The Empirical Economics Letters, 11(7): (July 2012) ISSN 1681 8997

Some Macroeconomics for the 20th Century

Zeus Salvador Hernández-Veleros

Economía, Instituto de Ciencias Económico Administrativas. Universidad

Autónoma del Estado de Hidalgo, México.

Email: zshveleros@yahoo.com

Abstract This paper aims to evaluate with empirical data the affirmations presented by
Lucas (2000), namely: in 2000, almost 90 percent of world economies had an annual
growth rate greater than 2 percent (in 1950 that percentage was almost 55 percent);
those economies that were more recent entries to the industrialization race have higher
initial growth rates than those first economies that left the state of stagnation many
years ago, the departure of which implies a catch-up behavior. We use panel stationarity
tests with multiple breaks in order to define those periods with the same long term
growth rates for 145 economies grouped in eight clusters during the second half of the
last century.
Keywords: Catch-Up, Growth Acceleration, Panel Stationarity, Multiple Breaks
JEL Classification Number: O47, O57

1. Introduction
We evaluate Lucas’s catch up model (2000) and we estimate the long term growth rate for
145 economies using a panel stationarity test with multiple breaks, in order to define if our
series are I(0) or I(1) during the period 1950-2000, and how many and when a break (or
more breaks) changed the long-run trend. Our hypotheses are:
1) The percentage of economies with a growth rate equal to or greater than two
percent was almost that which Lucas indicated for the period 1950-2000.
2) The economies that began their growth after 1950 have an average annual growth
rates as stable as the annual growth rate of the economies that started the
industralization race before 1950.
3) The economies that began their growth after 1950 have an average annual growth
rate greater than the average annual growth rate of the economies that started the
industralization race before 1950.
This paper consists of the next sections. First, we show the Lucas’s (2000) theoretical
model. Then we apply a panel stationarity test with multiple breaks to Maddison’s (2003)
data, in order to define long term growth rates by periods and test our three hypotheses.
Finally, we expose our conclusions about.
The Empirical Economics Letters, 11(7): (July 2012) 678

2. Catch-Up Model
2.1. Growth Acceleration
Lucas (2000) presents a numeric simulation of a simplified version of the Tamura (1996)
model of world income dynamics, based on technological diffusion. In the beginning all
economies are very poor, stagnant, with similar populations and income (in 1985 $600
U.S. dollars). An economy begins the race to industrialize through a stochastic
mechanism, whereby one gives the same odds to each country in the race to industrialize.
Different assumptions are employed in this race to industrialize: 1. The first economy to
begin the industrialization process grew at the constant rate of α = 0.02 from 1800
onward (a constant rate). 2. An economy that begins to grow at any date after 1800 grows
at a rate equal to α = 0.02 , the growth rate of the leader, plus a term that is proportional
to the percentage of the income gap between the leader and itself. So, we can classify the
various economies in two income categories: pre-industrial economies and economies that
have begun to develop; therefore, we must find at least one break affecting our economic
growth series and this series must be the stationary.
Lucas (2000) establishes that the inequality, measured by the standard deviation of
logarithm for income levels, in the period from 1800 to 2100 reached its highest point
sometime in the 1970s, and is now returning to zero. According to Lucas (2000) “… a late
entrant to the industrial revolution will eventually have essentially the same income level
as the leader, but will never surpass the leader´s level.”

2.2. Clustering
We apply the panel data stationarity test with multiple breaks to PCGDP for the period
from 1950 to 2000 for 145 economies, from Maddison (2003), grouped in eight clusters,
because we think than economies with a similar PCGDP have a common data generator.
We do not apply this test only to economies with a growth rate lower than 2 percent per
year or with pre-industrial income levels, because we find different examples of
economies that had a high growth rate overfor many years, and then suffered a decline.
How do we classify 145 economies in eight clusters? First, we grouped the three richest
economies in 1950: Qatar, Kuwait and the United Arab Emirates in one group. Then,
using group algorithms from the 1950 PCGDP of the 142 remaining economies, we define
three clusters: the first with 115 economies, the second with 17, and the third cluster with
10 economies. Because the first cluster contains too many economies (115), and because
these economies are heterogeneous in the variable used for their definition, we define five
more clusters within the first cluster. Thus, we obtained eight clusters: in the first cluster,
The Empirical Economics Letters, 11(7): (July 2012) 679

we find the poorest economies and, in the eighth cluster, we find the richest economies
(table 1).

