M E ECONOMIC RECORD, VOL 71. NO. 214. SEPTEMBER 1995.

259-270

A Time-Series Perspective on Convergence:

Australia, UK and USA since 1870*
LES OXLEY and DAVID GREASLEY
Department of Economics, DepaHment of Economic History.
University of Edinburgh and University of Edinburgh
University of Western Australia

Tests of the Convergence Hypothesis or the tendencyfor per capita

income levels to narrow over time, have generally utilized cross-
sectional data and have usually found conflicting evidence. In this
study we utilize time-series data on Australia, UK and USAfor the
period 1870-1992, and time-series tests, to consider both 'catching-
up' and 'long-run convergence'. The paper finds evidence in favour
of long-run convergence in per capita income levels for the UK and
Austrulia for the period 1892-1992 and catching-up in the case of
U K and USA, and Australia and USA, giving some s u p p o for~ the
exogenous approaches to economic growth.

I Introduction involve long periods of 'catching-up'. Further

Tests of the convergence hypothesis, or the ten-
dency for per capita income levels to narrow over
time, have attracted considerable attention. see,
for example, Barro (19911, Barro and Sala i
Martin (1992). Baumol (1986), Dowrick and
Nguyen ( 1989). Durlauf ( I 989). and Quah ( 1993).
The interest partly derives from the simple eco-
nomic underpinnings of the convergence hypoth-
esis. In the standard Solow-type neoclassical
growth model, convergence in per capita output
stems straightforwardly from a concave produc-
tion relationship and the nature of exogenous
technical progress, making long-run growth inde-
pendent of initial conditions such as the physical
capital stock. Extensions to this standard approach
which 'augment' the Solow model with human
capital include Barro (1991). Barro and Sala i
Martin (1992) and Mankiw, Romer and Weil
(1992). also imply some form of convergent
behaviour although it may be protracted and
*We would like to thank panicipants at the 1995 Eco-
nomic History Society Conference, at which a version
of this paper was presented, and two anonymous refe-
rees of this lourno!, for helpful comments.
Williamson (1995) and Barn and Sala i Martin
(1995) consider the implications of international
factor and commodity flows for the pace of
convergence.
In sharp contrast the recent work on endoge-
nous growth models associated with for example
Rebelo (1991), has different convergence impli-
cations. Here technological shocks may have per-
manent effects and preclude convergence. In
endogenous models physical and educational
investment is assumed, unlike the case of Solow-
type models. not to encounter diminishing returns,
suggesting leadership might persist. As such dif-
ferent assumptions: about the nature of technical
progress, for example exogenous Solow versus
endogenous Rebelo, the shape of the production
relationship, and the mobility of factors and com-
modities, have strong implications for conver-
gence and therefore the time-series patterns of
relative per capita output measures.
Most empirical tests of the convergence hypoth-
esis utilize cross-sectional data to investigate the
correlation between initial per capita GDP levels
and growth rates for groups of countries, see for
example, Barro (1991) and Mankiw, Romer and

259
'? 1995. The Economic Society of Australia. ISSN 0013-0249.
260 ECONOMIC RECORD SEPTEMBER

Weil (1992). This research generally finds in FIGUREI

favour of convergence for the industrialized coun- Relarive GDP per Capi11I
tries, especially in the years after World War 11. (1985 S adjusted for P.P.P.)
O’Rorke, Williamson, and Hatton, (1994) and
Williamson (1995) also report convergence
between New World primary producers and
industrial Europe in the period 1870-1914.
y1
However, DeLong (1988). and Levine and
Renelt’s (1992) survey based upon the Heston and l .0
1 ’ 8
Summers (1988) wider sample of data for 130
countries for the post-I950 period, repons less
evidence of convergence.
Where time-series tests are utilized. no evidence
favouring convergence has been repned. even .a. - I , . I .

