The Convergence Club

J. Bradford DeLong (University of California at Berkeley)
<delong@econ.berkeley.edu>
<http://www.j-bradford-delong.net/>


(Part of a joint project on "globalization and convergence" with Steve Dowrick of Australian National University <steve.dowrick@anu.edu.au>.) Here is our paper draft.


For the past several weeks I have been trying to work on a joint project on which I have not been pulling my weight (to put it mildly). The assigned topic is "globalization and convergence"--globalization being the set of forces that is bringing the world together in the sense of lowering the costs of international trade, international investment, international migration, and so forth; and convergence being the forces making different economies of the world more alike, in the sense of having access to a common technology, and having similar capital-labor ratios, real wage levels, productivity levels, and standards of living. The big problem is that the past century and a half certainly sees increased globalization, but it does not see convergence. How are we to understand this--especially given that Dowrick and Nguyen's (1989) demonstration of OECD-wide convergence showed that convergence could work powerfully if circumstances and institutions were favorable?

I confess that I do not know the answers, which has made this hard to think about. So the best I can do at the moment is to try to sketch out what the empirical patterns have been: overall divergence, coupled with convergence within a limited club of economies that changes membership somewhat idiosyncratically over the past two centuries.

Some thirty years ago geo-politicians and commentators spoke constantly of the countries of the globe as divided into three “worlds”: First, Second, and Third. To be of the “Third World” was to try to play off the United States against the Soviet Union (and hopefully receive large amounts of aid from both). To be of the “Third World” was to stress the differences between one’s own polity and economy and that of the industrial powers of the North Atlantic. To be of the “Third World” was to be—relatively—poor.

Now the Communist “Second World” is gone. But the term “Third World” is still useful. It underscores the differences—the sharp economic divergence in living standards and productivity levels in the world today. To use the more common “developed” and “developing” nomenclature for groups of countries is to suggest that differences are narrowing, that countries are "converging". But they are not.

Those economies that were relatively rich at the start of the twentieth century have by and large seen their material wealth and prosperity explode. Those nations and economies that were relatively poor have grown richer too, but for the most part much more slowly. And the relative gulf between rich and poor economis has grown steadily.

That the pattern of economic growth over the twentieth century is one of striking divergence is surprising to economists, for economists expect convergence. World trade, migration, and flows of capital should all work to take resources and consumption goods from where they are cheap to where they are dear. As they travel with increasing speed and increasing volume as transportation and communication costs fall, these commodity and factor-of-production flows should erode the differences in productivity and living standards between continents and between national economies.

Moreover, most of the edge in standards of living and productivity levels held by the industrial core is no one’s private property, but instead the common intellectual and scientific heritage of humankind. Here every poor economy has an excellent opportunity to catch up with the rich by adopting and adapting from this open storehouse of modern machine technology. Yet economists’ expectations have, throughout the past century, been disappointed whether the expectations were those of John Stuart Mill expecting the spread of democracy, literacy, and markets to develop the world, or Karl Marx expecting the British millowners' building of a network of railroads across India to backfire and have long-run consequences the millowners had never envisioned.

We can view this particular glass either as half empty or as half full. Half empty: we live today in the most unequal, in terms of the divergence in the relative lifetime income prospects of children born into different economies, world ever. Half full: most of the world has already made the transition to sustained economic growth; most people live in economies that, while far poorer than the leading-edge post-industrial nations of the world’s economic core, have successfully climbed onto the escalator of economic growth and are clearly richer than they were fifty or a hundred years ago.

Why have economists been disappointed in their expectation that economic forces--international trade, international migration, international investment, and technology transfer--will gradually smooth out the enormous gaps in productivity levels, real incomes, and living standards around the world? William Baumol (1989) proposed that we begin thinking about this problem by examining the membership over time of the "convergence club"--that set of economies where the forces of technology transfer, increased international trade and investment, and the spread of education were powerful enough to drive productivity levels to--or at least toward--those of the industrial core. Examine how it is that economies enter and fall out of this "convergence club," Baumol thought, should reveal clues to what are the particular economic, political, and institutional blockages that keep convergence the exception in the world today, and not the rule. Dowrick and Nguyen (1989) were the first to powerfully argue that the OECD countries--a set of countries that by and large shared a common social-democratic political setup and a common mixed-economy market-oriented economic setup--showed that convergence could work powerfully if circumstances and institutions were favorable.

This note takes a look at the membership of the convergence during four eras over the past two century: 1820-1870, 1870-1913, 1913-1950, and 1950-2000.

