Trade and the Speed of Convergence

• Author: E. Young Song
• DOI: http://doi.org/10.1111/rode.12065
• Date: 01 February 2014
• Published date: 01 February 2014

Trade and the Speed of Convergence

E. Young Song*

Abstract

Numerous studies on income convergence estimate the convergence equation derived for autarkic econo-

mies using data from the world that is increasingly integrated. This paper derives a convergence equation

for a world integrated by trade from the standard Heckscher–Ohlin model with factor price equalization.

The convergence equation for an integrated world differs from the autarkic one in that (1) the growth rate

of each economy is increasing in the global growth rate; (2) the rate of convergence is increasing in the

global growth rate; and (3) the rate of convergence, under conventional parameter values, is much lower.

1. Introduction

Research on income convergence exploded following the works of Mankiw et al.

(1992) and Barro and Sala-i-Martin (1992). These studies opened a stage for empirical

research on convergence rigorously based on neoclassical growth theory. A major

attraction of the approach is that the coefficients of a regression equation can be

directly linked to the structural parameters of the underlying theory, enabling

researchers to assess the quantitative plausibility of the theory from estimation

results.

A surprising feature of this literature is that regression equations are derived from

models assuming that the all countries in the world are in autarky. Many trade econo-

mists find this lack of interdependence disturbing. A key insight of classical trade

theory is that trade in goods effectively is trade in factors embedded in goods. An

open economy must show the pattern of accumulation distinct from that of an autar-

kic economy.

This paper derives a convergence equation for a world integrated by trade. I build a

dynamic Heckscher–Ohlin model for a world of economies with identical preferences

and technology, and examine how the growth rates of economies with different initial

conditions evolve over time under factor price equalization brought about by trade.

The convergence equation for an integrated world corresponds closely to the autarkic

version. The equation can be used as a regression equation for estimating the rate of

convergence, and the rate can be linked to the structural parameters of the model.

However, there are important differences: In an integrated world, (1) the growth rate

of each economy is increasing in the global growth rate; (2) the rate of convergence is

increasing in the global growth rate; and (3) the rate of convergence, under conven-

tional parameter values, is much lower.

Researchers on convergence were bewildered by the fact that neoclassical growth

theory, under plausible parameter values, overpredicts the rate of convergence by a

* Song: Sogang University, 35 Baekbeom-ro, Mapo-Gu, Seoul 121-742, Republic of Korea. Tel: +82-2-705-

8696; E-mail: eysong@sogang.ac.kr. The author wishes to thank seminar participants at the conference on

“The Institutional and Social Dynamics of Growth and Distribution”, KIEP, Sogang, Seoul National,

Hitotsubashi and Kobe University for their helpful comments. Comments by an anonymous referee also

improved the paper. However, all remaining errors are mine. The financial support by the Sogang Univer-

sity Research Grant of 201310029.01 is gratefully acknowledged.

Review of Development Economics, 18(1), 1–12, 2014

DOI:10.1111/rode.12065

© 2014 John Wiley & Sons Ltd