Income convergence

If poor countries grow faster than rich countries, over time they will catch up in terms of their level of income. This process is called income convergence. Alternatively, incomes would diverge if the rich countries grow more rapidly than poor countries. If economic growth is the same everywhere, then the differences in income across countries would remain the same.

What is the evidence? There is income convergence across countries that are already fairly affluent. For example, incomes have converged significantly in the European Union and other rich countries in North America and elsewhere.

Looking more broadly, there is no evidence that the incomes of poor countries in Africa, Latin America and elsewhere have gained relative to the rich countries. In fact, when it comes to the poorest of countries, there has even been some income divergence.

What do we see in the chart? We show the GDP per capita in Purchasing Power Parity (PPP) terms. In other words, this is the income per capita in each of these countries if people there paid the same prices as a U.S. consumer. This is the best measure for income differences across countries as it takes into account price differences. What is left is the difference in real incomes, i.e. how much one can buy with the income.

Observe the income convergence between the U.S. and Ireland. China's income per capita is also converging to the U.S. income per capita. However, it is still very low in relative terms. Sierra Leone is lagging behind and is not catching up.

When will China catch up with the U.S.?

In 2015, GDP per capita in China was $13,600 and in the U.S. it was was $52,700. If Chinese income continues to grow at 7% per year and U.S. income grows at 3% per year, the GDP per capita in the two countries will become the same in about 37 years, i.e. in year 2053.

If growth in China slows down to 6% per year, income convergence will take 50 years. At 5% annual growth in China, convergence will take 72 years.


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