Convergence and Catching Up in ASEAN: AComparative Analysis

Transcription

1 CIRJE-F-218 Convergence and Caching Up in ASEAN: AComparaive Analysis Lee Kian Lim Edih Cowan Universiy Michael McAleer Universiy of Wesern Ausralia March 2003 CIRJE Discussion Papers can be downloaded wihou charge from: hp:// Discussion Papers are a series of manuscrips in heir draf form. They are no inended for circulaion or disribuion excep as indicaed by he auhor. For ha reason Discussion Papers may no be reproduced or disribued wihou he wrien consen of he auhor.

2 Convergence and Caching Up in ASEAN: A Comparaive Analysis* Lee Kian Lim School of Accouning, Finance and Economics Edih Cowan Universiy Michael McAleer Deparmen of Economics Universiy of Wesern Ausralia Revised: February 2003 Absrac The increasing diversiy of average growh raes and income levels across counries has generaed a large lieraure on esing he income convergence hypohesis. Mos counries in Souh-Eas Asia, paricularly he five founding ASEAN member counries (ASEAN-5), have experienced subsanial economic growh, wih he pace of growh having varied subsanially across counries. Recen empirical sudies have found evidence of several convergence clubs, in which per capia incomes have converged for seleced groupings of counries and regions. This paper applies differen ime series ess of convergence o deermine if here is a convergence club for ASEAN-5, as well as ASEAN-5 and he USA. The caching up hypohesis saes ha he lagging counry, wih low iniial income and produciviy levels, will end o grow more rapidly by copying he echnology of he leader counry, wihou having o bear he associaed coss of research and developmen. Given he imporan effecs of echnological change on growh, his paper also examines wheher ASEAN-5 is caching up echnologically o he USA. * The auhors wish o hank a referee for helpful commens and suggesions. The second auhor is mos graeful o he financial suppor of he Ausralian Research Council and he Cener for Inernaional Research on he Japanese Economy, Faculy of Economics, Universiy of Tokyo.

3 1. INTRODUCTION The rapid rise in he economies of he Eas Asian and Souh-Eas Asian regions has occurred in he las hree decades. As repored by he World Bank (1993), he weny-hree economies of Eas Asia grew a a faser average rae han all oher regions in he world over he period. The high-performing Asian economies (HPAE) such as Japan, he Four Asian Tigers (Hong Kong, Souh Korea, Singapore, and Taiwan), and he hree Souh-Eas Asian newly indusrialising economies (Indonesia, Malaysia, and Thailand), have grown a a rae more han wice as fas as he res of Eas Asia since I has been suggesed ha he sages of economic developmen in hese eigh HPAE followed a flying geese paern (Kwan, 1994), which sared wih he miraculous growh of he Japanese economy, followed by Hong Kong, Souh Korea and Taiwan, and more recenly by several counries from Souh-Eas Asia. Consequenly, he fas-growing Eas Asian economies should be an ideal group of counries for which o es he convergence and caching up hypoheses. There have been several sudies (for example, Young, 1992, 1995; Easerly, 1995; Fukuda and Toya, 1995) which have examined he economic growh of he Four Asian Tigers. As here has been lile research regarding he counries in he Souh-Eas Asian region, his paper focuses on he five founding member counries of he Associaion of Souh-Eas Asian Naions (ASEAN). ASEAN was esablished in 1967 wih five member counries, namely Indonesia, Malaysia, he Philippines, Thailand and Singapore (hereafer referred o as ASEAN-5). The ciy-sae Singapore was he firs ASEAN-5 counry o achieve he newly indusrialised counries (NIC) saus, while he oher four member counries (hereafer referred o as ASEAN-4) are sill railing economically. An ineresing quesion is wheher Indonesia, Malaysia and Thailand (hereafer referred o as ASEAN-3), will become NIC in he manner of he Four Asian Tigers. Wih he empirical evidence indicaing he exisence of differen convergence clubs and regional convergence for differen naions, will here be a convergence club in he Souh-Eas Asian region? Since he mid-1980s, ASEAN 4 has followed he pah of is Norh-Eas Asian counerpars, embarking on he expor-led, foreign invesmen-driven growh sraegies. From 1986 o 1996, ASEAN-3 s real gross domesic produc (GDP) per capia grew a an average annual rae of percen, bu i was only 1.2 percen for he Philippines. Foreign rade encourages 1

4 diffusion of new producs and new echnologies, while inernaional invesmen brings echnology and organisaional improvemens (see Maddison, 1995). Will ASEAN-5 be able o cach up o heir echnological leader, he USA, if hey are able o susain curren growh raes? Will he Philippines fall behind he res of ASEAN-5 if he growh rae remains low? This paper examines he quesions raised above using differen ess of convergence and caching up, and will focus on he growh performance of he ASEAN-5 economies. As he cross secion ess for he convergence and caching up hypoheses for five counries are unlikely o be robus due o he exremely small degrees of freedom, i is more appropriae o perform hese ess in a ime series framework. The paper is divided ino five secions. Secion 2 provides seleced indicaors for ASEAN-5 in 1996, and examines he cross secion growh paerns of he ASEAN-5 counries and he USA. Secion 3 oulines he ime series mehods used o es he convergence and caching up hypoheses. Secion 4 presens he empirical resuls and heir implicaions. The conclusions of he sudy and fuure research are summarised in Secion CROSS SECTION AND TIME SERIES DATA The formaion of ASEAN can be aribued o geographical proximiy and regional economic and poliical co-operaion among is member counries. In he pas hiry years, he ASEAN-5 counries ha differ considerably in size, level of economic developmen and resource endowmen have undergone profound ransformaions. Each counry has experienced subsanial indusrial diversificaion and economic growh due o he adopion of expororiened rade policies, he rapid flow of foreign direc invesmen, and sound macroeconomic policies. Seleced indicaors for he ASEAN-5 counries in 1996 are shown in Table 1. Among he ASEAN-5 counries, Singapore is he smalles in erms of area and populaion, bu has he highes GDP per capia, wih no foreign deb, whereas Indonesia is he larges, bu also has he lowes GDP per capia and he highes exernal deb. The sources of rapid and susained growh, and he shared characerisics among he ASEAN-5 counries over he pas hree decades, were higher levels of foreign direc invesmen, physical and human capial accumulaion, and expor growh, as well as macroeconomic sabiliy (see Lim, 1999). 2

