Twin Peaks: Growth and Convergence in Models of Distribution Dynamics

Danny T. Quah

The Economic Journal, Vol. 106, No. 437. (Jul., 1996), pp. 1045-1055.

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The Economic Journal, 106 ( J u l y ) , 1045-1055 0 Royal Economic Society 1996. Published by Blackwell
Publishers, 108 Cowley Road, Oxford OX4 IJF, UK and 238 Main Street, Cambridge, MA 02142, USA.

T W I N PEAKS: G R O W T H AND C O N V E R G E N C E I N
MODELS O F DISTRIBUTION DYNAMICS
Danny T. Quah
Convergence concerns poor economies catching up with rich ones. At issue is what happens to the
cross sectional distribution of economies, not whether a single economy tends towards its own
steady state. It is the latter, however, that has preoccupied the traditional approach to convergence
analysis. This paper describes a body of research that overcomes this shortcoming in the traditional
approach. The new findings - on persistence and stratification; on the formation of convergence
clubs; and on the distribution polarising into twin peaks of rich and poor - suggest the relevance
of a class of theoretical ideas, different from the production-function accounting traditionally
favoured.

Conventional analyses of economic growth and convergence address one

natural set of questions. What is the contribution of physical capital to output?
Knowing this allows us to understand or explain patterns of growth by pointing
to rates of capital accumulation. How quickly can poor countries catch up with
richer ones? What factors aid this convergence? Appreciating these gives us
perspective on the relative levels of development that we observe across
different countries, and insight into how poor countries can improve their
circumstances.
There is a traditional approach to answering such questions: estimate a
cross-section regression of growth rates on income levels, possibly including
other variables on the right hand side of that regression. In this reasoning, the
levels coefficient informs on both capital's contribution to output and the rate
at which poor economies catch up with those richer. (Whether this catch up
occurs is known as the convergence hyfiothesis.) Such an equation relating growth
rates and levels takes on added significance when we recall that it can be
derived from theoretical growth models. This traditional approach thus seems
doubly blessed. I t sheds light on important economic questions; it dovetails
neatly with theoretical reasoning. This is the standard that all empirical
analysis strives for; what, in this traditional approach, could be controversial?
This paper argues that conventional analyses miss altogether key aspects of
economic growth and convergence. The reason is the following. One dimension
of growth is the mechanism by which agents in an economy push back
technological and capacity constraints; this increases aggregate output. When
the mechanism works spectacularly well, we consider the economy a growth
success. Such economic progress is germane to rich countries, just as it is to poor
ones - there need be no distinction between them. A different dimension of
growth, however, is the mechanism that determines the relative performance of
rich and poor economies: does growth in poorer economies lead to their
catching up with the richer ones? Here, one wants to know if economic progress
occurs differently in poorer economies than it does in richer ones.
The two mechanisms - pushing back and catching up - are related, but
logically distinct: one can occur without the other. For brevity, I will refer to
 I 046 THE ECONOMIC JOURNAL [JULY