When macroeconomists use the word "convergence," they think of a reduction in the variance of the distribution of output per worker levels (or total factor productivity levels, or real wage levels) across countries, or possibly of an erosion over time of initial edges or deficits in relative productivity vis-a-vis other national economies. We mean something different: we mean by "convergence" the assimilation of countries outside of northwestern Europe of the institutions, technologies, and productivity levels currently in use in northwestern Europe and in the rest of the developed industrial core of the world economy. What you are converging to is thus a moving target. But it is as much a structural and organizational target as one indicated by levels of GDP per worker. The World Bank reports that Saudi Arabia and the Persian Gulf Emirates certainly have levels of GDP per worker and standards of living equivalent to those of western Europe. Yet we would not want to claim that they have "converged" to the industrial core. So our definition of which economies are in the convergence club over a time period is not merely "did GDP per capita as a proportion of the North Atlantic level rise over the time period in question?" We require both relative income gains and a measure of industrial development as well.

1820-1870

By 1820 the British industrial revolution was in full swing. The steam engine was nearly a century old. The automated textile mill was no longer a novelty. The long-distance railroad was on the horizon. As the pace of structural change and industrial development accelerated in Britain, its technologies began to diffuse elsewhere, to the continent of Europe and overseas to North America.

As Sidney Pollard (1981) put it (pp. 45-46), the process of diffusion:

... found no insuperable obstacles in [spreading to continental Europe].... The regions of Europe differed, however, very greatly in their preparedness.... There was... an 'inner' Europe... closest ... to the social and economic structure... in Britain. Surrounding that core... other areas... less prepared.... Moreover, this conquest did not proced indefinitely outward.... [T]here came a line where the process stopped, sometimes for generations, and, in some cases, until today. Beyond it... only scattered outposts, too weak to affect much the surrounding country...

And as time passed, the process of diffusion gathered force and the size of the "convergence club"--the region to which structural change and industrial development were diffusing fast enough to reduce the relative gap vis-a-vis the core of the world economy--grew.

In the beginning the convergence club was very small. Between 1820 and 1870 it is limited to Britain itself, Belgium, and the northeastern United States. Industrialization had begun to spread elsewhere, to Canada, to the rest of the United States, to the Netherlands, to Germany, to Switzerland, to what is now Austria, to what is now the Czech Republic, and to France. However, all of these economies found themselves further from Britain in industrial structure than they had been back in 1820.

Note that here the focus on industrial structure rather than economy-wide productivity or labor-productivity makes the biggest difference. The labor-scarce U.S. west and Canada certainly have higher real wages than Britain by the end of this period, as do labor-scarce Australia and New Zealand. The Netherlands was in all probability more prosperous in overall terms than Britain in 1820, and even in 1870 the productivity and living standard gap was relatively small. (Indeed, the most parsimonious hypothesis explaining the slow industrialization of the Netherlands in the mid-nineteenth century is that Dutch workers had more productive and profitable things to do than work in the dark satanic mills and forges of the early industrial revolution; you can get coal to Amsterdam almost as cheaply as to Brussels, but real wages were much lower in the second than in the first, hence that is where the mills were located.) But on an industrial-structure and an industrial-technology definition of convergence, the primary product-producing economies, even the richest ones like Canada, do not belong in the convergence club before 1870. They are rich primary sector-based economies. They are not industrializing economies.

<http://www.j-bradford-delong.net/Econ_Articles/Dowrick/convergence_club/conv1820-1870.gif>

Figure 1: The World's "Convergence Club" in 1850

Dark purple--economies that are members of the "convergence club"

1870-1914

Between 1870 to 1914 the "convergence club" expands considerably. What Arthur Lewis called the countries of temperate European settlement--Canada, the western United States, Australia, and New Zealand, plus Argentina, Chile, Uruguay, and perhaps South Africa--clearly belong to the convergence club. They are rich, and are experiencing (for the most part) rapid income growth. But they are also making use of industrial technology, building up their materials processing and factor sectors, and becoming industrial economies. Australia started the period as the sheep-raising equivalent of OPEC of the late-nineteenth century, but by the beginning of World War I it was clearly well on the way to being a successfully industrializing economy.

The successful spread of the convergence club to include the economies of temperate European settlement is an achievement of the first, 1870-1914, era of globalization. The coming of the steamship and the telegraph made the transoceanic shipment of staple commodities economically feasible for the first time in human history. However, ocean transport was not so cheap as to make it economically efficient to do all materials and food processing in the industrial core of northwest Europe and the northeast United States. Buenos Aires, Melbourne, Santiago, Toronto, and San Francisco became manufacturing as well as trade and distribution centers. And the ease of transport and communication brought about by this first late nineteenth-century global economy made the technology transfer to enable this "rich peripheral" industrialization feasible.

