Economic convergence is the concept that poor economies will Assignment

Economic convergence is the concept that poor economies will eventually catch up with the developed countries - Assignment Example Chile is one of the smaller countries in South American region with one of the most vibrant economies in the region. It is termed as an upper middle income country as per the standards of World Bank. It is also considered as most stable and prosperous nations in the region due to its sustained economic performance. It has been argued that the Chile’s government has kept constant policies sustained over the period of almost three decades witnessing reduction in poverty to almost half. This impressive economic performance of the country has resulted into the narrowing of the gap between Chile and other developed countries as accelerated rate of growth has provided Chile much needed convergence to be part of the fastest growing countries. This literature review will provide a review of existing literature on the subject of economic convergence, growth and financial development in Chile. By reviewing the current literature, this review will offer insight into economic convergence of Chile. Macroeconomic Convergence- Theoretical Framework As mentioned above, there are two different concepts of macroeconomic convergence i.e. beta and sigma convergence. Beta convergence signifies convergence through the per capita income and the later is through convergence of cross sectional dispersion of per capita income. In economic growth literature, word convergence is often used to define the initial economic and subsequent growth. (Jones) Two countries exhibit convergence if the poor country with lower levels of income grows faster than the other. This type of convergence is called beta convergence where absolute convergence can be achieved when the per capita incomes actually converge to a steady level of state. Conditional convergence however occurs when the countries have different level of per capita income and it is also experiencing convergence. This also means that each country is actually converging at its own rate and that in the long run all countries will con verge and growth rates will be equalized. Absolute convergence also suggests the conversion of the growth rates of all the economies over the period of time. The convergence debate is mostly based upon two important models of economic growth i.e. Solow’s growth model as well as the endogenous growth theory. Neo-classical literature suggests that an economy starts to converge when the output is constant and the growth rate is zero. When both these variables are witnessed, a country is believed to be entering into an steady state where it starts to achieve convergence with other countries depending upon the fact that with whom country wants to correlate itself. (Papageorgiou and Perez-Sebastian) Economists have actually attempted to explain this concept by assuming two types of economies i.e. if two countries with same rates of investment, savings, depreciation, population growth rates and technological progress, poorer countries will tend to grow faster than the developed or r ich country. There is however a controversy over the growth models regarding the unconditional convergence especially endogenous growth models are believed to be based upon providing decreasing returns or constant returns to per capita capital. This controversy therefore makes it relatively difficult as growth theories predict convergence however; empirical studies do not tend to support this assertion with the data. Neo-classical models have also failed to find any correlation between