the first as a growth mechanism, and the second as a convergence mechanism. As

with all such taxonomies, the distinction is imperfect, but, we will see, is better
than nothing. Taking the distinction seriously means, temporarily, divorcing
the convergence hypothesis from issues of any one country's productivity
performance. What is important for convergence is how economies perform
relative to each other, not how a single economy performs relative to its own
history. Obviously, both growth and convergence mechanisms matter: to make
progress in understanding, however, the details of one are usefully abstracted
away to focus on the other.
This paper argues that a key shortcoming of the traditional approach is that
it fails to distinguish these two dimensions of economic growth. Theoretical and
empirical statements made about one are taken, inappropriately, to apply to
the other. Consequently, theoretical insights recognising the distinction are
unavailable in the standard approach.
I will describe below a body of newer empirical research that repairs this
shortcoming. This work models directly the dynamics of the cross-section
distribution of countries. I n doing so, it uncovers regularities fundamentally
different from those in conventional analyses. This research provides evidence
on persistence and stratification; on the formation of convergence clubs; and
on the cross section distribution polarising into twin peaks of rich and poor.
Such regularities raise intriguing questions. What economic structures
produce these dynamics? What mechanisms determine club formation and
membership? Is it only those already-rich economies that converge towards
each other, leaving the poor to form a different convergence club? What
features of cross-country interaction generate polarisation and stratification?
When physical capital flows more freely from one part of the world to another,
does that lead to a spreading out of the distribution - so that the rich get richer
and the poor, poorer? Or, does the opposite happen, and the poor have
opportunity to become richer than those previously rich? I n addressing these
questions, the researcher is led to draw on fresh theoretical ideas, in ways
hidden to the traditional approach. Thus, these distribution dynamics empirics
not only repair the failure in the traditional approach to represent reality
accurately, they also generate new theories on economic growth and
convergence.
The discussion below concentrates on income distributions across countries.
I t directly applies, however, to convergence and growth in other economic units
as well. Thus, the criticisms of the traditional approach extend readily. They
imply that the traditional approach cannot at all address the concerns of
policy-makers interested in regional development, economic and geographical
redistribution, and comparative economic performance. Instead, revealing
analysis must be found elsewhere - possibly in extensions of the models of
distribution dynamics described below.
The of the rest of this paper is to flesh out the points just made. The
paper is not intended as a broad survey of all possible criticisms of the
traditional approach. Rather, the coverage is selective. Section I highlights
those aspects of conventional analyses relevant to the current discussion.
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I9961 TWIN PEAKS 1°47
Section I1 describes that class of newer empirical findings that use distribution
dynamics, and indicates the theoretical issues raised in such work. Section I11
concludes.

I. T H E T R A D I T I O N A L A P P R O A C H

Traditional empirical analyses of growth and convergence derive from an

elegant theoretical insight. This is that, in many growth models, equilibrium
growth rates can be shown to be related to income levels through physical
capital's relative contribution to national income (Barro and Sala-i-Martin,
I 992 ; Romer, I 994; SaIa-i-Martin, 1995 ; 1 9 9 6 ) Developed explicitly, this
insight gives a 'convergence equation' with growth on the left-hand side,
explained by - among other things - income levels on the right.
I n this reasoning, the cross-country correlation between growth rates and
income levels is doubly interesting. I t sheds light on the rate at which poor
economies catch up with rich ones. Simultaneously, it informs on physical
capital's importance for growth. Estimated on a wide range of data, this
correlation implies a stable uniform rate of convergence equal to 2 % a year.
Thus, while the poor do eventually catch up with the rich, the speed with
which this happens is low: only half the gap between rich and poor is closed in
35 years. Moreover, the implied contribution of physical capital to aggregate
output is high - much higher than suggested by factor income shares in
national income accounts.
The second of these implications raises a puzzle : if it is physical capital that
is driving growth, why is it not being properly compensated by the market?
This basic question has motivated research on externalities and endogenous
technological progress (Romer, 1990). Such research seeks to explain the
observed empirical regularities on convergence rates and capital's factor
income share. At the same time, it resolves deep theoretical subtleties in the
theory of economic equilibrium with non-rival commodities.
I n the taxonomy given earlier, such analyses provide powerful insights on the
growth mechanism. However, whether they help us understand the con-
vergence mechanisms hinges on auxiliary assumptions. What is the nature of
interaction across different countries? Are currently leading economies always
the first to push back technology frontiers, and does new technology then
always filter passively to poorer economies? Are there costs of adoption that
lead to leap-frogging, where it is the temporarily follower economies that jump
to being leader, because they find it easier to exploit new discoveries3 Or, do
persistent advantages accrue to the leader, richer countries, simply by virtue of
their already being leader and richer? Do poorer economies need to overcome
poverty-trap barriers before they can hope to catch up with richer ones?
Traditional cross-section regressions on the 'convergence equation' can
address none of these issues. That they are revealing to the coefficient of
physical capital in a production function is just that, no more and no less. Such
exercises, while using dynamic information creatively, are part of a time-
honoured practice in production-function accounting, and might be usefully
compared to empirical analyses like those in Griliches and Ringstad ( I 97 1 ) .
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 I 048 THE ECONOMIC JOURNAL [JULY
However, in the absence of auxiliary assumptions, they give no insight on
whether poor countries are catching up with rich ones.
I show below that all the different possibilities relating rich and poor,
described two paragraphs above, are consistent with a 'stable uniform 2 % rate
of convergence' - as estimated from the traditional convergence equation.
Thus, a negative correlation between growth rates and levels says nothing
about the poor catching up with the rich.' Contrary to claims made elsewhere,
traditional empirics are completely silent on the important convergence
dimension in economic growth.
T o see this, I need to make explicit some ideas - empirical and theoretical
- on the dynamics of large cross sections. We turn to this next.