5 TABLE 1 Seleced ASEAN-5 Indicaors in 1996 Indicaors Singapore Malaysia Thailand Indonesia Philippines Area ( 000 sq. km) * , Populaion (millions) Populaion Growh (%) Real GDP (US$ billion) Real GDP Per Capia (US$) 21, , , Real GDP Growh (%) Expors (US$ billion) Impors (US$ billion) Exernal Deb (US$ billion) nil Inflaion CPI (%) Average Exchange Rae Sources: World Bank World Tables (EconDaa, 1998). ASEAN (1999). The daa for he ASEAN-5 counries are exraced from he World Bank World Tables (EconDaa, 1998), he Penn World Table (PWT) 5.6 of Summers and Heson (1994) 1, and various saisical repors of respecive local governmen agencies. Tesing for convergence and caching up among he ASEAN-5 economies in a ime series framework requires he comparaive income daa for hese counries over exended periods. Comparaive ime series daa for ASEAN-5 are only available from he PWT 5.6, which are limied o he pos-war period from 1960 o As Singapore separaed from Malaysia and became independen in 1965, any comparaive sudy of ASEAN-5 mus focus on he period since The PWT 5.6 is a revised and updaed version of PWT (Mark 5) prepared by Summers and Heson (1991), and has been disribued o he users since 1994 by he Naional Bureau of Economic Research, Cambridge, Massachuses. 3

6 Using he daa from PWT 5.6, Figure 1 plos he logarihms of real GDP per capia adjused for changes in he erms of rade 2 (LGDP) for he ASEAN-5 counries and heir echnology leader, he USA, over he period I is eviden from Figure 1 ha he LGDP series for all ASEAN-5 counries, excep he Philippines, are rending upwards. Singapore is he only ASEAN-5 counry which has aken he lead o close he income gap wih he USA. As for ASEAN-3, heir individual levels of LGDP are almos parallel o ha of he USA, bu he gaps beween ASEAN-3 and he USA appear o have narrowed slighly over he period. Inuiively, he iniial level of income and is subsequen growh rae are imporan in deermining he speed of caching up for ASEAN-3. FIGURE 1 Logarihms of Real GDP Per Capia, USA 9.0 Singapore Malaysia 8.0 Thailand 7.0 Indonesia Philippines Source: PWT 5.6. For a beer undersanding of cross-counry income convergence, i is useful o examine he cross-counry growh paerns of he five ASEAN counries and he USA. Figure 2 shows a scaer plo of he average growh rae of real GDP per capia from 1965 o versus he logarihm of real GDP per capia in I is eviden ha all ASEAN-5 counries (excluding 2 3 As all he ASEAN-5 counries are rade dependen, i would be more appropriae o use real GDP per capia in consan dollars adjused for he gains or losses in he erms of rade (1985 inernaional prices for domesic absorpion and curren prices for expors and impors) as a measure of real income. The average growh rae of real GDP per capia in is compued by aking he log-difference of real GDP per capia in 1965 and 1992, and divided by he number of years (which is 27). 4

7 he Philippines) had higher per capia GDP growh and lower iniial GDP levels, as compared wih he USA. The higher GDP growh and iniial GDP levels for Singapore, as compared wih he ASEAN-4 counries, could have conribued o heir success in aaining heir NIC saus. FIGURE 2 Per Capia Growh Rae ( ) Versus Iniial Per Capia GDP (1965) Per Capia GDP Growh Rae ( ) 8% 7% 6% 5% 4% 3% 2% 1% 0% Indonesia Thailand Philippines Singapore Malaysia USA Logarihm of Real Per Capia GDP in 1965 Source: PWT 5.6. Numerous sudies have examined he convergence hypohesis over an exended period. There are a leas hree differen ypes of convergence ess in he growh lieraure. The mos common es of convergence is o regress he average growh rae on he iniial level of real per capia oupu (wih coefficien β) using cross secion daa (see Barro, 1991). A negaive esimae of β is said o indicae absolue β convergence across counries. If oher characerisics of economies such as he invesmen raio, educaional aainmen and oher policy variables are included in he growh regression, a negaive esimae of β is said o indicae condiional β convergence. A second measure of convergence is o deermine if he dispersion of real per capia income is falling over ime, namely σ convergence (see Barro and Sala-i-Marin, 1992). In a ime series framework, a hird definiion of convergence is o deermine wheher here exiss a common deerminisic and/or sochasic rend for differen counries (see Bernard and Durlauf, 1995). In his case, convergence for a group of counries means each counry has an idenical long-run rend. 5

8 There are oo few observaions for serious empirical cross-secion ess of β convergence for ASEAN-5, or ASEAN-5 and he USA (hereafer ASEAN-5/USA). Esimaion of he β coefficien for ASEAN-5 and ASEAN-5/USA yield insignifican negaive esimaes a convenional levels. Inclusion of addiional variables such as secondary school enrolmen and he savings rae would lead o insufficien degrees of freedom, and hence is no considered. As β convergence is a necessary bu no sufficien condiion for income dispersion o be reduced over ime, esing for σ convergence provides a more accurae indicaion of income convergence across economies. In his sudy, he cross-counry sandard deviaions of (he logarihms of) real GDP per capia for ASEAN-5/USA, ASEAN-5 and ASEAN-4 are compued for he period (see Figure 3). The resuls indicae he dispersion of per capia GDP for ASEAN-5 increased from a low of 0.48 in 1965 o 0.69 in 1973, remained seady around ha level unil 1983, and rose again o 0.82 in As Singapore has ouperformed he oher ASEAN-5 counries over he pas hree decades, i is no surprising o observe ha he exen of income dispersion is reduced significanly when Singapore is excluded from he group. In fac, he income dispersion among ASEAN-4 fell gradually from 0.48 in 1965 o a low of 0.41 in 1986, before rising seadily o 0.56 in The increased income deviaions for ASEAN-4 from he mid-1980s can be aribued o he ouward orienaion policies adoped by he ASEAN-3 counries, which has led o heir rapid economic growh over he las en years. In he case of ASEAN-5/USA, he cross-counry sandard deviaions fell gradually from 1.04 o 0.91 over he period, and remained seady a around 0.96 afer The overall paern seems o indicae a sligh reducion in σ over ime. Given he limiaions of crosscounry regressions (see for example, Bernard and Durlauf, 1996; de la Fuene, 1997; Lee e al., 1997: Lichenberg, 1994; Quah, 1993, 1996), and he small sample size used, furher research is required o deermine wheher he cross secion growh paerns for ASEAN-5 are suppored in a ime series framework. Apar from he sudies of income convergence, he effecs of echnological caching up for ASEAN-5 are also examined. Foreign direc invesmen is widely acknowledged as a means of ransferring foreign echnology and knowledge o he hos counry. The ASEAN region has been a major recipien of inernaional direc invesmen flows, paricularly from he mid-1980s 6

