From a theoretical perspective, convergence "refers to the speed at which economies tend to approach their stationary equilibrium, that is, a regime of balanced growth."^[1] In other words, convergence describes a process whereby economies grow very rapidly to a point where they efficiently use their physical and human capital and achieve a point of equilibrium where more modest but sustained growth continues. Strictly speaking, this concept is referred to as conditional convergence, and is used to explain the notion that "an economy in which the per capita production level is lower than its steady-state level will have a growth rate higher than its underlying growth rate".^[2]

However, the existence of regional and national economies that are, at least in part, distinct from each other has necessitated a second aspect of convergence, known as unconditional convergence. This concept suggests that all economies are ultimately moving toward the same stationary equilibrium or steady-state level. As Coulombe puts it, "the convergence hypothesis thus assumes that the economy initially having the lowest per capita production level will experience a faster growth rate in the course of its catching up period."^[3] In other words, Pakistan or Panama will experience faster economic growth than the United States until they have all reached a common point of equilibrium.

On the surface, the evidence seems to support the reality of convergence as an economic phenomenon. Economic growth rates, as measured by change in Gross Domestic Product (GDP), show quite clearly that one can often expect more significant economic growth from poor economies than from rich ones. Landes points out that decolonization in Africa unleashed some astounding growth rates, between 6.0% and 11.0% per year, in places like Rhodesia, Morocco, Gabon and Kenya.^[4] Closer to the present time, Albanian growth rates stood out as the strongest in Europe through the mid-1990s - 9.6% in 1993, 8.3% in 1994, 13.3% in 1995 and 9.1% in 1996.^[5] In 1992, the Chinese economy grew by 12.8%, with even higher growth rates reported in the mid-1990s.^[6] These figures compare very favourably with the United States' average growth over the 1950-1987 period of 3.2% per year.^[7] Even in the industrialized world, the pattern of convergence was reflected in growth rates. Japan and Germany, for example, also grew faster than the United States (7.9% and 4.6% per annum respectively over the 1950-1987 period).^[8]
 

This apparent confirmation of convergence is not limited to measurements of GDP, but has been granted further support through the statistical work of many economists. The hypothesis of unconditional convergence has, according to Coulombe, "been verified empirically in a number of studies for relatively similar economies".^[9] As a result, much economic theory and economic development jargon has sprung up around the term, even to the point of its integration into the socialist ideologies of Karl Marx. Economists refer to the "flying geese" model, which "posits that developing nations follow paths of growth similar to those just ahead of them on the economic ladder."^[10] Or, as Marx put it, "The country that is more developed industrially only shows to the less developed, the image of its own future."^[11] Such concepts have, in turn, engendered the notion of the "catch up model". Because later developing nations, regions and communities may employ the tested methods or best practices of their predecessors, "it pays to be late."^[12] Landes suggests that the explosive economic growth of Germany and Japan are the best examples of this phenomenon, pointing out that "Follower countries were gaining disproportionately by jumping to state-of-the-art technologies."^[13]

Clearly, most economists were arguing, convergence theory was confirmed by real experience. As Barton Biggs of Morgan Stanley Asset Management put it, "In almost any way you care to measure, life is getting better for people in developing nations."^[14] Unfortunately for the convergence model, those in poorer countries and regions might beg to differ.

In 1990, a committee of key economic and political leaders from the developing world called the South Commission released a report entitled The Challenge to the South. In it, they examined in detail the economic track record of "southern" or developing nations, and found little evidence of the convergence model. "During the 1970s," they suggested, "there was a hope that... the North-South gap would narrow. But for most countries of the South, that gap has been widening. The world is becoming, not less, but more disparate in the basic conditions of human life. For many in the South, the hope has faded; the prospects have become gloomier than they were perceived to be only a decade ago."^[15]

Lest the position of the South Commission be thought political posturing, it is important to note that, just as growth figures may be marshalled to support the concept of convergence, they may also be used to undermine the concept. Landes suggests that "the difference in income per head between the richest industrial nation, say Switzerland, and the poorest non-industrial country, Mozambique, is about 400 to 1. Two hundred and fifty years ago, this gap between richest and poorest was perhaps 5 to 1, and the difference between Europe and, say, East or South Asia (modern China or India) was around 1.5 or 2 to 1."^[16]
 