11. D I S T R I B U T I O N D Y N A M I C S

This section develops models of distribution dynamics to study the convergence

hypothesis.2
Fix a year - say t - and consider the then-extant empirical distribution ofper
capita incomes across countries. Suppose that the density of that distribution is
as plotted, at time t, in Fig. I . That density shows some rich countries in the
upper part of the distribution; a majority of middle-income countries in the
middle part of the distribution; and some poor countries, in the lower.
There is a density for each year: Fig. I plots, at t + s, the density at some date
in the future from t. As drawn, two suggestive classes of features of Fig. I should
be noted. The first class constitutes the location, shape, and other external
characteristics of the distributions at different times: these can, in general,
fluctuate. The second comprises the intra-distribution dynamics, or churning-like
hehaviour - indicated by arrows in Fig. I - when individual economies transit
from one part of the distribution to another. We consider these different
features in turn.
Fig. I has drawn the income distribution at t + s to be bimodal or twin-
peaked: in the picture, there is a group of the rich, collecting together; a group
of the poor, collecting together; and a middle-income class, ~ a n i s h i n gThere
.~
is no a priori reason for this. The t + s distribution might well have been
unimodal, and tightly concentrated at a single point: then, the researcher
could, with some confidence, say the originally poor at t had, by t f s , attained
equal footing with the originally rich. The researcher might even want to call
that catching up.4
Sometimes, evidence on that negative correlation comes only with additional conditioning, hence the
term 'conditional convergence.' Sometimes, in the traditional approach, that evidence is buttressed also with
evidence on cross-sectional standard deviations. While this last is marginally helpful, it remains potentially
misleading: the next section shows why. As for conditional convergence, even in the best of all possible
scenarios, all it could show is whether each country converges to its own steady state, different from that of
other countries. I t is a complete puzzle to me how this can be interesting for whether the poor are catching
up with the rich.
Emphases on the empirics of distribution characteristics and dynamics appeared earlier in the personal
income distribution literature, e.g., Atkinson (1970) and Shorrocks (1978).
Why say 'twin peaks' rather than just 'bimodal', or make up the word ' twin-peakedness' rather than
simply use 'bimodality'? Despite having more letters, the former contain fewer syllables.
Something like this must be what European Commission policy makers have in mind when they talk
about achieving cohesion or equity across rich and poor regions in Europe.
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 I9961 TWIN PEAKS
Increasing incomes
Incomcl distributions

t /+s Time
Fig. I. Twin-peaks distribution dynamics.

If time t+s is within the researcher's data sample, then a hypothesised

tendency towards twin-peakedness can be examined directly from observed
data. If, however, time t+s is beyond the available sample, then a model is
needed before the researcher can reach a conclusion on this.
Is the twin-peakedness drawn in Fig. I more than just whimsy and artistic
licence? Below, I describe empirical techniques to study this. The quick answer
is that the world cross-section of countries does show such tendencies. There is
even evidence that twin-peakedness can already be observed for t + s within
current data samples. However, twin-peakedness will certainly not be seen if all
the researcher does is calculate means, standard deviations, third moments,
and so on, of the cross-section distributions.
Turn now to intra-distribution dynamics. I t does not take a high-tech
econometrician to note that, in the world, there are some rich countries that
have remained rich for long periods of time, and, similarly, that there are some
poor countries that have remained poor. Casual observation also readily comes
up with examples of rich countries that have transited to being relatively poor;
poor countries, to relatively rich; and groups of countries, beginning at similar
levels of development, eventually diverging, with some becoming richer, and
others, poorer. (Korea and the Philippines are the usual examples for the last.)
Put briefly, one sees a broad range of intra-distribution dynamics.
Next consider the intra-distribution arrows drawn in Fig. I . Just as cross-
sectional standard deviations give no insight on potential twin-peakedness in
the distribution, they say nothing either about churning within the cross
section. Understanding these intra-distribution dynamics, however, would
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 I 050 THE ECONOMIC JOURNAL [JULY

