CONVERGENCE?

The second implication of Solow’s theory, and perhaps the most striking, is what economists call convergence. Countries scarce in capital and relatively abundant in labor, like most poor countries, will grow faster because they have not yet reached their balanced growth path.

Solow himself was careful to stop well short of promising this. If a country has a lot of labor and very little capital, which is how many poor countries start out, then only a fraction of the labor force will be employable at a wage sufficient to ensure their subsistence (there may be nothing for the others to do), and as a result the country will not benefit much from its labor abundance. Convergence, if it happens at all, may be very slow.

Notwithstanding Solow’s warnings, this vision of an orderly transition from dire poverty to relative wealth as the countries catch up and then go on to the nirvana of balanced growth, combined with the promise of global convergence in living standards, provided such a comforting narrative for progress under capitalism that it took some thirty years before economists started noticing the model did not fit reality all that well.

To start with, it is not true that poor countries as a rule grow faster than richer ones. The correlation between GDP per capita in 1960 and subsequent growth is very close to zero.²⁵ How does this square with the fact that after the war Western Europe caught up with the United States? Solow had a possible answer. What his model actually says is that countries that are otherwise identical will head toward each other. This could be why Western Europe and the United States, which are very similar in many ways, converged toward each other. On the other hand, in Solow’s world countries that are naturally thriftier than others and invest more of their output will be richer in the long run. Moreover, for a while, before settling down to grow at the natural rate, initially poor countries that invest more will also grow faster as they converge toward this higher level of GDP per capita.

Could the lack of investment be the one reason the developing world differs from Western Europe and the United States? As we will see, the answer seems to be no.