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Archive for the ‘Convergence’ Category

Economists of all types agree with “convergence theory,” which is the notion that poor countries should grow faster than rich countries.

Though they are usually wise enough to also say “ceteris parisbus,” which means the theory applies if other variables are similar (the translation from Latin is “other things equal”).

I’m very interested in this theory because we can learn a lot when we look at nations that don’t have “equal” policies.

And the biggest lesson is that you have divergence rather than convergence if one nation follows good policies and the other one embraces statism.

Take a look, for instance, at what’s happened to per-capita economic output (GDP) since 1950 in Taiwan and Cuba.

The obvious takeaway from these numbers from the Maddison database is that Taiwan has enjoyed spectacular growth while Cuba has suffered decades of stagnation.

If this was a boxing match between capitalism and socialism, the refs would have stopped the fight several decades ago.

By the way, some folks on the left claim that Cuba’s economic misery is a result of the U.S. trade embargo.

In a column for the Foundation for Economic Education, Emmanuel Rincón explains the real reason why these two jurisdictions are so wildly divergent.

…the Communist Party of Cuba has blamed the United States for Cuba’s misery and poverty, alluding to the “blockade” that the U.S. maintains against Cuba. However, …the rest of the world can trade freely with the island. …Taiwan’s economy is one of the most important in the world, with a poverty rate of 0.7%, as opposed to Cuba, which has one of the most depressed economies on the planet and 90% of its population living in poverty. What is the difference between the two islands? The economic and political model they applied in their nations. …Taiwan has the sixth freest economy according to the Index of Economic Freedom… While Taiwan took off with a capitalist model, Cuba remained anchored in the old revolutionary dogmas of Fidel Castro… With popular slogans such as redistribution of wealth, supposed aid to the poor, and socialism, Fidel Castro began to expropriate land and private companies to be managed by the state…today the GDP of the Caribbean island is five times less than that of Taiwan, and 90% of its population lives in poverty, while in the Asian island only 0.7% of its population is poor. It is definitely not the fault of the “blockade”, but of socialism.

To be sure, Cuba would be slightly less poor if there was unfettered trade with the United States, so maybe Taiwan would only be four and one-half times richer rather than five times richer in the absence of an embargo.

The moral of the story is that there’s no substitute for free markets and small government.

P.S. Though I appreciate the fact that our friends on the left are willing to extol the virtues of free trade, at least in this rare instance.

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Economists widely agree with the theory of “convergence,” which is the (mostly true) idea that poor nations should grow faster than rich nations.

This means that we can learn important lessons by looking at examples of “divergence,” and I provide 20 examples in this presentation.

The above video is an excerpt from a presentation I made earlier this week to a seminar organized by the New Economic School in the country of Georgia.

While it seems like I was making the same point, over and over again (and I was), I wanted the students to understand that the real-world evidence clearly shows that good policy is critical if less-developed nations want convergence.

And I also wanted them to realize that there are many examples of free market-oriented nations growing much faster than anti-market countries.

But, by contrast, there are not examples that go the other way.

I’ve challenged my leftist friends to cite one case study of a poor nation that became a rich nation with big government.

Or to cite a single example of an anti-market nation that has grown faster than a market-oriented country.

Especially when using decades of data, which means there’s no ability to cherry-pick the data and create a misleading impression.

Needless to say, I’m still waiting for them to give me an answer.

Here are the background stories from the examples of divergence in my presentation.

My last example showed important examples of convergence.

  • Example #20: United States vs. Hong Kong, Singapore, and Switzerland

And here are a few other examples of divergence that I didn’t include in my presentation.

Shifting back to convergence, my column on breaking out of the “middle income trap” also has very interesting data on how Hong Kong, Singapore, Ireland, and Taiwan have closed the gap with (or even exceeded) the United States.

I also recommend this column which looks at a wide range of nations that are converging with, diverging from, or staying flat compared with the United States, as well as this column showing how Ireland has caught up and surpassed other European nations.

The moral of the story is that there’s a very simple recipe showing how poor nations can become rich nations.

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In this clip from a recent interview with Gunther Fehlinger, I explore the connection between two very important important economic concepts: Convergence and Wagner’s Law.

Before launching into further discussion, let’s nail down two very important definitions.

  • Convergence is the notion that poor countries should grow faster than rich countries and eventually attain a similar level of prosperity.
  • Wagner’s Law is the seemingly paradoxical observation that richer nations tend to have larger fiscal burdens than poorer nations.

These two concepts deserve elaboration because many people either fail to recognize the implications or they draw the wrong conclusions.

For instance, convergence is a sensible theory, but the rate of convergence (or divergence!) is very dependent on the degree to which nations have good policy (or bad policy).

Moreover, Wagner’s Law shows that politicians figure out how to extract more money and fund bigger government once nations become rich, but some people reverse the causality and assert that big government somehow caused nations to become rich.

The key takeaway from these observations, as I explained in the interview, is that poor nations that want convergence need to copy the policies that rich nations had when they became rich (in the interview at about 0:56, I mistakenly said “were rich” rather than “became rich”).

And I’ve written many times to show that the rich nations of the western world made the leap to industrial prosperity in the 1800s and early 1900s – at a time when they had no welfare states and very low fiscal burdens (indeed most of them didn’t have any income taxes during that period).

Which gives me another excuse to re-issue my never-answered challenge: Please show me an example, from any point in world history, of a country became rich after adopting big government.

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