Converging to Convergence

Authors:

Michael Kremer

Jack Willis

Yang Yo

1. Historical Background:

 Studies from the 1990s found no evidence of convergence, and there were
instances of divergence, with richer countries growing faster than poorer ones.

 National accounts data and historical data revealed weak and strong divergence
across different sets of countries, challenging neoclassical growth models.

2. Responses to Lack of Convergence:

 Lack of convergence led to the development of poverty trap models and

endogenous growth models that predicted divergence.

 Emphasis shifted to underlying determinants of steady-state income, such as

human capital, policies, and institutions, resulting in growth regressions and
conditional convergence tests.

3. Objective of the Study:

 The paper aims to update the stylized facts of convergence by revisiting empirical
exercises with 25 years of additional data.

 Focus areas include global trends in income and growth, as well as factors
influencing them, termed as the correlates of growth (human capital, policies,
institutions, and culture).

4. Absolute Convergence Trends:

  Analyzes absolute convergence by regressing ten-year growth in income per
capita on income per capita, showing a trend towards convergence since the late
1980s.

 Absolute convergence has been observed since 2000, challenging earlier notions
of divergence.

5. Potential Causes and Explanations:

 Considers possible causes for convergence trends, categorizing them into faster
convergence conditional on growth correlates and convergence in the growth
correlates themselves.

 Highlights that convergence is not driven by a specific region and becomes

stronger upon removing certain subsets of countries from the dataset.

6. Culture and Institutions:

 Examines changes in growth correlates, categorizing them into Solow

fundamentals, short-run correlates, long-run correlates, and culture.

 Finds evidence of convergence in culture, with several cultural variables

converging since 1990.

7. Interpretation and Questions:

 Discusses the possible interpretations of the observed trends, such as whether the
convergence is a blip or a turning point in world history.

 Raises questions about the relationship between growth and its correlates and
explores potential causes for changes in growth regression coefficients.

8. Methodology:
 Utilize standard cross-country data sources covering 1960-present.
 Adjust GDP per capita for Purchasing Power Parity (PPP).
 Use unbalanced panels to include countries with varying data availability.
 Exclude very small countries and those highly reliant on natural resource
rents.
9. Results:
 Identify absolute convergence since the late 1990s.
 β-convergence becomes significant in the late 1990s and stays significant
thereafter.
 A trend towards β-convergence (poorer countries growing faster) is observed
since 1990.
 σ-convergence (reduction in cross-sectional variance of income per capita) starts
slightly later, with a decline since the early 2000s.
10. Econometric Considerations:
 Address critiques related to fixed effects, cross-country heterogeneity, and annual
vs. 10-year growth.
 Discuss the stability of country fixed effects over time.
 Consider the trade-offs of using an averaging period and discuss the robustness of
results.
11. Conclusions:
 Findings support a trend towards convergence since 1990.
12. Robustness Checks:
 Analyze sensitivity to alternative specifications, such as varying the averaging
period and balanced panel considerations.
 Confirm that results are not driven solely by the inclusion of new countries over
time.
 Explore the consistency of results across different measures of income.
13. Limitations:
 Acknowledge limitations related to econometric specifications and potential
biases.
 Emphasize the importance of understanding the evolution of country-level steady
states.
14. Income Convergence:

 The study observes absolute convergence since the late 1990s.

 There is a trend toward convergence, especially since 1990.

  The trend is inconsistent with models predicting long-run divergence.

15. Driving Forces of Change:

 The shift to convergence is attributed to both a slowdown of growth at the frontier

and faster catch-up growth in poorer countries.

 The richest quartile of countries experienced a growth slowdown since 2000,

while the other three quartiles saw accelerated growth in the 1990s.

 The trend towards convergence is robust, even when excluding countries with
extreme growth experiences.

16. Regional Analysis:

 Excluding Sub-Saharan Africa strengthens the trend towards convergence in the

last twenty years.

17. Club Convergence:

 Convergence among high-income countries has slowed, aligning more with the
general global convergence pattern.

Methodology:

18. Data Sources:

 The analysis utilizes various datasets, including World Development Indicators,

Penn World Tables, and Maddison dataset.

 GDP per capita, adjusted for Purchasing Power Parity (PPP), is used for the main
analysis.

19. Convergence Measures:

 The study examines both β-convergence and σ-convergence.

 β-convergence is when poorer countries grow faster on average than richer

countries.
  σ-convergence is when the cross-sectional variance of (log) income per capita is
falling over time.

20. Econometric Considerations:

 OLS with fixed effects for year, clustered at the country level, is used for testing
β-convergence.

 Robustness checks include variations in panel balance, measurement error

considerations, and the use of alternative datasets.

