Introduction

Recent years have seen a burgeoning literature on the issue of why countries’ per-capita income levels converge (or do not, as the case may be). This topic is hardly new, of course, and much of the present research is merely rediscovering arguments that had long been known (the advantages of relative backwardness, the role of skills, the importance of investment or of learning by doing, etc.). There is, however, one feature of the older literature which recent writings have hardly exploited: that is, the role which government intervention (through, for instance, macroeconomic, industrial or exchange rate policies) could play in promoting growth. This neglect is understandable. In the context of the dominating orthodoxy, industrial policies can only lead to inferior outcomes, while macroeconomic and exchange rate policies, when not instantly ineffective, must be so in the medium term. Similarly heretic, and hence ignored, are approaches of the ‘export-led growth’ variety which dare to suggest that demand factors may contribute to longer-run growth differences.

Yet, just a cursory look at the economic history of the OECD countries since World War II suggests that the role of demand and policies cannot be ignored, notably in the 1950s (witness the importance that many attribute to the indicative planning of France, to the investment subsidies of Germany, to the industrial policies of Japan, and so on). In particular, policies may have influenced one area that seems crucial for an understanding of the convergence process, that of international competitiveness. Traditional approaches usually view the latter as an entirely endogenous function of the growth process itself.