Convergence? Criterion (Box 1)

TheWorld Bank 12 N U MBER 6 ECONOMICPOLICY Public Disclosure Authorized Canbackward subnational regions catchup withadvanced ones? Thereare big differencesbetween the per capita incomesof backwardand advancedregions in developingcountries-and little reasonto believethat these differenceswill disappearvery quickly.Addressing poverty may requiredirect policyinterventions that encouragethe fasterdevelopment of poorerregions. Public Disclosure Authorized The World Bank faces increasing demand observed for any industrial country. (It for advice on how economic development should be noted, however, that the sample Directinterventions can be accelerated in the poorer regions used is rather small.) The largest dispari- of developing countries. Although tradi- ties are usually in large developing coun- may be neededto tionally a lender to national governments, tries where transport costs are important, the Bank is ready to support subnational such as Argentina, Brazil, Indonesia, and ensurethat poorer governments with project and adjustment South Africa. But this is not always the loans. case, as disparities are relatively low in regionsshare in the One central question is, do backward India and high in Thailand (where large areas really need special treatment? Or will income differentials persist between benefitsof faster factor mobility and trade within countries Bangkok and the rest of the country). quickly equalize per capita incomes across Size seems to be less of a factor among national growth Public Disclosure Authorized regions? If such tendencies toward equal- industrial countries. Regional disparities ization-or, as it is more commonly called are low in Australia and Canada and in the literature, convergence-are higher in smaller countries such as France, strong, then policy should ensure only that Germany, Italy, and Japan. barriers to internal factor mobility and trade are removed. But if convergence is Evidence on convergence slow or nonexistent, direct interventions Traditional growth theory predicts that in may be needed to ensure that poorer a country with low barriers to goods and regions share in the benefits of faster factor mobility,, there should be a trend national growth. toward convergence in per capita income across regions. In addition, many coun- Subnational disparities in tries and economic unions of countries per capitaincomes have adopted regional development poli- Despite a widespread absence of internal cies aimed at effecting such convergence. Public Disclosure Authorized barriers to trade or factor mobility, average Since the mid-1950s disparities in per capita incomes vary considerably regional per capita incomes have fallen in across subnational regions-especially in nearly every industrial country. The only developing countries (figure 1). The low- exceptions are Australia (where regional est coefficient of variation calculated for disparities were initially relatively low) and any developing country is higher than that Germany (where disparities increased sub- FROM THE DEVELOPMENT ECONOMICS VICE PRESIDENCY AND POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK Figurei. Disparities in stantially after reunification in 1991). The tuate with national growth rates or macro- subnational'income evidence suggests a definite trend toward economic regimes, but again the experi- incomehave become convergence in industrial countries, ence varies. The sharp drop in inequality less pronounced though it is rather slow. in Brazil during the late 1970s may be Coefficient Changes over time are less clear for linked to the country's Second National of variation developing countries. For example, only Development Plan and its massive wave of 0.6 Brazil, China, and Indonesia showed con- government-directed import substitution. 0.5 tinuous reductions in interregional Center-state grants in India may have . inequality from the 1970s to the early reduced subnational income inequality, 0.4 1990s. In Colombia and Mexico disparities but they did not seem to spur faster growth narrowed in the first half of that period, in backward regions. In Mexico periods of 0.3 then widened in the second half. And over fast convergence coincided with periods of 1950s the same period India saw an increase in strong national growth. During periods of 0.2 199l _0s interregional inequality. low or negative growth, however, there was 0.1 Some studies test for convergence by divergence in regional per capita incomes. seeing whether regions with initially lower O _ ' v_ pg than average per capita incomes tend to Doesinternal migration facilitate Industrial Developing countries countries grow more quickly-the 3 convergence convergence? criterion (box 1). These studies consis- Internal geographic labor mobility is one Note:Calculations are for 10 tently find evidence of subnational con- of the main processes that economists developingcountries. vergence within industrial countries. But expect to iron out per capita income dif- Source:Williamson 1965; the average rate of convergence is surpris- ferences between subnational regions. World Bank staff. ingly slow, at about 1.8 percent a year, with Strictly speaking, migration should tend to a half-life of about 38 years. equalize welfare levels between regions, Beta convergence estimates for devel- which means that factors other than real oping countries vary more than those for wages-such as physical security and the industrial countries. In China they range innate attractiveness of regions as places to from no change during the central plan- live-are also likely to influence the pat- ning period to divergence during the tern of interregional migration flows. But Cultural Revolution. By contrast, during it is usually assumed that subnational real 1960-89 Colombia saw a high rate of con- wage differences are sufficiently large to vergence-3.2 percent a year. Empirical ensure that migration flows will predomi- exercises find that convergence rates fluc- nantly occur from lower- to higher-wage Box1 Measuringconvergence There are two types of convergence: a con- lapsing. Tests of a convergence are usually vergence and D convergence. Sigma coII- obtained from estimation of the following vergence means declining cross-sectional equation: dispersion of per capita income across units, as measured by the coefficient of variation or 1 other measures of dispersion. - log a + ,Blog(yit-,T) + u Beta convergence relates to the relation- T LYi,I ship between initial income levels and sub- sequent growth rates. This relationship is where y is the per capita income of region i usually inferred from regressions of growth at time t, and u is a random error term. If rates on initial income levels. A negative rela- we interpret this as the transition toward a tionship implies that poorer regions grow at uniform steady state or steady state growth faster rates and catch up to initially richer rate, then P measures the speed of conver- areas. Beta convergence is a necessary but gence-the fraction of the gap between cur- insufficient condition for the inference that rent per capita income and the long-run dispersion in income across regions is col- value that is reduced each period. areas. A consequent decrease in labor sup- population reporthavingmovedwithin the Figure 2. Migration does plyin backward areas relative to more pros- past 10 years-about 3 percent a year. But not contribul-e much perous areas will then encourage a most migration is within states, and even to convergenice narrowing of wage differences and per between poor and rich states there are Convergence capita incomes. invariably flows in both directions, which coeffidcent Recent research suggests that internal means that net flows are often much 0.025 migration has only a minor effect on con- smaller than gross flows. As a result net vergence (figure 2). These results must be annual migration in India in 1981-90 0.020 treated with caution, however, as the data ranged from -0.30 to 0.43 percent of the used are highly aggregated. The basic 1981 population across states. 0.015 method used to evaluate the role of migra- Second, in some countries migration is tion is to estimate the convergence equa- impeded by institutional obstacles. In China 0.010 tion both with and without a net migration and the former Soviet Union, for example, term. Adding the migration term should the absence of housing markets acts as a 0.005 reduce the convergence coefficient (1) if major brake on geographic mobility, while migration plays a significant role in the con- Chinese migration into urban areas is still 0 With ou vergence process. Since there is a danger of subject to legal restrictions. A recent study migration migration simultaneity bias in this equation, as one on migration in Russia finds that oblasts Note: Calculations are for a sample might expect higher per capita growth to with higher rates of apartment privatization of eight countries. induce more net migration, simultaneous are more likely to be chosen by immigrants Source:Subnational Regional Economics Knowledge equation estimating techniques are used. but are also more likely to experience sig- Management System. Most studies have found evidence that nificant emigration. It has also been sug- migration affects convergence, but this evi- gested that differences in housing dence is unimpressive. In the United opportunities may partly explain why inter- States, for example, without standardizing nal mobility is higher in Australia, Canada, for migration the estimated convergence New Zealand, and the United

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