21. Analysis of Correlates:

 The study explores convergence in various factors influencing growth, such as

policies, institutions, human capital, and culture.

 Correlates are categorized into enhanced Solow fundamentals, short-run

correlates, long-run correlates, and cultural traits.

22. Enhanced Solow Fundamentals:

 Human capital convergence starts from 1975, with poorer countries catching up.

 Investment is development-favored, showing moderate growth and stable

convergence.

 Population growth has slowed, especially in poor countries, contributing to

convergence.

Short-run Correlates:

23. Labor Force:

 Gender balance in education improved from 1985 to 2015, with a reduction in the male-
female education gap.

 Labor force participation rates remained stable, but there was β-convergence, indicating a
reduction in participation rate differences.

24. Political Institutions:

  Pervasive β-convergence and σ-convergence in political institutions, particularly strong
in the 1990s.

 Democracy scores (Polity 2 score) show a global increase from the late 1980s, with many
countries transitioning towards democracy.

 Deep institutional reforms in the 1990s led to a drop in convergence coefficients,

gradually returning to historical averages.

 Countries experienced both gains and setbacks in democracy scores, with developing
countries more likely to undergo political reforms.

25. Fiscal Policy:

 Government spending remained close to 16% of GDP globally.

 Substantial β-convergence in government spending, with higher spending in 1996

predicting a significant reduction in subsequent decades.

 Trade liberalization observed, with a significant reduction in tariffs from 1990 to 2010,
leading to β-convergence.

3.4 Culture:

26. World Value Surveys and Hofstede Dimensions:

 Culture measured through World Value Surveys and Hofstede dimensions.

 β-convergence observed in eight out of ten cultural variables, including political views,
work-life balance, and social issues.

 Younger generations converge towards different cultural aspects compared to the senior
generation.

27. Observations and Further Considerations:

 Labor force participation and gender balance in education have improved, contributing to
convergence.
  Political institutions, particularly democracy scores, have globally improved since the late
1980s.

 Government spending and trade liberalization show significant β-convergence.

 Cultural convergence is observed in various dimensions, with younger generations

showing shifts in political views and social perceptions.

Linking Converging Income with Convergence of Correlates":

Objective:

The section aims to explore the relationship between the trend towards income convergence and
the convergence of correlates (factors influencing economic growth) since the late 1980s. It
acknowledges the bidirectional nature of causation and seeks to understand how changes in
income convergence may influence policies, institutions, and cultural factors, and vice versa.

Approach:

1. Cross-Sectional Relationships:

 Examines the relationship between income levels and correlates, reflecting

modernization theory.

 Considers how these relationships have evolved since 1985.

2. Growth Regressions:

 Investigates the relationship between income growth and correlates while

controlling for income levels.

 Updates classic growth regression analyses with two additional decades of data.

3. Conditional Convergence:

 Explores conditional convergence, considering neoclassical growth models.

 Decomposes the gap between unconditional and conditional convergence to

understand the changing dynamics.
Key Findings and Considerations:

 Revisits cross-sectional relationships and growth regressions, updating previous analyses

with more recent data.

 Explores whether the trend towards absolute income convergence is due to the
convergence of absolute convergence to conditional convergence or if conditional
convergence itself has accelerated.

 Acknowledges the bidirectional causation, considering both the impact of correlates on

economic development and the influence of income convergence on policies, institutions,
and culture.

Observations and Further Considerations:

 The section sets the stage for a nuanced understanding of the interplay between income
convergence and correlates.

 Future analyses may involve instrumental variables to provide evidence on the directions
of causation, considering historical determinants of institutions and income as
instruments.

 The decomposition of the gap between unconditional and conditional convergence is a

promising avenue for understanding the evolving dynamics.

Correlate-Income Relationship and Modernization Theory":

Objective:

The section aims to investigate the relationship between changes in income levels and changes in
various correlates, assessing whether countries have shifted along the lines predicted by
modernization theory or if the relationships themselves have changed. The analysis explores
whether observed changes in correlates align with predictions based on income growth.

Methodology and Findings:

1. Correlation Between Changes:

  Examines whether actual changes in correlates align with changes predicted from
income growth.

 Overall, the fitted line is approximately on the 45-degree line, suggesting that
changes in correlates are, on average, in line with predictions from income
growth.

2. Comparison for Individual Correlates:

 Finds that while overall levels of correlates conditional on income have remained
constant, changes for individual correlates often deviate from predictions.

 Education and financial development have improved more than predicted by

income growth.

 Some measures of governance, such as property rights protection, investment

freedom, business freedom, and political stability, have stagnated or declined,
contrary to predictions.

3. Stability of Correlate-Income Relationships:

 Normalizes correlates by their values in 1985 and investigates the slopes of

correlate-income regressions.

