Poor countries are not catching up with rich countries

Poor countries seem to have stopped catching up with rich countries:

The original story of divergence then convergence remains the same, despite the scope for the revised data to alter results. For the three decades leading up to the empirical literature on economic growth, the gap between developed and developing nations expanded.

That all started to change around the fall of the Berlin wall, and poor countries went from lagging behind richer ones to maintaining pace with and then ultimately to growing faster resulting in convergence.

The latest data updates show that that golden era of relative prosperity has come to a halt. In the past decade and a half, there is no evidence that poor countries have grown faster than richer ones.

Some of the replies and quote tweets are interesting.

I asked Gemini about what the economic literature says about convergence:

The economic literature on convergence—the idea that poorer countries should grow faster than richer ones and eventually “catch up”—is a story of theory vs. reality.

While standard economic models predict convergence, empirical data shows it is not automatic. The consensus has shifted from a naive belief in “absolute convergence” to a more nuanced understanding of “conditional convergence.”

Here is a breakdown of what the literature says.

1. The Theory: Why Convergence Should Happen
The theoretical basis for convergence (often called the “catch-up effect”) comes primarily from the Solow-Swan growth model. It relies on two main mechanisms:

* Diminishing Returns to Capital: In a rich country with lots of factories and computers, adding one more computer adds very little to productivity. In a poor country with very little capital, adding that same computer creates a massive leap in productivity. Thus, investment in poor countries should yield higher returns and faster growth.

* Technology Transfer: Rich countries must invent new technology to grow (which is slow and expensive). Poor countries can simply adopt existing technologies (which is faster and cheaper), allowing them to “leapfrog” intermediate stages of development.

2. The Reality: Absolute vs. Conditional Convergence
When economists tested this theory against real-world data, they found a divergence between two types of convergence.
Absolute Convergence (The “Naive” View)

* Hypothesis: Poor countries will grow faster than rich countries, period. Eventually, the whole world will share a similar standard of living.

* Verdict: Rejected. When looking at global data (e.g., over the last 100 years), there is no evidence that poor countries automatically grow faster. In fact, for much of the 20th century, the gap between the richest and poorest nations widened (Divergence).
Conditional Convergence (The “Nuanced” View)

* Hypothesis: Poor countries will grow faster than rich countries only if they share similar structural characteristics (e.g., savings rates, population growth, education levels, and institutions).

* Verdict: Supported. The literature (most notably by Robert Barro and Xavier Sala-i-Martin) finds that if you control for variables like rule of law, education, and openness to trade, poor countries do grow faster. Essentially, a country converges not to the US standard of living, but to its own “steady state” determined by its policy and institutions.

3. Key Concepts in the Literature
”Convergence Clubs”

Because absolute convergence doesn’t happen, the world has split into “clubs.”

* Rich Club: Developed nations that trade with each other and maintain steady, slow growth.

* Catch-up Club: Emerging economies (like the Asian Tigers or arguably China/India) that have managed to join the convergence path.

* Stagnation Club: Extremely poor nations that are trapped in low-growth cycles due to poor institutions, conflict, or geography, failing to even start the convergence process.

The “Manufacturing Exception” (Rodrik’s Finding)
Economist Dani Rodrik discovered a fascinating exception. While economies as a whole don’t converge automatically, manufacturing sectors do.

* If you build a modern car factory in Ethiopia, its productivity will converge rapidly to the level of a car factory in Germany, regardless of the country’s broader policies.

* The Problem: The rest of the economy (agriculture, informal services) does not converge easily. Since many developing nations are skipping the manufacturing phase (“premature deindustrialization”), they are losing this automatic engine of convergence.

4. Summary of Findings

Concept	Definition	Status in Literature
Sigma (\sigma) Convergence	The dispersion of income across countries falls over time (inequality decreases).	Generally not found globally; found within specific groups (e.g., EU states, US states).
Beta (\beta) Convergence	Poor countries grow faster than rich ones.	Found only when “conditional” factors (institutions, education) are accounted for.
Speed of Convergence	How fast the gap closes.	The “Iron Law of Convergence” suggests a closure rate of about 2% per year for similar economies.
The Bottom Line

Being poor is not enough to guarantee growth. The “advantage of backwardness” is only an potential advantage. To unlock it, a country requires “social capabilities”—the institutions, education, and stability needed to absorb superior technology. Without these, a poor country will simply stay poor.
Relevant Video:

The Solow Model and the Steady State
This video offers a technical but accessible explanation of the Solow model, illustrating the mathematical reasons why economies are predicted to converge and distinguishing between the “absolute” and “conditional” types mentioned above.
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https://youtu.be/NExRqIIggfY?si=-c71onZQCUCYM0m4