that is essential to the capitalist economy); growth in the short term may be stopped or reversed during recessions, and then resume (sometimes, but not always, at temporarily more rapid rates) during recovery from a recession. But in this comment I am referring to long term trends, as per the question posed for this discussion.

In Market Economy the gap between rich and poor will widen until a new "Theory of National Income introduced" in which distribution of NI might be re-regulated.

Mohammad, it is not reality which should adjust to a theory: it is theories which should be based on reality. Theories are attempts to understand and explain what is and happens in the real world.

On the other hand, the gap between the income levels of rich and poor countries is NOT widening: it is narrowing.

Thank u Hector. It is of course widening because the theory of unequal distribution of income within and outside the geographical boundary of a country make it possible

Thanks much for your explanation,

Thanx Dr. Sahib

Mohammad, the mere idea that by means of a theory one can prove that something is happening is a ludicrous idea. Theories do not prove facts. Theories may explain why something is happening, but you cannot prove that something is happening by alleging a theory. For that, you need facts. And the fact, in this case, is that the gap is not widening. I refer, of course, to the gap between the per capita income of developing vs developed countries, considered as a whole. You may use the World Bank database of world development indicators as regards per capita income, measured at constant prices and aggregated by means of Purchasing Power Parities to make them aggregable and comparable over time and across boundaries.

This convergence is not something eternal: it is something relatively new; it emerged only in recent decades. During most of the 19th century and the first part of the 20th there was a tendency to a widening gap in per capita income between rich and poor areas of the world. But this was reversed in the latest 30 years approximately as more and more developing countries started growing faster.

I would recommend North, Wallis and Weingast's book "Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History". You can see an interview with Nobel prize winner Douglass North on http://www.youtube.com/watch?v=yCP8tqMO7OY

They state that there is no reason why "developing countries" automatically converge to "developed countries". North stresses the importance of politcs and a good theory of politics to understand economic development.

Thanks Gerdien for the reference and weblink...

Countries that solve their conflicts on war, civil war, property rights , taxation , public expenditures and market imperfections will catch up, others fall behind. That is the aseline. Complications fill books.

very nicely argued. Thanks Thomas

I am not a development economist but I think a lot about mechanisms that drive global and regional growth, trade etc. In this regard, it seems some fairly standard economic tools would go a long way towards thinking about this problem. First, what would enable labor to earn a higher wage in one country versus another? It seems to me that there are three main factors: (i) human capital levels, which is tied to education; (ii) the capital stock, with its embedded technology; and (iii) trade barriers. The growth experience of China over the last two decades suggests that countries can very quickly catch up with the capital stock provided they have access to capital. This makes private property rights key. If I invest in a country that subsequently nationalizes my investment, I am very unlikely to do it again (hence countries like Zimbabwe suffer). However, if private property rights are assured, the capital will likely flow towards countries that have cheaper labor. It is probably more difficult for a country to raise the human capital of its labor force than to raise the amount and quality of its capital stock and this is probably a slower process. As far as trade barriers are concerned, the world has been slowly moving towards freer trade. (By the way, I would also agree with Thomas that tax policies are also important in setting the incentives framework). The growth rate of China over the last two decades suggests that countries can catch up much faster than we thought in the 1970s. However, in the wake of China's success comes countries like Vietnam, which begin to displace activity from China as incomes begin to rise rapidly there. In a fairly static technology world, this would suggest that the global distribution of income between countries would tend to become more even over time. I suppose the question is whether continuous innovation shocks could offset this convergence process (emergence of Facebook, Twitter etc,) In the 19th century, the UK was the top economic dog, only to be replaced by the U.S. in the 20th century. There is nothing in economic theory or history that says the 21st century won't be the turn of China or India.

John, very nice argument.

Only a remark: once property rights are assured, capital is not certain to flow to the country with the lowest wages: there may be other problems (e.g. size of the market, or scarcity of skills). Thus, capital is seen to be quite interested in going to China in spite of the many difficulties arising from its political system, but would not go as easily to another country that guarantees private ownership but has a small market size, is located far away, or otherwise lacks other attractive factors. Otherwise, much more investment would be going to places like Uruguay or Botswana where private ownership is assured and wages are relatively low.

I think investment localization decisions are the result of a balance of factors, with investors weighing the various factors according to their perception of their (un)certainty and their relevance. They may forgive some negative feature of the country because it has some other redeeming quality. For instance, they may invest in China, forgiving its communist bureaucracy. They may choose France, in spite of high taxation, just for the sake of being in Europe and having access to European markets and skilled labor, instead of choosing, say, Romania (also in the EU, but less skilled labor) or Chile (great business environment, low taxation, but quite far away and not an EU member). Note also that wages are an important consideration in some industries that are more labor intensive, but not in others. Industries with low labor intensity may be willing to pay high wages to their (few) employees, because that is only a minor consideration in their industry. Thus, for example, you may setup a car assembly plant in Belgium, paying more than 35 euro/hour to the average worker in the robotized assembly plant, to produce cars with imported parts, instead of making the cars somewhere else, with lower wages but farther away from the market.

I agree with all of the above. I was just trying to keep the basic argument simple. Clearly enviromental regulations, cost of transportation of goods to market etc. all play a role. But as we see in China, wages are getting strongly bid up, which is resulting in companies looking elsewhere to produce. There is one other factor which should be in the argument and that is resource advantage (e.g. oil) although, as we have seen in some cases (e.g. Venezuela), having such an advantage may actually make the economy worse over time.

All factors may be the key to a decision under a ceteris paribus conditions. However, ceteris are not usually paribus.