In this period also the industrial revolution, and thus the convergence club, spread to include nearly all the countries of 'inner' Europe: Belgium, the Netherlands, France, Germany, Switzerland, Spain (but probably not yet Portugal), Italy (even if surely not its south), Austria, what is now Hungary, what is now the Czech Republic, Denmark, Norway, Sweden, Finland, and Ireland. Beyond that line, however, the convergence club did not extend. In spite of enclaves of industrialization, with one exception the relative gap in per capita productivity and industrial structure between the industrial core and economies like Russia, Turkey, Egypt, and the rest was wider in 1914 than it had been in 1870.

That one exception was Japan.

The failure of the tropical primary product-producing regions to join the convergence club in the 1870-1914 period marks the limiteed scale of the first, 1870-1914, era of globalization. International trade, international investment, international migration, and international conquest profoundly affected economic, social, and political structures throughout the world. The British Empire brought the rubber plant to Malaysia, and British investors financed the movement of indentured workers south from China to Malaysia to work the plantations to produce the rubber to satisfy demand back in the world economy's core. The British Empire brought the tea plant from China to Ceylon, and British investors financed the movemnt of Tamils from India across the strait to work the plantations to produce the tea to satisfy demand from the British actual and would-be middle classes. But these did not trigger any rapid growth in real wages, or any acceleration in productivity growth or industrialization, or any convergence to the world's economic core. (W. Arthur Lewis (????) argued that it was the particular position of China and India in the Malthusian cycle at the end of the nineteenth century that gave rise to this peculiar wage increase-less, structural change-less form of development and growth, that whatever increases in demand for labor in the tropical periphery were produced by the first era of globalization were overwhelmed by the elastic supply of potential migrant labor from China and India. But an equally valid way to look at it is not that migrant labor supply from China and India was remarkably large, but that the amount of increased trade between tropical periphery and industrial core was relatively small.) The convergence club remained of limited size, not touching continental Asia at all, and barely touching Africa and Latin America.

<http://www.j-bradford-delong.net/Econ_Articles/Dowrick/convergence_club/conv1870-1914.gif>

Figure 2: The World's "Convergence Club" in 1900

Dark purple--economies that are members of the "convergence club"
Light purple--economies that might be members of the "convergence club"

1914-1950

The enormous physical destruction wrought by two world wars coupled with the enormous economic destruction of the Great Depression make it difficult to discern trends between 1914 and 1950. By 1950 the gap in productivity and living standards between Japan and the United States was larger than it had been in 1914. But was Japan further behind in technology and industrial structure? Perhaps but perhaps not: it depends whether you take the as your benchmark the industrial structure of still war-ravaged Japan in 1950, or the level and quality of the technologies being installed in the rebuilding Japan, which were much closer to world best-practice in 1950 than in 1914. We argue for the second definition--we want to compare relative technology, industrial structure, and productivity gaps in 1914 to what they would have been in 1950 had postwar reconstruction been completed. Thus, from our perspective, Japan and its inner empire of Korea and Taiwan definitely belong in the convergence club over the extended "interwar" period from 1914 to 1950.

During this interwar period the southern United States joins the convergence club. Its long economic decline relative to the industrial core comes to an end in this period (see Wright (????)). The Soviet Union joins as well. Stalinist industrialization was a disaster for human life, social welfare, and economic efficiency. But it was a powerful form of industrialization. Elsewhere in Europe, however, there was little expansion in the size of the convergence club during this period.

But the convergence club did expand elsewhere. In Latin America, Venezuela, Peru, and Brazil joined. In Africa, Ghana, the Ivory Coast, Kenya, Tanzania, and Nigeria appear to make progress. Per capita income grows at least as rapidly as in the industrial core, and there are signs of if not widespread industrialization, at least widespread integration of plantation and smallholder agriculture into the world economy. Whether this is sufficient structural change to qualify for full-fledged membership in the convergence club is debatable. However, what is not debatable is that French North Africa--Morocco, Algeria, and Tunisia--began in this period to close the relative gap between themselves and western Europe.

An optimist--a John Stuart Mill, say, looking for knowledge, education, trade, and markets to bring the whole world together in a march to a liberal utopia--might have looked at the world in 1950 and been relatively optimistic. Naziism had been defeated. Communism was a bloody and authoritarian form of economic growth, but it might well become less bloody and less authoritarian over time. And elsewhere the convergence club was clearly growing, even if it was growing less rapidly than one would wish.