among industrial countries; see, for example. 1170 I190 1910 I930 1910 1970 1990
Bernard and Durlauf (1994. 1995). Time-series
tests investigate differences across countries in the
long-mn behaviour of per capita GDP.where con-
vergence implies that relative shifts must be tran-
sitory. Bernard and Durlauf (1994) consider why
the time-series and cross-sectional appmaches
typically give different results and we will reit-
erate some of these reasons in Section 11. Fur-
thermore. they generally favour the time-series
approach when ‘adjudicating theoretical disputes
in the growth literature’, in the main because of
the fundamental differences in approach to defin-
ing convergence. but also due to potential mis-
specification problems in Cross-Sectional tests.
Additionally the time-series perspective offers
insights into the macroeconomic experience of
individual countries.
This paper deploys time-series unit mot-based
tests to consider the convergence in per capita
GDP between Australia. the UK. and the USA
during the period 187b1992, and pays part~culu
attention to the distinctive macroeconomic history
of Austnlia. Australia’s per capita GDP levels in
the 1870s exceeded those of the UK and the USA.
but declined relatively thereafter. However,
whereas Australian and British per capita income
0.3‘
levels were little different by the 1980s. levels in UWUSA
the USA were considerably higher, see Figure I .
Faster GDP per capita growth in Australia and
the UK since 1945 has so far only modestly
dented the USA’s lead established during the first
half of the twentieth century.
The close and complimentary economic links
between Australia and the UK, shaped by trade. tive income advantage in the period 1870- 1900 as
investment and migration during the century after factor and commodity flows shifted both natural
1870s. suggests a natural test of convergence resource population balances and the terms of
between the two countries. Williamson (lW5) trade. Exceptionally, the USA resists the tendency
notes the tendency for regions of cccent European for New World incomes to converge to European
settlement, including Australia, to lose their rela- levels, becoming the UK’s major industrial com-
 I995 TlME-SERIES TESTS OF CONVERGENCE
petitor during the 1890s. and maintaining global
ascendancy for much of the twentieth century; see
Nelson and Wright (1992). The convergence
hypothesis suggests Australia and the UK should
have experienced per capita GDP convergence
with the USA during the twentieth century. Inves-
tigating pairwise GDP per capita, convergence
between Australia, the UK. and the USA should
shed light on British-New World economic rela-
tions before 1900, and on the convergence
hypothesis more generally, in relation to the
USA's twentieth-century global leadership.
The time-series approach gives rise to two def-
initions of the convergence hypothesis, and these
are considered in the next section. There we
extend the work of Bernard and Durlauf ( 1994)
by giving attention to the possibility of structural
discontinuities in the convergence process. The
subsequent section introduces the historiography,
particularly of Australia's macroeconomic record,
to motivate the investigation of discontinuities in
convergence experience. The possibility of stmc-
tural breaks in the growth record of the individual
countries are also Considered via endogenous tests
based upon the Zivot and Andrews (1992)
approach. Finally we report the pairwise time-
series test results and consider their implications
for the convergence hypothesis.
11 Time-Series Analysis and Convergence
The economic underpinnings of the conver-
gence hypothesis arise naturally within the stan-
dard or augmented Solow neoclassical gruwth
model. Here differences in initial endowments are
seen to have no long-term effects on growth with
deficient countries able to catch up to the leaders
who suffer from diminishing returns. In contrast.
Rebelo-type models imply leadership can be
maintained with non-convergence the likely
outcome. As such, not only are tests of conver-
gence interesting in their own right, but they
emerge as one natural testable implication of alter-
native models of growth.
The main feature of the time-series approach to
tests of convergence within a neoclassical. Solow
(1956)-type model, stems from the basic conclu-
sion of that model. In particular. the model pro-
duces the property that the long-run behaviour of
the economy will be independent of initial con-
ditions. To see this clearly, consider the following
version derived from Bernard and Durlauf (1994).
Assume the following standard neoclassical pro-
duction function:
26 I
where Y, denotes output, A, the level of produc-
tivity, Kt and H, physical and human capital, L,
labour and E , a productivity shock. F is crucially
assumed to exhibit non-increasing returns to scale
and standard Inada-type conditions and K , H and
L the following dynamics:
Lt = ( 1 + n)'h J
where sK and sH denotes savings rates, 6, and
6, depreciation rates and n the population growth
rate and 0 represents an initial value. Using such
a structure, Bernard and Durlauf (1994). consider
the limiting behaviour of the level of output, nor-
malized by the levels of productivity and labour,
i.e., A;' L;' Y,and demonstrate how via the con-
cavity of F such a limit will be independent of
KO, Ho and h.Countries with the same savings.
depreciation, and population growth rates; the
same E'S and Fs, will exhibit (steady-state) con-
vergence. Furthermore, given the standard neo-
classical assumptions this steady-state will be
unique.1
' A referee has suggested an alternative way of
gaining insights into the distinction between catching-
up and convergence within an exogenous growth model
by considering the following equation taken from Barro
and SJa-i-Mmin (1992). which describes a linear
approximation to the out of (stationary), steady-state
behaviour of (log) per capita output within an exoge-
nous growth model:
y, = y@)e+ + y' (1 - e-43 (3)
where y, is defined as (log) output per capita, ~(0) (log)
initial output per capita. yo is the stationary steady-state
(log) output per capita and thc speed of adjustment
which depends on various model parameten. If we con-
sider two countries i and j . and assume a common p,
we can re-write (3) as (3'):
Funhermore, if we assume sufficient time elapses such
that catching-up has
been completed then. e-r' I 0 and
( 1') reduces to:
CY;, - Y, = Cvf -Y,? (3")
where the difference in log per capita output will be
stationary without trend, i.e.. countries i and j will have
converged. Notice the absence of any association
262 ECONOMIC RECORD
When this result is translated into considering
output diferences, between countries, the time-
series tests require that these differences must be
stationary with no statistical association with
