Revisiting Convergence: A Research Note

• In Event: 559 - Regular Session. Development

Abstract

A number of recent studies show that income inequality is declining between countries. In this research note, I question the significance of these results by examining the role of initial inequality in producing convergence. Using simulation data, I demonstrate that large cross-national disparities will actually induce convergence. Conversely, when initial conditions approach parity, divergence becomes the more likely long-term outcome. The point of transition occurs at a moderate level of inequality (Gini = .384). I then apply these principles to real income data, creating a set of counterfactuals across 127 countries between 1980 and 2010. In this exercise, I manipulate the initial level of inequality in GDP PC, while holding constant each country’s observed growth rate during the sample period. I find that the growth dynamics of GDP PC will produce either convergence or divergence based simply on the initial distribution of income. Moreover, the point of transition is remarkably similar to that found in the simulation data, whether using population weights (Gini = .365) or not (Gini = .377). I conclude that the recent convergence observed in GDP PC is primarily a function of large income gaps between countries and would not have materialized at more moderate levels of initial inequality.

Author

• Rob Clark, University of Oklahoma