Determinants of economic growth in a panel of asean and developing countries

From 1980s, economists developed growth theory, which use endogenous economic growth model to evaluate the roles of knowledge, innovation and human capital.. contribu-In this study, the

VIET NAM THE NETHERLANDS

VIET NAM –THE NETHERLANDS PROGRAMME FOR MASTER OF DEVELOPMENT ECONOMICS

Supervisor: Nguyen Hoang Bao

Student: Tran Luu Quoc Vuong Class: MDE-16

A: List of chosen countries and territories in Asia Pacific Region 51

LIST OF FIGURES

LIST OF TABLES

IMF : International Monetary Fund

1.1 Problem statement 2

1.2 Objectives of study 3

1.3 Research questions 4

1.4 Scope of the research 4

1.5 Structure of the thesis 4

2 CHAPTER 2: THEORETICAL AND EMPIRICAL BACKGROUND 6

2.1 Theoretical background: 6

2.2 Empirical review 9

2.3 Summary 12

3 CHAPTER 3: RESEARCH METHODOLOGY 13

3.1 Conceptual framework 13

3.2 Variables 14

3.2.1 Dependent variables 14

3.2.2 Explanatory variables 15

3.3 Data 22

3.4 Econometric model 22

3.5 Summary 24

4 CHAPTER 4: DATA ANALYSIS 26

4.1 Growth rate and convergence 26

4.2 Descriptive analysis 27

4.3 Regression Results for Growth rates 30

4.3.1 Basic Regression 30

4.3.2 Hypothesis tests 32

4.3.3 The Determinants of Growth rate 39

4.3.4 The extended models 42

4.4 Summary 44

5 CHAPTER 5: CONCLUSION AND POLICY IMPLICATIONS 45

5.1 Main findings and policy implications 45

5.2 Limitation of the research and Recommendation for further studies 45

6 REFERENCES 48

1 CHAPTER 1: INTRODUCTION

1.1 Problem statement

Nowadays, there are over 200 countries on over the world with different institutions, with different growth rates These growth rates vary hugely across countries and between developing countries to developed countries According to recent surveys of many international organizations (IMF, WB, UN and so on), de-veloping countries and economies in transition continue to register much stronger growth than developed economies

After the end of the World War II, the world started to recover economic and the growth became an important part of economic science Economists have tried to apply other theories with a lot of empirical model to understand the process

of economic growth and explain enormous differences in economic performance across countries In the early, economists used Keynesian theories to discuss about the stability of the growth path Next, they focused on steady state growth rates exogenously determined by technological progress After that, Solow (1956) and Swan (1956) became the pioneers who enriched neoclassical economic growth model, and followed by a lot of others From 1980s, economists developed growth theory, which use endogenous economic growth model to evaluate the roles of knowledge, innovation and human capital

Improvements of economic theories and hundreds of researches have vided acceptable explanation for a particular phenomenon of recent decades: the great divergence in economic performance But, indeed, the income of underde-veloped economies, as a whole, are failing to catch up the income of the developed countries Realizing this inadequacy, economic growth studies have shifted their focus to find out the reason of this problems

pro-There were a lot of researches discuss about this problem, such as: Solow (2000), Aghion and Howitt (1998), Kenny and Williams (2001), Temple (1999),

Bosworth and Collins (2003) and Rogers (2003) They identified main tions to the recent growth literature, especially relevant institution factors The main objects these economists aimed were developing countries in the Asian Pa-cific area They wanted to understand how recent developments in the growth lit-erature contribute to economic development of Asian Pacific countries

contribu-In this study, the research examine the relationship between per capita growth rate to a set of quantifiable explanatory variables with a conditional con-vergence term: the growth rate rise when the initial level of real per capita GDP is low relative to the staring human capital and for given values of other policies, institutions and national characteristic variables This research will use panel data

of 25 countries and territories of Asian Pacific region for the period of 1990 - 2010

This study use panel data approach and apply three-stage less squared gression to examine the determinants of the growth rate The regression, which uses panel data, has many advantages with regards to typical cross-country regres-sion that was advanced by Raftery (1995), Sala-i-Martin et al (2004) First, using panel data, we will eliminate constraint by limited number of countries available Second, this method allows addressing the inconsistency of empirical estimates This inconsistency appears with omitted country-specific effects correlated with other regressors, or with endogenous variables which assumed to be exogenous

re-1.2 Objectives of study

This research will examine the relationship between per capita growth rate and a set of quantifiable explanatory variables: human capital (education and health), policies, institution and national characteristics From empirical studies, for given initial levels of state variables (including physical and human capital), the economic growth rates have positive relation to the rule of law, the investment ratio and negative relation to the fertility rate, the ratio of government consumption

international openness, with fair movements, the growth will increase but the latter effect is surprisingly weak

The research will define which factors affect to the growth rate of Asian Pacific developing countries, including Vietnam It also extend to evaluate some special countries, which have huge population size, such as: China, India; or de-veloped countries, such as Japan, Australia, Singapore and so on

1.3 Research questions

This research aims at answering the following questions:

 The relationship between per capita growth rate and a set of quantifiable explanatory variables? Which variables are significant ones to economic growth?

