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Real convergence: Empirical evidence for Latin America

Article  in  Applied Economics · August 2013

DOI: 10.1080/00036846.2012.703317

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Real convergence: empirical evidence for Latin America

Astrid Ayalaa,∗ , Juncal Cuñadob and Luis Albériko Gil-Alanab

a
School of Business, Universidad Francisco Marroquı́n, Edificio de la Escuela de Negocios, 6 Calle Final, Zona
10, 01010, Guatemala, Guatemala

b
School of Economics and Business Administration, Universidad de Navarra, Edificio Bibliotecas-Este, 31080,
Pamplona, Spain

∗
Corresponding author. E-mail: aayala@ufm.edu

This article investigates the real convergence of 17 Latin American countries to the United States (US) economy
for the period 1950 to 2011. Time series methods are used to test stochastic and β convergence. These methods
include the possibility of one or two structural changes. The results show that when endogenous structural
changes are considered several Latin American countries exhibit stochastic convergence. Nevertheless, real
convergence to the US is found only for three Latin American countries: Chile, Costa Rica and Trinidad and
Tobago, with these countries also presenting evidence of stochastic and β convergence.

Comments from two anonymous referees are gratefully acknowledged. Juncal Cuñado gratefully acknowledges
financial support provided by the Ministerio de Ciencia y Tecnologia (ECO2008-02458-E).

1
I. Introduction

Latin America represents 8.4% of the total world population (589 million people in 2011) and
contributes to 7.2% of the total world Gross Domestic Product (GDP). The real per capita
GDP in Latin America grew by a factor of 2.9 from $2,510 in 1950 to $7,654 in 2011, all
measured in 1990 International Geary-Khamis (IGK) dollars. The increase in real per capita
GDP corresponds to a long-term growth rate of 1.8% per year. Comparing this annual growth
rate with respect to Western Europe (2.1%), the US (2.0%), Asia (3.7%), Africa (1.3%) and
the total world average (2.3%), it can be concluded that Latin America has underperformed all
the regions, except for Africa. The gap between the real per capita GDP of the United States
(US) and Latin America is widening with time (the former having a real per capita GDP in
2011 of $30,928, 4.04 times the real per capita GDP of Latin America). A continuation of the
long-term Latin American growth rate of 1.8% per year implies that the region will attain the
real per capita GDP of the US in 2011 ($30,928) in 80 years. The slow economic growth rate
of the region motivates the study of the evolution of the real output per capita throughout the
countries in Latin America.
The objective of this article is to test real convergence of real per capita GDP of 17 Latin
American countries with respect to the US economy over the period 1950 to 2011. Moreover, it
is also verified which of the Latin American countries are on the path to becoming developed
countries.
Greasley and Oxley (1997) define real convergence as the tendency of equalization of GDP
per capita of different economies over time. The test of real convergence may serve to verify the
validity of two alternative growth theories: the neoclassical growth model (Solow, 1956; Swan,
1956) and the endogenous growth models (Romer, 1986; Lucas, 1988). First, the neoclassical
model predicts (under some assumptions) that per capita output will converge to each country’s
steady state (conditional β convergence) or to a common steady state (absolute β convergence),
independently of its initial per capita output level. Second, in endogenous growth models,
where the process of technological improvement is endogenized, there is no tendency for per
capita output levels to converge, since divergence can be generated by relaxing some of the
neoclassical assumptions (e.g., by considering the characteristic of nondiminishing returns to
the accumulation of capital).
There are several definitions of convergence and different methods for the empirical testing
of the convergence hypothesis. In order to develop the empirical investigation, the framework
of Carlino and Mills (1993) is used in this article. This approach defines real convergence as the
simultaneous compliance of two conditions: a) mean reversion in the differences in real output
per capita between countries; and b) a catch-up process to the benchmark country. The first
condition is verified by using alternative unit root tests, which capture endogenous structural
changes in the economy. The second condition is analysed by applying time series regression

2
tests.
This article provides the following contributions to the existing literature. First, most of the
previous studies on real convergence in Latin America have focused on the convergence process
within the region or within a country. We analyse the real convergence of the Latin American
countries to the US economy.1 Second, instead of using the classical approaches for testing unit
roots, we use unit root tests that allow for the possibility of one or two endogenously identified
structural changes to capture the complex behaviour of the Latin American economies. Third,
our test of real convergence verifies the validity for Latin America of the two alternative growth
theories explained above.
The remaining part of this article is structured as follows. Section II describes the economic
literature related to the topic. In Section III, the econometric methodology of the article is
summarized. Section IV covers the data description. Section V presents the results of the
empirical analysis. Finally, Section VI concludes.

