THE MACROECONOMICS OF CONVERGENCE the explanatory variables of the Solow model (e.g. population available factors of production. On the other hand, it is mostly the demand factors have an impact on the fluctuagrowth, technological advancement, savings rate), while represents further control variables that affect growth, and tions and cycles around the trend. One of the consequences is a residual term, factors that cannot be modelled. The of this consideration is that demand does not affect starting point of the estimate is that if conditional conver- long-term developments. This is because economic policies gence is true, there must be negative correlation between that influence demand do not have an influence on long-term the past level of income and economic growth, as an growth. Another consequence is that following the crisis, economy that starts from a lower level of development must economies should return to the pre-recession trend line, but grow faster to catch up with a developed economy. Accordingly, this clearly did not happen in the past 10 years. a significantly negative value would indicate the degree of reality of conditional convergence for parameter .28 This phenomenon became known as hysteresis; Blanchard et al. (2015) examined this issue in detail. They analysed more Unfortunately, empirical analyses are not concordant.29 than one hundred recessions with different robustness Initial researches were still able to demonstrate a negative examinations and found that in nearly two thirds of the parameter , but various later studies pointed out that the cases the level of GDP is below the pre-crisis trend. This is findings must be handled with reservations for a number of called hysteresis. If not only the level, but GDP growth is also reasons (exogeneity of explanatory variables, observation persistently below its pre-crisis dynamics, it is called super errors). Accordingly, conditional convergence is empirically hysteresis (Chart 2-10). Blanchard et al. (2015) identified partly verifiable, but at the same time it is not totally this phenomenon in about one third of the cases. unambiguous and universally valid. Chart 2-10: Stylised chart of hysteresis (changes in real GDP) In reality, as opposed to the foregoing, it is mostly the case Real GDP that so-called convergence clubs are observed, i.e. certain 40 Adaptation after crisis country groups actually converge to the same level of devel35 opment. This level of development, however, is not general, 30 Beginning of crisis 25 and not all countries are heading towards it, only the 20 ‘members of the given club’. It is conceivable, for example, 15 that investment in human capital entails various costs, and 10 countries in a weaker financial situation are unable to 5 finance it. However, human capital of adequate quantity and 0 quality constitutes one of the bases of sustained economic 1 3 5 7 9 11 13 15 17 19 21 23 25 period growth and convergence. Accordingly, the economies that Original trend Returning to trend deviate from the initial income level may follow different Hysteresis Super hysteresis paths of development, even if some of their macroeconomic Source: prepared by the MNB. fundamentals are similar.30 Various explanations were given for the hysteresis in the literature. The most widespread arguments are summarised below:31
2.5 Crisis experiences
There are various lessons to be drawn from the latest global economic crisis; the subchapter below provides a brief summary of them. One of them is that prior to the crisis the general framework of thinking was that all variables can be decomposed into trend and cycle components. The trend was equated to the component determined by the supply side. In the long run, wages and prices adjust completely flexibly, and thus the value of the trend is determined by the
•
Damage to human capital: Following a crisis, and especially if it is protracted, the professional abilities of the long-term unemployed may decline. If individuals who used to be employed do not train themselves due to lack of a job and cannot participate in trainings at a workplace, they are unable to acquire new knowledge and thus their knowledge can become outdated. These problems increase and accumulate as time goes by, e.g.
This phenomenon is described in the literature as beta convergence. About empirical results see, e.g.: Baumol (1986), Barro (1991), Bernard – Durlauf (1996), Barro – Sala-i-Martin (2004). 30 For more details see e. g.: Durlauf – Johnson (1995), Tan (2010). 31 Hysteresis and its underlying factors are discussed in more detail in Chapter 1 of the 2016 Growth Report.
28 29
GROWTH REPORT • 2018
49
