Both 'new growth' theory and recent empirical studies of cross-country growth have focused on the factors that cause some countries or regions to grow more rapidly than others and have also considered the `convergence hypothesis': that poorer countries tend to catch up with richer ones. In Discussion Paper No. 820, Research Fellow Danny Quah shows that most results of these empirical studies, which are typically based on regressing average growth rates on initial levels and interpreting a negative coefficient as evidence of convergence, suffer from Galton's classical `fallacy of regression' towards the mean. Finding that the initially poorer countries also happen to grow faster using standard regression techniques turns out to be uninformative about the convergence hypothesis.

Quah uses a dynamic version of Galton's fallacy to establish that coefficients of arbitrary signs in such regressions are consistent with an unchanging cross-section distribution of incomes. Alternative, more direct tests show a tendency for divergence of cross-country incomes. In the post-war era, rich countries have tended to become richer and poor countries poorer, while the middle-income group of countries appears to have been a vanishing class.

Galton's Fallacy and Tests of the Convergence HypothesisDanny Quah

Discussion Paper No. 820, July 1993 (IM)