 Finds that the slopes have changed remarkably little since 1985, with 69% to
87.5% of the variation in slopes explained by the 1985 values.

 Stability is observed even when considering trends since 1960, and the signs of
the correlate-income relationships remain highly stable.

Key Implications:

 Overall Conformity with Modernization Theory:

 The weak out-of-sample test suggests that, on average, changes in correlates align
with predictions from income growth.

 However, deviations for individual correlates indicate that a simple modernization

theory explanation may not fully capture the complexity of changes.
  Stability of Correlate-Income Relationships:

 The stability of correlate-income relationships since 1985 implies a robustness in

the patterns observed over time.

"Growth-Correlate Relationship and Growth Regressions":

Objective:

The section investigates the relationship between economic growth and various correlates,
focusing on the changes in the growth-correlate relationship over time. It discusses the evolution
of growth regression coefficients and explores whether recent changes in policies and institutions
have affected growth.

Methodology and Findings:

1. Approach to Growth Regressions:

 Acknowledges the limitations of growth regressions as a causal framework but

recognizes their value in providing an out-of-sample test for the predictive power
of policies and institutions identified in earlier literature.

 Highlights the vulnerability of the growth regression literature to overfitting and

the potential for using events post-publication to assess correlates and
identification strategies proposed more recently.

2. Changes in Growth Regression Coefficients:

 Examines the changes in growth regression coefficients (λts in Equation (4)) over
time for different correlates.

 Finds that coefficients for human capital (education) and other Solow
fundamentals have fallen somewhat in magnitude but remain correlated.

 Coefficients on short-run correlates (those changing over relatively short

horizons) fell substantially from 1985-2005, with essentially zero correlation
between the two periods.

3. Persistence of Correlation with Growth:

  Categorizes correlates into short-run, long-run, and culture, noting the persistence
of their correlation with growth.

 Shows that the slope of the correlate-growth relationship has shrunk towards zero
for short-run correlates but remains more stable for long-run correlates and
culture.

4. Trends in Growth-Correlate Slopes Since 1960:

 Reports trends in growth-correlate slopes since 1960, supporting the main

findings and showing a gradual trend in the flattening of growth regression
coefficients from 1985 to 2005.

Hypotheses for Future Work:

 Provides two hypotheses for the observed reduction in growth regression coefficients:

 Reduction in the correlation between correlates, leading to a reduction in omitted

variable bias.

 Non-linear effects, where policies and institutions may have mattered more when
there were large differences across countries.

"Shrinking Gap Between Conditional and Unconditional Convergence":

Objective:

The section explores the relationship between unconditional and conditional convergence,
investigating whether the gap between the two has changed over time. It analyzes the impact of
conditioning on various correlates and observes the trends in convergence coefficients.

Key Points:

1. Shift to Conditional Convergence:

 Responding to the failure of unconditional convergence, the concept of

conditional convergence gained support. This involves convergence conditional
on determinants of steady-state income, such as policies and institutions.
2. Effect of Conditioning on Correlates:

 The effect of conditioning on correlates is examined, with Solow fundamentals

showing the most stable effect, long-run correlates and culture being intermediate,
and short-run institutions having the least stable effect.

 From 1980 onwards, the average effect of conditioning on short-run and long-run
correlates has shrunk to around zero, while Solow fundamentals and culture have
remained more steady.

3. Multivariate Analysis:

 A multivariate version is attempted by selecting a sample of 72 countries and

including various institutional variables.

 Trends from 1985 to 2007 show a clear reduction in the unconditional

convergence coefficient, while the conditional convergence coefficient does not
exhibit a clear trend.

4. Closing Gap Between Conditional and Unconditional Convergence:

 Despite the downward trend in the unconditional convergence coefficient, there is

no clear trend in the conditional convergence coefficient.

 The gap between unconditional and conditional convergence has substantially

closed over time, indicating that absolute convergence has become closer to
conditional convergence.

5. Explanation for Changes Since the Late 1980s:

 The rapid convergence in observable policies and institutions, possibly as a

reaction to the growth literature of the 1990s, explains the shrinking gap between
absolute and conditional convergence.

 A speculative interpretation suggests that as policies and institutions became less

correlated with unobservable determinants, the gap reduced.

 The results suggest a shift from absolute convergence to conditional convergence,

in line with neoclassical growth theory.
6. Optimism and Pessimism:

 Reasons for optimism include the observed convergence in correlates, supporting

conditional convergence as a robust phenomenon.

 Potential causes for pessimism include recent deteriorations in democracy and the
economic costs of climate change, particularly affecting developing countries.

7. Conclusion:

 The document concludes by highlighting the substantial reasons for both

optimism and pessimism regarding the continuation of absolute convergence.