II. Literature Review

This section is divided into two subsections. First, some important empirical contributions on
real convergence are reviewed. Second, the empirical testing and evidence of real convergence
in Latin American economies are presented.

Empirical contributions on real convergence

The first papers testing absolute and conditional β convergence used cross-sectional econometric
frameworks. Under the cross-sectional approach, a negative (partial) correlation between per
capita output growth rates and initial per capita output is considered as evidence of absolute
(conditional) convergence. One of the most generally accepted results in the empirical papers
is that there is no absolute β convergence among a broad sample of economies. Nevertheless,
conditional β convergence is found when a more homogenous group of economies is examined
or when the GDP per capita growth rate is conditioned on additional explanatory variables.2
The cross-sectional approach has been criticized in subsequent literature.3 The arguments
presented against the use of a cross-sectional approach, led researchers to consider the use
of time series to study β convergence (Tomljanovich and Vogelsang, 2002; Nieswiadomy and
Strazicich, 2004) and the dispersion of per capita output (σ convergence4 ) for many economies
1
The US economy is chosen as the benchmark country, since this developed economy is the main investor
and trade partner of Latin America. Therefore, it is interesting to test if the Latin American economies have
improved their economic performance with respect to the US.
2
See Mankiw et al. (1992), Levine and Renelt (1992), Barro and Sala-i-Martin (1995) and Fung (2009).
3
See Quah (1993) and Evans and Karras (1996). For a review of the differences between cross-sectional
convergence and time series forecast convergence, see Durlauf and Quah (1998).
4
σ convergence is satisfied when the SD of real per capita output across a group of economies tends to
decrease over time.

3
(Sala-i-Martin, 1996; De la Fuente, 1997; Dietzenbacher et al., 2009).
The problems related to testing absolute, conditional and σ convergence motivated the in-
troduction of a fourth definition of economic convergence, known as stochastic convergence
(Carlino and Mills, 1993; Bernard and Durlauf, 1995, 1996). Stochastic convergence happens
when permanent movements in the per capita output of a country are associated with perma-
nent movements in the per capita output of another country.5 From a time series approach,
stochastic convergence explores if the common stochastic elements are important and estimates
the degree of persistence of the differences across countries. One implication of the definition
of stochastic convergence is that the per capita output differences between countries cannot
contain unit roots.
During the last decade, three main streams of empirical works on stochastic convergence
literature have been formed: a) unit root tests with structural breaks, b) fractionally integrated
models and c) nonlinear approaches. First, the unit root tests with structural breaks can model
less stable economies of emerging or developing countries. When the convergence test considers
the possibility of structural breaks, evidence of convergence is found in many cases.6 Second, the
fractional integration based models estimate the order of integration of the output per capita
difference time series. This approach provides mixed results.7 Third, the use of nonlinear models
have been proposed to verify stochastic convergence, since several studies on unit root process
(e.g., Granger and Swanson, 1997; Leybourne et al., 1996; Ludlow and Enders, 2000) argue
that the linear decay in the linear time series models fail to capture the asymmetric and/or
time-varying adjustment of some macroeconomic variables.

Empirical evidence on real convergence in Latin America

De Gregorio and Lee (1999) finds no evidence of stochastic convergence neither within Latin
American countries nor between Latin America and the OECD8 for the period 1965 to 1995. On
the other hand, Ferreira (2000) finds strong evidence of regional convergence for Brazil. Dobson
and Ramlogan (2002) use a panel of 19 countries of Latin America over the period 1960 to 1990
and find evidence of absolute β convergence. These authors divide the sample into three sub-
samples with exogenously determined breaks and include conditioning variables with the same
parameters for all the economies. Duncan and Fuentes (2005) use a panel data unit root test
to analyse the regional convergence for Chile and find evidence of absolute β convergence and
σ convergence over the period 1960 to 2000. Holmes (2006) tests long-term output convergence
among eight Latin American countries, over the period 1900 to 2003, using a Markov regime-
5
A more precise definition of stochastic convergence is provided in Section III.
6
See Greasley and Oxley (1997), Cellini and Scorcu (2000) and Strazicich et al. (2004).
7
See Sowell (1992), Michelacci and Zaffaroni (2000), Dolado et al. (2002), Mayoral (2006), Cunado et al.
(2006).
8
Organisation for Economic Co-operation and Development (OECD)

4
switching framework to identify the presence of heterogeneity in output dynamics across time.
This author finds evidence that convergence has been present in some form across the entire
sample period. Serra et al. (2006) develop an empirical study on the convergence of per capita
output for regions within six large middle-income Latin American countries. They find that poor
and rich regions within each country converged at very low rates from 1970 to 2000 and that
there is evidence of regional ‘convergence clubs’ within Brazil and Peru. Finally, Galvão and
Gomes (2007) apply a time series approach to test for stochastic and β convergence of 19 Latin
American countries with respect to the region over the period 1951 to 1999. This study uses
unit root tests with endogenous structural breaks, finding evidence of conditional convergence
in Latin America for 12 economies.

