Catching up, Forging ahead, and Falling behind: A Panel Structure Analysis of Convergence Clubs∗

The paper advocates and implements a new panel structure model to investigate the club convergence hypothesis. The model consists of a set of linear dynamic models that characterize the behavior of growth rates within each convergence club and a logistic regression that classifies these linear models. An EM algorithm is used to estimate the system by maximum likelihood and inference is conducted using asymptotic theory derived for the model. Our findings suggest that the world economy consists of three convergence clubs: an advanced club, an underdeveloped club and a developing club. Different convergence clubs exhibit different convergence behavior in terms of both speed of convergence and steady state growth rate. In particular, the steady state growth rates are for the three clubs are 2.09%, 0.27%, and 2.90% per year, respectively. These differences in long run growth imply that some countries will catch up and even forge ahead and some countries will fall behind. JEL Classification: C13; C23; C51