inform on the dynamics of the poor catching up with the rich. I t would inform
on the poor stagnating within poverty traps; on the poor overtaking those
previously rich; and on convergence club dynamics - sub-groups or clubs
forming, with member countries converging towards each other, and diverging
away from different clubs. I t would shed light on possibilities for the poorest
5 % of the cross section catching up with the richest 5 % ;and on whether global
development takes multi-tier forms. Intra-distribution dynamics include
information on switches in ranks - the leading country falling to seventeenth
position, or vice versa - but, more than that, they also include information on the
distance traversed when such switches happen.
I have just described some characteristics of (cross-country income)
distribution dynamics that will be of interest in discussing convergence.
Formalising this description offers two payoffs: first, precise statistical
quantification; second, theoretical analysis based on economic ideas.
The simplest useful model of distribution dynamics is one where a stochastic
difference equation describes the evolution of the sequence of distributions. Let
Ft denote the time t cross-country income distribution. Associated with each
4 is a probability measure A,, where

A stochastic difference equation describing distribution dynamics is then

A, = T*(At-l, ut), integer t, (1)

where (u,:integer t) is a sequence of disturbances, and T* is an operator

mapping the Cartesian product of probability measures with disturbances to
probability measures. (Needless to say, the first-order specification in ( I ) is just
a convenience for the discussion. Nothing substantive hinges on it, and the
model easily generalises to higher-order dynamics.)
Since our concerns include intra-distribution dynamics, ( I ) has to record
more than just means and standard deviations - or more generally - of a finite
set of moments of the distribution sequence {F,,F,, ...). Equation ( I ) takes
values that are measures, rather than just scalars or finite-dimensioned vectors,
and thus differs from the typical time-series model.
The structure of T * reveals if dynamics like those in Fig. I occur. Estimated
from observed data, T* allows empirical quantification of those dynamics.
Economic hypotheses restrict T * in particular ways : they therefore provide
predictions on how A,, and thus the distributions 4, can evolve over time.
Just as in time-series analysis, the researcher might seek to understand T * by
its 'impulse response function': set the disturbances u to zero, and run the
difference equation forwards.

with the result being a proxy for A,,. Then, convergence in country incomes
to equality might be represented by ( 2 ) tending, as s + co, towards a
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19961 TWIN PEAKS 1051
degenerate point mass. Alternatively, the world polarising into rich and poor
might be represented by ( 2 ) tending towards a two-point measure : the implied
limit distribution 4+,,s - t co, would then be bimodal or twin-peaked. More
generally, stratification into different convergence clubs might manifest in ( 2 )
tending towards a multi-point, discrete measure, or equivalently, a multi-
modal distribution. How quickly a given initial distribution, F,, evolves into the
limiting distribution, I;E+,, s - t co, can be read off T*'s (spectral) structure.
Finally, T * also contains information on intra-distribution dynamics.
Exploiting that structure, one can quantify the likelihood of the poor catching
up with the rich, and characterise the (random) occurrence times for such
events.
In summary, studying T * informs on all the interesting issues in convergence
analysis. What then does empirical evidence - the Summers-Heston (1991)
data - tell us about T * and Fig. I ? Desdoigts ( 1994), Lam0 ( 1995), Paap and
van Dijk (1gg4), and Quah (1993a, b ; 1996a) take the approach of estimating
- in some form - the operator T*. Some of this work views estimating T * as