III. Methodology

This section contains two parts. First, some basic notation is introduced and the concept of
convergence from an econometric point of view is defined. Second, different tests for the existence
of convergence in the unit root test framework are presented.

Basic notation and definitions

We focus on the differences of the log real GDP per capita between the US (y1t ) and each Latin
American country (y2t ). The yt = y1t − y2t indicator has been widely used in other empirical
works (e.g. St. Aubyn, 1999; Silverberg and Verspagen, 1999).
In order to study the log GDP per capita differences between two countries, we consider the
following regression model,
yt = δ 0 Zt + xt , (1)
where Zt is an m × 1 vector of explanatory variables, δ is an m × 1 vector of parameters and xt
is the error term driving the yt process.
The main component determining the stochastic properties of yt is the error term, xt , which
may be specified as follows: a) an integrated of order zero process, I(0); b) a unit root process or
an integrated of order one process, I(1); and c) fractionally integrated process, I(d).9 The I(0)
and I(1) processes are special cases of I(d). Several stochastic properties of xt are determined by
the order of integration d. If 0 ≤ d < 0.5, then xt is covariance stationary and shocks disappear
in the long run relatively fast. This clearly includes the standard I(0) stationary ARMA cases.
If 0.5 ≤ d < 1, then xt is not covariance stationary, and shocks though mean reverting, take
longer time to disappear than in the previous case. If d = 1, then xt contains a unit root and
shocks do not die away over the long run. If d > 1, the series is not covariance stationary and
its impact is permanent.
9
See the definitions of I(0), I(1) and I(d) processes in Hamilton (1994).

5
 The main interest of this study is to verify the real convergence of a country to a benchmark
country. Carlino and Mills (1993) state that the two conditions required for the real convergence
of two countries are: a) stochastic convergence and b) β convergence, which are defined as:

Definition 1 (stochastic convergence): Two countries exhibit stochastic convergence when xt

forms a mean reverting time series, i.e. d < 1.

Definition 2 (β convergence or convergence as catch-up): β convergence is evidenced when the

difference of the log GDP per capita of two countries decreases over time, i.e. limj→∞ E[yt+j |Ft ] =
0, where Ft is the information set available in period t.

Existence of convergence – unit root tests

We perform different unit root tests in order to verify stochastic convergence. The null hypoth-
esis, H0 , in each unit root test is that xt forms a unit root process, i.e. that the process is not
mean reverting. The alternative hypothesis, H1 , in all cases is that the process does not contain
a unit root but is stationary I(0), i.e. it is mean reverting. In other words, when H0 cannot
be rejected, then the two countries are not converging. On the other hand, when H0 is rejected
then there is evidence of stochastic convergence of the two countries. Alternative formulations
of the δ 0 Zt term lead to different unit root tests.
The first test employed is the traditional Augmented Dickey Fuller (ADF, Dickey and Fuller,
1979) unit root test. Moreover, we also consider alternative unit root tests incorporating struc-
tural changes (Lee and Strazicich, LS 2003, 2004). The rationale for using unit root tests that
include structural breaks is based on the facts presented in Section IV in which data analysis
suggest that structural breaks took place in some countries in Latin America.

Unit root test without structural breaks. The first test applied to verify stochastic con-
vergence is the ADF test. The estimated specification includes a constant and a time trend.10
However, it does not consider structural changes in the time series.
If we reject the unit root null hypothesis with the ADF test, we run the following regression
to test for β convergence.11
yt = µ + βt + ut , (2)
where ut is the possibly serially correlated I(0) error term. Regarding β convergence, different
conclusions are derived depending on the estimated parameter values:

C (β convergence): µ and β have opposite signs and they are significantly different from zero
at the 10% level. (µ 6= 0, β 6= 0)
10
The specification of δ 0 Zt in Equation (1) in this test is δ0 + δ1 t.
11
See Carlino and Mills (1993), Tomljanovich and Vogelsang (2002) and Nieswiadomy and Strazicich (2004).

