Download Convergence scenarios: an overview

Convergence Scenarios:
an Overview
Jonathan Temple
(University of Bristol)
“Classical” Convergence
Approach represented by papers such
as Barro and Sala-i-Martin (1992) and
Mankiw, Romer and Weil (1992)
Based on closed economy growth
models in Solow/Swan tradition
Or Ramsey/Cass/Koopmans
Adds assumptions about world growth
Some Basics…
Predicts countries converge in growth rates
But income levels differ in steady-state
This is because steady-state determinants
vary across countries
Most familiar: investment, population growth
These determinants treated as exogenous
A Key Strength…
A key strength of the approach is to
recognise that, in principle…
…there is no reason why most
countries cannot become rich
So future may not look like the past
Viewpoint differs from non-economists
Empirical Findings
Wide variety of convergence estimates
Recent work suggests rates are slow
So countries spend a lot of time away
from steady-state
Some evidence suggests “clubs”
But a lot of uncertainty (small N)
…and asking wrong question?
This is the Wrong Approach…!
Bad approach for emissions scenarios
Estimated convergence rate is
(implicitly) an average
Taken across different countries/regions
Regressions weight countries equally
Effectively small countries (sub-Saharan
Africa) carry much more weight
The Wrong Approach, Part II
Approach treats countries as closed
These economies evolve independently
For empirical purposes, treats steadystate determinants as exogenous
Rules out feedback from growth
How to relax these assumptions?
Possible Feedback Mechanisms
Endogenous world growth
Geography and market access
Demography
Endogenous institutions
Financial development
Equipment prices
Energy prices
Feedback from climate
Endogenous World Growth
Clear externalities in knowledge
Powerful effects of scale in endogenous
growth models
World population of researchers
expanding rapidly (India, China…?)
Will only be offset if research process is
becoming more difficult
Geography and Market Access
Recent work in trade emphasizes role of
spatial location and market access
Suggests multiple equilibria at level of
world regions
Fast growth in specific regions will
change patterns of market access
Hence feedback from regional growth
Demography
Crucial for emissions scenarios to build
in endogenous demography
Offsetting effects: rising longevity
versus fertility transition
Quantity/quality trade-off models
predict human capital accumulation rise
Importance of policies in China, India
Endogenous Institutions
Work such as AJR (AER 2001) suggests
institutions crucial to steady-state GDP
Strong correlations between institution
indices and levels of GDP
Endogenous democratization…
…might reduce forecast dispersion?
Less risk of civil war as income rises?
Growth and Finance
Much work links growth to financial
development
Development of banks endogenous to
income level
Then stock markets…
Financial globalization relevant to
convergence (e.g. FDI flows)
Equipment Price Effects
Why does real investment differ?
Work such as Hsieh/Klenow suggests
relative price of equipment crucial
Evidence suggests this price much
higher in poor countries
Can be expected to fall as part of
convergence process?
Energy Price Effects
Price of energy unlikely to be
independent of global convergence
May feedback into world growth
This effect will also tend to reduce
dispersion of emissions scenarios,
relative to dispersion of GDP scenarios
Global Warming Feedbacks
Central point: endogenous climate
So different convergence scenarios may
have feedbacks via climate
For example, agriculture, water stress
Changes in infrastructure, global
distribution of population, etc.
How to Model All These Effects?
Full structural model very complex…
So best approach may be reduced-form
Aggregate major regions
Consider different convergence
behaviour in each…
But build in virtuous circle effects as a
reduced-form