Growing Closer? Economic Divergence and Convergence in the 21st Century

Some parts of the world are “catching up” and becoming wealthy, while others are lagging behind. How can better governance accelerate economic growth?

Photo credit: Jannick via Unsplash

By

Joseph Foti

Economic theory predicts that low-income countries should eventually converge with high-income countries. They have abundant, underutilized factors of productivity–abundant labor and land. Add a bit of finance and technology, et voilà, the theory goes. This idea is true much of the time. On average, developing countries do have higher growth rates than richer countries.

Yet, one field of development economics argues that this catch-up does not happen as often as predicted. A famous 1992 paper by Robert Barro and Xavier Sala-i-Martin found that from 1960 to 1985, low-income countries failed to catch up with high-income ones. In 1997, Lant Pritchett similarly argued that the divergence between developed and developing countries that started in the late 19th century had continued into the 20th.

Different economic schools offer different reasons for this: dependence on primary commodity exports (dependency theory, or the “Prebisch-Singer Hypothesis”), political and economic institutions (the “New Institutional Economics”), or capital concentration (see the “Big Push” school, among others).

These papers were rigorous and accurate–for the time period they covered. But, what is fascinating about the late 20th and early 21st century is that the “divergence” findings actually turned out to be wrong.

Some Patterns of Growth are Changing

More specifically, the post-1990 world looks a lot more like convergence than divergence — at least in some places. Most famously, China and India now seem to be approaching the rest of the industrialized world. By 2050, extreme poverty in Asia and Latin America may be completely eliminated. Asian countries, especially in Southeast and South Asia are seeing a particular boom, taking advantage of global supply chains, digital technology, and investments in public education.

At the same time, parts of Europe and Japan have stalled out for long periods of time. Of course, there are exceptions to this — (Notably, Greece and Spain have bucked the trend and there is evidence that Japan may emerge from decades of malaise.

Other regions continue to see uneven growth. On the one hand, there are the classic rentier or strongman states like Democratic Republic of Congo or Zimbabwe, which continue to suffer from poor governance, under-developed markets, and currency issues. A second group of countries is performing relatively well — in fact, the IMF predicts that 9 of the 20 fastest growing economies in the world will be in Africa. The fastest-growing among them — Rwanda, Ethiopia, Ivory Coast and Tanzania — lack oil resources. (This is interesting because oil is often a ticket to quick income, but often hinders long-term industrialization. This is the so-called “resource curse.”) The larger countries — South Africa, Nigeria and Angola — which make up two-fifths of the continent’s economy, have not yet unlocked the secret to large, sustained growth.

Dani Rodrik and others have predicted that the window to development through industrialization is closing, as more and more factories are automated, limiting opportunities for mass employment outside of the service sector. The information economy offers one pathway for some countries, like Kenya, but the opportunities for high productivity, labor-intensive manufacturing, the new evidence suggests, are a thing of the past. The Asian countries that enjoyed this boom may be the last to do so. If that is true–which is not certain–governments will need to grapple realistically with whether or how to achieve export-led or service sector-led growth.

What is clear is that few countries have skipped high-productivity industrialization, like New Zealand or the United Arab Emirates. In their cases, economic growth worked because of their small size or strong rule of law and market integration with other countries. Add to this the fact that many African countries are either ignored or battered by the winds of geopolitics, the vicissitudes of foreign finance, and the ravages of climate change. These outside shocks are extra burdens for those countries and their future generations.

Open Government Reforms for Economic Convergence

To that end, there are a number of pathways that could lead to convergence, if governments can undertake them. Likely, governments will need to undertake an adaptive approach. Following is a list of routes, short definitions and explanations of how open government is an ingredient in each.

Monetary Policy

Evaluate exchange rate adjustments and ensure central bank independence. Transparent governance is critical, with independent central banks, treasuries, and supreme audit institutions providing public reasoning for their actions. Open communication of policy decisions and the rationale behind them fosters public trust and market confidence. This lowers the price of borrowing, freeing up money for other expenditures (as documented below) and attracting private investment. Open government reforms to deal with these issues include:

• Strengthening central bank and other controlling agency independence and transparency, including audits
• Ensuring public debt transparency and oversight and open budgets to help the public understand revenue, borrowing, and spending.

Infrastructure Investment

Undertake high-quality infrastructure projects with clear procurement processes and anti-corruption safeguards. Public-private partnerships should include performance monitoring and ensure equitable access to services, especially in underserved regions. Relevant open government commitments include:

• Open contracting
• Transparency in project borrowing

Social Spending

Increase investments in education and health, ensuring transparent budgeting and inclusive service delivery. To develop a wide base of workers, targeted programs must address inequality and prioritize vulnerable populations, with regular audits to minimize waste. Open government approaches include:

• Open budgets, especially gender-responsive budgeting and budgeting to support justice, democracy, and human rights

Tax and Domestic Resource Mobilization (DRM)

Implement progressive taxation systems and robust mechanisms to combat tax avoidance and evasion. Transparency in tax collection and expenditure, coupled with citizen engagement, ensures accountability and trust in the system. Open government reforms include:

• Beneficial ownership policies to help minimize aggressive tax avoidance
• Enforcement and compliance data on prosecuting aggressive tax avoidance to help the public understand whether their agencies are prioritizing revenue enforcement where it matters

Trade Integration

Pursue free trade agreements and high-value export opportunities (e.g., nickel processing in Indonesia) with provisions for fair labor practices and environmental protections. Transparent trade negotiations and implementation foster inclusivity and mitigate risks of elite capture.

• Participation and transparency in trade negotiation
• Revenue transparency
• Competitive bidding and licensing

Infant Industry Models

Support industrial policies or export promotion with clear goals, sunset clauses for subsidies, and mechanisms to prevent inefficiency, corruption, or capture. Regular performance evaluations and stakeholder consultations ensure adaptability and accountability.

• Research and development portfolio management
• Competitive and open subsidy and trade barrier policies

Other Approaches

Other approaches bring together a mixture of approaches to development above. These might be less replicable, but there is a way that these can be done that minimizes corruption, white-collar crime, and favoritism combining the best of the models above.

• The New Zealand Model: Focus on service sector improvements and high-value exports, with policies promoting innovation, skill development, and equitable economic participation. Transparent governance and market-friendly regulations foster sustainable growth.
• The Dubai Model: Develop financial hubs (potentially viable for Nairobi or South Africa) with strong regulatory frameworks, anti-money laundering measures, and stakeholder engagement. Transparency in financial transactions and adherence to international standards bolster credibility and investor confidence.

The economic trajectory of the 21st century has defied strict predictions of divergence or convergence. As old paths close, new paths to sustained and equitable growth remain unclear. Some regions have leveraged industrialization, trade integration, and digital innovation to fuel convergence, while others continue to struggle with governance failures, structural barriers, and external shocks. Traditional industrial pathways may become less viable.

Consequently, governments will need to embrace a more adaptive and experimental mindset. This cannot be done through a top-down approach. To navigate this new landscape, we need to strengthen collaborative governance. The challenge ahead is not just economic but institutional.