Comments on: Computers and convergence

By: John Quiggin

John Quiggin — Mon, 17 May 2004 23:20:38 +0000

I suspect we’re starting to run into sample size problems. The data set contains only about 10 poor countries (below 80 per cent of US GDP/hour worked in 1979), and of those, Finland and Ireland have clearly caught up to the main group since then. Most of the others showed fairly strong catchup in the 1980s, then slowed down. But we’re really only talking about one business cycle in maybe eight countries. Looking at the experience of the other European countries, and history in general, I’m willing to bet on further catchup in the future for these countries. But (despite the fact that my post referred to Spain) my main point is about the completion of convergence among the leading dozen or so countries in Western Europe and North America.

By: Giles

Giles — Mon, 17 May 2004 21:51:02 +0000

But why has it ended? As I understand it you are arguing that this is because convergence in whatever the accumulable factor has been completed. But under most normal models this would imply that the countries that were poor initially would end convergence latest. In fact from the raw data it looks to me like the poor countries finished converging before the richer European countries and stopped at a lower level. And adding in age/cohort and labor quality effects may well strengthen rather than weaken this conclusion. I am therefore suggesting that if you argue that it is complete it must be a) conditional and/or b) include to some “exogenous” event (as opposed to absolute convergence in some “endogenous” factor).

By: John Quiggin

John Quiggin — Mon, 17 May 2004 21:11:56 +0000

giles, I’m not sure if we’re disagreeing. You say convergence has ended, I say it’s complete. I’m looking at the GDP/hour series from the dataset you mention, and it seems consistent with the claim I’ve made. That is, taking the US as the base, the leading European countries have values around 1, some higher, some lower. As you observe, Spain has done poorly on the same measure in recent years, but this may be due to things like the age-structure of the workforce.

By: Giles

Giles — Mon, 17 May 2004 16:38:52 +0000

John I looked at this with data from http://www.ggdc.net/index-news.html Using all the productivity measures, European convergence stopped a while ago (although more recently than in the demo data I posted above). In particular the convergence of the poorest countries generally stopped first and, in some cases, preceeded the rise in high unemployment (although I haven’t checked this properly). Most importantly you would then expect that the countries with the highest unemployment would have had the strongest convergence. But this is clearly refuted by the data on countries like Spain, Portugal and Greece – all of which had high unemployment and stalled productivity convergence. Ireland by contrast had low unemployment and high convergence. This sugguests that the quality effect is not the most significant factor. More important I think is the age cohort effect – old workers are more productive than young workers. Thus countries like France, with a relatively old workforce tend to be more productive than say Spain and the US where young workers make up a larger proportion of the labor supply.

By: Giles

Giles — Mon, 17 May 2004 16:22:51 +0000

Scott – the US is still a relatively closed economy so depreciations in the dollar do not have as large or quick an effect on as they would on more open economies such as the UK and the Netherlands. So unless the dollar stays depreciated for a long time do not expect there to be much effect.

By: Scott Martens

Scott Martens — Mon, 17 May 2004 11:34:23 +0000

I’m curious about the effects of foreign exchange on these figures as well – the ones from Wendell Cox at Demographia. Since a high-valued dollar lowers the cost of imports for Americans, it seems to me that exchange rates might have a larger effect on PPP ratios than it would initally appear. Has the now much lower dollar exchange rate raised import prices for Americans? The dollar has fallen sharly over the last couple of years, enough so that there might have been quite a lot of convergence with Europe and Canada recently.

By: John Quiggin

John Quiggin — Mon, 17 May 2004 06:18:51 +0000

Giles, it’s certainly necessary to take account of the average quality effect arising from different rates of participation, and I plan to take that up when I do my next post on this topic. But I don’t think it’s sufficient to overturn the general conclusion that output per hour has converged.