6
 D (divergence from different levels): µ and β have the same sign and they are significantly
different from zero at the 10% level. (µ 6= 0, β 6= 0)

c (constant at different levels): µ is significantly different from zero at the 10% level, and β is
insignificant at the 10% level. (µ 6= 0, β = 0)

d (divergence from the same level ): µ is insignificantly different from zero at the 10% level,
and β is significant at the 10% level. (µ = 0, β 6= 0)

E (constant at the same level ): µ and β are both insignificant at the 10% level. (µ = 0, β = 0)

Unit root test with one structural break. There are several unit root tests in the literature
that consider the possibility of a structural break in yt (Perron 1989; Zivot and Andrews 1992;
Perron 1997; Vogelsang and Perron 1998). A common feature of previous tests is that they omit
the possibility of a unit root with break. Therefore, spurious rejections of H0 may occur. LS
(2004) extend these unit root tests since they consider a unit root with break under the null
hypothesis. In the LS (2004) test, the following regression is estimated:
k
X
0
∆yt = δ ∆Zt + φS̃t−1 + cj ∆S̃t−j + et , (3)
j=1

where S̃t = yt − Ψ̃x − Zt δ̃ and Ψ̃x = y1 − Z1 δ̃. The δ̃ parameters denote coefficients estimated by
a regression of ∆yt on ∆Zt , Zt = [1, t, Dt , DTt ]0 and ∆Zt = [1, ∆Dt , ∆DTt ]0 . The ∆S̃t−j terms
are included to correct for serial correlation.12
In the case of rejecting the unit root hypothesis of the LS (2004) test, β convergence is tested
before and after the estimated date of structural change by estimating the following regression
model:
yt = µ1 DU1t + µ2 DU2t + β1 T IM E1t + β2 T IM E2t + ut , (4)
where DU1t = 1 if t ≤ TB and zero otherwise, DU2t = 1 if t > TB and zero otherwise,
T IM E1t = t if t ≤ TB and zero otherwise, and T IM E2t = t − TB if t > TB and zero otherwise.
The µ̂i and β̂i estimates lead to the same conclusions for each period i as the ones stated after
Equation (2).

Unit root test with two structural breaks. The unit root test with a single structural
break mentioned in the previous section does not take into account that several structural
breaks may occur in the economy. This fact motivated Lumsdaine and Papell (1997) to include
two structural breaks in their unit root test. However, these authors do not consider structural
12
The specification of δ 0 Zt in Equation (1) in this test is δ0 + δ1 t + δ2 Dt + δ3 DTt . See LS (2004) for the
selection of the number of augmentation terms, k.

7
breaks under the null hypothesis. LS (2003) address this problem by including two structural
breaks in the null hypothesis. Compared to the LS (2004) model, the only difference in the
LS (2003) model notation in Equation (3) is that Zt = [1, t, D1t , D2t , DT1t , DT2t ]0 and ∆Zt =
[1, ∆D1t , ∆D2t , ∆DT1t , ∆DT2t ]0 .13
When the unit root hypothesis of the LS (2003) test is rejected, β convergence is tested
before and after the estimated date of structural changes by estimating the following regression
model:

yt = µ1 DU1t + µ2 DU2t + µ3 DU3t + β1 T IM E1t + β2 T IM E2t + β3 T IM E3t + ut , (5)

where DU1t = 1 if t ≤ T1B and zero otherwise, DU2t = 1 if T1B < t ≤ T2B and zero otherwise,
DU3t = 1 if t > T2B and zero otherwise, T IM E1t = t if t ≤ T1B and zero otherwise, T IM E2t =
t − T1B if T1B < t ≤ T2B and zero otherwise, and T IM E3t = t − T2B if t > T2B and zero
otherwise. The µ̂i and β̂i estimates lead to the same conclusions for each period i as the ones
stated after Equation (2).

IV. Data

The data used in this study is the annual log real GDP per capita in 1990 IGK Purchasing
Power Parity (PPP) adjusted dollars14 for 17 Latin American countries and the US for the
period 1950 to 2011. The data were obtained from ‘The Conference Board Total Economy
Database’ provided by the Groningen Growth and Development Center (GGDC).15
Fig. 1 presents the evolution of the real GDP per capita of Latin America, the US and the
total world average for the period 1950 to 2011. The figure shows that the gap between Latin
America and the US has widened over time.

[APPROXIMATE LOCATION OF FIGURE 1]

The 17 Latin American countries under study are the following: Argentina, Barbados,
Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Ja-
maica, Mexico, Peru, Saint Lucia (St. Lucia, henceforth), Trinidad and Tobago, Uruguay and
Venezuela. These countries represent 94.3% of the total Latin America GDP and 89.4% of the
region’s population for 2011.
Table 1 presents the average growth rates of annual GDP per capita for the 17 Latin American
countries and the US economy. The averages are computed for the entire sample period: 1950-
2011 and for the following sub-periods: a) 1950-1970, b) 1971-1990 and b) 1991-2011. Table
13
The specification of δ 0 Zt in Equation (1) in this test is δ0 + δ1 t + δ2 D1t + δ3 D2t + δ4 DT1t + δ5 DT2t .
14
The IGK is a hypothetical unit of currency that has the same purchasing power as the US dollar had at a
given point in time in the US.
15
Available at: http://www.conference-board.org/data/economydatabase/ (accessed on 14 February 2012).

