Giuseppe Nicoletti and Joaquim Oliveira Martins

1
Convergence paths role of structural and policy
factors
Workshop on Global convergence scenarios
structural and policy issues Paris,
16 January 2006

• Giuseppe Nicoletti and Joaquim Oliveira Martins
• OECD Economics Department

2
Which broad convergence scenarios can be
envisaged?

• All countries converge to the same GDP per capita
  level
• Perfect mobility of factors
• Same endowments
• No segmentation of markets
• Technology diffusion
• All countries converge at same GDP per capita
  growth, but different levels
• Imperfect mobility of factors (notably labour)
• Different endowments (notably human capital)
• Market segmentation (notably services)
• Limited technology diffusion (different
  incentives)
• Possibility of either convergent or divergent
  paths
• Endogenous growth
• Agglomeration effects

Not very realistic
Tractable ?
Perhaps the more realistic, but difficult to
project
3
Conditional convergence, clubs and accelerations
Convergence within OECD (logs GDP per
capita) US and BRICs
Leader
Source Maddison (2003), data 1990 US PPPs
4
Ingredients of long-term projections
5
Labour utilisation

• Demographics is key to project growth (using
  cohort approach)
• Drag on growth of -0.3 to -0.5/yr in EU, -0.8 in
  Japan over 2005-50 period in CHINA -0.3 to
  -0.5/yr after 2025
• Increasing trends on labour participation in all
  countries, but sometime reduced hours
• Big gaps in participation of young workers, old
  workers and women mostly related to institutional
  settings in OECD and with cultural/demographic
  factors in the South
• What feedback mechanism of growth on demographics?

6
Labour productivity

• Capital deepening
• Endogeneity of saving rates (e.g. life cycle)
• Financial intermediation and development what
  link?
• Need a coherent view of capital flows
  (importers/exporters of capital differences in
  time preferences)
• What feedback mechanisms?
• TFP growth
• Pure technical progress ?
• Capital quality May increase both in the North
  and the South (ICT adoption) we now understand
  better how catch-up is affected by technology
  diffusion
• Labour quality Contribution to growth is likely
  to decline in the North and to increase in the
  developing world

7
From growth rates to levels the role of policies
Leader
Convergence club
Log GDP per capita
Follower close PF
Sustained catch-up
Followers far PF
Growth acceleration
time
Policies III
Policies I
Policies II
8
What channels for policy?

• Macroeconomic framework as pre-condition
  (liberalisation, stabilisation, financial sector
  reform)
• Policies affecting labour participation
• Participation Tax wedges Bargaining, EPL
• Links with social policies (pensions, health,
  education)
• Policies affecting labour productivity
• Human capital formation Enhancing competition
  Incentives to adopt new technologies
• Policy design is key
• Coherence/Complementarity role of institutions
• Adapt policies to distance to frontier (type
  I-II-III)

9
But the debate is open

• What is endogenous? Growth or policies?
• Growth accelerations are not always associated
  with major reforms How different is to sustain
  and ignite growth?
• Baseline (no-policy) vs. policy scenarios?
• Baseline only limited catch up in labour
  productivity levels should be factored in on a
  priori grounds
• Policy scenarios convergence in levels could be
  envisaged, but policies may be endogenous and
  their design is critical to reap the benefits for
  growth
• Thank you!