By: Giles

Giles — Mon, 17 May 2004 05:43:07 +0000

And the obvious point is that if you have a lower participation rate, then you invariably have a higher productivity since only the most productive workers are employed. If they us only employed Bill Gates its productivity would be about 5 billion per worker. However, the problem with Frances higher productivity is its persistently higher unemployment rate – so any comparison needs to introduce some consideration of social/work equality. I high productivity worth it if the cost is a large alienated section of the population lying unemployed?

By: Giles

Giles — Mon, 17 May 2004 05:22:53 +0000

ok manybe most was too strong but 6 out of thirteen, the UK, Holland, Sweeden, belgium Canada and France all reached their peak more than 20 years ago. I think any strict convergence theory would want a more than 50% success rate.

By: Brian Wilder

Brian Wilder — Mon, 17 May 2004 04:15:53 +0000

The comments on how many hours Americans work are interesting; another factor in American prosperity is China: China, by maintaining its currency at about one-third its purchasing power parity rate, has flooded the U.S. with cheap manufactured goods. Clothing, toys, all sorts of things, have declined significantly in price over the last ten years. Now Chinese economic growth is pushing on commodity prices, as China imports vast quantities of oil, wheat, etc. For the moment, the huge stockpiles of American dollars are sufficient to pay for this trade, but at some point the Chinese may want to “raise” prices for the Americans and Europeans and “reduce” prices for their commodity imports, by depressing the value of the dollar. Letting the yuan rise and the dollar fall would raise domestic Chinese living standards substantially. Although it might undermine the export-led investment boom, at some point, a domestic investment boom will take over. This may happen slowly or suddenly. If suddenly, the U.S. will take a big dent, as the world realizes that this is a Chinese century. China, together with its East Asian periphery stretching from Siberia to Burma, has scale and resources far beyond that available to the U.S. China won’t be within spitting distance of the U.S. or Europe, in terms of GDP per capita, when it moves up from 2nd place to become the largest economy in the world, but the impact on U.S. and European incomes of pressure on commodity prices, global warming, etc. could be substantial.

By: Jason

Jason — Sun, 16 May 2004 23:30:01 +0000

I wasn’t attempting to refute John’s post, my comment was more directed at Giles’ link and followup.

By: andrew

andrew — Sun, 16 May 2004 23:12:36 +0000

Jason’s point above has been made elsewhere (the last Economist issue I believe). France, for instance, has 5% higher output/work hour, productivity, that the US when you remember that they work about 5-8 hours less a week. Which is John’s point – 32 hour weeks and 2 month vacations are in trade for more income.

By: Jason

Jason — Sun, 16 May 2004 22:24:10 +0000

Ummm, are you looking at the same graph as me? I followed the link, and it looks to me like most countries highlighted bar (when they reached the highest % of GDP per capita) was quite recent, in the last 5 years of the survey. One thing I’ve noticed from my stay in America is that people here work MUCH longer hours than people elsewhere (and this magnifies even more so if you take into account the longer commutes here). When I see Norway at 85.7% of US GDP, and I know that the hours spent on work there (for the cross section of society I know, engineers/professors, admittedly a biased sample) are about 60% of those in the US, I’d say it’s actually the US that needs to catch up to Norway.

By: Giles

Giles — Sun, 16 May 2004 20:35:58 +0000

http://www.demographia.com/db-ppp60+.htm alos provides an interesting counter refutation most countires closest run in with the US were 20 or 30 years ago.

By: Giles

Giles — Sun, 16 May 2004 20:30:13 +0000

“I’m leading up to an argument that, in an important sense, the process of convergence among developed countries is complete, or close to complete. ” Which leads to the question of whether a process of divergence may now begin. The interesting case in point would be countries, like south america, that have generally had high investment in education and a couple have had income per capita roughly equal to the US’s (Argtentina and Venuzuala)at some time in the last century and yet ended up diverging. The second problem is that some countries like Korea have higher internet connection rates than the US and incomes that differ by a significant amount. The third is the sotchasitc argement – maybe growth is a random process and convergence a rationalisation of a convergence to the mean process. In which case, the question is, is spain going to converge to a nice mean like the US or a nasty mean like morocco?