Catch-up Cycle: A General Equilibrium Framework
Technology adoption and diminishing marginal returns to capital are driving forces of the catch-up cycle.
Certain stylized facts are common among successful economic latecomers: an inverse U-shaped gross domestic product and capital per capita growth rate, high growth rates during the catch-up period, and rapid structural changes. We propose, for the first time, a general equilibrium framework to document the catch-up cycle that a successful latecomer is likely to experience. We argue that technology adoption and imitation, and diminishing marginal returns to capital are the two driving forces of the catch-up cycle. The technological gap and speed/efficiency of technological catching-up are two fundamental factors for successful catching-up. This paper concludes with a case study for the People’s Republic of China and sheds light on the different policy choices at various stages of the catch-up cycle.