The catch-up effect, or theory of convergence, explains why less developed economies grow faster than wealthier ones, ultimately narrowing the income gap. This is supported by factors such as diminishing marginal returns and technological replication, but limitations related to capital, social capabilities, institutional factors, and population growth hinder its full realization. Japan's economic journey serves as a tangible illustration of the catch-up effect in action.
The catch-up effect, also known as the theory of convergence, suggests that less developed economies tend to experience faster growth than wealthier ones, ultimately narrowing the income gap. This concept is based on the idea of diminishing marginal returns, technological replication, and the role of social capabilities. It revolves around several key concepts:
Diminishing Marginal Returns
In economics, the law of diminishing marginal returns asserts that as a country invests and accumulates profits, the incremental gain from each subsequent investment diminishes. Essentially, returns on capital investments decrease as the level of investment increases. This principle implies that capital-rich countries experience smaller returns on investments compared to developing nations.
Differential Growth Rates
Empirical data supports the catch-up effect theory. More developed economies tend to exhibit slower but more stable growth rates when contrasted with less developed countries. For instance, in 2019, high-income countries averaged 1.6% GDP growth, whereas middle-income and low-income countries saw growth rates of 3.6% and 4.0%, respectively (according to the World Bank).
Underdeveloped nations can achieve rapid growth by replicating production methods, technologies, and institutions from developed countries—a phenomenon often referred to as a second-mover advantage. Access to advanced technology and knowledge from more developed nations facilitates swift economic expansion in developing markets.
Limitations to the Catch-Up Effect
While the catch-up effect can fuel economic growth in developing countries, several limitations hinder its full realization:
Lack of Capital
A shortage of capital can significantly impede a developing country's ability to catch up. While some nations have effectively managed resources and secured capital to boost economic productivity, this remains an exception rather than the norm on a global scale.
Economist Moses Abramowitz highlighted the importance of "social capabilities" for countries to benefit from the catch-up effect. These capabilities encompass the ability to absorb new technology, attract capital, and participate in global markets. Limited access to technology or prohibitive costs can thwart the catch-up process.
High-quality institutions, particularly those related to international trade, play a crucial role in the catch-up effect. Research by economists Jeffrey Sachs and Andrew Warner revealed that countries with open trade policies experienced faster growth compared to those with protectionist and closed economies.
Another obstacle to the catch-up effect lies in the fact that per capita income depends not only on GDP but also on a country's population growth. Less developed countries often have higher population growth rates, which can dilute the impact of economic growth on individual incomes.
Catch-Up Effect Example
A compelling historical example of the catch-up effect is Japan's economic trajectory:
- Between 1911 and 1940, Japan emerged as the world's fastest-growing economy, expanding its influence in South Korea and Taiwan.
- Following World War II, Japan's economy faced significant challenges but rebounded during the 1950s, importing technology and machinery from the United States.
- From the 1960s to the early 1980s, Japan achieved remarkable growth rates. However, by the late 1970s, as Japan became one of the world's top economies, its growth slowed down.
This pattern of rapid initial growth followed by a more moderate pace is not unique to Japan but is a recurring theme in the development of economies, often referred to as the "catch-up effect."
The catch-up effect, or theory of convergence, underscores the tendency for less developed economies to grow more rapidly than their wealthier counterparts, ultimately narrowing income disparities. While this concept is supported by factors such as diminishing marginal returns and technological replication, its full realization depends on overcoming limitations related to capital, social capabilities, institutional factors, and population growth. Historical examples, like Japan's economic journey, serve as tangible illustrations of the catch-up effect in action.