<http://www.j-bradford-delong.net/Econ_Articles/Dowrick/convergence_club/conv1914-1950.gif>

Figure 3: The World's "Convergence Club" in the Interwar Period

Dark purple--economies that are members of the "convergence club"
Light purple--economies that might be members of the "convergence club"

1950-2000

But the next period, the period between 1950 and 2000 that we have just lived through, brought surprises. The convergence club both expanded and contracted massively.

For the first time ever, nations that had been in the convergence club fell out of it. In Latin America, countries like Venezuela, Peru, Argentina, Chile, and Uruguay exhibited stunning relative economic declines over the last half century. Argentinian relative income levels had declined during 1913 to 1950, as the value of primary products fell, but its industrial structure had converged toward industrial core norms. But between 1950 and 2000 the sectoral distribution of the labor force froze, and Argentinians lost a third of their relative income vis-a-vis the industrial core.

Coastal west Africa fell out of the convergence club (if it had ever belonged in the first place). Coastal east Africa fell out as well (if it had ever belonged). South Africa did not maintain modern economic growth fast enough to close the gap with the industrial core over the second half of the twentieth century, and educational and industrial structure gaps vis-a-vis western Europe grew substantially. PPP-concept GDP per capita in South Africa was perhaps a quarter of that in the industrial core in 1950, and is less than a sixth of that in the industrial core today. (Botswana, however, has been one of the fastest-growing economies in the world.) And the countries of French North Africa fell out of the convergence club as well: Morocco, Tunisia, and Algeria are today further behind France in relaive material productivity and industrial structure than they were in 1950. The former Soviet Union fall out of the convergence club as well. First came the stagnation that began in the mid-1970s as the ability of the centrally-planned system to deliver even its own kind of growth eroded. Then came the collapse of economic activity in the 1990s that followed the end of communism.

This shrinkage of the convergence club during what was an era of expanded international trade and massive moves toward an open world economy is remarkable, and very much counter to economists' perhaps naive expectations. In each case the driving factors may have been political. Rene Dumont (196?) warned at the very beginning of African decolonization that the post-colonial governments were following policies that destructively taxed agriculture and enriched relatively parasitic urban elites. The work of Robert Bates (198?) two decades later suggested that little had changed. Diaz-Alejandro (1970) and DeLong and Eichengreen (1994) argued that the failure of the southern cone of South America in economic development after World War II was largely a political failure as well. And the failure of the Soviet Union to live up to its potential both before and after its disintegration is well known. If correct, this would suggest that all the potential for international economic contact and technology transfer cannot survive bad economic policies. It would, however, beg the question of why such bad economic policies were so likely to be adopted in the half century after World War II.

But as these economies fell out of the convergence club, other economies joined. The East Asian miracle took hold: Japan, South Korea. Taiwan, Hong Kong, Singapore, Thailand, Malaysia, after 1965 Indonesia, and after 1978 China clearly belong to the convergence club. Only the unreformed socialist governments of Burma, Cambodia, Laos, and Vietnam keep them from joining the rest of East and Southeast Asia. (The Philippines and Papua New Guinea, however, go their own way as well.) In the Balkans, Yugoslavia, Romania, and Bulgaria join he convergence club: once again centrally-planned economies succeed in growth at a particular stage of early industrialization, albeit at a large human cost. In the eastern Mediterranean Greece, Turkey, Israel, and Egypt are now in the convergence club. In Latin America Colombia and Mexico join. And after 1980 India begins not only to grow economically but to narrow the gap in aggregate productivity and industrial structure.

In the first, 1870-1914, era of globalization its implications for the size of the convergence club were clear. Globalization forces were sufficient to pull the temperate economies of European settlement into the convergence club, but insufficient to pull any other regions into the club even though they had powerful effects on economic structure. In the second, 1950-2000 era of globalization its implications for the size of the convergence club are less clear. Why has it been such a friend to East Asia but not to Latin America? Why has the eastern Mediterranean done so well and the southwestern Mediterranean so badly? What explains the economic collapse of Africa relative to the high hopes of the decolonization era and to the 1914-1950 interwar period?

<http://www.j-bradford-delong.net/Econ_Articles/Dowrick/convergence_club/conv1950-2000.gif>

Figure 4: The World's "Convergence Club" Today

Dark purple--economies that are members of the "convergence club"
Light purple--economies that might be members of the "convergence club"
Light green--economies that used to belong to the convergence club, but that have fallen out of membership
Dark green--economies that might have once belonged to the convergence club, but that have fallen out of membership

Big questions all, to which we do not have very good answers.


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