New empirical evidence on income convergence

This paper aims at providing further evidence on stochastic income convergence for a group of 30 countries over a century long period, from 1900 to 2008, utilizing novel econometric methods for determining structural breaks and unit roots. Recent studies have noted the problem of low power and size distortions in unit root tests, and spurious rejections that plague unit root tests which treat structural breaks asymmetrically. The proposed methodology used in this paper enables robust detection and estimation of breaks, and reliable inference regarding the presence of unit roots conditional on the presence or absence of breaks. We find that the periods of War, the Great Depression and oil price shocks to be possible reasons for the occurrence of breaks. The unit root test results indicate limited evidence of stochastic income convergence. We find none of the current upper-middle-income and lower-middle-income countries to show convergence, while high-income countries such as Australia, Canada, the Netherlands, Norway, Portugal and USA show signs of convergence toward the world average. Copyright Springer-Verlag Berlin Heidelberg 2015