The interesting question (development and institutional) economists are wondering about with respect to China, is whether its economic growth is sustainable given the levels of corruption, lack of transparency and democracy in China. I guess we will have to wait and see how this big experiment turns out!

Being am a fan of the New Institutional Economics (NIE) and Douglass North, I am somewhat sceptical about China's future...

I am not quite sceptical about China's future economic development, although of course the growth rates would tend to decline. I am instead sceptical about the future of the political system of China. It would need adapting, and will probably adapt, although facing many resistances along the way. One cannot build a capitalist economy on a communist regime basis, no more than one can build it on a feudal or absolutist monarchy basis. In the end, the economic framework will corrode the political system and force its reform. Nobody knows the how and when, of course. Not even them.

I have a small question to Professor Maletta that the way communist and authoritative regime in China are using their working force and helping them to expand their economies of scale (also making forced efficiency gain), how far is it tenable and sustainable?

I am no expert in China beyond reading some published analyses. Two questions stand for attention.

First, the era of very rapid growth is in transition to an era of less rapid growth in China, for various reasons:

1. The flow of rural-urban emigrants adds an ever decreasing proportion of new workers to the urban labor force (because the rural pop and its flow of emigrants grows very little, and it represents a declining fraction of the ever growing urban population.

2. There is a rapidly increasing demand for skilled workers and professionals, that is not easily matched by graduates in the Chinese educational system or its millions of students with fellowships to study abroad.

3. The easiest part of economic development, where most growth consists of catching up with existing technology, is almost over, and now the challenge is to grow in other areas where growth can only occur at the rythm of technological discovery (which historically is no more than 1-2% per year).

Second, the political scheme in China is still centralized, bureaucratic, and authoritarian, and this is becoming a hindrance more than a positive factor for growth. Pressures towards political change is growing, and the leadership is trying to achieve it veeeeery gradually, but it would not be possibly for such changeto be so smooth and so slow as the leadership desires. More democracy would entail better standards of living for the population, and thus a more expensive labor cost, which would also slow-down growth in industries depending on low wages.

In relation to the above, paying for an increasingly skilled labor force and acquiescing to more demands for better standards of living would require more abundant and ready access to tradable goods and services, priced at international prices, and this is proving hard with the current exchange rate of the Renminbi (which makes foreign currency and foreign goods too costly for ordinary Chinese).

At the same time, an extremely cheap currency produces an ever increasing trade surplus, that ends up being a liability because the enormous foreign currency reserves thus accumulated are ultimately invested in Western securities (chiefly US Government bonds). China would have to accept a more rapid revaluation of the Renminbi, and that would spur imports and reduce the competitive advantage of some Chinese industries that rely on cheap labor. All this would also contribute to slow-down the rate of growth. Notice that all these factors are beyond the reach of the Chinese government, and most of them are just unintended consequences of their institutional changes that opened their economy to capitalism in recent decades. The expected policy changes (democratization, currency revaluation and the like) would not necessarily be a free policy choice, but a necessity.

Convergence is impossible because drastic rollback in consumption levels and patterns is not possible.

Western per capita consumption basket and pattern is so ecologically draining, and also so polluting that the earth could not support the remaining 4/5th of its population replicating it. So the ecology bars 80% of humanity from reaching this level and pattern. And downward stickines will prevent the West and the Developed World from rolling down.

I dont expect the gap to widen. But planetary exhaustion and the dawn of wisdom in man, I hope, will act in tandem will help to ease up the mad materialistic race and the game of catching up. Instead, the both the developed and the developing, I hope, will ease up and call enough 'enough'.

All factors may be the key to a decision under a ceteris paribus conditions. However, ceteris are not usually paribus.

I believe there are attempts for such convergence through International conferences, Summits and engagements with the United Nations. Nevertheless, there is the need to consider this concept of bridging the gap and projects systematized to baseline projects and report on models for getting the poor closer to the rich.

Crucial question and interesting replies. I guess there are examples of underdeveloped countries that managed to develop, right?

Very critical question - whose response is two dimensional. If interested in a hypothetical answer to this hypothetical question, you are likely to receive 3 sets of response (i) yes , (ii) No and (iii) Yes and No. Let's start with the 'Yes", it is possible that developing countries may leapfrog some stages of development and quickly catch up with the developed economies and the key drivers in this respect include ICTs and exploration of virgin resources such as oil and gas. If resource rich developing economies do their homework well and avoid the so called 'dutch disease', the oil and gas exploration, development and production in likely to propel many to the path for sustainable development -quickly transiting from LDCs to MICs and DCs. Another factor is youthful population - if developing countries can exploit the population bulge into 'demographic dividend' , they would be able to expand effective demand , boosting production and productivity, export reciepts and GDPs, which are major ingredients to development. The "No" side looks at factors that perpetuate unequal trade relationships and flow of resources between developed and developing countries as well as leakage of economic resources from developing world. Issues of capital flight, corruption, impunity that are akin to most operations of most developing economies would come into play here. No need to discuss the 'yes and no' answer, which simply takes a middle ground of the above responses.

The second way to look at this is by looking at empirical evidence where countries like the newly industrialized economies of Asia - the Asian Tigers, China and India whose economies have grown spectacularly over the past 3 decades. Similar evidence may be brought to bear for those developed nations whose economies have stagnated over the period under review. By comparing the rate of expansion of developing and contraction of developed economies, one can project whether and when the two growth curves will be at tangent or cut one another. It is however, important to note that comparison should not be based only on economic indicators (GNP and per capita GNP), there are a variety of other social, environmental and governance indicators that like to be looked at such as gross national happiness, human rights and rule of law, freedom of association , longevity to life and poverty. One needs to know exactly which metrics should be used assist in such analysis.