Empirical Cross - Section Dynamics in Economic Growth

Traditional empirical strategies for studying convergence—more generally, the dynamics and determinants of economic growth—can be misleading if important, underlying permanent or growth components are stochastically time-varying. This paper documents the degree to which this instability characterizes the data, and then offers an alternative empirical framework. This alternative—directly modelling the dynamics of the evolving cross-section distributions—applied to cross-country income data yields some interesting insights: economies across the world seem to be converging to a distribution where many remain wealthy, and many remain poor. Those economies able to make the transition from low to high income levels are primarily small and sparsely-populated; middle-income ones, by contrast, are a vanishing class. JEL Classification: C23, F47, O47 Communications to: D. T. Quah, LSE, Houghton Street, London WC2A 2AE. [Tel: +44-171-955-7535, Email: [email protected]] [(URL) http://econ.lse.ac.uk/~dquah/]