9 o he 1990s. This has helped o accelerae he region s economic growh, as he caching up hypohesis posulaes ha less advanced counries are able o increase heir produciviy by replacing heir exising older capial sock wih more modern equipmen. FIGURE 3 Sandard Deviaions of he Logarihm of Real GDP Per Capia, ASEAN-5/USA Sandard Deviaions ASEAN-5 ASEAN Source: These figures are compued using daa from PWT 5.6. The disance from he leader counry in erms of per capia income or produciviy is commonly used as a measure of caching up effecs. Figure 4 depics he log-differences of real GDP per capia beween he echnology leading counry, he USA, and each of he ASEAN-5 counries from 1965 o I is eviden from Figure 4 ha he echnological gaps beween he USA and he five ASEAN counries have generally declined over ime, excep for he Philippines. The log per capia oupu difference beween he USA and he Philippines fell from 2.24 in 1965 o a low of 2.05 in 1982, before increasing o 2.35 in The caching up hypohesis suggess ha he backward counry, wih low iniial income and produciviy, will end o grow more rapidly by copying he echnology from he leader counry. An abiliy of he lagging counry o absorb he more advanced echnologies is dependen on is social capabiliy, which involves various aspecs of he counry s developmen process. Technological caching up is ofen associaed wih innovaive aciviies such as R&D and paening. On he oher hand, capial invesmen is necessary o impor he more advanced 7

10 echnology ha is embodied in he new equipmen. Besides innovaion and invesmen, he level of educaion also plays a crucial role in deermining he echnical compeence of he labour force. FIGURE 4 Logarihmic Differences in Real Per Capia GDP Beween he USA and Five ASEAN Counries, Indonesia Philippines Thailand Malaysia Singapore Source: PWT 5.6. Figure 5 shows he percenage of oal populaion enrolled in secondary educaion for five ASEAN counries. 4 On average, he secondary school enrolmen raios in ASEAN-5 are rising, excep for Singapore. This resul is raher surprising, especially as Singapore is well known o have he highes educaed labour force among he ASEAN-5 counries. One possible explanaion is ha he daa for secondary school enrolmens do no include sudens enrolled in privae schools because a complee ime series is no available. In addiion, here has been a subsanial shif in enrolmens of GCE O-level sudens from he radiional pre-universiy cenres o he Insiues of Technical Educaion and Polyechnics, which are no included in he daa. Koo (1998) found he demographic ransiion in each counry migh have a greaer influence on he increase in secondary school enrolmens. The auhor sressed ha he greaer supply of human resources does no necessarily imply an improved economic performance 4 Generally, he secondary school enrolmen raio is found o have a more dominan effec on a counry s economic growh as compared wih he primary school enrolmen raio. 8

11 unless i is linked o efficien resource use. For example, an early focus on echnical and/or vocaional educaion in Singapore has overcome a shorage in echnical labour requiremens. FIGURE 5 Secondary School Enrolmen Raio for ASEAN-5, Singapore 6.0 Malaysia Philippines Thailand Indonesia Sources: Saisical Yearbooks and Educaion Saisics from five ASEAN counries (various years). Besides he educaion variable, oher caching up sudies have also used paens daa as an indicaor of innovaion. For developing counries, such as hose in ASEAN-5, paens daa are generally no available. Alernaive measures of innovaion in ASEAN-5 would be he growh raes of domesic invesmen or governmen expendiure on educaion. 3. METHODOLOGY This secion focuses on he ime series ess of he convergence and caching up hypoheses for wo groups of counries discussed above, namely ASEAN-5 and ASEAN-4, over he period. For he convergence ess, his secion applies a simple saisical es for he oupu rends, uni roo ess (namely, he DF and ADF ess) and coinegraion analysis (he Johansen es), and he Kalman filer mehod and cluser algorihm o he oupu series. In he case of caching up, he uni roo ess on he oupu differences beween wo counries, and he 9

12 Verspagen (1991) model ha incorporaes caching up and falling behind, will be used. These ime series mehods are discussed briefly below. 3.1 Convergence Tes In a ime series framework, a simple saisical es for converging or diverging rends of an oupu series, as proposed by Verspagen (1994, p. 156), is wrien as follows: W i = ln y ln y, (1) i * where y i is real GDP per capia for counry i a ime and y * is average real GDP per capia for * s counries in he sample, (i.e. y = ( y ) s s i = 1 changes according o he following process: i ). I is assumed ha for each ime period, W W 1 Ψ Wi. (2) i+ = If Ψ > 1, per capia income in counry i diverges from he sample group; if Ψ < 1, convergence of income akes place. Under he assumpion of diminishing marginal reurns, he empirical implicaion of he β convergence hypohesis is ha counries wih low iniial per capia oupu are growing faser han hose wih high iniial per capia oupu. In a ime series conex, his can be inerpreed o mean ha differences in per capia incomes among a cross secion of economies will be ransiory. Hence, a sochasic definiion of income convergence requires per capia income dispariies across counries o follow a saionary process. This sudy applies uni roo-based ess o examine he ime series properies of oupu differences for ASEAN-5 counries. Following Oxley and Greasley (1995), he Dickey-Fuller-ype es based on he oupu difference beween wo counries, p and q, is given below: y n p, yq, = µ + α + β y p, 1 yq, 1 ) + = δ j j ( y p j y 1, q, j ) ( + ε, (3) where y i, is he logarihm of per capia GDP for counry i (= p, q) a ime. 10

