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Convergence of World Economies Essay


Introduction

Globalisation is the influx of ideas, capital goods, information, and culture in a borderless society (Rajan 3). Over the decades, globalisation has been the buzzword in many economic studies. Aided by market liberalisation and the collapse of communism, economic globalisation has shortened “economic distances” among countries (Westerfield 181). This phenomenon has dominated many academic literatures, as researchers strive to understand the effects of globalisation on the global business space (Rajan 3; Westerfield 181).

However, few studies have explored the extent of economic convergence in a global world. From this background, this paper explores the extent that world economies are converging. This focus draws our attention to income convergence (among developing and developed countries), financial convergence, and industrial convergence. These three analyses outline the pillars of this discussion.

Financial Convergence

Financial convergence partly explains economic convergence in the global economy (Kiely 89). According to Kiely (89), rich and poor nations create a financial complex where both groups of nations exhibit financial surpluses and deficits (depending on their economic power).

However, since both groups of countries trade in one global market, they have to co-exist through financial convergence. For example, the Bretton-Woods system outlines one framework where different countries (with different economic structures) trade in one market. Global financial institutions, such as the World Bank and the International Monetary Fund have also fostered financial convergence in the same regard (Kiely 88).

These institutions support rich and poor nations by providing a framework where rich countries use their surplus money to support nations with deficit budgets. This balance occurs through loans, financial grants, and similar agreements (Kiely 91). This way, the global economy achieves financial stability.

Another way that financial convergence occurs in the global economy is using a single monetary currency to benchmark the value of global financial transactions. For example, many nations use the US dollar as the global currency (in most international transactions) (Kiely 91). In this arrangement, the global economy uses the dollar as the main reserve currency.

The use of one reserve currency eases global transactions because countries can avoid the confusion and inconvenience of using different currencies in international trade. Furthermore, different economies, around the world, compare their domestic currencies with the dollar.

The trade liberalisation theory explains the streamlining of international trade through a common financial framework (Zafar 4). This theory advocates for the removal of international trade barriers to foster international trade.

Although the theory includes a wide scope of trade barriers (such as policies, tariffs, and the likes), using a single currency in international trade equally expresses the need to have a borderless economy.

Stated differently, financial convergence (using a single monetary currency), supports the trade liberalisation theory because it allows different countries to trade easily among themselves (Zafar 4). These assessments show that, in the context of economic integration, world economies converge at a financial level. Overall, this analysis shows that global economies converge through financial convergence.

Income Convergence

Globally, globalisation has manifested itself differently. According to Arrighi and Silver (3), although the economic divide between wealthy and poor nations steadily diminishes, the income divide between members of both groups of countries remains the same.

According to Maddison (67), the average income in developed countries (mainly European countries, America, Australia, and Canada) was lower than other countries (in the 1000s). In fact, he says, between the year 1000 and 1800, Asian countries had a higher income than other countries around the world (Maddison 67).

However, this balance shifted in favour of western countries, during the 1800s (Maddison 67). Globalisation played a significant role in causing this shift because it created a new capitalistic society that benefitted western countries (in terms of the ownership of capitalistic structures).

This situation led to the convergence of high income groups in western countries. In fact, according to Maddison (67), although many countries had increased their incomes through capitalism, developed nations managed to outpace the rate of income growth in developing countries by growing the same index three times faster than their developing counterparts did (Maddison 67).

Statistics show that by 2003, developed countries had increased their income by about 21-fold, while developing countries had increased their income by a paltry sevenfold (Maddison 67). Consequently, economic integration has created a “convergence club” among members of wealthy states because the income distribution in these countries is favourable to their people.

The income disparities between wealthy and poor nations largely stem from the principles of the comparative advantage theory, as explained by David Ricardo (cited in Mankiw 57). The comparative advantage theory advocates for the concentration of production and manufacturing sectors in nations that traditionally enjoy this advantage (Mankiw 57). In other words, the theory suggests that all countries should specialise in producing goods and services that they enjoy a competitive advantage (Mankiw 57).

Similarly, the theory proposes that these countries should import goods and services that they do not produce (Mankiw 57). This theory explains why high incomes have traditionally concentrated in wealthy countries because these countries have dominated most manufacturing and production sectors. Comparatively, poor countries are net importers of these goods and services, thereby earning a low income.

The comparative advantage theory advocates for this imbalance by supporting the domination of manufacturing and production firms in wealthy countries (Mankiw 57).

Therefore, although third world countries have made tremendous progress in economic growth, they still do not enjoy the “high end” income distribution that first world countries enjoy. Consequently, Arrighi and Silver (8) believe the main preoccupation of third world countries is to increase their income distributions to match their first world counterparts (in a globalised society).

The convergence of high income in wealthy countries fails to live up to the spirit of economic integration because proponents of globalisation have supported the concept for its potential in reducing income disparities, poverty, and inequality in the global society (Dolvik 6). Indeed, proponents of globalisation say economic integration increases global trade, thereby fostering technological development and labour mobility (especially between wealthy and poor countries) (Dolvik 6).