an exercise in nonparametric analysis, others, in semi-parametrics; yet others

take discretisations of A, whereupon T * becomes just a stochastic matrix. The
important insight driving these methods is not a technical one, say, of greater
flexibility in estimating a 'convergence equation' regression. Rather, it is that
all these methods provide a global, entire picture of what happens with incomes
across countries. For cross-country data, all the research just mentioned find
T * having features that imply ' twin-peaks' d y n a m i a 5 Estimated T*'s
indicate that clustering or clumping together of country incomes - convergence
club behaviour - occurs eventually, Estimated T*'s reveal precise descriptions
of-events where economies, initially starting out close together, diverge over
time towards either of the twin peaks. Thus, the empirical evidence shows all
the features hypothesised in Fig. I .
Durlauf and Johnson (1995) side-step analysing T * directly. Instead, they
estimate cross section regressions, but allow the regression to 'adapt'
subsamples, depending on data realisations. This innovative empirical
technique permits consistently uncovering local basins of convergence. Durlauf
and Johnson find evidence for the kind of multi-modal behaviour depicted in
Fig. I . They interpret their findings as multiple regimes; in the distribution-
dynamics framework here, multiple regimes and multi-modality are in-
distinguishable.
Bianchi (1995) takes yet a third approach to studying twin-peakedness. As
in Durlauf and Jonson (1gg5), Bianchi eschews dealing directly with T*.
Actually, he goes even further, and considers each distribution 4 , in isolation,
ignoring dynamic information. Bianchi estimates each 4 non-parametrically,
and then applies to each a bootstrap test for multi-modality. He finds that in
the early part of the sample (the early 1g6os), the data show unimodality.
However, by the end of the sample (the late I 980s) the data reject unimodality
in favour of bimodality. Since Bianchi imposes less structure in his analysis -

Ben-David (1994) takes a different approach, but with end results that have the same interpretation.
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 1052 THE ECONOMIC JOURNAL [JULY

nowhere does he consider T * dynamics - one can reasonably guess that his
findings are more robust to possible misspecification. Here again, twin-
peakedness manifests.
I t is obvious that calculating standard deviations or any other moment of the
cross section distribution can show nothing about twin-peaks dynamics. The
cross-section correlation between growth rates and income levels reveals even
less, its interpretation plagued by a version of Galton's Fallacy.6 However,
operator T * can shed light on that seductive intuition - the poor growing faster
and thereby catching up with the rich - that growth-on-levels regressions wish
to exploit. Quah ( 1 9 9 6 ~ calculates,
) from an estimated T*, the probability
density of passage times from poor parts of the income distribution to rich
parts.' He finds that although growth miracles - the Hong Kongs, the South
Koreas, and the Singapores - can happen with reasonable positive probability,
the passage time from the bottom 5 % percentile to the top, given the
magnitude of the gap extant, averages in the hundreds of years. Thus,
persistence and immobility characterise the world cross section of country
incomes.
(Although their being stated with T*-induced preciseness is new with the
body of research that I have just summarised, all such empirical facts have long
been used informally in work such as Lucas (1988, 1993)).
What new economic ideas do these distribution dynamics suggest? These
dynamics draw attention towards the nature of cross-country interactions -
although, to be clear, not entirely away from production function accounting.
They suggest that an appropriate test of economic ideas about the convergence
hypothesis will come from looking at implications on how the entire cross
section distribution evolves, not from studying the behaviour of a single,
representative economy.
A theoretical model of distribution dynamics - in generational earnings -
was developed by Loury ( I 98 I ) . Many of those technical modelling ideas apply
here as well, although the current emphasis on clustering and coalition
formation across individual elements of the distribution is novel. This focus on
cross-sectional grouping does, however, mesh with recent econometric research
(Brock and Durlauf, 1995; Manski, 1993).
That particular economic features - threshold externalities, capital market
imperfection, heterogeneity, country size, club formation - might produce
'twin peaks' dynamics across countries can be seen in theoretical models in
Azariadis and Drazen ( I ggo), Galor and Zeira ( I 993)) Quah ( I 995 b, 1996"))
and Tamura (1992). Quah (1995b, 1996a) most closely relates the theoretical
message in these papers to empirical analysis.
The theoretical model in Quah (19953) describes economic forces that
determine coalition or convergence club formation. That model shows why