13 In a ime series framework, a disincion is made beween long-run convergence and convergence as caching up. The saisical ess are inerpreed as follows: 1. If y p, y q, conains a uni roo (i.e. β = 1), per capia GDP for counries p and q diverge over ime. 2. If y p, y q, is saionary (i.e. no sochasic rend, or β < 1): i) α = 0 (i.e. he absence of a deerminisic rend) indicaes long-run convergence beween counries p and q; and ii) α 0 indicaes caching up (or a narrowing of oupu differences) beween counries p and q. Clearly, he saisical ess of caching up and convergence are relaed as boh require y p y q o be saionary, wih he difference lying in he deerminisic rend erm. Bernard and Durlauf (1995) have proposed a more sringen ime series es for convergence and common rends. The noion of convergence in mulivariae oupu is defined such ha he long-erm forecass of oupu for all counries, i = 1, KK, n, are equal a a fixed ime (see Bernard and Durlauf, 1995, p. 99): lim E( y1, + y, + I ) = 0, i > 1, (4) k k i k where y i,+k is he logarihm of real per capia oupu for counry i a ime +k, and I is all he informaion available a ime. Applying he conceps of uni roos and coinegraion, heir convergence es deermines wheher y 1,+k y i,+k in equaion (4) is a zero mean saionary process in a coinegraion framework. Convergence in oupu for wo counries, p and q, implies heir oupu mus be coinegraed, wih coinegraing vecor [1, -1]. This definiion of convergence in oupu also implies ha counries p and q mus have a common ime rend if heir oupu series are rend saionary. Counries ha do no converge in oupu may sill experience he same permanen shocks, bu will differ in heir long run magniude across counries. Thus, Bernard and Durlauf (1995) 11

14 proposed he ess for common rends which allows permanen shocks o have differen longrun weighs. For mulivariae oupu, counries j = 1, 2, KK, n are defined o conain a single common rend if he long-erm forecass of oupu are proporional a a fixed ime (see Bernard and Durlauf, 1995, pp ): lim E( y1, + α y, + I ) = 0, j > 1, (5) k k j j k where α is he vecor of long-run weighs for counries j = 2,3, KK, n. In he case of wo j counries, p and q, hey are said o have a common rend if heir oupu series are coinegraed wih vecor [1, -α]. I is imporan o noe ha he concep of coinegraion is used for he sudy of non-saionary ime series, paricularly a non-saionary vecor auoregressive (VAR) process inegraed of order one (i.e. an I(1) series). Hence, esing for convergence and common rends in a coinegraion framework requires he individual oupu series o be inegraed of order one. The following augmened Dickey-Fuller (ADF) es will be used o deermine he order of inegraion for real GDP per capia of he ASEAN-5 counries: y p i, = a0 + a1 + βyi, 1 + = δ + ε j j y 1 i, j i,, (6) where y i, is he logarihm of per capia oupu for counry i, y i, approximaes he growh rae, is he deerminisic rend, p is he order of he auoregressive process, and y i,-j is included o accommodae serial correlaion in he errors. To esimae he rank of he coinegraing marix in a mulivariae framework, he oupu vecor process is wrien in he following VAR represenaion (see Johansen, 1991): Y = Γ( L) Y + ΠY + µ + ε, (7) k where Y is a vecor of he logarihms of real GDP per capia for he ASEAN-5 counries, Π represens he long-run relaionships of he coinegraing vecors, Γ(L) (a polynomial of order 12

15 k - 1) capures he shor-run dynamics of he sysem, and ε are he independen Gaussian errors wih zero mean and covariance marix Ω. The reduced rank (0 < rank(π) = r < n) of he long run impac marix is formulaed as follows: Π = αβ, (8) where β is he marix of coinegraing vecors and α is he marix of adjusmen coefficiens. The maximum likelihood (ML) esimaors of α and β can be obained by solving he following equaion (see Johansen, 1991, pp ): 1 λs S S S 0, (9) kk k k = where 1 Sij M ij M i1m 11 M 1 j = denoes he residual sums of squares marices and M ij he produc momen marices (i, j = 0, k). Using he esimaed eigenvalues, λˆ > λˆ L L > λˆ 0, 1 2 k > and esimaed eigenvecors, Vˆ = (ˆ ν, νˆ, K K, νˆ ), normalised by Vˆ S kk Vˆ = I, yields 1 2 k βˆ = (ˆ ν, νˆ, K K, νˆ ), (10) 1 2 k αˆ = S βˆ. (11) 0k Two likelihood raio (LR) es saisics are used o es he reduced rank Π for coinegraion, namely he race and maximal eigenvalue saisics of he sochasic marix Π. The race saisic for esing H 0 (r) agains H 1 (unresriced) is given by J race = T n = + 1 λ i r 1 ln( ˆ ), (12) and he maximal eigenvalue saisic for esing H 0 (r) agains H 1 (r+1) is given by J = T ln(1 λˆ ). (13) max 13

16 Applying he Johansen ML esimaion mehod, convergence in mulivariae oupu, as defined in equaion (4), would require r = n 1 (or four) coinegraing vecors for five ASEAN counries of he form [1, -1] (i.e. one common long-run rend for he individual oupu series in Y ). The Johansen procedure also permis hypohesis esing of he coinegraing relaions and heir adjusmen coefficiens, using he LR es wih a chi-squared disribuion. This mehod is necessary o deermine if he r coinegraing vecors are of he form [1, -1], which requires a uni resricion imposed on all he coefficiens of he r coinegraing vecors. Anoher ime series approach o es he convergence hypohesis is he Kalman filer mehod, as proposed by S. Aubyn (1999), which is more powerful han he DF-ype es when here is a srucural break in he convergence process. Oupu per capia for a pair of counries, y p and y q, is said o converge if heir difference y p, y q, converges in probabiliy o a random variable as ends o infiniy. The Kalman filer ess are derived from he following sae space model (S. Aubyn, 1999, p. 29): y p yq, 2, = γ + ε, ε ~ N(0, σ ), (14) γ = γ 1 + µ, µ ~ N(0, Ω ), (15) Ω 2 = φ Ω 1, (16) 2 Ω. (17) 0 = Ψ Equaion (14) is known as he measuremen equaion and (15) as he sae equaion. I is assumed ha he variance of µ given by Ω in (16) is poenially ime varying, bu his variance will end o zero in he long run if φ < 1, which implies ha he wo oupu series are converging and heir difference becomes an I(0) variable. The likelihood funcion can be consruced using he Kalman filer algorihm and he es for convergence is H 0 : φ = 1 agains H a : φ < 1, based on he following es saisic: φ ML 1 T ( φml ) =, (18) ( h 1 ) 22 where φ ML is he ML esimaor and (h 1 ) 22 is he corresponding elemen of he inverse of he informaion marix. I is imporan o noe ha he criical values for he es saisic do no 14