Between 1980 and 1992, Nigeria showed an annual rate of growth of -0.4% despite its oil wealth, Algeria a rate of -0.5% and the Ivory Coast a rate of -4.7%.^[17] Per capita annual GDP growth rates for all southern countries combined from 1980-1987 stood at approximately 1.1%.^[18]

Furthermore, the proponents of convergence theory have been forced to consistently modify external variables to bolster the utility of the convergence model. In 1967, Denison argued that one should exclude short-term aberrations. Abramovitz found in 1986 that convergence could not account for European growth patterns before 1914 or between World Wars I and II. Mankiw, Romer and Weil in 1992 suggested that growth models should "allow" for investment in human capital. Many works, including those of Islam (1995) and Romer (1987) assumed identical technologies for all countries studied. Islam (1995) "allowed" for differences in levels of productivity. Jorgenson and Yip (1998) suggest that the model still holds, providing one corrects for "international differences in productivity, capital quality, labour quality, and hours worked per capita."^[19] Coulombe (1998) has suggested that the model is strongest for "relatively similar economies".^[20]

In other words, poorer economies will grow faster than rich economies - provided one "adjusts" the numbers for unequal human resources, uneven distribution of technology, different levels of productivity, variances in the quality of capital, differences in the number of hours worked, and then makes sure that the economies were similar to begin with! Even then, one must recognize that these figures may not apply during "periods of aberration". Clearly, the convergence model rests on an increasingly shaky economic foundation.

The concept of convergence, however, has additional weaknesses, based in part on traditional economic assumptions and measurement tools. The first of these, though not always articulated, is that economics is unable to account for non-quantifiable variables. For example, no economic tools can explain the impact of culture on economics, but from Weber's "protestant work ethic" to today's discussions of southeast Asian work habits, culture has clearly had a dramatic role in economic growth patterns. Landes suggests that "Such terms as 'values' and 'culture' are not popular with economists, who prefer to deal with quantifiable (more precisely definable) factors."^[21]

An amusing tale recounts a conversation between a Scandinavian economist, and free-market advocate Milton Friedman. "In Scandinavia we have no poverty," suggested the economist. "That's interesting," replied Friedman, "because in America among Scandinavians, we have no poverty, either."^[22] Simplistic, perhaps, but also revealing of an aspect of economics that growth statistics, and therefore convergence, cannot adequately account for.

The second difficulty with the concept of convergence arises from its use of standard economic measurement tools, such as GDP. In many instances, these tools are unable to capture an adequate reflection of the true state of an economy. Environmentalists have pointed out, for example, that the Exxon Valdez oil spill, a negative event, had a positive influence on the GDP of Alaska. In essence, because of the way some economic measurement tools are calculated or constructed, negative costs are transformed into positive impacts. Thus an economy battered in quick succession by an oil spill, a hurricane, an earthquake, massive rioting and deadly floods might show positive growth in GDP as a direct result of those disasters.
 

This issue is particularly problematic when dealing with growth figures from developing nations. Landes points out some of the impacts of urbanization in Bangkok, including air quality problems from an overabundance of motor vehicles. "Today, half the traffic cops in the city are suffering from respiratory illness," he suggests, "and a 1990 study reports that bad air (lead levels three times those in Europe or the United States) costs six points of IQ by age seven."^[23] Although it might be possible to catch the value of the lost productivity of traffic police in some economic models, it is not possible to calculate the negative economic impact of millions of points of cumulative IQ loss. However, the positive impact of the pollution-causing motor vehicles will be counted.

War, too, may hide negative economic impacts under a positive facade. "Being fooled by hidden costs is the source of a lot of economic confusion," suggests P.J. O'Rourke. "War is often spoken of as an economic stimulant. World War II 'pulled America out of the Depression.' Germany and Japan experienced 'economic miracles' after the war. Somebody is not counting the cost of getting killed and wounded. Besides, if destruction were the key to greater economic productivity, every investor on Wall Street would be learning Albanian."^[24]

As a result of these discrepancies, positive growth figures may mask dismal economic performances, and vice versa. By extension, negative economic factors in poorer economies will contribute to a false impression that convergence is taking place.

