where in its simplest formulation the technology level is proxied by a constant term, _c_ , and a series of dummy variables. In a later section, proxy variables with respect to growth of trade openness, bad governance, time trends and other variables will be included in the equation. The majority of the following regressions include three dummies. First, a 1963 impulse dummy captures a positive one-off effect stemming from expectations regarding the Central American Common Market (MCCA). Second, a 1982 impulse dummy takes into account a negative one-off effect stemming from the peak of internal war. Third, a 1977 step dummy which models a structural change in the long-run relationship of the variables. A Chow breakpoint test does not reject the null hypothesis of no structural change during that year (p = 0.000).

In fact, the 1977 dummy is always negative, very significant, and most likely corrects for the deviations resulting from the civil strife. Interestingly, this finding is consistent with the quality index of the capital stock series showing a decreasing trend since 1977.<sup>21</sup>

# **5.2 Average Years of Schooling and Growth**

Table 5 shows the results for the average years of schooling specification. The adjusted R<sup>2</sup> of the error-correction model is rather high and indicates a good data fit. Test statistics do not indicate any serial correlation or misspecification at conventional levels. The residuals have been found to be normally distributed and to follow stationary patterns. If not mentioned otherwise, these properties apply equally to subsequent regressions. The loading coefficient is highly significant and suggests a moderate speed of adjustment towards the long-run growth path, equal to about 25 percent of the deviations per year. After any specific shock to the economy it would, on the average, take approximately 10 years to reach the level of output consistent with long-run growth (with differences to be less than 10 percent). In the subsequent regressions, however, the magnitude of the coefficient? but not its significance? was found to be fragile with respect to the econometric specification. The asymptotic critical values of the t-ratio for the coefficient are taken from Banerjee et al. (1998). The significance level suggests a cointegrating relationship of the variables.<sup>22</sup>

> 21 Evidently, the Guatemalan time series are full of distortions, for example the 1976 earthquake and major political events. However, a sparse inclusion of dummy variables is the preferred econometric formulation. Other settings will be described in the following sections. It is important to emphasize that the bas ic results are not sensitive to the dummy variables. That is, the omission of the impulse dummies (1963 and 1982) does have little impact on the qualitative results. However, it is important to model the structural break.

> 22 Notice equally that the human capital parameters are highly significant and compare favorably with the critical values provided by Pesaran et al. (2001). This is reassuring given the small sample size of 50 observations and the consequently low power of the ADF tests, where the stationarity properties of the repressors may not be known with certainty.

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