17 follow a sandard -disribuion, and S. Aubyn (1999) provides a simulaed disribuion for esing he null hypohesis of no convergence. The cluser algorihm proposed by Hobijn and Franses (2000) is also applied in his paper, as i provides inferences abou convergence clubs for a small group of counries such as ASEAN-5. This procedure is based on he asympoic properies of he log per capia income (y ) dispariies beween n counries for T years, and he mulivariae process is given by (see Hobijn and Franses, 2000, p. 61): * 1 * y = a + b + D v s 0 s + = u *, (19) where y n = K 1, y ] R, is a deerminisic rend, v * is he firs difference of he [ y, n * m {0, K, n} common rends in y, and * u is a zero mean vecor saionary process. This paper focuses on esing wo ypes of convergence, namely asympoically perfec and asympoically relaive convergence, which are defined by Hobijn and Franses (2000, pp ) as follows: i) n * counries are converging asympoically perfecly if x is zero mean saionary; ii) n * counries are converging asympoically relaively if x is level saionary. The auhors defined n * as a sub-sample of n counries, and x M * n y * R * n 1, which is assumed o have he same represenaion as y in (19), wih saionary covariance, η = [ u v ], having he following moving average ( ) represenaion: η = Ψ s s ε = Ψ( ) = 0 s L ε s, (20) where ε is an independenly and idenically disribued (iid) zero mean process, E[ ε ε ] = Ω = PP (using he Choleski facorisaion), Λ = Ψ(1) P and G = Λ Λ. 15

18 Based on a mulivariae generalisaion of he saionariy es proposed by Kwiakowski e al. (1992), Hobjin and Franses provide he following wo saisics for esing wheher x is zero mean saionary (for asympoically perfec convergence) or level saionary (for asympoically relaive convergence): = 1 2 T Zero mean saionariy: ϖ = T S [ G ] T ~ Level saionariy: ϖ = T S [ Gˆ ] ~ µ = l S 1 1 ˆ l S, (21), (22) ~ 1 T where S s = x 1 s, S x = s x s= s, and Ĝ 1 1 l is a Newey-Wes (1987) esimaor of T he firs k (= n * -1) rows and columns of G. Tess for asympoically perfec and asympoically relaive convergence of clusers i and j are applied o where (i) y and ( i, j) ( i) ( j) ki + k j 1 x M k + R i k y j y, ( j) y are vecors of (log) real GDP per capia for counries in clusers i and j, respecively, and k i and k j are he numbers of counries in clusers i and j, respecively. The p-values or excess probabiliies of ϖ and ( i, j) 0 ϖ are denoed by ( i, j) µ p and ( i, j) 0 ( i, j ) p µ, respecively, and he criical p-value or significance level is denoed by p (0, min 1). According o Hobijn and Franses (2000, p. 68), asympoically perfec convergence is rejeced for all pairs of clusers if no combinaion of i and j has p i >. Clusers of counries ha (, j ) 0 pmin converge asympoically perfecly will hen be esed for level saionariy using he ( i, j ) p µ value. 3.2 Caching Up Tess The heory of caching up effecs is imporan in explaining he role of echnological caching up in influencing modern economic growh. Given he imporan effecs of echnological change on growh, esing for echnological caching up beween he USA and each counry of ASEAN-5 is conduced. A number of ess of he caching up hypohesis use cross secion samples, such as he following dynamic model proposed by Verspagen (1991, p. 363), which incorporaes boh caching up and falling behind: 16

19 G K us = ln, (23) K i G & = a G, (24) 1 + b1 0 + ε1 G & = a E, (25) 2 + b2g0 + c2p + d 2 + ε 2 G& = a + b G e, (26) δ( G0 E) + c3p + ε3 where G is he echnological gap, K US and K i are he knowledge sock of he echnology leader, he USA, and lagging counry i, respecively, P is he exogenous rae of knowledge growh in he lagging counry, E is he variable ha influences he inrinsic learning capabiliy, he do above he variable denoes is growh rae (or ime derivaive), he subscrip 0 denoes iniial values, and ε i is a random disurbance wih zero mean and finie variance 2 σ i. I is expeced ha he hree variables, G 0, P and E, are inversely relaed o he growh raes of he echnological gap (G & ). Thus, he expeced signs of he parameers are b 1, b 2, c 2, d 2, b 3, c 3, δ < 0 and a 3 > 0 (which represens he iniial value of he echnology gap), while he consans a 1 and a 2 can be of eiher sign. A negaive b 1 parameer in he simples caching up regression (24) suppors he caching up hypohesis ha lagging counries have higher raes of produciviy growh, hereby narrowing he echnological gap. Equaion (25) is an augmenaion of he simples caching up hypohesis (24), wih wo addiional variables, P and E. Equaion (26) is based on he specificaion of a hreshold for he iniial value of he echnology gap, whereby no caching up is possible if he inrinsic learning capaciy is oo weak or falls below some criical level. The social capabiliy of a counry o cach up is capured by he exponenial erm, where δ represens he inrinsic capabiliy o assimilae knowledge spillovers. Thus, a larger δ implies a smaller echnological disance effec. Insead of using only he firs and las values, Verspagen (1991) derived he growh of he echnology gap using he following equaion for each counry over he period : G = a + θ + ε, (27) where a is a consan, is a ime rend and ε is an iid (0, σ 2 ) error erm. The esimaed θ is aken as a measure of G & in equaions (24)-(26). 17