 Intensity of impact of these factors to economic growth of the Asia Pacific region?

1.4 Scope of the research

The research focuses on examine the convergence hypothesis implies that the growth rate of real per capita GDP would tend to be inversely related to the level of initial real per capita GDP, and the role of a set quantifiable explanatory variables The chosen countries are 25 countries in Asian Pacific region, and some special countries which have huge population size (China, India) or specific char-acteristics (Japan, Singapore) This research only examines in the period of 1985 -

2010 because lacking of GDP data before 1980 for all countries in this region

1.5 Structure of the thesis

The research will be organized with five chapters The chapter one has structure as above: explain the reason why we choose this topic, identify the prob-lems that the research need to examine with some major research questions and the scope of the research The rest of this research has four chapters Chapter two

shows a brief view of theoretical background of growth model, from the sical growth models to the endogenous growth models, and the role of trade and institutions on the growth rate as well A review of empirical studies makes clearly about results of different models when applying to explain recent developments

neoclas-In chapter three, we will highlight the research methodology, including ceptual framework and variable descriptions We will have a briefly discussion about the reason why we choose these variables, how to enter them into the equa-tions after introducing the general econometrics model Besides, the process out-line which we use to analyze data, is also mentioned in this chapter Chapter four will show the regression results of the models We will analyze and get findings to answer the questions in the chapter 1 We also compare findings to results of other empirical studies And at chapter five, we resumes main findings and reevaluate factors which have significant influence to growth rate of an economy This chap-ter also identifies the limitation and implications for further study

con-2 CHAPTER 2: THEORETICAL AND EMPIRICAL BACKGROUND

2.1 Theoretical background:

In the 1950s, growth theory was composed mainly of the neoclassical model, developed by Ramsey (1928), Solow (1956), Swan (1956), Cass (1965) and Koopmans (1965) One feature of this model is the convergence property with the characteristic of diminishing returns to capita in a closed economy, where tech-nological progress is assumed to be exogenous and there are same technical op-portunities across countries This theory said that, the predicted growth rate will higher with the lower starting level of real per capita gross domestic product

If all economies were naturally the same, except for their starting capital intensities, the convergence would apply in an absolute sense; it means that, poorer economies typically grow faster per capita and tend thereby to catch up to the richer economies However, if they differ from a lot of factors, such as rate of birth, willingness to work, technology accessing, government policies, the convergence force applies only in a conditional sense The predicted growth rate will be higher

if the starting level of per capita GDP is low in relation to its long–run (steady state) position For example, a poor country would not tend to grow rapidly if it also has a low long–term position which possibly because its public policies are unfavorable or its saving rate is low

But along the time has been changing, this model showed its own limitation

So, a new wave rose in economic growth theory Growth theorists of 1960s sumed that technological progress is exogenous to the growth rate, will make the economy temporarily grows in short term but not in long term But, unfortunately, while endogenous factors, like as the saving rate and population growth, determine the steady state or ceteris paribus of an economy, the technological progress de-cides the growth rate of the steady state Thus, we can use model of growth to explain everything but long-run growth

as-And as a consequence, since the 1980s, the economic growth theory had a new sense Several variables treated as exogenous before became endogenous The Ramsey-Cass-Koopmans model endogenized the savings rate, and in conse-quence, the saving rate may not be constant along the transition to the long run steady state Other different assumptions, fertility was treated as endogenous in researches of Galor and Weil (1996), Cigno and Rosati (1996) and Barro and Becker (1989) Besides, in Solow – Swan model, the explicit consideration of hu-man capital was not mentioned, and this absence motivated work on endogenous growth theory and a series of idea-based model

In the mid-1980s, a group of growth theorists dismissed the Solow-Swan model because they did not satisfied with common accounts of exogenous factors determining long-run growth They were interested in the endogenous growth model that assumes constant and increasing returns of capital and replace the ex-ogenous growth variable with explicit key determinants The researches were done

by Paul Romer (1986), Lucas (1988) and Rebelo (1991) are initial researches of the new wave Instead of technological change, growth in these models was caused

by indefinite investment in human capital in the forms of education, experience, and health and reduced the diminishing return to capital accumulation