initial values. This is in sharp conhast to the basic
cross-sectional tests of convergence which arc
based upon a negative association between output
differences and initial output levels. This particu-
lar feature represents the crucial potential incom-
patibility between cross-sectional and time-series
tests.
Contrast such conclusions with Rebelo (199 I)-
type endogenous models where the production
function exhibits non-constant (increasing)
returns. In this case output differences between
economies can become unbounded. Furthermore,
notice the possibility thru convergence may
involve a multiplicity of steady states. a feature
utilized by Durlauf and Johnson (19941, to dem-
onstrate the problems faced by traditional cross-
section tests of exogenous versus endogenous
growth models--an issue returned to later below.
Convergence, however, is but one implication
of such models and does not in itself represent a
full test of the competing approaches. In order to
test for convergence some form of clear definition
and some appropriate form of time-series data are
required where, as we will see. the crucial feature
to be exploited are the time-series properties of
the data.
Following Nelson and Plosser's (1982) pio-
neering research considerable effort has been
devoted to establishing whether or not individual
output series typically contain a unit root and are
difference stationary. The issue lies at the centre
of modern macroeconomics since the existence of
a unit mot implies output fluctuations infinitely
persist to shape mean output and employment.
Durlauf ( 1989), and Bernard and Durlauf (1995).
utilize the Dickey-Fuller unit mot testing pmce-
durc as a time-series based test of convergence.
Here convergence implies output innovations in
one economy should be transmitted internation-
ally. The absence of transmission implies that per
between initial values and the definition of convergence.
Alternatively. write (3') as:
Q, - y,,) =u + be-"' (3'")
where b = (v(O), - )to),) - (vl* - y,?. and a = yl* - therefore represents a much stronger version of
' ) 1 Here (3"') captures the notion of catching-up
h'v etined above where the diffemnce in log per capita
output will be stationary. but with significant trend
effects.
SEFTEMBER
capita output differences between countries con-
tains a unit root. since output shocks generating
relative GDP movement infinitely persist causing
economic divergence-an implication of the
endogenous growth models of Rebelo. Utilizing
slightly different definitions to Bernard and
Durlauf (1994). this can be illustrated via the con-
cepts of catching-up and long-run convergence.
Defdtioa:
Caching-up: consider two countries i and j,
and denote their per capita real output as yi and
yi. Catching-up implies the absence of a unit root
in their difference yj'- yi. p i s concept of con-
vergence relates to economies our of long-run
equilibrium over a fired interval of time, but
assumes that they are sufficiently similar to make
tests (and rejections). of the hypothesis non-trivial.
In this case catching-up relates to the tendency for
the difference in per capita output to narrow over
time. Hence non-srationarity in yj - y.. I
il stochas-
tic trend, must violate the proposition although the
occurrence of a non-zero time trend, a determin-
istic trend in the process. in itself. would not. A
sufficient condition for catching-up would be sto-
chastic cointegration between yi and y j .
Long-run convergence: consider two countries
i and j . and denote their per capita real output as
yi and y j . Long-run convergence implies both the
absence of a unit root i n their difference yi - yj
and a time trend in the deterministic process, i.e.,
the absence of both a stochastic and deterministic
trend. In this case a sufficient condition for con-
vergence would imply both stochastic and deter-
ministic cointegration between yi and y,.
Catching-up differs from long-run convergence
in that the latter relates to some particular period
T equated with long-run steady-state equilibrium.
In this case the existence of a time trend in the
non-stationary yi - y j would imply a narrowing
of the (per capita output) gap or simply that the
countries though catching-up had not yef con-
verged. Conversely, the absence of a time trend
in the stationary series implies that catching-up
has been completed.
Clearly long-run convergence and catching-up
are related in that both imply stationary yi - yj.
However, long-run convergence relates only to
(similar) economies in long-run equilibrium and
the convergence hypothesis.
As defined above, statistical tests of catching-
up and long-run convergence hinge, therefore, on
the time-series properties of yi - yj. The natural
 199s TIME-SERIES TESTS OF CONVERGENCE
route for such tests involves Dickey-Fuller type
tests based on the bivariate difference in per capita
output between pairs of countries, i and j , i.e..
n
where y indicates the logarithm of per capita
output. If the difference between the output series
contains a unit root. a = 1. output per capita in
the two economies will diverge. The absence of a
unit root. a < I. indicates either catching-up, if
f3 f 0. or long-run convergence if p = 0.
The main reservation surrounding the robust-
ness of unit root tests in general, and therefore
their application to tests of convergence in
particular, concerns the possibility that structural
discontinuities in the series may lead to erroneous
acceptance of the unit root hypothesis. Perron
( 1989). and Rappoport and Reichlin ( 1989). con-
sider the importance of incorporating the effects
of discontinuities when investigating the statistical
propenies of long-run historical series. For
example. Perron ( 1989) has challenged Nelson
and Plosser's (1982) findings that US production
series typically contain unit roots since allowing
for the effects of the great contraction around
1929 appears to overturn the unit root null. Alter-
natively, Zivot and Andrews (1992). contend that
discontinuities have been too readily accepted and
that macroeconomic time series usually contain a
unit root. These analysts consider extensions to
Dickey-Fuller type regression tests which embed
the unit root null. a = I within the models:
yI =p + 8Du + Pt + dD(TB)
n
i- I
=p + BDu + pt + yDT + dD(TB)
n
+ + 2 6; AY,-~+ el
i- 1
(C)
where y is the variable of interest;
D(TB) = I i f f = TB, 0 otherwise;
Du = I if t > TB, 0 otherwise;
263
D P = t - TB. and DT = t if t > TB and 0
otherwise,
and TB refers to the time of the break.
Models A, B, and C use the specified dummy
variables to respectively allow the incorporation
of a crash, trend change and joint crash and trend
changes, when testing the unit root null. a = I.
Under the rejection alternative a < 1. and signif-
icance is tested against the Perron ( 1989). critical