8
1 exhibits that the following Latin American countries present higher average GDP per capita
growth for the period 1950 to 2011 than the US: Barbados, Brazil, Chile, Colombia, Costa Rica,
Dominican Republic, Mexico, St. Lucia and Trinidad and Tobago. Moreover, the table also
shows the time duration in years required for Latin American countries to achieve the 2011
real GDP per capita of the US economy according to the figures reported. According to this
measure, the following countries need less than 100 years to reach the US GDP per capital level:
Argentina, Barbados, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Mexico, St.
Lucia, Trinidad and Tobago and Uruguay. However, for Bolivia, Ecuador, Guatemala, Jamaica,
Peru and Venezuela, more than 100 years are required to achieve the US levels.

[APPROXIMATE LOCATION OF TABLE 1]

Table 2 presents the descriptive statistics of the differences in the log real output per capita
of the 17 countries under study with respect to the US for the period 1950 to 2011. The countries
with the highest mean of differences are St. Lucia (2.19), Dominican Republic (2.12) and Bolivia
(2.11), and the economies with the lowest mean of differences are Trinidad and Tobago (0.66),
Venezuela (0.69) and Argentina (0.95). It is worth noting that the reason for the lower mean of
the differences in the case of Venezuela and Argentina is the higher initial level of output per
capita in 1950 in comparison with other countries. Fig. 2 presents the evolution of log GDP per
capita differences for each country under analysis.

[APPROXIMATE LOCATION OF TABLE 2, FIGURE 2]

V. Empirical Results

This section summarizes the empirical findings of the article. First, the results obtained for the
unit root tests and stochastic convergence are presented. Afterwards, β convergence conditions
of output per capita differences are discussed.

Unit root test results and structural changes

Table 3 shows the unit root test results for the ADF (1979) and LS (2003, 2004).16 This table
also presents the adjusted R-squared, Ra2 model selection metric for each unit root test. The
table shows that the LS (2003) test exhibits the highest Ra2 value for all countries. Therefore,
in the remaining part of this article, we focus on results of the unit root test incorporating two
structural breaks.
We find evidence of stochastic convergence to the US for 11 of the 17 Latin American coun-
tries. In particular, the unit root null hypothesis is rejected for Bolivia, Chile, Colombia, Costa
Rica, Ecuador, Jamaica, Mexico, St. Lucia, Trinidad and Tobago, Uruguay and Venezuela.
16
The unit root tests of LS (2003, 2004) were performed using the Gauss codes downloaded from the website
of Junsoo Lee. Available at http://www.cba.ua.edu/∼jlee/gauss.

9
 In the following part of this section, the periods between the dates of structural changes are
reviewed for each Latin American country for which stochastic convergence is evidenced by the
LS (2003) unit root test.17

Bolivia: The period between 1972 and 1991 presents two major events. The first one is default
through inflation with 1985 as the year of peak inflation. The second one is a banking
crisis. In 1987, the banking system nonperforming loans reached 30%. Moreover, these
loans reached 92% by mid-1988. After 1991, Bolivia faced a banking crisis magnified by
the impact of the Mexican ‘tequila crisis’, which resulted in decreasing capital inflows to
the country between the years 1994 and 1995.

Chile: The economy of Chile in the period between 1971 and 1990 is characterized by three
events. The first one is the restructuring of the external debt of the country in the year
1972. The second one is the default through inflation experienced by Chile in the year
1973. Moreover, the Pinochet government began in that same year. The third event is the
banking crisis of 1976, which resulted in the insolvency of the entire mortgage system. The
year 1990 corresponds to the beginning of a period of increasing economic growth for Chile
as a result of economic policy reforms that favoured trade openness and the reduction of
budget deficit and inflation.

Colombia: The economy of the country was affected by the global banking crisis of 1997,
which resulted in decreasing capital flows. After 1997 a period of relative stability began
for the economy of Colombia.

Costa Rica: The year 1980 signals the end of a period of high economic growth for Costa
Rica. The period between 1980 and 1997 exhibits two major events. The first one is
the restructuring of the external debt in 1981. The second one is the default through
inflation in 1982. After 1997, the economy began its recovery through increasing exports
and foreign investment.