Using the existence of R&D theories and imperfect competition, Romer (1990), Grossman and Helpman (1991) presented positive externalities of human capital accumulation and found that the gap between the marginal value of an ad-ditional unit of human capital and the market wage Moreover, from the results of researches which applied endogenous growthe model (Romer 1986, 1989, 1990; Lucas 1988; Rebelo 1991; Grossman and Helpman 1991; Aghion and Howitt 1992), there was evidences to prove that the growth rates can be permanently changed by variables which affected by government policies In these papers, the

Another factors have important impact to the economic growth are trade and international trade Different for Solow-Swan model, which is for closed econ-omies, the extended neoclassical growth models show that opening an economy can temporarily increase the growth rate In the endogenous growth models, open-ness to international trade can give different results Through various channels, such as: learning-by-doing, specialization and spillovers, knowledge transfers, R&D and scale effect, economic performance will have explicit enhancement However, the impact of trade on growth can be positive or unclear, different across countries, depending on their characteristics

But, the neoclassical growth models and the endogenous growth models can not address the fundamental driving forces of growth, and hence, cannot explain the enormous variation in economic performance across countries over time Re-cent decades, poorer countries have failed to grow faster than high-income coun-tries, and the Solow-Swan type of growth model cannot explain by using conver-gence concept The endogenous growth model can provide an explanation for both questions: why higher income per capita countries can grow fast or faster than lower income per capita ones; and why larges countries may grow faster due to scale effects However, in the case of under-developed economies, this model still cannot explain the difference in economic performances

Along with the development of the endogenous growth model, new inquiry was been revealed with the proliferation of literature on imperfect information, the existence of transaction cost, incomplete market functions, and the role of govern-ment and institutions Especially, the role of institutions and institutional change

in economic growth became one of important topic of growth literature (Hodgson

1988, 1994, 1998; Eggertsson 1990; North 1989, 1999; Olson 1982, 1996, 2000; Olson et al 2000) They argued that the differences in the quality of nations’ insti-tutions and economic policies are results of the differences in the wealth of those nations

There were a lot of argument about “what is the definition of institution?”, but they can be summarized into two definitions The first equates institutions to the rule of the game, establishing the baseline conditions for other actions: property rights, the role of formal law, culture, human behavior and individual decision making The second concentrates on governing structures, in which firms, organi-zations and designations of other kinds are referred to as institutions, like financial institutions and labor market institutions According to the theory of institutional economics, the ‘exchange’ concept is not only an exchange of physical products

or material services, but also is the transfer of two ownerships Therefore, tions become an important factor which evaluates market efficiency So, countries with better institutions will organize and use resources more efficiently to achieve

institu-a higher level of income

2.2 Empirical review

Identifying the determinants of economic growth has always been one of most important concern of the growth literature Since 1980s, there were a lot of empirical researches, using both neoclassical and endogenous growth theories, to identify the sources of growth And there is a consensus among economists that economic growth is determined by a number of sources – physical capital, human capital and knowledge

Using data of 98 countries in the period 1960-1985, Barro (1991) applied cross-sectional framework to examine the determinants of these economies The research showed that while the initial level of real per capita GDP negative affect

to the growth rate of real per capita GDP, the initial human capital would boost the growth rate higher Additional, human capital positively affects to the ratios of physical investment to GDP while having negatively impact to the fertility rates The share of government consumption in GDP will lead the growth rate slower,

of political stability has positive influence to the growth rate while proxy for ket distortions inverts

mar-In another research with panel data of around 100 countries from 1960 to

1990 (1996), Barro reevaluated the role of human capital in the form of education and health to the economic growth of a countries He emphasized the relationship between physical capital and human capital: the faster the economy growths, the greater its current level of human capital develops Later, Sachs and Warner (1997) used cross-country regression model to evaluate the economic growths of African countries during the period 1965 – 1990 They found that poor economic policies play an important role in the slow growth of these countries, especially, these coun-tries lack of openness of international trade They also argued that if the countries has faster growth in human capital, these countries will have faster transitional growth Gallup et al (1998) had a further conclusion He said that the countries which has a developed labor force will be more efficient in using resources than others countries Nelson and Phelps (1966), Romeo (1990), Levine and Zervos (1993), Brunetti et al (1998), Martin and Xavier (1997) also had researches iden-tifying the role of human resource in absorbing and applying knowledge, technol-ogy into the economic growth

