Catch-up effect
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The catch-up effect, also called the theory of convergence, states that poorer economies tend to grow faster than richer economies. Therefore, all economies will eventually converge in terms of per capita income.
This means that a poorer country’s income will eventually catch up to a richer country's. In theory new technologies may allow the economies of emerging countries to even surpass industrialized nations, but the possibility of this happening has become increasingly debatable as developed nations become increasingly modernized at fast paces. One of the reasons for this phenomenon is that poor countries often have little in the way of technology and are often inefficient. Since they have no access to capital to invest they can’t improve their processes and are trapped in this low-efficiency pattern. If, however, they manage to attain some capital for investment the returns on this investment might be huge. This could be explained by the law of diminishing returns. A developed nation is so technologically advanced that the ROI of every unit of currency spent is dramatically lower than the ROI in an undeveloped nation because the poor nation is further behind in this diminishing returns path. This extra return allows poor countries to rapidly increase investment capital and raise efficiency until the law of diminishing returns kicks in and they are growing at the same pace as more advanced nations.
Productivity analysis among developed nations provides evidence of convergence as well. The differences in productivity techniques is what separates the leading developed nations from the following developed nations, but by a margin narrow enough to give the following nations an opportunity to catch-up. This process of catch-up continues as long as the following nations have something to learn from the leading nations, and will only cease when the knowledge discrepancy between the leading and following nations becomes very small and eventually exhausted.
An example of this effect is the rapid growth in the Asian markets of Singapore, Hong Kong, Taiwan, and Korea in the 1960s and 1970s that led to them being called the Four Tigers. These countries started off very poor with little economic power, a lack of capital, no huge skyscrapers and rich banks and quickly transformed their economies into major world players.
Some economists criticise the theory, stating that endogenous factors, such as government policy, are much more influential in economic growth than exogenous factors. See endogenous growth theory.