values, which have larger absolute size than the
Dickey-Fuller T.
Applying Perron's unit mot testing strategy
requires the prior specification of breakpoint
years. Christian0 (1992), and Zivot and Andrews
(1992). favour an alternative approach based upon
recursive searching for endogenous discontinuities
at every year within the sample. They deploy
dummies similar to Perron's to incorporate cnsh
and trend breaks, but dispense with the single year
dummy, D(TB). Critical values reported by Zivot
and Andrews ( 1992). for testing the significance
of a with breaks at any year are much greater in
absolute value than Perron ( I 989), raising a strin-
gent b h e r to the rejection of a unit root.
Before considering the results, it is useful to
consider the relationship between previous cross-
sectional tests and these new time-series
approaches. Within the cross-sectional test frame-
work. convergence is identified if (bivariate) dif-
ferences in growth rates are negatively correlated
with initial income levels-'the cross-section
tests consequently examine whether the average
change in per capita output of the initially poorer
country exceeds that of an initially richer
country,' Bernard and Durlauf (1994). In conViLFt
the time-series tests of convergence require that
these differences in growth rates are stationary
with no statistical association with initial wealth.
As such, the time-series version of catching-up,
which permits for time trend effects, captures a
version of the cross-sectional tests of conver-
gence. The time-series perspective is therefore a
stronger notion of convergence which subsumes
the cross-sectional tests as tests only of catching-
up and is one mason for Bernard and Durlauf s
preference for the approach. A second stems from
the robustness of the time-series approach when
discriminating between for example. endogenous
versus exogenous models of growth. In particular
using an example from Durlauf and Johnson
(1994). they illustrate how a significant p (as
defined in fn. I), can emerge when assuming an
exogenous growth process. but the true process
stems from an endogenous growth model with
264 ECONOMIC RECORD
multiple equilibria. No such ambiguity would
pertain to the time-series notion of convergence
because of the required absence of association.
Ill Macroeconomic History and Structural
Discontinuities
The issue of structural discontinuity figures
prominently in Ausmlian macroeconomic history.
For the pre- I9 I4 era we have argued that the 185I
gold discoveries and the 1891 depression seg-
mented Australian growth, see Greasley and
Oxley ( 1994a). Here we focus on the period since
1870 to allow comparison with the U K ' s and the
USA's GDP per capita. Both Australian and
British GDP per capita appear to follow a differ-
ence stationary, (DS). process for the period 187G
1992. whereas the results in Table I suggest the
USA's data are trend stationary, (TS).
Elsewhere we suggest that structural disconti-
nuities associated with World War I, 1914-18.
and the great contraction. 1929-33. disguise the
true TS model for the U K , see Greasley and Oxley
(1994b). It seems possible that Australian GDP
per capita also follows a segmented trend station-
ary process during the period 1870-1997,. see Raj
( 1992). Nineteenth-century expansion of the Aus-
tnlian economy was interrupted by the 1890s
depression. The timing and causes of the down-
turn have k e n widely debated. but typically ana-
lysts consider the 1890s as a watershed between
nineteenth-century expansion and a period of
slower growth lasting until 1939. Maddock and
McLean ( 197 I ) highlight the slight rise in GDP
TABLEI
Testing for Unit ROOISin GDP per Cupita 1870-IWJ
( without discontinuities?
~ ~~ ~ ~ ~~~~
Australia - I .577 0.864 1.419
UK + -0.85 I 0.564 1.198
us -4.363. 0.037 5.883
ADF refers to the Dickey-Fuller statistic with 2 aug-
mentations except + which refers to ADF(6).
*denotes significant at the 5% level using the Mac-
Kinnon (1991) critical values. Lh4(SC) relates to a
L a p g e Multiplier test for first-order serial correlation
and Q6 is a Ljung-Box test based upon 6 lags.
T h e degree of augmentation h u been chosen so as to
produce serially uncorrelated error terms, significant
lagged difference terms and pmimony. in an attempt to
maximize test power. Such criteria w e n used to choose
the level of augmentation in dl cases.
SEPTEMBER
per capita during the half century after 1890 in
their survey of long-run Australian growth, while
Jackson (1977) reckons that the 1890s dividing
line may have been of fundamental importance. I t
appears. see Butlin (1962) and Boehm (1971). that
Australia's export potential was unable to meet
growing overseas liabilities, and that the 1891
crash was a mechanism for equilibrating the
balance of payments.
Twentieth-century Australian macroeconomic
history also highlights a number of likely discon-
tinuities. Most distinctively interwar Australian
GDP per capita peaked in 1925. Pope (1987) con-
siders the post- I925 downturn was connected to
levels of domestic investment, especially building.
In part patterns of building investment reflected
demographic swings, but the UK's return to the
gold standard in 1925 was accompanied by con-
straints on capital flows to Austrilia. see Pressnell
(1978) and Tsokhas (1994). The Australian
economy was already on a downward path when
the USA's crash around 1929 heralded a collapse
of world trade. Although Australian GDP per
capita rose after 1931. 1925 levels were not
regained until 1940.
Other landmarks in Australia's twentieth-
century macroeconomic history which may have
k e n associated with structuril discontinuity
accord more closely with the major international
shocks. The disruption to world trade during
World War I was particularly detrimental to
Australia. whereas Australian GDP per capita
surged over 30 per cent between 1939 and 1944
as increased demand lifted the economy from
depression. Maddock ( 1987) emphasizes the long
boom in the Australian economy to 1970 dated
from the onset of World War If. The oil price
shocks around 1973 marked the end of the boom.
and inevitably slowdown in the world economy
adversely affected Australia. However Pagan
( 1987) argues the extent of retardation was exac-
erbated by a loss of competitiveness due to real
exchange n t e appreciation both during the 1970s
and the early 1980s mining boom.
Within the period 1870-1992 the years most
likely to have witnessed discontinuity in Austral-
ia's GDP per capita are, 1891, 1914-.18. 1925,
1929. 193945, and 1973. Zivot and Andrews's
( 1992) recursive search procedure offers the sim-
plest approach to assessing the significance of
single postulated breaks. Figure 2 illustrates the
ADF(2) statistics obtained by respectively incor-
porating crash, trend change, and joint crash and
 1995 TIME-SERIES TESTS OF CONVERGENCE 265