The most problematic aspect of convergence theory, however, is its reliance on the concept of a steady-state level or point of stationary equilibrium. Essentially, convergence is based upon the concept that all economies are growing at different speeds toward the same fixed goal. This is a notion that falls apart under closer scrutiny.

Equilibrium points have long troubled economists. One of the earliest was described by French economist J.B. Say (1767-1832), who articulated Say's Law, "Supply creates its own demand." At its heart, this argued the reality of a point of equilibrium. Although much favoured in the 19th Century, Say's Law fell into disrepute with the advent of the concept of marginalism.^[25] But the discussion of Say's theoretical point of equilibrium has prompted debate over points of equilibrium in general. Pope, for example, asks, "Do equilibrium points... really exist? Or are they easily dreamt up by those who... are intellectually seduced by the elegance of the concept... ?"^[26]

The fact is that in assuming movement toward a common point of equilibrium, convergence rests on some highly suspect ground. Are the economies of Tanzania and Taiwan really moving in the same direction, toward the same goal? Or are they, in fact, working towards entirely different ends? By assuming that all economies move toward the same point, convergence theories (and to a certain extent, neoclassical economics in general) deny the possibility of fundamental shifts in the paradigms of economic growth patterns, and the notion that the impact of these shifts may not extend to every economy equally. In particular, the neoclassical model cannot account for fundamental technological revolutions (what the literature terms general purpose technologies^[27]). This is especially the case where the benefits of such technological change do not accrue evenly across economies, as in the case of the information technology revolution.

The information technology revolution has fundamentally changed the way in which the economy functions. Peter Drucker, one of the great management theorists of the 20th Century, has suggested, for example, that "Economic theory is still based on the scarcity axiom, which doesn't apply to information. When I sell you a phone, I no longer have it. When I sell information to you, I have more information by the very fact that you have it and I know you have it."^[28]
 

At the root of Drucker's statement is the notion that the information economy will function according to different rules than the industrial economy. With a stroke, the equilibrium point, the steady-state level of convergence theory is eliminated. Information economies are, in essence growing towards a different point than industrial economies. Thus, the growth rate of Jordan may be measuring a completely different phenomenon than that measured by the growth rate of Japan.

Support for this notion of a widespread change in economic realities is clearly growing. "Through all of human history," suggest James Dale Davidson and Lord William Rees-Mogg, "from its earliest beginnings until now, there have been only three basic stages of economic life: (1) hunting and gathering societies; (2) agricultural societies; and (3) industrial societies. Now, looming over the horizon, is something entirely new, the fourth stage of social organization: information societies."^[29]

Wired magazine, the Bible for a new generation of info-industrialists, has suggested that this information revolution represents "a tectonic upheaval in our commonwealth, a social shift that reorders our lives more than mere hardware or software ever can."^[30] Even economists like Richard Lipsey have begun to explore the nature of this shift, comparing it to the Industrial Revolution in its impact, and suggesting that "the current revolution is working one of the three most profound sets of social and economic changes in this millennium."^[31]

Poor communities and regions have expressed alarm at their inability to incorporate the new reality into their economic systems. "Recent developments in high technologies have complicated the South's [economic strategies]," suggested the South Commission. "For the small, low-income countries, the options are plainly limited; even the initial steps may prove very difficult."^[32]

At its heart, this shift calls into question another fundamental notion of traditional economics - namely, that a dollar always equals a dollar. In neoclassical terms, " a dollar's worth of human capital makes the same marginal contribution to growth no matter where it is invested."^[33] In other words, a dollar invested in digging a ditch is equivalent in its impact to a dollar invested in software development. Clearly, this is no longer the case. "From a microtechnology viewpoint," argues Lipsey, "each dollar's worth of human capital (measured at values determined by current inputs) has a different value depending on the type of skills involved in their application."^[34] From an economic growth perspective, a dollar invested in the new information economy is likely to produce higher returns than a dollar invested in a non-information economy. Again, this is because (as per Drucker), each use of the information economy accelerates its growth.

This notion of accelerated, often exponential growth, lies at the heart of the information economy, entrenched in notions like Moore's Law ("With price kept constant, the processing power of microchips doubles every 18 months."^[35]). This directly contradicts one of the fundamental tenets of convergence theory, namely the law of diminishing returns, which posits that growth slows down over time; that is, growth decelerates as one approaches the point of stationary equilibrium.

