Economic Growth and Convergence: A Quantitative Analysis of Global Development Patterns (1995-2024)

Abstract

One of the greatest challenges facing the global economy is the economic gap between developing and developed economies. African countries have made considerable progress in economic growth, but there are still huge gaps in income levels, productivity and standards of living as compared to developed Schengen economies. This thesis investigates the convergence of African countries towards developed economies and the role of human capital, trade openness and foreign direct investment in the speed of convergence. The study uses panel data of 40 countries (24 African countries and 16 developed Schengen economies) for the period 1995–2024. The analysis relies on fixed-effect econometric models estimated on data from the World Development Indicators. To explore existence of convergence and factors affecting the speed of convergence we estimated absolute, conditional and moderated convergence models. The empirical findings strongly suggest a convergence of African economies towards the developed economies of the Schengen countries. The β-convergence hypothesis states that countries with lower levels of initial income will tend to grow faster than richer countries. The results also show that trade openness and foreign direct investment are positively related to economic growth via technology transfer, market integration and capital accumulation. A key contribution of this thesis is the analysis of the speed of convergence from the perspective of moderated convergence. The results show that the only structural factor that has a significant positive effect on the speed of convergence is the human capital. Countries with higher life expectancy are more capable of closing income gaps more quickly than countries with weaker foundations of human capital. Trade openness and foreign direct investment on the other hand are not significant to the speed of convergence but are good for growth. The findings suggest the need for both integration with the external economy and for investment inflows for sustainable economic catch-up, and for the capacity of economies to build human capital and to absorb productivity-enhancing technologies. Policies that improve health care, education, skills development and technological capabilities should receive as much focus as strategies that encourage trade and investment. The study finds that convergence between African and developed Schengen economies is underway, but the speed of convergence is highly conditional on structural conditions that promote long-run productivity growth and economic transformation. Therefore, the best way to accelerate convergence process and reduce persistent income inequalities is through investment in human capital.