Citation
Lee, Hock Ann
(2002)
Convergence of Income in Asian Countries.
Masters thesis, Universiti Putra Malaysia.
Abstract
This study examines convergence of per capita real income for seven Asian
countries namely Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore
and Thailand during the period 19701999. It has been argued that income
convergence could be used as one of the criteria to form a single currency area.
Utilizing the concepts of deterministic and stochastic convergence, this study
uses 3 types of time series techniques, namely the standard ADF test, the Zivot
Andrews endogenously determined break points and the JohansenJuselius
cointegration analysis to test the convergence hypotheses. These time series
procedures are able to show whether the convergence hypotheses are supportive of
the Slow growth model (deterministic convergence or long run convergence) or
augmented So low model (stochastic convergence) or endogenous growth model
(divergence). In particular, the empirical findings are presented in two ways. First,
convergence between individual country' s log per capita real income and
aggregate log per capita real income of the group (relative log per capita real income). Second, convergence between two country's log per capita real income
(bivariate differences log per capita real income).
The results show that per capita income of Indonesia, Japan, Korea and
Malaysia is converging to the aggregate per capita income of the group. However,
the findings in bivariate differences log per capita real income show that per capita
income of Indonesia, Korea, Malaysia and Singapore are converging toward per
capita income of Japan. In addition, the results of ZivotAndrews endogenously
determined break points revealed that the year 1978 which was between the first
oil shock (19731975) and the second oil shock (19791980) was not the cause for
concerned. This indicates that supply shock or external shock has minimal impact
on Asian's countries growth processes.
Overall, this study has shown some initial insights on the possible single
currency area among Asian countries based on income convergence hypothesis.
This can be explained by the fact that Asian countries is undergoing a relatively
high growth potential to converge toward a similar per capita income level either
with leading country (Japan) or a group of Asian's countries per capita income.
However, it should be noted that income convergence is a necessary condition but
not a sufficient determinant to form a single currency area. Thus, a meaningful line
of further study could be focused on the achievement of Asian regions against the
five keys Maastricht Convergence Criteria namely inflation rate, long term interest
rate, exchange rate, debt to GDP ratio and budget deficit to GDP ratio.
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