In the same research in 1996, Barro also extended Barro and Lee (1993) to include two factors as political instability variables: the rule of law index and the index of democracy Similar with above research, Barro got the same results: growth is negatively related to the initial level of real per capita GDP, fertility, government consumption and inflation; but positively related to initial schooling and life expectancy, improvement in the terms of trade At the same time, he ob-tained some new information: Effect of political freedom to the economic growth

is weak, but this effect could be nonlinear with some unclear signs Similarly, the democracy also have weak effect on growth On the contrary, the standard of living

on a country’s propensity have strong and positive impact to experience

democ-Also focusing on political issues, Mauro (1995), Knack and Keefer (1995) and Alesina et al (1996) have their own ways By using subjective indexes origi-nate from information collected by private monitoring organizations, they con-curred that political instability have negative effects to investment and growth They also argued that subjective indexes of corruption and the quality of bureau-cracy will have negative relation to the growth

Using endogenous growth models, there were a lot of analysis has been done by using economic rights (capital mobility, trade restrictions, property rights, civil liberty and other indicators of economic regulations) Barro (1991), Ozler and Rodrik (1992), De Haan and Sturm (2000) argued that if less regulations and fewer obstacles should motivate faster growth rates and capital accumulation Howerver, according to Heckelman and Stroup (2000), Carlsson and Lundstruom (2002), the effects of economic freedom on growth maybe vary across areas

Besides, institutions has also become a new interest of economists with the pioneers of Acemoglu et al (2001, 2003), Rodrik et al (2002) and Easterly and Levine (2002) They found that institutions are the most important factors affecting

a country’s income Furthermore, Acemoglu et al (2001), Frankel and Romer (1999), Rodrik et al (2002) used institutions and integration as instruments and stated that “the quality of institutions is the only positive and significant determi-nant of income levels”

The growth effects of trade openness has also been confirmed by many pirical studies: Dollar (1992), Sachs and Warner (1995), Edwards (1998), Green-away et al (1998), Frankel and Romer (1999), Vamvakidis (2002)… The growth effects of trade not only have been found via investment, human capital accumu-lation, and technology, but also by the quality of macroeconomic policy, govern-ment size and the extent of price distortions (Levine and Renelt 1992, Frankel and

em-Above results were updated in another results of Barro in 2003 He got the same results as the research he completed in 1996 mentioned above He found that there is existences of condition convergence in the model: the growth rate would rise when the initial level of real per capita GDP is low and depend on initial state variables like human capitals in the forms of education and health, other institution and national characteristic variables The difference in the paper is that he using panel data to approach the problems

2.3 Summary

This chapter gives an overview on theoretical background, which shows us empirically determinants of economic growth From neoclassical models to en-dogenous growth models, and the role of institutions, theoretical economists have try to identify which factors have significant impacts to the performance of an economy Although there are still a lot of problems but it is meaningful for policy implications

3 CHAPTER 3: RESEARCH METHODOLOGY

3.1 Conceptual framework

ap-plied to measure the effect of quantifiable explanatory variables to the economic growths Growth rate of per capita GDP is used as economic growths while the initial state of the economy is described by initial level of per capita GDP and initial human capital in the form of education attainment and health Moreover, some variables that reflect policies, institutions and national characteristics, such

as investment ratio (Knight, Loayza and Villanueva, 1992; Sala-i-Martin, 1995; Barro, 2003), international openness (Dollar, 1992; Sachs and Warner, 1995; Ed-wards, 1998; Frankel and Romer, 1999; Vamvakidis, 2002; Baldwin, 2003; López, 2005), fertility rate (Barro, 1995, 2003; ), the ratio of government consumption (Barro, 1995, 2003; X Sala-i-Martin; ) and the inflation rate (S Fischer, 1993; Barro, 1995, 2003; ) are concluded in the model to explain the impact of condi-tional convergence term The reasons why these variables are chosen, mentioning specifically in the part 3.2 of this chapter (data and variables)

The framework that we are considering to choose model for regressions as below:

Figure 3.1: Conceptual framework of the study

3.2 Variables

3.2.1 Dependent variables

This research uses per capita GDP as dependent variables It is the ratio of GDP to population, a measurement of how prosperous a country feels to each

of its citizens and a growth in per capita GDP is referred to as intensive growth

In comparison with GDP, per capita GDP is widely assumed to be a better dicator to evaluate level of development of a country By using this variable,

in-we can also compare the prosperity of countries with different population size There are some reasons for using per capita GDP instead of GDP (or GNP) First, GDP only counts money transaction, does not count many goods pro-vided for free It means that, GDP does not reckon contributions of crucial eco-nomic functions in the household and volunteer sectors It can be a serious problem when examining the economies of the less-developed nations where a lot of economic activities take place in household sectors