From a practical perspective, this weakening of the concept of convergence has far-reaching implications. Poorer regions, nations and economies have long been assured that their growth will outpace that of richer regions, and that economic development is, at least in part, a waiting game. The new reality suggests that theses poorer parties are now, in fact, growing toward a point of equilibrium that is being abandoned for an entirely new model by richer parties. As a result, economic growth strategies must undergo a similarly radical shift in approach.
 

If the information revolution is the engine of economic growth in the new economy, then poorer economies will rationally pursue economic development strategies that develop business, industry and economic activity based on information technologies. On its surface, this seems like a simple concept, but it leads to some far-reaching changes in practice. It is not uncommon today to hear economic development structures and organizations proclaiming their pursuit of information technology opportunities. However, at a practical level, the tools and methods used to do this are often the same as those that have been used for many years. If the information revolution is truly revolutionary, many of these traditional approaches will be less than successful.

As an example, convergence theory gave rise to the concept of the "flying geese" model, where imitation or copying could lead to economic growth. Thus, for example, the story of the early industrial revolution in Europe is often a story of industrial espionage and the recruitment of experts. The success of one nation could be copied and reproduced in another. But in the information age, where selling a product does not decrease supply, copying existing products or methods is not a guarantee of success. Rather than "flying geese", the new model relies on "leapfrogging", on the ability to look at someone else's technology and jump beyond it to the next technology. Thus, the emphasis of economic development becomes anticipatory, rather than monitory. In other words, innovation supersedes imitation.

At a practical level, this means several things. First, an economy must strive to be near the cutting edge, to understand and integrate new ideas and technologies as quickly as possible. As Lipsey suggests, "being at or near the leading edge is important for retaining a competitive position..."^[36] In part, this may be accomplished by investment in hardware, in the basic infrastructure of the information economy.

This infrastructure may often be costly, but to go without even more so. Davidson and Lord Rees-Mogg suggest that in 1946 a three-minute phone call from New York to London cost US$650. Today, it costs less than US$1.^[37] As modern business has come to rely on such telecommunications devices, those economies that made the investment necessary to upgrade from a 1946 telecommunications system to a modern system have tremendous advantages for both business recruitment and economic growth. Those that failed to make the necessary investment have placed themselves in the economic backwater, further and further from a position conducive to leapfrogging.

Of equal importance to the anticipatory approach is what might be called "forward thinking", or forecasting. Although there are dangers inherent in trying to predict the future, it is important that economic growth strategies focus on tomorrow's opportunities rather than today's. The obvious example of a failure to do this is the rush to recruit call centres that has characterized economic development in the 1990s. Governments provided massive incentives to create customer service jobs in an industry that is likely to be obsolete within fifteen years. Where is the economic potential in providing customer service that will shortly be available more cheaply, more efficiently and more easily over the Internet? How many consumers are likely to dial centralized 800 numbers for information when the same result can be achieved in the living room with a television remote control? How many companies are likely to pay the thousands of call centre staff when a single webmaster can deliver the same information via the web?

Infrastructure and forward thinking are, however, structural phenomenon. What they really create is an atmosphere in which innovation can take place, and innovation is the engine of the new economy. As Lipsey suggests, "the accumulation of ideas, with labour constant, is not subject to decreasing returns as is the accumulation of capital, with ideas (technological knowledge) constant. Investment need not be subject to decreasing returns, as long as it embodies new technological knowledge. Instead, with ideas as the key factor in growth, it is seen that incomes can go on growing forever. The usual diminishing argument - that people use the best ideas first and then go on to less productive ones - does not apply to technological change."^[38]
 

Increasingly, deliverers of economic development strategy must focus on mechanisms for increasing innovation within their economies. All such strategies, however, must be built upon two fundamentals: education and retention (or recruitment) of innovators.