Ecuador: The period between 1972 and 1993 included a significant event. Ecuador experienced
a banking crisis in the year 1981, in which a program for exchanging domestic for foreign
debt was implemented to bail out the banking system. After the year 1993, the effects
of the liberalization reforms introduced by President Rodrigo Borja provided stability for
the economy.

Jamaica: Jamaica experienced the restructuring of its external debt in 1978. At the end of
1978, the ratio of external debt to GNP18 of Jamaica was 48.5%.
17
The information on Latin American economies is obtained from Reinhart and Rogoff (2009).
18
Gross National Product (GNP)

10
 Mexico: The period between 1977 and 1984 presents two major events. The first one is
the banking crisis experienced by Mexico in the years 1981 and 1982. During these two
years there was capital flight and the government responded by nationalizing the private
banking system. The second one is the external debt restructuring of Mexico in the year
1982. The dollar deposits were forcibly converted to pesos and the ratio of total public
debt to revenue was 5.06. Both events hampered the economic growth of the country.
After 1984, Mexico experienced macroeconomic instability evidenced by three significant
events. The first one, is the default through inflation in the year 1987. The second one is
the Mexican ‘tequila crisis’ in the years 1994 and 1995. The third event is the high fiscal
deficit of the Mexican government in 1998.

St. Lucia: The year 1974 is the end of a high economic growth period and the year 1988
corresponds to the start of a period of economic stability for the country.

Trinidad and Tobago: The period between 1973 and 1990 is characterized by economic
instability, which resulted in the external debt restructuring in the year 1989. The ratio
of external debt to GNP at the end of 1989 was 49.4%.

Uruguay: After 1981, the country has not been able to improve its economic performance.
Uruguay experienced a banking crisis during the period from 1981 to 1984 as a result of
the Argentine devaluation, the decreasing commodity prices and the increasing interest
rates in the US.

Venezuela: The period between 1981 and 1996 exhibits five important events. The first one is
the external debt restructuring in 1982. The second one is a series of notable bank failures
in the years 1982, 1985 and 1986. The third one is the banking crisis that started in 1993
with the failure of the country’s largest bank, which closed in the beginning of the year
1994. Authorities intervened in 17 of 47 banks that held 50% of deposits, nationalized
nine banks, and closed seven more in 1994. The government intervened in five more banks
in 1995. The fourth one is the domestic debt default of 1995. The fifth one is the default
through inflation of the year 1996. Moreover, the Hugo Chávez government began in 1996.
After 1996, there has been no improvement in the economic development of Venezuela as
a result of economic intervention policies and hampered property rights and institutions.

From the unit root test results reported above, it can be noticed that the countries that do
not exhibit stochastic convergence to the US economy under any specification are: Argentina,
Barbados, Brazil, Dominican Republic, Guatemala and Peru. This may possibly be caused by
the presence of more than two structural breaks in the log GDP per capita differences of these
countries with respect to the US during the period analysed.

11
 [APPROXIMATE LOCATION OF TABLE 3]

β convergence results

The results of β convergence regressions for the LS (2003) unit root test are presented in Table
4. The unit root null hypothesis cannot be rejected for Argentina, Barbados, Brazil, Dominican
Republic, Guatemala and Peru. We evidence β convergence after the last break towards the US
economy for Chile, Costa Rica and Trinidad and Tobago. As both stochastic and β convergence
are evidenced for these countries, it can be concluded that they exhibit real convergence towards
the US economy. The characteristics of these countries may help to understand the variables
that favour more sustainable growth spells. Moreover, the output difference with respect to the
US economy is constant at different levels for Ecuador, St. Lucia, Uruguay and Venezuela after
the last break point. Finally, we find divergence from the US at different levels after the last
break for Colombia, Bolivia, Jamaica and Mexico.

[APPROXIMATE LOCATION OF TABLE 4]

VI. Concluding Remarks

This article has investigated the real convergence of 17 Latin American countries to the US
economy for the period 1950 to 2011 based on the methodology developed by Carlino and Mills
(1993) and extended by Strazicich et al. (2004). Time series approaches have been used to
test for stochastic and β convergence. The tests of stochastic convergence have considered
the possibility of one or two endogenously determined structural changes in the convergence
process. Therefore, homogeneity has not been assumed to exist among countries and specific
break dates have been endogenously determined for each country. The econometric methodology
of this article seems to be suitable because of the instability experienced by the Latin American
economies during the sample period.
The results indicate that when endogenous structural changes are taken into account, 11 out
of the 17 Latin American countries exhibit stochastic convergence. Nevertheless, real conver-
gence has been found only for three Latin American countries: Chile, Costa Rica and Trinidad
and Tobago because they have presented both stochastic and β convergence. Thus, we have
found that when the US economy is used as benchmark country, the endogenous growth model
is able to explain a considerable proportion of the empirical evidence. A comprehensive exam-
ination of the macroeconomic and institutional variables that have enhanced real convergence
for Chile, Costa Rica and Trinidad and Tobago can provide valuable information about the
determinants of sustainable economic growth.
The results, though consistent across the tests, should be taken with caution due to the small
sample sizes used in the evaluation. This study can be extended in several directions. A line of