20 I has been observed in he lieraure ha many caching up sudies are essenially he same as he convergence hypohesis. In a ime series framework, he basic caching up hypohesis (24) is equivalen o esing for convergence, as described in equaion (3) above, wihou a ime rend and lagged dependen variables. Equaion (24) is also similar o equaion (2), which measures he produciviy gap of a lagging counry from he leader counry raher han from he sample mean of he group. Despie he small cross secion sample, equaion (24) is esimaed for he nine Asian counries over he period , following he mehod proposed by Verspagen (1991). In a ime series framework, equaions (24)-(26) are esimaed over he same period for he five ASEAN counries, and he USA is reaed as he leader counry. This means ha he dependen variable, G &, in equaions (24)-(26) is aken as he firs difference of G (i.e. G & G G 1 ), while he = iniial values of he echnology gap (G 0 ) are replaced by he firs lagged value of he echnology gap (G -1 ). 4. EMPIRICAL RESULTS All esimaion and es resuls are derived using he Microfi 4.0 economeric sofware program (see Pesaran and Pesaran, 1996), excep for he Kalman filer convergence es and he cluser algorihm resuls, which are obained using he Gauss 3.2 program. Real GDP per capia for each counry has been convered o naural logarihms (namely, LGDP). 4.1 Convergence Using he simple saisical es of Verspagen (1994) for converging or diverging rends of he LGDP series (see equaions (1) and (2)), he esimaion resuls for ASEAN-5 and ASEAN-4 counries are repored in Table 2. Among he ASEAN-5 counries, he Philippines and Singapore are he wo diverging counries, whereas ASEAN-3 converges owards he mean LGDP level. When Singapore is excluded, Indonesia becomes he only converging counry in 18

21 ASEAN-4. These resuls indicae ha he counry wih he fases or lowes income growh in a group of counries generally diverges from he mean LGDP level in ha group. TABLE 2 Tes Resuls for Divergence in ASEAN-4 and ASEAN-5 ASEAN-4( Ψˆ ) ASEAN-5( Ψˆ ) ASEAN Indonesia Malaysia * Philippines * * Singapore * Thailand * Noe: * indicaes LGDP of he counry diverges from he sample group. Following Oxley and Greasley (1995), he Dickey-Fuller-ype es on he oupu difference beween wo counries (see equaion (3)) is applied o ASEAN-5. As his es disinguishes beween long-run convergence and convergence as caching up, he USA is included as a leader counry o es for convergence as caching up. For annual daa, an iniial lag lengh of wo is used for he ADF es. If he esimaed -saisic is insignifican, he lag lengh is reduced successively unil a significan lag lengh is obained. Table 3 documens he esimaed -values wih and wihou a linear rend over he period The criical values for he DF and ADF ess wih and wihou a linear rend over he period are and , respecively. TABLE 3 Tesing for Long-Run Convergence -value (α = 0) -value (α 0) Counry No Trend p Trend p 19

22 USA Indonesia Malaysia Philippines Singapore Thailand Singapore Indonesia Malaysia Philippines Thailand * Malaysia Indonesia Philippines * 1 Thailand Thailand Indonesia Philippines Indonesia Philippines Noes: p is he lag lengh. * indicaes significance a he 5% level. The oupu differences beween all pairs of counries are found o be non-saionary or diverging, excep for Singapore and Thailand, and Malaysia and Philippines. In he case of Singapore and Thailand, he diagnosic ess indicae he esimaes of he variances could be biased due o heeroscedasiciy. Using Whie s heeroscedasiciy-adjused sandard errors, he -value of suggess no convergence in oupu differences beween Singapore and Thailand. As for Malaysia and he Philippines, rejecion of he null wih α 0 implies convergence as caching up beween hese wo counries. However, his resul is no conclusive as he ADF es saisic is sensiive o he sample period used. Overall, he resuls indicae divergence beween pairs of ASEAN-5 counries and he USA. Before esing for convergence based on Bernard and Durlauf (1995), i is essenial o deermine he order of inegraion for each of he oupu series. The ADF ess are used o es for he presence of uni roos in he logarihms of real GDP per capia (LGDP) for ASEAN-5 20

23 and he USA. Tess for possible breaks in he oupu series, as suggesed by Perron (1989), are no considered because of he small sample size and he lack of any disinc breaks observed in he per capia GDP level (see Figure 1). For annual daa, an iniial lag lengh of wo is used for he ADF es. If he esimaed -saisic is insignifican, he lag lengh is reduced successively unil a significan lag lengh is obained. The esimaed -saisics for he ADF ess are presened in Table 4. The criical values for he DF and ADF ess wih and wihou a linear rend over he period are and , respecively. Since he null hypohesis of a uni roo is no rejeced for he six LGDP series, hey are non-saionary. By aking firs differences of he series, he es resuls from TABLE 4 ADF Tess for Non-Saionariy in Levels Period of Variable Esimaion -value p ILGDP MLGDP PLGDP SLGDP TLGDP ULGDP Noes: The firs leer of he variable represens he counry considered (i.e. I = Indonesia, M = Malaysia, P = he Philippines, S = Singapore, T = Thailand, and U = USA). A deerminisic rend is included in he ADF auxiliary regression. p is he lag lengh. Table 5 indicae ha all six LGDP series are inegraed of order one, excep for Singapore. I is noed ha he uni roo es resuls for Singapore were sensiive o he sample period used. In his paper, he order of inegraion for he LGDP series for Singapore is assumed o be one, as he es saisics for he differenced series for a longer sample period were significan a he 5% level (e.g. -saisic = for p = 0 over he period). Thus, he Johansen mehod can be used o es for he presence of coinegraing vecors or common rends. 21