Table 1: Economies in Clusters Grouped according to their 1950 PCGDP

Cluster Economies
1 Equatorial Guinea, Botswana, China, Cape Verde, Lesotho, Burma, Cambodia,
Mongolia, Mauritania, Nepal, Bangladesh, Burkina Faso, Mali, Rwanda,
Guinea Bissau, Malawi, Eritrea and Ethiopia, Comoro Islands, Togo, Burundi,
Guinea, Tanzania, Chad, Zaire

2 Taiwan, South Korea, Oman, Thailand, Indonesia, Egypt, Swaziland, Yemen,

Libya, Pakistan, India, Vietnam, Mayotte, S. Helena, West Sahara, Zimbabwe,
São Tomé and Principe, Laos, North Korea, Nigeria, Cameroon, Kenya, Sudan,
Gambia, Uganda, Zambia, Central African Republic, Afghanistan, Niger, Sierra
Leone

3 Palestine and Gaza, Tunisia, Dominican Republic, Sri Lanka, Jamaica,

Romania, Algeria, 20 small Asian Countries, Albania, Philippines, Congo,
Honduras, Senegal, Mozambique, Côte d'Ivoire, Benin, Ghana, Iraq, Somalia,
Liberia, Haiti, Angola, Madagascar

4 Japan, Greece, Malaysia, Turkey, Seychelles, Costa Rica, Panama, Brazil,

Bulgaria, Iran, Yugoslavia, Jordan, Ecuador, Paraguay, El Salvador, Morocco,
Bolivia, Nicaragua, Djibouti

5 Singapore, Hong Kong, Spain, Puerto Rico, Portugal, Mauritius, South Arabia,
Syria, Mexico, Poland, Hungary, 24 small Caribbean countries, Colombia,
Bahrain, Reunion, South Africa, Namibia, Peru, Lebanon, Guatemala, Cuba

6 Norway, Ireland, France, Belgium, Finland, Austria, 13 small Western Europe,

Italy, Germany, Israel, Trinidad and Tobago, Chile, Czechoslovakia, Argentina,
Uruguay, U. S. S. R., Gabon

7 U. S., Denmark, Canada, Switzerland, Netherlands, Australia, Sweden, U. K.,

New Zealand, Venezuela
8 United Arab Emirates, Kuwait, Qatar
The Empirical Economics Letters, 11(7): (July 2012) 680

2.3. Stationarity and Breaks

The Carrion-i-Silvestre, del Barrio-Castro and López-Bazo’s test (2005) has as its null
hypothesis panel stability with the presence of multiple structural breaks. It incorporates
an unknown number of changes that shifts the average and the trend of individual time
series, where the number and position of structural breaks can differ among individuals.
They determine the number of structural breaks using the modified Schwarz information
criterion (LWZ). In this panel stationarity test, the authors assume homogeneous and
heterogeneous long run variances. The long run variance is estimated using the Barlett and
Quadratic spectral kernels with automatic spectral window bandwidth selection. The
authors calculate bootstrap distribution to take into consideration cross-section dependence
among individuals, so they use 2,000 replications.

3. Breaks in the Long Term Growth Trends: Changes in Growth Rates

If we compare the Hadri´s statistics using Barlett spectral kernel, homogeneous long run
variance, breaks and dependence among economies with the bootstrap critical values, then
the null hypothesis of stationarity with multiple breaks cannot be refuted at the 5 % level
of significance for all the clusters (Table 2). However, if we compare Hadri’s statistic
using the Barlett spectral kernel, heterogeneous long run variance, breaks and dependence
among economies with the bootstrap critical values then the null hypothesis of stationarity
cannot be refuted at the 5 % level of significance for only clusters one, two, five, six,
seven and eight. We believe we have this result because we don´t have enough breaks (the
code is designed for five breaks) for clusters three and four, or simply these series are I(1)
(Table 2).

We define with this panel stationarity test when and how many breaks the series have, in
order to calculate long term growth rate between breaks for all economies and evaluate our
first hypothesis.
The Empirical Economics Letters, 11(7): (July 2012) 681

Table 2: Panel Stationarity Tests with Breaks, Homogeneous and Heterogeneous Long-
-run Variances and Dependence among Economies for PCGDP´S of Clusters 1 To 8,
1950-2000 (Individual Intercepts and Trend)

Cluster Variance Hadri with Barlett Bootstrap critical value Conclusion at

Test p-val 5% 1% 5 % sign.
1 Homogeneous 4.424 0.000 12.705 14.464 I(0)
Heterogeneous 6.682 0.000 15.886 18.469 I(0)
2 Homogeneous 12.075 0.000 13.119 14.784 I(0)
Heterogeneous 18.774 0.000 19.296 22.020 I(0)
3 Homogeneous 16.082 0.000 18.913 20.926 I(0)
Heterogeneous 26.105 0.000 22.952 27.690 I(1)
4 Homogeneous 12.329 0.000 13.286 15.033 I(0)
Heterogeneous 19.991 0.000 18.86 20.825 I(1)
5 Homogeneous 14.511 0.000 23.638 27.902 I(0)
Heterogeneous 32.123 0.000 39.121 45.643 I(0)
6 Homogeneous 6.168 0.000 15.855 17.895 I(0)
Heterogeneous 12.203 0.000 18.481 22.095 I(0)
7 Homogeneous 1.932 0.000 9.620 11.367 I(0)
Heterogeneous 6.961 0.000 11.525 13.608 I(0)
8 Homogeneous 28.584 0.000 49.650 63.161 I(0)
Heterogeneous 24.600 0.000 57.327 75.373 I(0)