FIGURE2 Zivot and Andrews critical values. However a

Zivor and Andrews ( 1992) Apprcwh Perron-type approach with the a priori specifica-
tion of the 1925 discontinuity does overturn the
DS null. with an ADF(2) of -4.54. Moreover
a single endogenous trend break around 1931
appears sufficient to reject a unit root. even
though Zivot and Andrews's critical values raise
a stringent barrier to the rejection of the DS null.
Neither of the world wars or the 1973 oil price
shocks appear to have segmented Australia's GDP
per capita growth record.
It seems likely that the strength of the 1931
break partly stems from measuring accelerating
growth from the depth of the interwar trough,
which casts some doubt on the historical signifi-
cance of the trend discontinuity. Moreover Zivot
and Andrews's procedure only searches for single
year breaks, whereas discontinuities may have
occurred in combinations of years. Furthermore,
ignoring a significant 1925 effect when searching
for further breaks may introduce measurement
error and hence mislocate the true discontinuity.
The results in Table 2 investigate the possibility
of multiple breaks. focusing on the combined
effects of a I89 1 crash, I925 joint crash and trend
break, and a 1931 trend change.
A combination of a 1891 crash and 1925 join1
crash and trend change yields the largest absolute
ADF(2) statistic. Zivot and Andrew's critical
values are not appropriate for multiple break
models. but Inwood and Stengos (1991). report
5 per cent level critical values for similar two- and
three-break models respectively at -4.86 and
-5.13. Although not precisely comparable with
the Inwood and Stengos values, the results here
lend support to the segmented TS model. and
highlight the likelihood of 1891 and 1925 discon-
tinuities in Australia's GDP per capita record.
The case in favour of a 1931 trend change
appears less strong in the multiple break frame-

TABLE2
Unit Root Tests for Austruliun GDP per Cupiru

Year of discontinuities
I89 I C and I89 I C, I925C&T. I89 I C and
1925C&T 1931T 1931T
trend change dummy variables within the unit root ADF(2) -6.450 -6.427 -4.975
testing strategy. LM(SC) 0.001 0.545 0.639-
The year 1891 appears as the strongest crash in Q6 1.637 3.013 1.772
Australian macroeconomic history, and 1925 as
the major joint crash and trend change, although C denotes crash, T trend break. and C&T joint crash
neither ADF(2) statistic overturns the DS null on and trend change
266 ECONOMIC RECORD SEPIZMBER

work. Adding a I93 I break to the 189 I and 1925 TABLE3

discontinuities reduces the ADF(2) statistic. Unit Roor Tests
Clearly Australian trend GDP per capita growth UK-Ausrralian. US-Ausrralian and UK-US,
accelerated between the world wars, which GDP per Cupira
explains why the Zivot and Andrews type results (wirhout discontinuities)
pinpoint the 193 I trough as the single most prom-
inent trend break. However CI priori consideration Countries Sample ADF LM(SC) Q6
of the historical record and multiple break mod-
elling yields strong evidence of a two-break seg- UK-Australia 1870-1992 -3.250 0.792 4.029
mented trend stationary representation with UK-Auswlia # 1892-1992 -5.531* 0.m 7.969
US-Auswlia + 1870-1992 -2.301 0.047 1.823
discontinuities around 1891 and 1925. Figure 3 UK-US + 1870-1992 -3.160 0.994 5.818
illustrates the preferred two-break model incor-
porating a 1891 crash and 1925 joint crash and 'denotes significant at. the 5% level based upon
trend discontinuity. MacKinnon ( 1991). AD6denotes ADF(4) except those
marked + which relate to ADF(2). 8. p value on
IV Time-Series Test Results for Convergence included time trend, (p in eq. 4) = 0.627
This section reports painuise tests for long-tun
(steady-state) convergence, and catching-up. On the likelihood of structunl discontinuities in the
the basis of the results in Table 3 based on equa- Australian (and the British) growth record, for
tion 4. for the 1870-1992 period, neither version example that associated with the crash of 1891,
of the convergence hypothesis receives support, suggests their impact on the convergence process
since a unit root cannot be rejected i n the cross- warrants investigation. Interestingly the British
country differences in GDP per capita. However and Australian economies appear to have been

FIGURE3
+ t + dulH9I
Australian GDP per cupiru: y = c + dt1925 f du1925

1.1475

,61717 -

.m-

- .413u
1981 1932 1963 199

MICNCIL Fitted .............

