Confused about what is the catch up effect?

Being a student of Economy, you must be familiar with many difficult concepts and hypotheses. The Catch up effect is one of these. If you have read about this in your class but didn’t get a clear understanding, then you’re at the right place. Read this guide to clear your concept on this topic. The information provided here is great for enhancing your knowledge, gathering data to write an academic paper and for researching purposes. So, delve into the information given below and make the topic a little less complicated.

What is the catch up effect in Economics?

The catch up effect is a theory which states that the economies which are poor or developing grow much faster in comparison to economies that have higher per capita income. Thus, all economies, whether poorer or wealthier, will reach an equal level of high per capita income. As the economies converge gradually, this theory is also known as the theory of convergence. To state it in another way, the poor economies will eventually ‘catch up’ with the wealthier economies. Thus, according to this theory, the gap between the poorer and richer nations will decrease as the countries with lower income have more chances of rapid growth rate.

What is the logic behind catch up effect and how does it work? 

Catch up effect refers to the idea that economies both poorer and wealthier eventually converge. It implies that the economy of poorer countries grows faster due to higher growth possibilities. This is how the poorer economies catch up with the richer ones according to per capita income, and a minimisation of the divide between the two is achieved.

The ‘catch up effect’ theory is based on the logic that better growth opportunities are available for the economies that are developing. Opportunities like access to technological knowledge from the developed world, growing returns of capital, etc. remain with the developing economies.

Evidence gathered through observation implies that although some developing economies have been effective in tapping the advantages available for growing faster and catching up with the wealthier economies, the same cannot be said about a big portion of the developing world.

However, there are some limitations to this theory, based on the foundations of social, political differences, or social. All of these also influence growth at the same time.

Diminishing returns and catch up effect

The theory of convergence or catch up effect is based on the law of diminishing marginal returns. It implies that when a new country does investment and gain profits from that, the acquired amount will always be lower than the investment amount. Whenever a country invests, they get less benefit in comparison to the investment. Hence, for the capital rich countries, returns on capital investments are less strong than that of the developing countries.

Due to diminishing returns, the saving rate sees an increase, which eventually heads towards higher growth only for some time. Since the higher saving rate brings in more capital, the benefits gained from the added capital turn lesser by time. This is why, in the long run, the growth slows down. A higher level of productivity and income is led by higher savings rate, but, higher growth is not achieved. However, it can take quite a lot of time to reach this long run. An increase in the saving rate can bring in significantly higher growth in a period of many decades.

Another inference of the diminishing returns to capital is that if a country starts out comparatively poor, it grows faster. The catch up effect can also be described as the effect of initial conditions on the following growth. In the poorer countries, the workers do not have the basic tools, thus resulting in low productivity. The workers’ productivity can get raised by small amounts of capital investment. On the other hand, in the countries with a richer economy, the workers have a great amount of capital that results in high productivity. Here, as the capital amount per worker is high, productivity is also significant. Thus, extra capital investment fails to leave a lasting effect on the productivity.

This is why the countries with poorer economy get an advantage. They can imitate the technologies, production methods, and the institutions of the countries that are developed. The developing nations have a continuous growth rate because they get to access the technological knowledge of the advanced countries.

The problems of catch up effect and its post crises

There are some problems or limitations related to the catch up effect. Some of these are given below:

• Dependence on social investment levels and basic infrastructure- Investing in high tech equipment can be ineffective in case of a lack of education and training. These can include the capability to adopt new technology, take part in global markets, and attract capital. Local culture and expectations also affect the results. Also, specific investment types can face resistance. Economist Moses Abramowitz first talked about this limitation. He implied that the catch up effect would not take place if the technology is not prohibitively expensive or not freely traded.
• Dependence on trade openness- There is an argument regarding the nations that have trade liberalisation stay in a better position to get higher economic growth rates. The developing countries that put limitations on trade face difficulty catching up with the countries with higher income.
• Various responses to globalisation- To give an example, South East Asia benefitted through enhanced levels of trade and inward investment. Due to this, fast economic growth rate was achieved in several economies like, Philippines, Korea, China, and Vietnam. In contrast, Sub-Saharan African, a poorer economy, has not gained any benefit through an equal level of investment. Through this, it is suggested that the political and economic factors were not ready to take in the possible manufacturing growth. Thus, it can be seen that just by having the possibility for growth, it is not guaranteed that growth will be attained.
• Resource curse- The resource curse can be seen as another problem of the catch up effect. It is suggested that the developing countries that have plenty of natural raw materials can have difficulty in enjoying fast economic growth rates. According to the resource curse, it is suggested that due to an abundance of raw materials, the followings can occur:
• The overvalued rate of exchange that makes exports less competitive
• Crowding out of the other economic sectors which leads to an unbalanced growth
• Foreign multinationals owning resources which leads to a very little amount of the wealth reaching the average people

Thus, there are many limitations or problems of the catch up effect.

Is there a catch-up effect in the Gulf?

In a study published on ResearchGate, the convergence among the Gulf countries towards their average and the economy of the USA has been analysed. It was found that the convergent economies catch up with their average at a much higher speed than what the theoretical models expect.

The GCC or Gulf Cooperation Council consists of a comparatively homogeneous group of six countries that demonstrate the theoretical requirements for most of the convergence model. In this case, resemblance among the concerned countries is also required. Prior to this study, per capita income’s convergence amongst the GCC countries have never been examined before. The study attempted to figure out if any ‘convergence club’ existed between the GCC countries on one side, and again, between the economies of the GCC and that of the US on the other side. The US can be considered as a proxy for the global economy. As per the per capita income, the convergence is examined. There are strong economic ties amongst the Gulf economies and the USA gives justification for choosing the latter as the benchmark of convergence.

In several dimensions, these ties can be identified. For example, attaching the currencies of the GCC to the US dollar, and subsequently the pairing of the monetary policy of the USA and the same of the GCC countries, and the acceptance of US dollar as the authorised trading currency for oil amongst the international market can be given. Apart from this, the speed of the convergence is explored. To analyse if the convergence exists or not, various models and tests, are used extensively.

Evidence led to the belief that there is an existence of convergence between most of the GCC economies towards their average. Along with this, the likelihood of a structural break art at the time of the study period is also considered. Furthermore, beta-convergence, following the stochastic convergence tests were analysed. Other than this, the convergence speed based on the beta convergence’s time series estimation in the present data set was calculated. According to the results, the GCC’s biggest economies, UAE and Saudi Arabia, are financially attached to the USA as per the fluctuations in the stock market, they also have decoupled from America as per the GDP.

It was revealed in the study that if any convergence is found, the GCC economies are likely to converge to each other quickly. However, very weak evidence exists for the same when it comes to the US economy. The outcome that is received closely aligns with the neoclassical theory. The theory predicts that economies that have similar characteristics converge faster.

Describe the catch up effect by Claire Hodgkins on Prezi 

In the presentation prepared by Claire Hodgkins on Prezi, we get an overview of the catch up effect. It contains the meaning of the concept, how it works, real-life examples, comparative growth rate, statistics, GDP per person, an example on Africa, data based on Uganda which concludes that if major changes in either inflation rate, GDP, or other aspects are achieved, it is impossible for Uganda to get out of poverty.

This was a short guide on the catch up effect. Here’s hoping that it will help you to write a stellar paper.  Now that you have a thorough understanding of the concepts, you can score the best grades and impress your professor right away.

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