Industrialization, Convergence, and Patterns of Growth

Abstract

The long-run behavior of national growth rates has long been of great interest because it sheds light on future income disparities across countries as well as the prospective income of individual countries. Recently, the interest has been further stimulated, for the neoclassical growth model [6; 31] and new endogenous growth models [16; 26] yield sharply different predictions: while the neoclassical growth model predicts that countries with similar preferences and technology will converge to similar levels of per capita income, endogenous growth models predict that there will be no such tendency. In this regard, a substantial body of empirical study has examined whether the regression of the growth rate on the level of income per capita indeed produces a negative coefficient as predicted by the neoclassical model. Evidence is mixed, however. In particular, the regression results are very sensitive to the selection of countries: typically, the results for relatively developed countries are consistent with the convergence hypothesis [3; 11], but the results for the samples including less developed countries are rather in conflict with the convergence argument [9; 27]. The goals of this paper are (1) to document a stylized nonlinear (humped) pattern in growth, (2) to demonstrate how an explicit recognition of this pattern helps reconcile the conflicting results on convergence (and the conditional convergence result, below), and (3) to suggest a potential explanation for the humped pattern from a view of industrialization. Section II shows that there exists an economically and statistically significant hump in the growth rate of postwar cross-country data: on average, middle income countries grew the fastest, high income countries the next, and low income countries the slowest. Thus, a negative correlation between growth rates and income per capita is observed when low income countries are excluded from the sample, but no such correlation is found for a larger class of countries. To find the factors that can explain the fast growth of middle income countries, this paper first considers the most widely used three explanatory variables in growth regressions: the investment to GDP ratio, the percentage of age group enrolled in secondary education, and the rate of population growth. Both parametric and nonparametric analyses show that these variables cannot explain the humped pattern: middle income countries grew far faster than could be explained by