 I995 TIME-SERIES TESTS OF CONVERGENCE 267

convergent during the century following the dis-
continuity associated with the 1891 Australian
crash. The absence of both a unit root and a deter-
ministic trend in the UK-Australia data for the
period 1892-1992, favours the strong version of
the convergence hypothesis.
Whether or not the failure of the time-series
approach to typically identify convergence stems
more widely from discontinuities in the process
can be assessed by applying Zivot and Andrews's
search procedure to the comparative series. The
results in Table 4 report the maximum absolute
ADF statistics obtained by endogenous searching
over the period 1870-1992 for crash, trend, and
joint crash and trend changes in a naturally
extended version of equation 4.
All three pairwise results reject the existence of
a unit root in some variant of the model and are
supportive of some form of the convergence
hypothesis. The UK-Australia results support
long-run convergence, with the 1891 crash
marking a discontinuity i n the process.
The UK-Australia results do contain a signifi-
cant joint crash and trend change discontinuity in
1891. but the absence of a significant individual
trend break and the closeness of the crash and
joint crash and trend break ADF statistics point to
the dominance of the 1891 crash. Alternatively
both the US-Australia and UK-USA results
contain significant trend discontinuities, and
hence favour the weaker catching-up version of
the convergence hypothesis. Catch-up towards the
USA's GDP per capita dates from 1950 for the
UK and the years of World War I1 for Australia.
The results therefore show how the omission of
significant discontinuities can lead to incorrect
inferences being drawn regarding convergence
and importantly the possible causes of economic
growth. In particular, in the UK-Australia case
where long-run convergence is inferred, support
for the Solow growth model emerges. Catching-
up in the UK-USA and USA-Australia case is
supportive of the augmented Solow model. while
no case supports one important implication of the
Rebelo model, i.e.. long-tern non-convergence.
However, as stated earlier such implications do
not constitute full tests of the growth models.
V Conc(uding Remarks
Doubts have grown in recent years about the
value of the convergence hypothesis. Partly
the scepticism concerns the inability of cross-
sectional studies to discern convergence other
than between a narrow range of countries at
particular times, but more fundamentally the basic
utility of the cross-sectional approach has been
questioned. Moreover, the recent development of
time-series convergence tests has led to results
which hereto have been wholly unfavounble to
the convergence hypothesis, even for industrial
economies. The novelty of this paper's statistical
findings lies in the support found for the conver-
gence hypothesis via a time-series perspective.
Incorporating discontinuities led to the rejection
of a unit root for all the comparative Australian,
UK, and USA GDP per capita series.
In themselves these results offer support for the
catching-up version of the convergence hypothe-
sis. Further the absence of a deterministic trend in
the UK-Ausualia series points to the attainment
of long-run (steady state) between these two econ-
omies. Such results have broader utility when
related to current debates on exogenous versus

TABLE4
Unit Root Tests-Diferences in GDP per Capita
Zivot and Andrews Approach

Country k Year Crash Trend Crash & Trend

UK-Australia # 4 1870- I992 -5.418" -4.192 -5.440*

[I8911 [ I8991 [I8911
US-Australia 2 1870-1992 -4.085 -4.483" -4.585
[I8911 [ 1943-441 [I9411
UK-US 3 1 870- I992 -4.303 -4.828* -5.342*
(19661 [ 19501 [I9411