Education has long been recognized as an engine of growth. Britain lost its early advantage in the chemical and pharmaceutical industries to Switzerland and Germany because, quite simply, it "did not have the trained and gifted chemists needed to generate invention."^[39] O'Rourke points out that one of the most tangible economic barriers facing Tanzania (then Tanganyika) was the impossibility of bringing "economic planning and social justice to a country that had 120 university graduates at the time of independence."^[40] Paul Kennedy suggests that every study of American competitiveness has stressed the same issue: the United States must "vastly improve the level of skill and training among the work force at large and provide opportunities for thorough retraining; and raise educational standards..."^[41]

Education, however, is only valuable to a local economy if the recipients of that education remain within the community. If they leave, in the phenomenon commonly known as a "brain drain", the value of that education accrues to the economy to which they move. Thus aggressive economic development strategies will attempt not only to retain educated actors within an economy, but to recruit more of them from outside that economy. In an era where many young people leave their regions or countries to pursue external economic opportunities, this has created huge but largely unacknowledged and unstudied negative economic impacts in many regions. Similarly, in communities that have attracted these individuals (e.g. Silicon Valley or Hong Kong), the positive economic impact has been enormous.

In the end, these strategies and approaches are at best superficial. To be effective they must be fitted to the nature and character of particular economies, communities and regions. However, these and all strategies for economic growth and development must be based upon a clear understanding of the fundamental changes occurring in economic paradigms. To rely on outmoded notions of stationary equilibrium points and unconditional convergence is to miss the real nature - and real opportunity - of today's economy.

 

[1.] Serge Coulombe, Regional Disparities in Canada: Characterization, Trends and Lessons for Economic Policy (Ottawa, 1997), p. 7.
[2.] Coulombe, p. 7.
[3.] Coulombe, p. 7.
[4.] David S. Landes, The Wealth and Poverty of Nations (New York, 1998), p. 499.
[5.] P.J. O'Rourke, Eat the Rich: A Treatise on Economics (New York, 1998), p. 42.
[6.] Robert D. Kaplan, The Ends of the Earth (New York, 1996), p. 297.
[7.] Landes, p. 459.
[8.] Landes, p. 459.
[9.] Coulombe, p. 7.
[10.] Garrett Menning, "India's Other Path: Disorganized Capitalism in Surat," Current History, November 1998, p. 386.
[11.] Karl Marx, Capital: A Critique of Political Economy (New York, 1906), p. 13.
[12.] Landes, p. 381.
[13.] Landes, p. 460.
[14.] Kaplan, p. 297.
[15.] South Commission, The Challenge to the South (Oxford, 1990), p. 2.
[16.] Landes, p. xx.
[17.] Landes, p. 432n.
[18.] South Commission, p. 33.
[19.] For a review of all this material and more, see Dale W. Jorgensen and Eric Yip, "Whatever happened to Productivity Growth?", (1998) pp. 9-11.
[20.] Coulombe, p. 7.
[21.] Landes, p. 215n.
[22.] O'Rourke, p. 69.
[23.] Landes, p. 480.
[24.] O'Rourke, pp. 113-114.
[25.] William Henry Pope, All You Must Know About Economics (Second Edition) (Uxbridge, 1997), pp. 3-4.
[26.] Pope, p. 3.
[27.] Richard G. Lipsey, Economic Growth, Technological Change and Canadian Economic Policy (Vancouver, 1996), p. 13.
[28.] Kevin Kelly, "Wealth is Overrated and Other Heresies, as Pronounced by Peter Drucker," Wired, March 1998, p. 161.
[29.] James Dale Davidson and Lord William Rees-Mogg, The Sovereign Individual (New York, 1997), p. 12.
[30.] Charles C. Mann, "Who Will Own Your Next Good Idea?", Atlantic Monthly, September 1998, p. 72.
[31.] Lipsey, pp. 24-25.
[32.] South Commission, p. 113.
[33.] Lipsey, p. 75.
[34.] Lipsey, p. 75.
[35.] John Browning and Spencer Reiss, "The Encyclopedia of the New Economy, Part II," Wired, April 1998, p. 102.
[36.] Lipsey, p. 35.
[37.] Davidson and Lord Rees-Mogg, p. 185.
[38.] Lipsey, pp. 59-60.
[39.] Landes, p. 290.
[40.] O'Rourke, p. 197.
[41.] Paul Kennedy, Preparing for the Twenty-First Century (New York, 1993), pp. 337-338.