24 TABLE 5 ADF Tess for Non-Saionariy in Firs Differences Period of Variable Esimaion -value p IDLGDP * 0 MDLGDP * 0 PDLGDP * 1 SDLGDP TDLGDP * 0 UDLGDP * 0 Noes: DLGDP denoes he firs difference of LGDP. p is he lag lengh. * indicaes significance a he 5% level. The six LGDP series are esed for convergence beween each counry of ASEAN-5 and he USA, and ASEAN-4 and Singapore, based on he definiion in Bernard and Durlauf (1995). Boh he Akaike Informaion Crierion (AIC) and Schwarz Bayesian Crierion (SBC) are used o deermine he order of he VAR model. Overall, he es saisics and choice crieria indicae a VAR model of order one. If he LGDPs of wo counries are coinegraed, he resricion [1, - 1] is imposed on he coinegraing vecor. Table 6 repors he race and maximal eigenvalue saisics of he sochasic marix (wih unresriced inerceps and no rends in he VAR) ha deermine he number of coinegraing vecors (r), and he LR es of resricions on he coinegraing vecor. TABLE 6 Maximal Eigenvalue, Trace and LR Saisics for VAR(1) model, Counry Maximal Eigenvalue Trace LR Tes for H 0 : r = 0, H a : r = 1 H 0 : r = 0, H a : r 1 [1, -1] vecor USA Indonesia Malaysia Philippines Singapore Thailand

25 Singapore Indonesia * Malaysia * Philippines Thailand Noe: * denoes significance a he 5% level. Boh he race and maximal eigenvalue saisics rejec he exisence of a long-run coinegraing relaionship beween he USA and each of he ASEAN-5 counries. In he case of Singapore and each ASEAN-4 counry, he race saisics indicae a long-run coinegraing relaionship exiss beween Singapore and each of Indonesia and Malaysia. On he oher hand, he maximal eigenvalue saisics do no rejec he null hypohesis of no coinegraing relaionships beween Singapore and each ASEAN-4 counry. If he race saisics yield he correc inferences, he LR es of a uni resricion on each coinegraing vecor is no rejeced, which implies income convergence beween Singapore and each of Indonesia and Malaysia. However, Cheung and Lai (1993) sress ha he Johansen s LR es ends o underesimae he coinegraion space in small samples, which ofen leads o he rejecion of no coinegraion under he null. In addiion, he significance of he race saisics for boh Indonesia and Malaysia (see Table 6) are no robus o he sample period used. Thus, he coinegraion ess are based on he maximal eigenvalue saisics, which rejec income convergence beween Singapore and each of Indonesia and Malaysia. For he wo groups of counries repored in Table 6, ess for he presence of a common rend are also underaken. Boh he race and maximal eigenvalue saisics sugges he presence of a leas one coinegraing vecor, which indicae non-convergence of income for hese wo groups of counries. As he ime series ess for convergence developed by Bernard and Durlauf (1995) are raher sringen, he Kalman filer approach proposed by S. Aubyn (1999) is also applied o he income daa for ASEAN-5 and he USA. Following he specificaions of he sae space model, equaions (14) and (15) are esimaed using he Gauss program provided by S. Aubyn. There are 15 pairwise combinaions for hese six counries, and heir esimaed es saisics are 23

26 shown in Table 7. The non-sandard criical values for he Kalman filer es, T(φ ML ), a he 5% and 1% levels of significance are and 3.479, respecively. 5 In esing convergence beween he USA and individual ASEAN-5 counries (he firs five pairs of counries shown in Table 7), Singapore is he only counry ha rejecs he null hypohesis of non-convergence a he 5% significance level. This suggess ha he per capia incomes of he USA and Singapore have converged over ime. As for he en pairwise ASEAN-5 counries, only Malaysia, Thailand and Indonesia are found o have converged wih Singapore, while he null hypohesis of non-convergence is no rejeced for he remaining seven pairs of ASEAN-5 counries The empirical evidence for income convergence beween Singapore and he USA lends suppor o he observed high growh performance of Singapore, which has reduced subsanially he income gap wih he USA. In relaion o he exisence of an ASEAN-5 club, he convergence beween Singapore and individual ASEAN-3 counries is classified as limied convergence (see S. Aubyn, 1999), where only a subse of a counry s per capia income converges o ha of a leading counry, in his case, Singapore. TABLE 7 Kalman Filer Tess for he USA and ASEAN-5, Convergence Tes Saisic T(φ ML ) Counry Parameer H 0 : φ = 1, H a : φ < 1 USA Indonesia Malaysia Philippines Singapore * Thailand The non-sandard criical values for he disribuion of φ ML under he null were abulaed from 1,000 replicaions (see S. Aubyn, 1999). 24

27 Singapore Indonesia * Malaysia ** Philippines Thailand ** Malaysia Indonesia Philippines Thailand Thailand Indonesia Philippines Indonesia Philippines Noes: * indicaes significance a he 5% level. ** indicaes significance a he 1% level. These findings of income convergence beween Singapore and ASEAN-3 conradic he resuls from he ime series approach of esing oupu differences for saionariy using he DF and ADF ess. S. Aubyn (1999) argued ha he economic definiion of income convergence does no necessarily imply ha he oupu difference beween wo counries is saionary. I is possible for he per capia incomes of wo counries o converge, bu heir difference migh no exhibi saionariy. These conrasing resuls could be explained by he definiion of convergence in S. Aubyn (1999), which only requires he oupu difference of wo counries o converge in probabiliy o a random variable raher han o zero, as proposed by Bernard and Durlauf (1995). Despie he rising rends in income gaps beween Singapore and individual ASEAN-3 counries during he early period, he log-differences for hese hree pairs of counries appear o have remained a a consan level from he mid-1970s onward (see Figure 6). FIGURE 6 Logarihms of Real Per Capia GDP Differences Beween Singapore and Individual ASEAN-4 Counries,