k is the degree of augmentation +denotes significant at the 5% level based upon Zivot and Andrtws (1992).
[ 1 denotes the year of the maximum absolute value of the ADF. 1, p value on included time trend (p in eq. A).
= 0.495;p value on time trend, (p in eq. C), = 0.364 and p value on change in trend (y in eq. C), = 0.398.
268 ECONOMIC RECORD
endogenous growth. Solow, and Solow-type
models augmented by human capital and inter-
national factor mobility, of exogenous economic
growth imply convergence or catching-up.
However, Rebelo-type models allow the possibil-
ity for perpetual leadership. The results here give
some support for the exogenous over endogenous
models although care should be taken not to take
such implications too far without full tests of the
appropriate economic models.
The results also shed light on the particular
macroefonomic history of the three economies.
Most interestingly the UK and Australian econo-
mies appear highly integrated throughout the
1870-1992 period. with the effects of
macroeconomic shocks readily transmitting
between the two economies, although the 1891
crash segments comparative Australia-UK eco-
nomic performance. In effect the UK and
Australia attain pmllel economic performance in
the 1870-1891 period 31 a higher level of Austn-
lian GDP per capita. reflecting the abundance of
Australian natural resources. Levels of Australian
GDP per capita substantially in excess of the
UK's (and the USA's) apparent in the 1870s were
unsustainable. Williamson (1995) articulates the
forces, principally migration and an adverse terms
of trade for New World primary producers as the
utilization of new land led to rising agricultural
supply and lower prices. eventually undermining
the Australian advantage. While the increasingly
integrated international market after 1870 steadily
eroded the Australian wage premium over the U K
from 84 per cent in 1870 to 35 per cent in 1890
and 16 per cent in 1913. the statistical results here
suggest a stationary GDP per capita gap between
the two countries of around 25 per cent between
1870-91, followed by long-run parity after the
1891 crash.?
It seems likely that the Australian GDP per
capita advantage to 189 I was sustained by capital
inflows which temporarily masked a fundamental
shift in Australia's economic position and main-
tained Australian land and property prices despite
a deteriorating terms of trade. The collapse of the
Melbourne land boom in I888 heralded the crash,
and Butlin ( I 962) stresses the role of low land,
pastoral and railway investment returns during the
1880s in limiting Australia's export potential and
:Pope and Withers (1994). doubt the existence of
Australia-UK wage convergence before 1914. though
they accept relative Australia GDP per capiw might fall
in the 1890s due to h e collapse in farm incomes.
SEPTEMBER
constraining her ability to meet growing overseas
liabilities. Essentially the 1891 crash appears to
be an income adjustment for correcting a balance
of payments disequilibrium, which served to
equalize Australian and UK GDP per capita
levels, with price deflation principally providing
the equilibrating mechanism. Butlin's (1962) GDP
deflator for Australia falls 20 per cent relative
Feinstein's (1972) UK GDP deflator between
1890-94, and Australian property prices fell even
faster, Melbourne house rents collapsed by 30 per
cent between 1890-92. The timing of the adjust-
ment may have partly. been influenced by extra-
neous events, the Bariing crisis of 1890 generally
d e t e d British overseas investment and the UK's
domestic investment cycle peaks in the 1890s. but
the underlying cause of GDP per capita equali-
zation appears to be the erosion of Australia's
advantage derived from abundant natural
resources as international migration and commod-
ity flows promoted convergence.
The USA was faced with a similar adjustment
problem in the 1890s. but in contnst to Aus-
tralia's experience. the USA's GDP per capita
surged ahead to global leadership during the
early decades of the twentieth century. The
capital inflows needed to fund the USA's current
account deficit were not forthcoming in the early
1890s and Friedman and Schwartz (1967) argue
that gold outflows and price deflation were exac-
erbated by doubts surrounding the USA's adher-
ence to the gold standard. Price deflation, as
Vatter (1975) shows, was one element promoting
the USA's industrial competitiveness. Clearly
certain foundations for industrial success had
been laid earlier, substantial industrial import
substitution took place behind tariff barriers in
the 1880s and a well-developed education system
contributed to the development of an American
system of manufactures. However Greasley and
Oxley (1996) suggest the 1890s did mark a dis-
continuity in the USA's industrial development.
Further, Lamoreaux ( 1988) argues the 1890s
deflation hit capital intensive firms hard, stimu-
lating the merger wave which shaped the USA's
corporate structure for much of the twentieth
century, and helping facilitate mass production
for the mass market.
The emergence of a competitive industrial
economy around the 1890s sets the USA apart
from Australia and other New World economies.
While migration and international trade tended to
erode the advantages of other resource abundant
economies, the USA surged to global leadership.
 I995 TIME-SERIES TESrS OF CONVERGENCE
It was not until after World War I1 that Australia's
and the UK's GDP per capita show a tendency
towards catch-up to the USA's levels, highlighting
the baniers to technology transfer during the first
half of the twentieth century. Moreover the
modest excess of trend growth in the two catch-
ing-up economies over the USA's rate after 1950.
suggests the convergence process will be long
drawn out. Typically, on the basis of results
derived from cross-sectional studies Australia, the
UK, and the USA have been considered part of
the same convergence club. The time-series
results here offer a different perspective, high-
lighting the closeness of the UK's and Australia's
economic links, and the distinct economic expe-
rience of the USA. More generally the results
