2.2 Convergence types

Chart 2-4: Correlation between investment rate and TFP growth

4 3

) % ( h t w o r g P F T

2

1

0

-1

0 10 20 Investment rate (%) 30

Note: The individual values are average values as of 1990. Sources: PWT, MNB calculation. 40

Accordingly, a feedback process takes place in these models.

Investment raises the level of capital, but as a result, the level of technological development rises, which increases the productivity of capital, encouraging further investment. This approach may be understood as the description of the R&D sector, but its modelling in this form in Romer’s (1986) study is, of course, extremely simplified. Subsequent models handled this sector in a more detailed manner. 19 Romer (1990) thinks that the assumption that knowledge is available for the community as a whole is wrong. As a result

of the patent system, new discoveries are protected, and thus companies have monopolistic power, which provides

higher profit for them. Therefore, Romer switched over from perfect competition to monopolistic competition, relying upon the model of Dixit and Stiglitz (1977). In addition, a so-called knowledge production equation describes how the aggregate stock of ideas evolves over time: working in knowledge production, which can be identified with the number of researchers or engineers working in the

increase in knowledge is determined by the number of

researchers, although how much new knowledge is created depends greatly on the level of accumulated knowledge as well. On the equilibrium path, the increase in technology determines economic growth as well, which equals the growth in knowledge. Accordingly, in the long run, the number of researchers determines growth. Examining empirical data,

Jones (1995) found that this assertion is not in line with the facts. According to his finding, knowledge production

depends on the change in the number of researchers, i.e. the law of diminishing returns prevails here as well. 20

In addition, relevant institutions also play an important role in economic growth: Acemoglu et al. (2002)

empirically

verified the impact of the institutional system on growth. According to their analysis, in the examination of the differences in economic performance across countries the explanation is that an adequate institutional system supports economic growth.

Accordingly, as we have seen, the importance of human

capital is also unquestionable nowadays;

most of the economic development, innovation and development are

ultimately provided by knowledge, and increasing

knowledge means sustained economic growth. Jánossy (1966) already called attention to the importance of human capital, but Mankiw et al. (1992) proved its importance empirically as well. 21 Human capital is discussed in more

detail in Chapter 5. of the Report.

One of the key questions in growth theory is whether the differences between poor, middle-income and rich countries will ever cease to exist. Based on this approach, two basic types of convergence are distinguished, the

where indicates the time index,

is the human capital industrial sector, while

is the level of ideas accumulated during history (in books, studies, patents) (and is its

change), and

is the productivity parameter. Accordingly, the

conclusions of which may be important for economic policy:

According to absolute convergence, the differences in income between countries will disappear sooner or later. Irrespective of any other factors (e.g. production possibilities, economic policy), economies are heading towards the same level of development in the long run.

Based on data from past decades, this theoretical approach cannot be corroborated at all.

According to

conditional convergence, not every economy is automatically heading towards the same level of development, only ones with similar characteristics. This is exactly what neoclassical growth models

19 Without attempting to be exhaustive, e.g. Romer (1990), Acemoglu and Zilibotti (2011). 20 The finding of Bloom et al. (2017) is similar. 21 For example, Mincer (1958) and Schultz (1961) were also among the first who dealt with the theory and importance of human capital.