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 in order to achieve a higher growth rate than developed countries and therefore converge in the long-term.

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' in order 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.citation | last1 = Lucas | first1 = Robert | author-link =Robert E. Lucas, Jr. | year=1990 |title= Why doesn't Capital Flow from Rich to Poor Countries? | journal = American Economic Review | volume = 80| pages = 92-96]

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. 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 in order to trigger catch-up growth.

References

* [http://www.economist.com/research/Economics/alphabetic.cfm?term=catch-upeffect The Economist definition of the catch-up effect]
* John Matthews, Catch-up strategies and the latecomer effect in industrial development. New Political Economy, 2006.
* [http://links.jstor.org/sici?sici=0022-0507%28198606%2946%3A2%3C385%3ACUFAAF%3E2.0.CO%3B2-G Moses Abramovitz, Catching Up, Forging Ahead and Falling Behind. Journal of Economic History, 1886.]

ee also

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