suggest that factor and commodity flows. as well
as technological transfers are important for con-
vergence, and that conditions for convergence
were more favourable before 1914 and after 1945
than during the period between the world wars.
REFERENCES
Barro. R. J. (1991). 'Economic Growth in a Cross-
Section of Countries'. Quurrerly Journal of Econom-
iL.S 106. 407-45.
- and Sala i Manin, X. ( 1992). 'Convergence', Journal
of Political Economy 100, 223-5 I .
Baumol. W. J. (1986). 'Productivity Growth, Conver-
gence, and Welfare: What the Long-Run Data Show',
American Economic Review 76, 1072-85.
Bernard, A., and Durlauf, S. ( 1994). 'Interpreting tests
of the convergence hypothesis', Journal of Econo-
metrics (to appear).
- and - (1995), 'Convergence in international
output'. Journal ofApplied Econometrics 10.97-108.
Boehrn. E. A. (1971). Prosperity and Depression in
Australia. 1887-1897. Clmndon Press, Oxford.
Butlin. N. G. (1962). Australian Domestic Product.
Investment and Foreign Borrowing, 1861-193U39.
Cambridge University Press, Cambridge.
- (1986). 'Contours of the Australian Economy
1788-1 860', Australian Economic Histo? Review
26. 96-125.
Christiano, L. J. (1992). 'Searching for a Break in
GNP, Journal of Business and Economic Staristics
10, 237-50.
DeLong. B. J. (1988). 'Productivity Growth. Conver-
gence, and Welfare', American Economic Review 78,
I 138-54.
Dickey, D. A. and Fuller, W. A. (1981). 'Likelihood
Ratio Tests for Autoregressive Time Series with a
Unit Root'. Economerrica 49, 1057-72.
Dowrick, S. and Nguyen, D. T. (1989). 'OECD Com-
parative Economic Growth 1950-1985: Catch-Up
269
and Convergence'. American Economic Review 79.
I010-30.
Durlauf. S. N. (1989). 'Output Persistence, Economic
Structure, and Choice of Stabilisation Policy', Brook-
ings Pupcrs in Economic Activiiy. vol. 2, 69-1 16.
- and Johnson. P. (1994). 'Multiple Regimes and
Cross Country Growth Behaviour', Journal of
Applicd Econometrics (to appear).
Feinstein. C. H. (1972), National Incomc. Expenditure
and Output of the United Kingdom 185s-1965.
Cambridge University Press. Cambridge.
Friedman. M., and Schwartz. A. J. (1967). A monetary
history of thc Unircd Stares 1867-1960, Princeton
University Press. Princeton.
Grrasley, D. and Oxley, L. (1994a). 'Segmenting the
Contours: Australian Economic Growth 1898- 19 13'.
working paper, University of Edinburgh.
- and - (1994b). 'Comparing British and United
States' Economic and Industrial Performance 1860-
1993: A Time Series Perspective'. working paper.
University of Edinburgh.
- and - (1996). 'Explaining United States industrial
growth 1860- I99 I : Exogenous versus endogenous
models', Bulletin of Economic Research (to appear).
Heston, R. and Summers. A. (1988). 'A New Set of
International Comparisons of Real Product and Price
Levels: Estimates for 130 Countries. 1950-1985'.
Review of Income and Weulrh 34. 1-25.
Inwood. K. and Stcngos, T. (1991). 'Discontinuities in
Canadian Economic Growth 1870- 1985'. E.rpl,lora-
rions in Economic History 28. 2 7 4 8 6 .
Jackson, R. V. (1977). Australian Economic Devrlop-
men1 in !he Ninefeenth Centu?, Canbern.
Lamoreaux. N . R. ( 1988). The Greor Mer*qcr Movement
in American Business. Cambridge University Presh.
Cambridge.
Levine, R. and Renelt. D. (1992). 'A Sensitivity Anal-
ysis of Cross Country Growth Regressions', Atnrri-
can Economic Review 82. 9 4 2 4 3 .
MacKinnon. J. (1991). 'Critical values for Cointegration
Tests', in R. F. Engle and C. W. J. Granger, L q y -
Run Economic Relationships, Oxford University
PESS.
Maddison, A. (1991 ), Dynamic Forces in Capitalisr
Development, Oxford University Press.
Maddock, R. (1987). 'The Long Boom'. in R. Maddock
R. and I. W. McLean. The Australian Economy in rhe
Long-Run. Cambridge University Press.
- and McLean. 1. W. ( 197 1 ), The Australian Economy
in the Long-Run, Cambridge.
Mankiw. N . G., Romer, D., and Weil, D. N. (1992).
'A Contribution to the Empirics of Economic
Growth', Quuncrly Journal of Economics 107.
407-37.
Nelson. C. R. and Plosser, C. I. (1982). 'Trends and
Random Walks in Economic Time Series', Journal
of Monetary Economics 10, 139-62.
Nelson, R. R. and Wright, G. (1992). 'The Rise and Fall
of American Technological Leadership: The Post-
270 ECONOMIC RECORD
War E n in Historical Perspective'. Journal of €co-
nomic Lrerature 30. I93 I -64.
ORorkc. K., Williamson. J. G.. and Hatton. T. J.
(1994h 'Mass Migntion. Commodity Market Inte-
gration and Real Wage Convergence', in J. G. Wil-
liamson. and T. J. Hatton, Migration and rhe
Intermuionol Lobour Marker. Routledge. London.
Pagan, A. (1987). 'The End of the Long Boom'. in
Maddock and McLean.
Pcrron. P. (1989). 'The Great Crash. the Oil Price
Shock. and the Unit Root Hypothesis'. Economcrrica
99, 1361-1401.
Pope. D. (1987). 'Population and Australian Economic
Development'. in Maddock and McLem.
- and Withers. G. (1994). 'Wage Effects of Immign-
tion in Late Nineteenth Century Australia'. in Wil-
liamson and Hatton.
Pressnell, L. S. (1978). '1925, The Burden of Sterling',
Economic Histop Review 21, 67-88.
Quah, D. ( 1993). 'Empirical Cross-Section Dynamics in
Economic Growth'. European Econumic Review 37.
426-34.
SEFTEMB ER
Raj, B. ( I 992). 'International Evidence on Persistence
in Output in thc Presence of an Episodic Change',
Journal of Applied Econometrics 7 . 28 1-93.
Rappopon, P. and Reichlin. L. (1989). 'Segmented
T m d s and Non Stationary Time Series', Economic
Journal (Supplement) 99, 1361-1401.
Rebclo. S. (1991). 'Long-Run Policy Analysis and
Long-Run Growth'. Journal of Polirical Economy 99.
5W21.
Tsokhas. T. (1994). 'The Australian Role in Britain's
Return to the Gold Standard', Economic History
Review 47. 129-46.
V m r ( 1975). The Drive to Industrial Maturity, Green-
wood Press. London.
Williamson, J. G. (1995). 'The Evolution of Global
Labor Markets Since 1830: Background Evidence
and Hypotheses', Erplorarions in Economic Histor_v
32. 1.11-96.
Zivor. E. and Andnws. D. (1992), 'Funher Evidence on
thc Great C m h , the Oil Price Shock, and the Unit
Root Hypothesis', Journal of Business ond Economic
Statistics 10. 25 1-70.