28 Indonesia Philippines Malaysia Thailand Source: PWT 5.6. For comparison, he cluser algorihm for esing asympoically perfec and asympoically relaive convergence is also applied o he ASEAN-5 counries, and ASEAN-5/USA. The cluser algorihm is provided by Hobijn and Franses (2000) as a Gauss program. Before applying he cluser procedure, i is necessary o choose he criical p-value (p min ) and he bandwidh parameer (l) (see Secion 4). According o Hobijn and Franses (2000, p. 69), a smaller p min implies ha a rejecion of convergence under he null hypohesis is less likely, while he choice of l does no seem o have a significan effec on he number of convergence clubs found. 6 Consequenly, p min is se a he 1% significance level and he bandwidh for he Barle window (l) is se a 4. The es resuls are presened in Table 8. TABLE 8 Resuls of Cluser Algorihm for ASEAN-5 and ASEAN-5/USA Asympoically Perfec Convergence Asympoically Relaive Convergence (p min = 0.01, l = 4) (p min = 0.01, l = 4) ASEAN-5/USA: 6 clusers ASEAN-5/USA: 3 clusers 1. Indonesia 1. Malaysia and Thailand 2. Malaysia 2. Philippines and USA 3. Philippines 3. Singapore and Indonesia 6 In small samples, based on he Mone Carlo resuls for he univariae version of he KPSS es, he choice of l is found o have a significan effec on he size of he es (see Hobijn e al., 1998). 26

29 4. Singapore 5. Thailand 6. USA ASEAN-5: 5 clusers ASEAN-5: 3 clusers 1. Indonesia 1. Malaysia and Thailand 2. Malaysia 2. Singapore and Indonesia 3. Philippines 3. Philippines 4. Singapore 5. Thailand For ASEAN-5/USA, here are six asympoically perfec convergence clubs wih a single counry in each club, and hree asympoically relaive convergence clubs wih wo counries in each club (see Table 8). The resuls of asympoically perfec and asympoically relaive convergence are he same for ASEAN-5, excep for a single counry (i.e. he Philippines) in an asympoically relaive convergence club when he USA is excluded. Based on he definiion of asympoically perfec convergence proposed by Hobijn and Franses (2000), here is no evidence o suppor he equalisaion of per capia incomes in he long run, implying ha none of he ASEAN-5/USA counries converges o each oher. However, he resuls indicae he exisence of hree asympoically relaive convergence clubs of wo counries, namely Malaysia and Thailand, Singapore and Indonesia, and he Philippines and he USA. Given he low growh performance of he Philippine economy, i is surprising o find asympoically relaive convergence beween he Philippines and he USA. This could be explained by he definiion of asympoically relaive convergence, which requires he income gap beween wo counries o be level saionary, or simply o remain sable (i.e. no caching up) over ime, as in he case of he Philippines and he USA (see Figure 4). As he samples are relaively small, he ess are also conduced wih p min = 0.05, wih he bandwidh parameer ranging from 1 o 6 o examine he robusness of he resuls. For boh ASEAN-5 and ASEAN-5/USA, an increase in he criical p-value o 0.05 does no affec he resuls obained in Table 8. However, when he bandwidh parameer is reduced o 2 and below, i increases he number of asympoically relaive convergence clubs o four for boh ASEAN-5 and ASEAN-5/USA. In boh cases, Singapore and Indonesia do no converge o he same asympoically relaive convergence club, bu each of hem converges o a single counry club. 27

30 Based on he cluser procedure, here is evidence o suppor asympoically relaive convergence beween Malaysia and Thailand, and he Philippines and he USA. Overall, his paper finds no evidence of convergence wihin he ASEAN-5 counries, and wihin ASEAN-5/USA in a ime series framework, using he uni roo and coinegraion echniques. In erms of limied convergence, however, he Kalman filer resuls suppor convergence beween he USA and Singapore, and also beween Singapore and individual ASEAN-3 counries. On he oher hand, he cluser analysis indicaes he exisence of asympoically relaive convergence clubs for Malaysia and Thailand, and for he Philippines and he USA. I is imporan o sress ha he resuls obained could be affeced by he size of he sample. In addiion, he ime series mehods available o es he convergence hypohesis are limied o esing he ime series properies of income differences, wihou considering he facors ha deermine economic growh. 4.2 Caching Up Alhough he ASEAN-5 counries have experienced remendous economic growh, heir curren levels of real income per capia sill lag behind ha of he USA, excep for Singapore (see Figure 1). Thus, i is unlikely ha here would be empirical evidence of income convergence among ASEAN-4 counries and he USA. As echnological progress has imporan effecs on a counry s economic growh, he caching up equaion (24) is used o es for echnological caching up beween he ASEAN-5 counries and he USA over he period Real GDP per capia adjused for changes in he erms of rade is used as a proxy for he sock of knowledge in each counry. The growh rae of he echnological gap for each counry over he period is derived by regressing he echnological gap (G) on a ime rend (see equaion (27)). In Figure 7, he iniial level of he echnological gap in 1965 is shown agains is esimaed growh rae for ASEAN-5 counries. I is eviden from he scaer plo in Figure 7 ha here is no significan cross secion correlaion beween he growh rae of he echnological gap and is iniial level. 28

31 FIGURE 7 Technological Gap Growh Rae ( ) Versus Iniial Level (1965) Growh Rae of Technological Gap 1% Philippines 0% -1% -2% Thailand -3% Malaysia Indonesia -4% -5% Singapore -6% Logarihm of Iniial Technological Gap (1965) Source: PWT 5.6. Tesing for echnological caching up in a ime series framework is underaken for each of he ASEAN-5 counries and he USA. Two addiional variables are included in equaions (25) and (26). Verspagen (1991) used he sum of he number of paen grans per capia in he USA over he period as a proxy for he exogenous rae of knowledge growh due o research aciviy (P). However, he auhor has noed ha paen daa are no a good indicaor of innovaion, and ha US paens are exernal paens for he lagging counries in he sample. As invesmen is an imporan facor in deermining ASEAN-5 s economic growh, he growh rae of per capia gross domesic invesmen (GDI) a consan prices is preferred o paen daa as a proxy for P. Daa for he growh raes of per capia GDI from he World Bank World Tables are only available for ASEAN-5 from 1967 onward, which resrics he esimaion of equaions (24)-(26) o he period. As for he educaion variable (E) ha influences he inrinsic learning capabiliy, he percenage of he populaion enrolled in secondary educaion is chosen as a proxy. Due o he unavailabiliy of he secondary educaion variable prior o 1971 for Indonesia, he sample period is Equaions (24) and (25) were esimaed using ordinary leas squares, while (26) was esimaed using non-linear leas squares. The resuls of he esimaed regressions are shown in Table 9. 29