Academic journal article Journal of Southeast Asian Economies

Pairwise Output Convergence in Selected Countries of East Asia and the Pacific: An Application of Stochastic Unit Root Test

Academic journal article Journal of Southeast Asian Economies

Pairwise Output Convergence in Selected Countries of East Asia and the Pacific: An Application of Stochastic Unit Root Test

Article excerpt

I. Introduction

The concept of convergence is defined in the literature as implying "forces accelerating the growth of nations who were latecomers to industrialization and economic development give rise to a tendency towards convergence of levels of per capita product or, alternatively of per worker product" (Baumol 1986, p. 1075). David Hume contended that transfer of technology to be a driving force for convergence of poorer and richer countries by enlarging the size of their markets. Convergence of income is a natural outcome of the neoclassical growth models, and its validity is of paramount importance for economic welfare. The empirical as well as the theoretical literature on convergence is vast, and a comprehensive review can be found in Islam (2003) with a mixed bag of results. Islam (2003, p. 309) attributes the wide array of empirical results due to many different interpretations of convergence. The following taxonomy indicates some of the different ways in which convergence has been understood:

(a) Convergence within an economy vs. convergence across economies;

(b) Convergence in terms of growth rate vs. convergence in terms of income level;

(c) [beta]-convergence vs. [sigma]-convergence;

(d) Unconditional (absolute) convergence vs. conditional convergence;

(e) Global convergence vs. local or club-convergence;

(f) Income-convergence vs. TFP (total factor productivity)-convergence; and

(g) Deterministic convergence vs. stochastic convergence.

Islam (2003, p. 16) writes about the progression of the study of convergence as follows:

   From a chronological point of view, the study of
   convergence began with the notion of "absolute
   convergence" and then moved to the concept of
   "conditional convergence." Both these concepts
   were initially studied using the notion of
   "[3-convergence." The notion of o-convergence
   arose later. Alongside emerged the concepts of
   "club-convergence," "TFP-convergence," and the
   time series notions of convergence. There was
   also a chronological progression from the
   "informal cross-section" to "formal cross-section,"
   and then on to "panel" approach to
   convergence study. The "time-series" and the
   "distribution" approaches developed alongside.

For large samples of countries that cut across regions and income levels, most of the evidence fails to support absolute convergence. Although large samples of countries do not display convergence, the evidence of convergence is somewhat stronger for smaller groups of countries specially among countries at similar income levels. Ben-David (1998) and Chatterji (1992) find empirical evidence of convergence among the world's "poorest" and "wealthiest" countries although they fail to do so for middle-income countries. In response to Ben-David (1998) and Chatterji (1992), Chowdhury (2005a, 2005b) tested the "bi-modality" and failed to find absolute and conditional convergence in poorer countries of South Asia and middle income counties of ASEAN. Galor (1996) and Quah (1997) provide theoretical justifications for the convergence club hypothesis, according to which convergence will occur among subsets as opposed to broad samples of countries.

The central objective of this study is to empirically examine convergence in eleven countries of East Asia and the Pacific region. Our sample included the economies of Australia, New Zealand, Japan and the newly industrializing economies (NIEs) of Hong Kong, Singapore, South Korea, Taiwan (Asian tigers) along with emerging economies of Indonesia, Malaysia and the Philippines (the tiger cubs). Some of these economies, specially the tigers, have been hailed as models of achievement for other emerging economies. The sample included countries which are territorially small (Singapore and Hong Kong) and also countries which are big territorially (Australia, Indonesia). …

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