a1 Universidade do Minho and NIPE
Using a two-sector endogenous growth model, the speed of convergence is determined primarily by the gap in rates of return between physical and human capital. In closed economies, for a typical situation of having relatively less physical capital than in a steady state, the return on physical capital will be significantly high, whereas the return on human capital will be relatively low. This gap in rates of return is quite large when the economy is not at its steady state. In open economies, where human capital is nontradable, the gap in rates of return is small, as is the gap between the international interest rate (which is less than the closed economies return on physical capital) and the return on human capital. Convergence in open economies will be relatively slow, and convergence in closed economies will be relatively fast, and therefore there is little gain from financial liberalization.
I am grateful to Gene Grossman and Gilles Saint-Paul for helpful comments and suggestions. I am also grateful to Luís Aguiar, António Antunes, Stefano Bosi, François Bourguignon, Rui Castro, Daniel Cohen, Pierre-Olivier Gourinchas, Clemens Grafe, Olivier Jeanne, Nobuhiro Kiyotaki, Philippe Martin, Thierry Verdier, and Carlos Winograd for useful discussions and to conference and seminar participants of SED, LAMES, LACEA, EEA, SAET, Vigo WIFI (Workshop on International FInance), Fundação Getúlio Vargas, and Universidade do Porto. I thank Fundação para a Ciência e Tecnologia for financial support and Research Grant PTDC/EGE-ECO/112169/2009. Additional financial support from the Spanish Ministry of Science and Innovation through Grant ECO2008-02752 is also gratefully acknowledged.