Trade and International Convergence of Per Capita Income

Do countries that are more open achieve higher growth rates than countries which are less open? With the same degree of openness do poor countries tend to grow faster than rich countries? If they do, the poor countries will move toward equalizing the level of per capita income and there will be income convergence. The objective of this paper is to investigate empirically the role of trade in the process of convergence. International flows of goods and factors tend to result in convergence of factor prices among partner countries. Moreover, international trade serves as an important channel through which ideas and technology flow from one country to another country. Some empirical studies show that the countries trading intensively with each other tend to converge in per capita income. In this paper, we use the Penn World Data from 1950 to 1992 to study the role of trade in convergence. The average growth rate of real per capita gross domestic product (GDP) is regressed on the starting level of log real per capita GDP. This approach, known as beta convergence, is used in the literature. If the growth rate of real per capita GDP is negatively related to the starting level of log real per capita GDP, it means that countries with lower per capita income grow faster and hence there will be movement toward equality in the level of per capita income. We estimate the coefficient by both linear and nonlinear least squares methods. The results show that convergence takes place among developed countries and trade helps in the process for the group of developed countries. As far as trade between developed and developing countries is concerned, there is no evidence of convergence.