Modern Macroeconomics.pdf

684 Modern macroeconomicsWhen we talked to Edward Prescott two days ago he was reasonably confidentthat convergence would eventually occur. Did this important debateinfluence your own thinking about growth and what are your views on thisarea of research?It is very important to keep clear what the facts are. The facts are that over thetime horizon that people have looked at the data, say from 1950 to thepresent, there is very little evidence of overall convergence. Everybody agreesabout this, even if it is not always stated up front. People who describe thistendency for countries to converge are saying that if everything else were thesame – if you hold all the right variables constant – then there would be atendency for countries to converge. For example, this is one of the key resultsin Robert Barro’s work. This is really just a refined statement of the convergenceclub interpretation articulated by Baumol. If you look at countries thathave the same values for these variables, then they tend to converge. But it isalso true that in the background, the overall progress towards reduced dispersionin per capita incomes has been very modest. Pritchett was making auseful background point. If you go back before 1950, it must be the case thatthere was a period where incomes diverged quite a bit – some countriesmoved very rapidly ahead as others were left behind. At that time, the overalldistribution of income widened for a period of time. More recently, in thepost-war years, the overall distribution has been roughly constant.So why do we care about this issue? First you might care about it from ahuman welfare point of view, or an income distribution point of view. On thosegrounds there is some reason for pessimism – we really have not made thatmuch progress in the last 30 or 40 years. You might also care about it becauseyou think it might help you discriminate between different theories of growth –which ones are right and which are wrong. Many people have asserted that thisprocess of conditional convergence – everything else equal, incomes converge– is consistent with a pure Solow style model, that is, one where knowledge is apublic good, all technology is a public good. So they say the evidence isconsistent with the public-good model of technology. That statement is correctbut the evidence is also completely consistent with a model where technologyis not a public good. In this interpretation, the technology gap model, flows oftechnology between countries are what drive the convergence process. In thisexplanation, the convergence you see is catching up with technology, not justcatching up in the stock of capital per worker. Under the Solow model asinterpreted by Mankiw and others, technology is already the same everywherein the world. It is a public good that is in the air like a short-wave radiobroadcast, so under this model there is no room for technological catch-up. Itstill mystifies me that people try to justify this model in the face of directevidence about the importance of technology flows. But they certainly use theconditional convergence evidence to back up their position.