In this regard, proponents of globalisation have suggested a universal best standard of managing the global economy. Similarly, their views propose an “invincible” influence of market forces in correcting income and social inequalities (Dolvik 6). However, based on high-income convergence in wealthy countries and low-income convergence in poor countries, we see the weaknesses of this view (Maddison 67).

Stated differently, economic integration has failed to reduce inequalities between developed and developing countries (particularly concerning income distribution). Broadly, it is correct to affirm the existence of a biased income convergence between poor and rich nations (Arrighi and Silver 12). This situation prevails despite the increased industrial convergence between wealthy and poor countries.

Industrial Convergence

Industrial convergence refers to the spread and growth of manufacturing firms among different countries in the world (Arrighi and Silver 15). At the start of the industrial revolution, first world countries controlled the world’s manufacturing sector (because most manufacturing companies originated from these countries) (Arrighi and Silver 12).

However, in the last five decades, developing countries have shifted this balance and reduced the gap in industrial development between developed and developing countries (Arrighi and Silver 12). This convergence occurred between the 1960s and 1980s, when more third world countries started to produce goods for export to the global market (Arrighi and Silver 12). Adam Smith (cited in Fleischacker 91) has explained this phenomenon through his book, the Wealth of Nations.

He said competition among nation-states creates wealth and prosperity (Fleischacker 91). At the centre of his argument is the role of selfish interests in creating wealth among different nations. Stated differently, many countries try to outpace one another through economic development (Arrighi and Silver 12).

In the modern world, this competition has occurred through industrial development. Therefore, according to Adam Smith, developing nations have narrowed the gap in industrial development by competing with wealthy nations on the same front (Fleischacker 91).

Based on a complete analysis of the growth of Gross Domestic Product (GDP) in developing countries, Arrighi and Silver (15) believe developing countries have outpaced developed nations, in terms of industrialisation. They support this assertion by saying, the manufacturing GDP of wealthy countries has dropped in the last decade, while the manufacturing GDP of developing countries has increased in the same period (Arrighi and Silver 15; Maddison 67).

The growing dominance of emerging economies, such as China and Thailand, in the global manufacturing sector explains the industrial convergence between developed and developing countries (Maddison 67). Researchers have highlighted many reasons for this industrial convergence, but the de-industrialisation of developed countries emerges as the main explanation for this convergence (Arrighi and Silver 15).

In sum, economic integration has helped poor countries to compete with wealthy economies by producing goods and services that compete with capital goods that originate from wealthy countries. This trend has led to the growth of different industrial sectors in developing nations. Particularly, this trend has contributed to the industrial convergence between wealthy and poor nations (Dolvik 6).

Conclusion

After weighing the findings of this paper, we see that world economies converge on the premise of financial, industrial, and income integration. However, income integration manifests a dual outcome because economic integration has converged high incomes in wealthy countries and low incomes in poor countries. This way, economic integration has strengthened income inequalities between wealthy and poor countries.

This outcome emerges from a backdrop of industrial convergence because both groups of countries have narrowed their divide in industrial growth. Therefore, developing nations have caught up with the developed nations by expanding their industrial sectors. Lastly, this paper identifies financial convergence as another attribute of economic integration.

The use of the US dollar to benchmark international trade and the use of financial surpluses from wealthy countries to correct budgetary deficits in poor countries are some examples of financial integrations that characterise the global economic space. Overall, this paper highlights financial, income, and industrial convergences as the boundaries of economic convergence in today’s globalised society.

Works Cited

Arrighi, Giovanni and Silver Beverly. “Industrial Convergence, Globalisation, and the Persistence of the North-South Divide.” Studies in Comparative International Development, 38.1 (2003): 3-31. Print.

Dolvik, Eric. The Globalisation Challenge: Convergence or Divergence of National Labour Market Institutions, Oslo, Norway: University of Oslo, 1999. Print.

Fleischacker, Samuel. On Adam Smith’s Wealth of Nations: A Philosophical Companion, Princeton, NJ: Princeton University Press, 2009. Print.

Kiely, Ray. Empire in the Age of Globalisation: US Hegemony and Neoliberal Disorder, London, UK: Pluto Press, 2005. Print.

Maddison, Angus. “Shares of the Rich and the Rest in the World Economy: Income Divergence Between Nations, 1820–2030.” Asian Economic Policy Review, 3.1 (2008): 67–82. Print.

Mankiw, Nate. Principles of Economics, London, UK: Cengage Learning, 2011. Print.

Rajan, Ramkishen. Economic Globalization and Asia: Essays on Finance, Trade and Taxation, New York, NY: World Scientific, 2003. Print.

Westerfield, Robert. Current Issues in Globalization, New York, NY: Nova Publishers, 2004. Print.

Zafar, Ali. Revenue and the Fiscal Impact of Trade Liberalization: The Case of Niger, Washington, DC: World Bank Publications, 2005. Print.

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IvyPanda. 2019. "Convergence of World Economies." November 25, 2019. https://ivypanda.com/essays/convergence-of-world-economies/.

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IvyPanda. (2019) 'Convergence of World Economies'. 25 November.

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