Divergent Staaten

While on the subject of economic convergence and divergence, I thought it would be interesting to look at Germany. Since reunification, Germany has been marked by the stark economic differences between eastern and western Germany. During their time as separate states, West Germany greatly out paced East Germany in economic growth.

Since reunification though, the German government has poured tons of resources into the eastern Staaten, hoping to bring about a convergence. So far success has been limited. At first, they thought they could pay for reunification through the privatization of East German factories, but they turned out to be in such bad shape they were essentially given away. When replacing the East German currency, the government gave a highly favorable exchange rate, in an effort to increase wealth. However, this ended up inflating labor costs, which led to persistent unemployment. A massive investment in construction proved fruitless as the population continued to decline, leaving many disused buildings.

However, the government learned much from these early efforts, and with the recent growth of the Germany economy, one would hope that some convergence has occurred. Unfortunately, I can't find an comparison of incomes over a long enough period of years to determine if there has been a convergence in that area. An article from Spiegel says that in 20 years, household incomes in the east went from 35% to 53% of that in the west.
I have more complete data on unemployment though.
Instead of there being a more immediate convergence, there was a divergence in unemployment rates up until 2001, and the unemployment rate didn't peak until 2005. However, since then, the drop in unemployment in the east has outpaced the west.

Another chart I find interesting is comparing the number of unemployed people for each job vacancy.

After a massive spike in 2004, the number of job vacancies in eastern Germany greatly increased. So it appears, at least in terms of employment figures, eastern Germany didn't begin to converge with the west until around 2005, when Germany's economy started to improve.

While doing this research, I found one interesting article that now I can't find, wherein it concluded that attempts to compare the economies of the west and the east were flawed as the east is more rural. While the largest city in Germany, by far, is Berlin, all other cities in the top 10 are in western Germany. When compared to just rural areas in the west, the level of convergence is much higher. It's just that recent economic growth in Germany has mostly taken place in the cities, which the east is lacking.

Divergent States

The different rates of economic growth is a rather common topic when comparing countries. There is always a question of whether growth leads to convergence, assuming growth has decreasing marginal returns, or to divergence, assuming growth acts as a feedback loop. Of course, given the number of variables involved, there are plenty of examples to support either claim. While many Asian countries are approaching the levels of wealth seen in Western countries, there are many African countries that have been left behind.

Focusing on just divergence, one reason it occurs is because countries are sovereign. Just because one country has a growing economy, doesn't mean that another randomly selected country will have one. It takes a certain level of exchange between the two countries to forestall divergence. For example, since the introduction of NAFTA, economic growth in the US and Mexico has been almost the same every year. This is of course a situation where there is neither divergence nor convergence. Arguably though, there is a positive relationship between integration and economic convergence.

One reason to believe this is true is to look at regions within a country. It appears to be very rare that two regions within a country have divergent growth rates, at least not in the long-run. China is currently experiencing divergent internal growth rates between the coastal regions and the interior (per capita GDP in the wealthiest province is 5 times greater than in the poorest). China is actively trying to fix this problem, but other countries have mechanisms in place that also address this problem, although more passively, such as the free movement of capital and labor. For example, when a region becomes poorer than its neighbors, property and labor will be cheaper which entices businesses to move there.

What I am curious about though is how effective these mechanisms are. It's actually kind of a marvel that given how big the US is, that most people can expect the same standard of living in every state. There are pockets of wealth and poverty, but those are scattered throughout the US, not concentrated in certain areas.

I wanted a long term look at how GSP per capita in each state grew relative to the US GDP per capita. Unfortunately, there was a change how GSP is measured in 1997, so older data will not much up. Regardless, there have been some interesting movement since 1997.

The most basic way to look at divergence is to find the standard deviation of GSP per capita between states. In 1997, the average state had a GSP per capita of $35350 with an standard deviation of $6943. In 2011, the average state had a GSP per capita of $41446 with an standard deviation of $8109. While the standard deviation increased, so did the average, and relative to the average, nothing has changed as in both 1997 and 2011, one standard deviation was 20% of the average. However, in the years available, 1997 and 2011 are both high points. In 2003, one standard deviation was 17.5% of the average. So since 2003 there seems to have been a divergence, but a glacial one.

Looking at a more individual level, in 1997 the wealthiest state, Alaska, had a GSP 2.4 times greater than the poorest state, Idaho. In 2011 the wealthiest state, Delaware, had a GSP 2.2 times greater than the poorest state, Mississippi. So not only has the gap between the wealthiest and the poorest decreased, but the states holding the top and bottom positions has changed. This indicates that no state is soaring ahead or falling behind.

That said, there is a huge difference in growth rates from 1997 to 2011. During that time period, GDP per capita in the US increased by 14%. At the low end, Michigan's GSP per capita declined by -2%. At the high end, North Dakota's GSP per capita increased by 41%. However, despite such different growth rates, neither state have a GSP per capita much different from the rest of the country. All it really changed was their relative position. North Dakota has intriguing gone from being nearly one standard deviation below the average to nearly one standard deviation above the average.

Another interesting finding is that the current 3 wealthiest states all had below average growth. Which indicates there is some convergence happening at the top. However, there is some indication the poorest states are not converging with the average. Mississippi, the current poorest state, had only 9% growth, while South Carolina, the 3rd poorest state, had only 1% growth. While there's no indication that this trend will continue, it is still a worrying position to be in. It will be interesting to see when this divergence reverses itself.