Macroeconomic convergence, financial development and economic growth Dissertation

Macroeconomic convergence, financial development and economic growth - Dissertation Example The potential of the developing countries to grow faster is more than that of the developed countries as the developing countries have diminishing returns to factors. Convergence can be of two types, the process of poorer economies catching up with the richer economies is referred as alpha convergence whereas beta convergence is the process in which a country converges to its own steady state rate of growth (Alfaro et al.2005). As pointed out by professor Jeffrey Sachs ,many countries due to its closed economic policies cannot converge, this could however be overcome if the free trade policies are included which will lead to openness of the economy. Between the years 1970-1989, 111 countries have been studied on the basis of their rate of convergence. It was found by Andrew Warner and Sachs that the countries following closed economic policies had a growth rate of 2% whereas the countries following open economic policies have a growth rate of 4.5 % (Alfaro et al.2005) There are many countries that have converged with the developed countries such as the Asian tigers, HongKong, Singapore, Taiwan, and South Korea. As sited by many economists the endogenous rather than the exogenous factors triggers the growth of an economy (Alfaro et al.2005). ... tal are important as it significantly influences the savings and rate of investment (Halmai & Vasary.2009.p.3).Technological spread, change in growth rate and total productivity of the factors are the major players in enhancing the rate of convergence. Macroeconomic convergence and economic growth Integration of the national and regional economies with the global economy is one of the salient features over the history. Two models of economic integration which relates to income convergence are firstly growth models and secondly trade models (Kim.1997.p.4). According to the neoclassical Solow model of growth, the regional level of income varies due to the different capital labour ratios. Whereas the Hecksher Ohlin trade model says that the income varies across the regions due to the difference in the factor prices and factor endowments (Kim.1997.p.5). Income convergence occurs due to trades in goods and economic integration via equalisation in prices. Factor endowments vary across the regions and therefore various regions specialise in different industries. Thus if the regional variation in the factor endowments increases then there arises divergence in the income levels as the structure of industries diversifies. Conversely as there exits similarity in the factor endowments then the income level also converges in the due course. Economic integration also gives rise to income divergence (Kim.1997.p.5) The growth models put forward by Romer and Lucas, which are based on increasing returns on physical capital, states the chances of such income divergence. Even the trade models by Krugman states that income divergence may arise due to the differences in the industrial structures. If the industries equipped with high technology and high wages are subjected to external