12
research is the endogeneization of the time of the structural breaks in the context of fractional
integration (see Gil-Alana, 2008) in order to test the presence of stochastic convergence in
highly unstable economies. Furthermore, nonlinear approaches can be used to verify stochastic
convergence for the region (see Beyaert and Camacho, 2008).

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15
Table 1. Average growth rate of real GDP per capita

Country 1950-2011 1950-1970 1971-1990 1991-2011 Duration

US 1.9% 2.3% 2.2% 1.5% 0
Argentina 1.2% 1.9% −0.6% 2.1% 87
Barbados 2.4% 4.9% 1.8% 1.0% 49
Bolivia 0.8% 0.6% 0.1% 1.6% 283
Brazil 2.3% 3.0% 2.4% 1.7% 65
Chile 2.2% 1.8% 1.0% 3.6% 36
Colombia 2.0% 1.8% 2.2% 1.9% 75
Costa Rica 2.3% 3.2% 1.2% 2.7% 57
Domin. Rep. 2.8% 2.1% 2.3% 4% 63
Ecuador 1.7% 2.1% 1.6% 1.2% 106
Guatemala 1.2% 2.0% 0.8% 1.5% 156
Jamaica 1.6% 5.3% −0.1% −0.2% 131
Mexico 2.0% 3.0% 1.7% 1.2% 69
Peru 1.6% 2.6% −1.2% 3.4% 104
St. Lucia 2.9% 3.8% 3.3% 1.5% 69
Trin. and Tob. 3.1% 4.0% 0.6% 5.0% 7
Uruguay 1.5% 0.5% 1.1% 2.6% 69
Venezuela 0.5% 1.8% −1.3% 0.5% 251

Notes: The reference country, US, is written in bold font. The last column shows the time duration (in years)
to achieve the 2011 real GDP per capita of the US.

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Table 2. Descriptive statistics of yt for the period 1950 to 2011

Country Mean Max Min SD

Argentina 0.9492 1.4145 0.6236 0.2258
Barbados 1.1290 1.5235 0.8685 0.1666
Bolivia 2.1100 2.4434 1.6057 0.2450
Brazil 1.5676 1.7831 1.2742 0.1308
Chile 1.0819 1.4156 0.7782 0.1650
Colombia 1.5452 1.6751 1.0025 0.0892
Costa Rica 1.4662 1.6457 1.3039 0.0901
Domin. Rep. 2.1202 2.3998 1.7185 0.1361
Ecuador 1.7097 1.9931 1.4938 0.1324
Guatemala 1.7692 2.0067 1.5230 0.1683
Jamaica 1.7624 2.1380 1.3623 0.2427
Mexico 1.3034 1.4704 1.0322 0.0978
Peru 1.6221 2.0651 1.2889 0.2760
St. Lucia 2.1864 2.5438 1.9174 0.1819
Trin. & Tob. 0.6645 0.9949 0.1881 0.2231
Uruguay 1.0751 1.4028 0.6532 0.1956
Venezuela 0.6860 1.4368 0.0797 0.3972

Notes: yt denotes the difference between the log GDP per capita of the US and each Latin American country.
Max and Min denote maximum and minimum, respectively. The number of periods observed for each country
is T = 62.

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Table 3. Unit root tests of yt

ADF LS (2004) LS (2003)

