Conditional Convergence

What is conditional convergence? Conditional convergence is the tendency that poorer countries grow faster than richer countries and converge to similar levels of income. However, there's a caveat. This convergence is conditional on institutions and other factors being similar. Two countries with really different institutions -- they're not going to converge. At least that's the theory. Is it true?

Let's take a look at the 20 founding members of the OECD, basically the western developed economies. It seems reasonable to say that they've got similar institutions. Here we're going to plot the growth rate of these countries over 40 years on the vertical axis, and real GDP per capita in 1960 on the horizontal axis. Conditional convergence predicts that the countries which were poorer in 1960 -- they should have grown faster over the next 40 years than the countries which were wealthier in 1960. And that's exactly what we see. The countries which were relatively poor in 1960 -- they grew faster than the countries which were relatively wealthy in 1960. So, among countries with similar institutions, we do see convergence, conditional convergence.

The idea of conditional convergence is important, because it highlights the role institutions play in economic growth.