Turning Potential Growth Disasters into Growth Miracles: The Bare Essentials of Conditional Convergence

Abstract

In this paper I simplify the modeling of transitional dynamics and empirically explain why so many developing economies have seen their per capita income diverge from that of most OECD economies. I also provide evidence that strongly supports conditional convergence among the sample considered consisting of 40 non-OECD plus 24 OECD economies. Diverging per capita incomes and conditional convergence are, thus, not inconsistent with each other. Introducing installation costs into the analysis unlocks the key role of the price of capital in growth and development. My findings are consistent with a model of imperfect competition where optimizing agents save a constant fraction of their incomes.