Country TS Ra2 TS TB Ra2 TS T1B T2B Ra2
Argentina −1.8797 3% −3.6428 1982 17% −4.2847 1973 1983 34%
Barbados −2.3747 27% −3.3536 1980 38% −4.3376 1974 1990 54%
∗∗
Bolivia −1.4852 11% −3.7840 2002 39% −6.1717 1972 1991 55%
Brazil −2.3368 16% −3.5042 1979 22% −4.3290 1971 1986 38%
Chile −0.8842 5% −3.7567 1983 26% −5.4677∗ 1971 1990 47%
Colombia −4.6811∗∗∗ 25% −5.7185∗∗∗ 1979 32% −10.7465∗∗∗ 1973 1997 85%
Costa Rica −2.0353 3% −4.1661 1980 34% −7.3709∗∗∗ 1980 1997 62%
Domin. Rep. −1.1792 2% −3.8258 1982 21% −4.3048 1967 1984 33%
Ecuador −1.5273 1% −4.0239 1981 23% −5.7955∗∗ 1972 1993 38%
Guatemala −2.7485 27% −2.9374 1979 23% −4.5714 1975 1991 53%
Jamaica −4.0327∗∗ 41% −3.6529 1964 40% −5.7567∗∗ 1961 1982 43%
∗ ∗
Mexico −2.1119 7% −4.3506 1984 31% −5.4927 1977 1984 40%
Peru −1.4007 12% −3.2923 1986 19% −4.7079 1970 1987 37%
St. Lucia −3.0503 23% −4.0276 1986 41% −6.2907∗∗ 1974 1988 49%
∗∗∗
Trin. and Tob. −2.4653 35% −4.0354 1986 36% −6.4468 1973 1990 62%
Uruguay −1.0455 10% −3.8271 1962 18% −5.8387∗∗ 1969 1981 43%
∗∗ ∗
Venezuela −1.9167 3% −4.8339 1981 34% −5.3041 1981 1996 67%

Notes: yt denotes the difference between the log GDP per capita of the US and each Latin American country.
Augmented Dickey-Fuller (ADF). Lee and Strazicich (LS). Test Statistic (TS). Adjusted R-squared (Ra2 ). TB
and TiB denote the year of the structural change for models LS (2004) and LS (2003), respectively. The critical
values reported in LS (2003, 2004) were used to evaluate the significance of the corresponding test statistics. *,
** and *** denote test statistic significant at the 10%, 5% and 1% level, respectively.

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Table 4. β convergence regression for the LS (2003) unit root test

Country µ1 β1 t1 T1B µ2 β2 t2 T2B µ3 β3 t3

Argentina
Barbados
Bolivia 1.70∗∗∗ 0.02∗∗∗ D 1972 1.78∗∗∗ 0.03∗∗∗ D 1991 2.34∗∗∗ 0.00∗ D
Brazil
Chile 0.95∗∗∗ 0.00∗∗∗ D 1971 1.20∗∗∗ 0.01∗∗ D 1990 1.14∗∗∗ −0.01∗∗∗ C
Colombia 1.49∗∗∗ 0.00∗∗∗ D 1973 1.51∗∗∗ 0.00∗ D 1997 1.69∗∗∗ 0.01 c
Costa Rica 1.58∗∗∗ −0.01∗∗∗ C 1980 1.51∗∗∗ 0.00 c 1997 1.53∗∗∗ −0.02∗∗∗ C
Domin. Rep.
Ecuador 1.62∗∗∗ 0.00∗ D 1972 1.47∗∗∗ 0.01∗∗∗ D 1993 1.87∗∗∗ 0.00 c
Guatemala
Jamaica 2.04∗∗∗ −0.06∗∗∗ C 1961 1.37∗∗∗ 0.02∗∗∗ D 1982 1.78∗∗∗ 0.01∗∗∗ D
Mexico 1.41∗∗∗ −0.01∗∗∗ C 1977 1.13∗∗∗ 0.00 c 1984 1.30∗∗∗ 0.00∗∗∗ D
Peru
St. Lucia 2.52∗∗∗ −0.01∗∗∗ C 1974 2.32∗∗∗ −0.01 c 1988 1.98∗∗∗ 0.00 c
Trin. & Tob. 0.92∗∗∗ −0.02∗∗∗ C 1973 0.39∗∗∗ 0.03∗∗∗ D 1990 1.10∗∗∗ −0.06∗∗∗ C
Uruguay 0.59∗∗∗ 0.03∗∗∗ D 1969 1.15∗∗∗ −0.01 c 1981 1.22∗∗∗ 0.00 c
Venezuela 0.12∗ 0.01∗∗∗ D 1981 0.76∗∗∗ 0.02∗∗∗ D 1996 1.19∗∗∗ 0.00 c

Notes: The ti denotes the i-th period separated by the structural break times. The TiB denotes the year of
structural break i. C = β convergence, D = divergence from different levels, c = constant at different levels, d =
divergence from the same level, E = constant at the same level. The empty cells refer to unit root processes for
which the regression is not estimated. *, ** and *** denote test statistic significant at the 10%, 5% and 1% level,
respectively. The significance of the parameter estimates was evaluated according to Newey and West (1987).

19
Fig. 1. Real GDP per capita in Latin America, US and world average from 1950 to 2011
Notes: GDP is measured in ‘1990 International Geary-Khamis dollars’.

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 View publication stats

Fig. 2. Difference between the log GDP per capita of the US and each Latin American country

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