Catch-up effect

The catch-up effect, also called the theory of convergence, states that poorer economies tend to grow at faster rates than richer economies. Therefore, all economies should in the long run converge in terms of per capita income and productivity. Developing countries have the potential to grow at a faster rate than developed countries as they can replicate production methods, technologies and institutions currently used in developed countries. This addition of capital allows them to rapidly increase productivity and incomes to achieve a higher growth rate than developed countries, and therefore converge in the long-term. Convergence assumes that all countries are growing, but at different speeds. To say that country A converges on country B is to say that the ratio of the real GDP (per capita) of these two countries get smaller over time.

Limitations

The fact that a country is poor does not guarantee that catch-up growth will be achieved. Moses Abramovitz emphasised the need for 'Social Capabilities' to benefit from catch-up growth. These include an ability to absorb new technology, attract capital and participate in global markets. According to Abramovitz, these prerequisites must be in place in an economy before catch-up growth can occur, and explain why there is still divergence in the world today.

The theory also assumes that technology is freely traded and available to developing countries that are attempting to catch-up. Capital that is expensive or unavailable to these economies can also prevent catch-up growth from occurring, especially given that capital is scarce in these countries. This often traps countries in a low-efficiency cycle whereby the most efficient technology is too expensive to be acquired. The differences in productivity techniques is what separates the leading developed nations from the following developed nations, but by a margin narrow enough to give the following nations an opportunity to catch-up. This process of catch-up continues as long as the followed nations have something to learn from the leading nations, and will only cease when the knowledge discrepancy between the leading and follower nations becomes very small and eventually exhausted.

Robert Lucas stated the «Lucas Paradox» which is the observation that capital is not flowing from developed countries to developing countries despite the fact that developing countries have lower levels of capital per worker.^[1]

Examples

There are many examples of countries which have converged with developed countries which validate the catch-up theory. In in the 1960s and 1970s the East Asian Tigers rapidly converged with developed economies. These include Singapore, Hong Kong, South Korea and Taiwan - all of which are today considered developed countries or cities. In the post-war period (1945-1960) examples include Germany, France and Japan, which were able to quickly regain their prewar status by replacing capital that was lost during World War II.

Some economists criticise the theory, stating that endogenous factors, such as government policy, are much more influential in economic growth than exogenous factors. For example, Alexander Gerschenkron states that governments can substitute for missing prerequisites to trigger catch-up growth. A hypothesis by economic historians Kenneth Sokoloff and Stanley Engerman suggested that [factor endowments] are a central determinant of structural inequality that impedes institutional development in some countries. Kenneth Sokoloff and Stanley Engerman proposed that in the 19th century, countries such as Brazil and Cuba with rich factor endowments such as soil and climate are predisposed to a guarded franchise with limited institutional growth. Land that is suitable for sugar and coffee such as Cuba experienced economies of scale from the establishment of plantation that in turn created the small elite families with vested interest in guarded franchise. The exogenous suitability of land for wheat versus sugar determines the growth rate for many countries. Therefore, countries with land that is suitable for sugar converge with other countries that also have land that is suitable for growing sugar.

References

• The Economist definition of the catch-up effect
• John Matthews, Catch-up strategies and the latecomer effect in industrial development. New Political Economy, 2006.
• Moses Abramovitz, Catching Up, Forging Ahead and Falling Behind. Journal of Economic History, 1986.
• K. Sokoloff and S. Engerman, “Institutions, Factor Endowments, and Paths of Development in the New World,” Journal of Economic Perspectives, (Summer 2000), p. 217-32.

See also

• Economics
• Investment
• Return on investment
• Productivity
• Emerging nation
• Sow's ear effect
• Endogenous growth theory