Convergence Hypotheses are Ill-Posed:Non-stationarity of Cross-Country Income Distribution D

Abstract

The recent literature on “convergence� of cross-country per capita incomes has been dominated by two competing hypotheses: “global convergence� and “club-convergence�. This debate has recently relied on the study of limiting distributions of estimated income distribution dynamics. Utilizing new measures of “stochastic stability�, we establish two stylized facts that question the fruitfulness of the literature’s focus on asymptotic income distributions. The first stylized fact is non-stationarity of transition dynamics, in the sense of changing transition kernels, which renders all “convergence� hypotheses that make long-term predictions on income distribution, based on relatively short time series, less meaningful. The second stylized fact is the periodic emergence, disappearance, and re-emergence of a “stochastically stable� middle-income group. We show that the probability of escaping a low-income poverty-trap depends on the existence of such a stable middle income group. While this does not answer the perennial questions about long-term effects of globalization on the cross-country income distribution, it does shed some light on the types of environments that are conducive to narrowing/global income distribution; convergence clubs; transition kernel; stochastic stability