Poor economic performance in a country will often lead to changes in the domestic policies and institutions, political instability, or changes in international relations. Induced institutional change of this kind affects the interpretation of the empirical evidence on economic convergence: a divergent process may be stabilized by institutional and political intervention. Stabilization may result even if the effects of each intervention are stochastic and the expected value of the benefits from each reform is non-positive. Thus, the appearance of conditional convergence may carry no implications for ’the underlying parameters of technology and preferences.’ ©1999 Elsevier Science B.V. All rights reserved.