Academic journal article IUP Journal of Applied Finance

Testing for Convergence and Catching-Up for Kedah with the Rest of the States in Malaysia: A Panel Unit Root Test Analysis

Academic journal article IUP Journal of Applied Finance

Testing for Convergence and Catching-Up for Kedah with the Rest of the States in Malaysia: A Panel Unit Root Test Analysis

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

Malaysia's economic growth has surpassed that of the other ASEAN nations. Nevertheless, disparity in income across states in Malaysia continues to be a matter of concern. The existence of regional inequalities and the prospect that these inequalities may widen were recognized by the Malaysian government. As a matter of fact, the eight volumes of the 5-Year Malaysia Plan reflects the sincerity of the Malaysian government in eradicating the problem of regional or state imbalances. Accordingly, in their quest to achieve both development and equity at the same time, policies and strategies are continuously being formulated and implemented across the states.

Tables 1 and 2 present some interesting observations on the performance of the 14 states in Malaysia for the period 1970-2000. In the year 1970, five states-Negeri Sembilan, Perak, Selangor, Sabah and Wilayah Persekutuan-registered real GDP per capita that is above the national average. However, in 2000, Melaka, Penang, Selangor, Terengganu and Wilayah Persekutuan acted as the engine of growth, contributing to real GDP per capita that is above the national average. In the same year, Sabah lagged behind the national average by 35% of real GDP per capita. In terms of ranking, in 1970, Sabah ranked 3rd after Wilayah Persekutuan and Selangor. However, in 2000, it was ranked 12th followed by Kedah (13th) and Kelantan (14th). The statistics suggest that in 2000, Sabah was the 3rd poorest state in Malaysia, despite her high ranking as the 3rd richest state in 1970. As far as Kedah is concerned, she was ranked 4th as the poorest state in 1970; however, from 1980 to 2000, Kedah was the 2nd poorest state in Malaysia. Unfortunately, on the other hand, the state of Kelantan has remained poor all along.

The purpose of the present paper is to assess empirically whether the state of Kedah has been converging, diverging or catching up with the rest of the 13 states in Malaysia for the period 1961-2003. From an economic point of view, the issues of convergence and divergence are very important. In the case of convergence, this would point to the existence of market forces, which will eventually lead to similar living standards across states. In the case of persistently large (or widening) gaps or divergence between poor and rich states, there could be a need for economic policy measures to stimulate a catch-up process. The catching-up hypothesis suggests that the poorer states with low initial income and productivity tend to grow more rapidly by copying the technology from the leader country, say, by replacing the existing older capital stock with more modern equipment, implying that capital investment is necessary to import the more advanced technology embodied in new equipment (Lim and McAleer, 2004). One good example of transferring foreign technology and knowledge to the host country is through foreign direct investment.

Methodology

In a time series approach, stochastic convergence asks whether permanent movements in one country's per capita income are associated with permanent movements in another countries' income, i.e., it examines whether common stochastic elements matter and how persistent the differences among countries are. Thus, stochastic convergence implies that income differences among countries cannot contain unit roots. In other words, income per capita among countries is stationary. Empirical studies on testing stochastic convergence, among others, include Campbell and Mankiw (1989), Cogley (1990), Bernard (1991), Carlino and Mills (1993), Bernard and Durlauf (1995), Greasly and Oxley (1997), St. Aubyn (1999), and Cellini and Scorcu (2000).

According to Bernard and Durlauf (1995), stochastic convergence occurs if relative log per capita GDP, y^sub iqt^, follows a stationary process, where y^sub iqt^ = log Y^sub it^ - log Y^sub qt^, and Y^sub it^ is the log of real per capita GDP for state i, and Y^sub qt^ is log of real per capita GDP of a reference state, and both series is I(1). …

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