Working Paper: NBER ID: w28992
Authors: Daron Acemoglu; Carlos A. Molina
Abstract: Kremer, Willis, and You (2021) revisit cross-country convergence patterns over the last six decades. They provide evidence that the lack of convergence that applied early in the sample has now been replaced by modest convergence. They also argue this relationship is driven by convergence in various determinants of economic growth across countries and a flattening of the relationship between these determinants and growth. Although the patterns documented by the authors are intriguing, our reanalysis finds that these results are driven by the lack of country fixed effects controlling for unobserved determinants of GDP per capita across countries. We show theoretically and empirically that failure to include country fixed effects will create a bias in convergence coeffcients towards zero and this bias can be time-varying, even when the underlying country-level parameters are stable. These results are relevant not just for the current paper, but for the convergence literature more generally. Our reanalysis finds no evidence of major changes in patterns of convergence and, more importantly, no flattening of the relationship between institutional variables and economic growth. Focusing on democracy, we show that this variable's impact continues to be precisely estimated and if anything a little larger than at the beginning of the sample.
Keywords: Convergence; Economic Growth; Institutions; Democracy
JEL Codes: O47; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lack of country fixed effects (C23) | downward bias in convergence coefficients (C51) |
| downward bias in convergence coefficients (C51) | false impression of changing convergence patterns (F62) |
| omission of fixed effects (C23) | inconsistent estimates of convergence (C13) |
| inclusion of country fixed effects (C23) | accurate estimation of effects of institutional factors on growth (O43) |
| democracy (D72) | positive effect on GDP per capita (F62) |