Macroeconomic Convergence, Development And Growth Essay

Macroeconomic Convergence, Development And Growth - Essay Example The convergence process is dependent on a large number of factors such as the population growth, speed of capital formation and the presence of efficient economic policies as well as appropriate financial institutions. Along with this the accumulation of human and physical capital are important as it significantly influences the savings and rate of investment (Halmai & Vasary, 2009, p.3). Technological spread, change in growth rate and total productivity of the factors are the major players in enhancing the rate of convergence (Halmai & Vasary, 2009, p.3). As per professor Jeffrey Sachs, countries following closed economic polies have not been successful in converging. The countries following closed economic policies had a growth rate of 2% whereas the countries following open economic policies have a growth rate of 4.5 %. As sited by many economists, endogenous rather than the exogenous factors triggers the growth of an economy (Alfaro et al, 2005). The Asian tigers such as Taiwan, Hong Kong, Singapore and South Korea have been successful in converging with the developed countries. An economy is said to have achieved economic growth, if it is able to produce more goods and services than what it used to produce initially. Economic growth is often related with technological progress. If an economy has achieved growth than the standard of living of its citizens also improves. In US, the economic growth occurred with the introduction of high technology in the country. Financial development also follows from the economic growth. This is due to the fact that if an economy is financially sound then its economy is also developed. Association between Economic Growth and Macroeconomic Convergence Economic growth takes place in a country whenever the resources are utilised more efficiently (Romer, 2007). As per the neoclassical growth theories, a country converges to its steady state rate, if there exists diminishing returns from investing in the physical capitals. Poore r economies have a greater tendency to converge owning to its high marginal productivity. This process of convergence which eventually leads in the equalisation of the per capita incomes amongst the countries is called absolute convergence. If for a country the convergence takes place both in terms of growth rate as well as income levels than the process becomes beta convergence. According to the idea of club convergence, if countries have similar initial conditions then they have a tendency to converge. This concept is regarded as sigma convergence. It is also emphasised that if the countries vary in their initial conditions then they will not converge, this could however be overcome if the economic policies could eliminate the variations. Solow growth model emphasise that such variations in a country’s economic policy cannot lead to long run economic growth (Romer, P, 2007). As the scatter plot alongside shows, the association between average annual growth rate and real GDP per capita need not be associated similarly for all nations, even though they are featured by similar initial characteristics. A country’s economic growth is measured by its level of technological progress. According to the endogenous growth theory, creation of enlarged market in an economy leads to a better utilisation of economies of scale. This on the other hand has a positive impact on a