' This connection is made in Friedman ( I 992) and Quah (1993b, 1996 b). Quah ( I 996b) also details why
no combination of,'-convergence and u-convergence (in the terminology of Barro and Sala-i-Martin (1992)
and Sala-i-Martin (1995, 1996)) can provide a satisfactory work-around.
' Durlauf and Johnson (1994) have studied similar phenomena in the dynamics of personal income
distribution.
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 I 9961 TWIN PEAKS 1°53
'conditional convergence' in the traditional approach can be misleading:
when different convergence clubs form, factor inputs (e.g. human capital) and
social characteristics (e.g., democracy) will endogenously align around values
determined by each country's convergence club. Conditioning on such
'explanatory variables' leads the researcher using the traditional approach to
conclude, erroneously, that it is those variables that determine a country's
economic position. By contrast, in the model, it is the factors deciding club
membership that determine everything. The traditional researcher never finds
those, and incorrectly attributes growth and convergence to factor inputs and
social characteristics. Moreover, because in that traditional approach, the
researcher only estimates a cross-section regression, he sees only the behaviour
of the (conditional) representative economy. He will never detect the multi-
peakedness that arises in the cross-country distribution.
Similar lessons manifest in the model in Quah ( 1 9 9 6 ~ )Here,
. it is varying
degrees of capital market imperfection that lead to twin-peaks dynamics in the
model. I n the traditional approach, the researcher might simply proxy the
capital market imperfectness by interest rates, say. However, in the model, all
countries eventually have equal rates of return for borrowing and investment.
The traditional researcher, therefore, never finds out the reason why twin-peaks
dynamics occur - not that he ever even realises their presence. Moreover, the
model predicts that every country converges (in a univariate sense) to its own
steady state at an identical rate shared by all other countries. The traditional
researcher then finds exactly a globally stable, constant rate of 'convergence'
in the traditional conditional convergence regression. Such a finding, however,
sheds no light on the actual distribution dynamics occurring.

111. C O N C L U S I O N

With hindsight, the key point in this paper is obvious. Convergence concerns
poor economies catching up with rich ones. What one wants to know here is,
what happens to the entire cross sectional distribution of economies, not
whether a single economy is tending towards its own, individual steady state.
However, it is the latter that has preoccupied the traditional approach.
Proposed fixes to that approach (e.g., the increased emphasis on g-convergence
in Sala-i-Martin (1995)) continue to miss the principal important features of
economic growth and convergence.
Such criticisms would be merely idle if there were no alternative empirics
that appropriately address the key issues relevant to convergence analysis. This
paper has described a rich and growing body of research that does exactly that.
The new findings reported here - on persistence and stratification; on the
formation of convergence clubs; on the distribution polarising into twin peaks
of rich and poor - suggest the relevance of a class of theoretical ideas, different
from the production-function accounting favoured by the traditional approach.
It might, ultimately, be those factors that are important for growth, not just
crudely boosting the inputs in a neoclassical production function.
Many issues remain to be researched in this alternative approach. The
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 1°54 T H E ECONOMIC JOURNAL [JULY
empirical analyses of distribution dynamics can be substantially refined : Quah
( I 995 a, C) explore some ways to do this. Theoretical models for cross-country,
or more general social, interaction (e.g., Benabou (1995); Brock and Durlauf
( I 995) ; Quah ( I 995 b), among many others) provide new insights on how
economies evolve - and, in turn, generate intriguing new predictions to be
studied empirically.
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Twin Peaks: Growth and Convergence in Models of Distribution Dynamics
Danny T. Quah
The Economic Journal, Vol. 106, No. 437. (Jul., 1996), pp. 1045-1055.
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[Footnotes]

2
The Measurement of Mobility
A. F. Shorrocks
Econometrica, Vol. 46, No. 5. (Sep., 1978), pp. 1013-1024.
Stable URL:
http://links.jstor.org/sici?sici=0012-9682%28197809%2946%3A5%3C1013%3ATMOM%3E2.0.CO%3B2-X

6
Do Old Fallacies Ever Die?
Milton Friedman
Journal of Economic Literature, Vol. 30, No. 4. (Dec., 1992), pp. 2129-2132.
Stable URL:
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Convergence
Robert J. Barro; Xavier Sala-i-Martin
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Do Old Fallacies Ever Die?

Milton Friedman
Journal of Economic Literature, Vol. 30, No. 4. (Dec., 1992), pp. 2129-2132.
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Income Distribution and Macroeconomics

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Identification of Endogenous Social Effects: The Reflection Problem

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The Journal of Economic Perspectives, Vol. 8, No. 1. (Winter, 1994), pp. 3-22.
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The Measurement of Mobility

A. F. Shorrocks
Econometrica, Vol. 46, No. 5. (Sep., 1978), pp. 1013-1024.
Stable URL:
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The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950-1988
Robert Summers; Alan Heston
The Quarterly Journal of Economics, Vol. 106, No. 2. (May, 1991), pp. 327-368.
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