During the first period (before the first break) there were 62 economies with an annual
growth rate lower than 2 percent, and 83 economies with a rate higher than 2 percent; for
the last period (after the last break) we find 96 economies in the group of economies with
a growth rate lower than 2 percent, and 49 economies with an annual growth rate higher
than 2 percent (figure 1). During the period of 1950-1970, we find a good fit between
Lucas’s (2000) estimation and empirical percentage of economies growing, but that
changed. Therefore, an essential statement of the Lucas’s model isn´t supported by data
(Figure 1).
The Empirical Economics Letters, 11(7): (July 2012) 682

Figure 1: Percent of Economies with an Annual Growth Rate Higher than 2 Percent
Defined by Period using Breaks and Defined Per Lucas (2000), 1950-2000

100.00
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

According to long trend growth rates According to Lucas(2000)

As well, Lucas (2000) uses a specific measure of the degree of inequality in the world
economy, namely, the standard deviation of the logarithm of income levels at each date
weighted by the probability (proportion) that an economy begins to grow on date t and
the other weighted by one minus the sum of probabilities until that moment t . Thus, if
that percentage is incorrect, then the inequality measure is also incorrect.

In order to evaluate the second and third hypotheses, we consider the information from the
period 1950-2000 for economies that register growth rates greater than 2 percent per year
during the period previous to the first break, as well as during the period following the last
break. We do this because there are some economies registering growth rates higher than 2
percent at the beginning of the period, which do not maintain this growth rate. Then we
compare the results with information from economies that initially have low growth rates
for the period, but after one or more breaks, register and maintain high growth rates. We
call the first group, consisting of 27 economies, “experienced runners” and the second
group, consisting of 22 economies, ”inexperienced runners”, because we analyze this
phenomenon as the race to industrialization. 56 economies grow more than 2 percent
during the first period, but they do not maintain that rhythm. 40 economies grow very
slowly during both periods. The greater number of economies start this race during the
Seventies; the lesser number during the Eighties (table 3).
The Empirical Economics Letters, 11(7): (July 2012) 683

Table 3: Number of Economies that Initiated their Race to Industrialization Per

Decade, 1950-1999 (Economies)

Decade Number Decade Number Decade Number

1950-59 4 1970-79 6 1990-99 4
1960-69 6 1980-89 2 1950-99 22

The experienced runners have growth rate with a standard deviation of 5.13 percent; on
the other hand, the inexperienced runners have a standard deviation of 6.90 percent during
the period of high growth rates.

The standard deviation test (sdtest) at STATA is very sensitive to the assumption that data
are drawn from an underlying Gaussian distribution. We decide to apply the Shapiro-Wilk
and Shapiro-Francia normality tests and we refute the null hypothesis. Therefore, we apply
three other tests in order to know if our distributions have the same standard deviations:
the Levine (W_0), the Brown (W_50) and the Forsythe (W_10). The Brown and Forsythe
tests are more robust than the Levine test when dealing with skewed populations. In this
case, we cannot refuse our second null hypothesis and there is equality between the
standard deviations.

Experienced economies have an average annual growth rate equal to 3.31 percent and
inexperienced economies have an average annual growth rate of 3.11 percent. Using
bootstrapping, with 2,000 replications, we evaluate the our third null hypothesis:
( H 0 : mean(exp er ) − mean(un exp er ) = 0 ,which we cannot refute.

We apply one permutation test in order to evaluate the null hypothesis of there being no
difference between two probability distributions F and G , namely, the equality of means
between the growth rates of experienced economies and the growth rates of inexperienced
economies. It is not possible to refute the null hypothesis of equality among distributions.
The achieved significance level (ASL) is 0.46 (=936/2000) and an assumption behind a
permutation test is that the observations are exchangeable under the null hypothesis. Thus,
an important consequence of the exchangeability assumption is that tests of different in
location require equal variance. We do not apply a permutation test of equality of
variances because as previously mentioned, the command sdtest requires normal data,
which one is not present (Figure 2).
The Empirical Economics Letters, 11(7): (July 2012) 684

Figure 2: Kernel Densities of Experienced Economies´ Annual Growth Rates and

Inexperienced Economies´ Annual Growth Rates of PCGDP, 1950-2000

.15
.1
.05
0

-50 0 50 100
x

kdensity exper kdensity unexper

4. Conclusions
Our results refute Lucas’s (2000) affirmations: the number of economies that begin the
industrialization race is less than the number proposed by Lucas; both groups have similar
variability and the growth rates of inexperienced economies are not greater than the
growth rates of experienced economies. Therefore, during the last three decades of the last
century the catch-up mechanism broke down.

References

Carrion-i-Silvestre, Josep Lluís, Tomas del Barrio-Castro and Enrique López-Bazo, 2005,
Breaking the Panels: An Application to the GDP per capita, Econometrics Journal, 8, 159-
175.

Lucas, R. E. Jr., 2000, Some Macroeconomics for the 21st Century, Journal of Economics
Perspectives, 14, 1, 159-168.

Maddison, A., 2003, The World Economy: Historical Statistics, Paris: Organisation for
Economic Co-operation and Development.