The lost decades: Developing countries' stagnation in spite of policy reform 1980-1998

I document in this paper a puzzle that has not received previous attention in the literature. In 1980-98, median per capita income growth in developin g countries was 0.0 percent, as compared to 2.5 percent in 1960-79. Yet I d ocument in this paper that variables that are standard in growth regression s-policies like financial depth and real overvaluation, and initial conditi ons like health, education, fertility, and infrastructure generally improve d from 1960-79 to 1980-98. Developing country growth should have increased instead of decreased according to the standard growth regression determinan ts of growth. The stagnation seems to represent a disappointing outcome to the movement towards the "Washington Consensus'' by developing countries. I speculate that worldwide factors like the increase in world interest rates , the increased debt burden of developing countries, the growth slowdown in the industrial world, and skill-biased technical change may have contribut ed to the developing countries' stagnation, although I am not able to estab lish decisive evidence for these hypotheses. I also document that many grow th regressions are mis-specified in a way similar to the Jones (1995) criti que that a stationary variable (growth) is being regressed on non-stationar y variables like policies and initial conditions. It may be that the 1960-1 979 period was the unusual period for LDC growth, and the 1980-98 stagnatio n of poor countries represents a return to the historical pattern of diverg ence between rich and poor countries.