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Key Takeaways:
- The catch-up effect suggests that all economies will eventually reach parity in per capita income as underdeveloped economies grow faster than wealthier ones. This concept is also known as the theory of convergence.
- The catch-up effect hinges on the law of diminishing marginal returns and empirical observations of growth trends among developed and developing countries.
- Countries can enhance their catch-up effect by embracing free trade, developing social capabilities such as technology absorption, attracting capital, and participating in global markets.
- Limitations of the catch-up effect include capital scarcity, prohibitive technology transfer costs, inadequate institutional frameworks, and rapid population growth in developing nations.
Unpacking the Catch-Up Effect
The catch-up effect is a compelling economic theory suggesting that all economies will eventually converge in terms of per capita income. The rationale is that underdeveloped economies tend to grow more rapidly than wealthier economies, eventually “catching up” to their more developed counterparts.
This catch-up or convergence theory is based on two main tenets. Firstly, the law of diminishing marginal returns states that as a country invests and profits, the amount gained from each investment diminishes as investment levels rise. This law implies that returns on capital investments in capital-rich countries are not as large as in developing countries.
Secondly, empirical observations demonstrate that more developed economies typically grow at a slower yet more stable rate than less developed countries. According to the World Bank, high-income countries averaged 1.6% GDP growth in 2019, compared to 3.6% for middle-income countries and 4.0% for low-income countries.
The Role of Replication and Second-Mover Advantage
A key aspect of the catch-up effect lies in the ability of underdeveloped countries to replicate the production methods, technologies, and institutions of developed countries. This mimicry can fuel more rapid growth as it grants developing markets access to the technological advancements and institutional know-how of developed nations. This phenomenon is often termed a second-mover advantage and has resulted in rapid growth rates in various developing economies.
Limitations of the Catch-Up Effect
Despite the potential for rapid economic growth, various constraints can significantly hinder a developing country’s ability to catch up. Scarcity of capital is one such limitation, as many developing nations struggle to secure the resources needed to increase economic productivity efficiently.
Economist Moses Abramowitz pointed out that for countries to benefit from the catch-up effect, they must develop and leverage “social capabilities”. These include the ability to absorb new technology, attract capital, and participate in global markets. If technology transfer is restricted or too costly, the catch-up effect may not materialize.
Moreover, the quality of institutional frameworks, particularly concerning international trade, plays a vital role. A study by economists Jeffrey Sachs and Andrew Warner revealed that countries with free trade and open economic policies experienced faster growth. Conversely, countries with protectionist and closed economy policies experienced slower growth.
Population growth is another significant obstacle to the catch-up effect. Generally, less developed countries have higher population growth rates than developed economies, which can dilute per capita income gains.
Case Study – The Catch-Up Effect in Action
Japan’s economic history offers an illustrative example of the catch-up effect. Between 1911 and 1940, Japan was the world’s fastest-growing economy, heavily investing in neighboring regions such as South Korea and Taiwan and fueling their economic growth. Post-World War II, Japan’s economy lay devastated, but the country managed to rebuild a sustainable economic environment during the 1950s by importing machinery and technology from the United States. This led to remarkable growth rates from 1960 through the early 1980s.
Despite Japan’s robust economic performance, the United States’ economy continued to grow steadily. By the late 1970s, when the Japanese economy ranked among the world’s top five, its growth rate had slowed down, demonstrating the catch-up effect.
The Path of the Asian Tigers
The economies of the Asian Tigers, a term referring to the rapid economic growth of certain Southeast Asian countries, also show the catch-up effect in action. These economies experienced swift economic growth in their early development years, followed by a slower and declining growth rate as they transitioned from being developing to developed economies.
In conclusion, the catch-up effect serves as an intriguing lens through which to view economic development and convergence. While it offers promising prospects for growth in underdeveloped economies, a variety of constraints can inhibit the materialization of this effect. Understanding and addressing these limitations is crucial for nations striving to bridge the economic gap and achieve a level playing field in terms of per capita income.