State Variables

- Initial per capita GDP

- Initial human capital

 Education

 Health

Economic Growth

Policy Variables &

The second reason, GDP overlooks everything that occurs outside the realm of monetized exchange, regardless of the importance to well-being Cobb

et al stated that it likes a business that kept a balance sheet by adding all action, not care they are income or expenses, assets or liabilities Moreover, GDP calculation violates accounting principles when treating depletion of nat-ural capital as current income, but capital depreciation And the last problem, the GDP totally ignores the distribution of income, different from per capita GDP

trans-In this research, we will examine the relationship between the growth rate and other factors for each ten-year period: 1990-2000 and 2000-2010

3.2.2 Explanatory variables

a Initial per capita GDP

According to empirical analysis, a lot of growth theorists has stated that the growth rate of per capita GDP would tend to be inversely related to the initial per capita GDP for given determinants of GDP (Barro, 1991, 1995, 2004; Sala-i-Martin, 1995) In this research, we will inspect the growth rate for 2 ten-year periods (1990-2000 and 2000-2010) Besides, we will use earlier values

in 1985 and 1995 as instruments to diminish the tendency of overestimation of the convergence rate because of temporary measurement error in GDP

The initial level of per capita GDP enters into the growth equation in the form log(yt−1) so that the coefficient on this variable represents the rate of con-

hypothesis, this variable was expected to have negative sign

b Educational attainment

In this research, we use education attainment and health to measure human capital, one of two state variables And in turn, to measure the education attain-ment, school enrollment rates are chosen: primary-school enrollment rate and secondary-school enrollment rate

Hanushek and Kimko (2000) suggested that we should us traditional schooling or primary or secondary-school enrollment rate variables to evaluate the quality of labor force, and emphasize the role of human capital in further

As microeconomic analysis, it is often to find that schooling has a significant impact on productivity and wage earnings

Similarly to initial level of per capita GDP, we enter the figures in 1990 and 2000 to growth equations for 2 periods, respectively This variable expect

to have positive sign

c Life expectancy

As one of measurements of human capital, the reciprocal of life expectancy

at age one is used as a proxy in the basic system If the probability of dying were independent of age, then this reciprocal would give the probability per year of dying

From 1940s, by the rise of the wave of international health innovations and improvements, life expectancy became an important factor of demographic sci-ence From an estimation of mortality by disease before the 1940s using data source from the League of Nations, the authors found that the life expectancy have a significant affect to population but much smaller affect to economic growth Daron Acemoglu and Simon Johnson (2006) consist of 59 countries, from Western Europe, Oceania, the Americas and Asia during the period 1940-

1980 to measure the impact of the health of the population on economic growth

and differ across countries, depending on the investment rate The life tancy have small positive effect to economic growth in initial period, but not enough to compensate for the increase in population

expec-With the same interest, David de la Croix and Omar Licandro (1999) amined the relationship between life expectancy and endogenous growth They stated that “the effect of life expectancy on growth is positive for economies with a relatively low life expectancy, but could be negative in more advanced economies.” So, from above argument, the expected sign of this variables to economic growth is not clear

ex-d Fertility rate

Similarly to life expectation, the fertility rate is also a measure of human capital It have an important role on increasing population growth, which has a negative effect on the steady-state of capital in the neoclassical growth model

So, there is a prediction that the fertility rate would have a negative relationship

to the growth rate

Barro and Sala-i-Martin (1995) using data of around 100 countries and found the negative relationship between fertility rate and the growth rate They argued that higher fertility rate the economy has, the higher population growth

is Moreover, female primary education has a strong negative relation with tility rate This result is the same to other researches (Schultz, 1989; Behrman, 1990; Barro and Lee, 1994; Quamrul H Ahraf, David N Weil and Joshua Wilde, 2012) Another reason Barro stated is that higher fertility also requires greater resources devoted to childrearing, and as consequence, reduce the eco-nomic growth

fer-The expected sign of this variables to economic growth is negative

In the neoclassical growth model, the long-run growth rate is independent

of government policy, but in the endogenous growth model, the role of ment has changed In Barro (1991), there are the presence of constant returns

govern-to capital, including private capital and public services He found that there is

a significant negative affect on growth from the ratio of government tion to GDP; and, big government is bad for growth

consump-And there are several studies have examined this conclusion Landau (1983) showed evidence of a negative relationship between the growth rate (per capita GDP) and the share of government consumption expenditure in GDP by inspecting data of over 100 countries in the period 1961-1976 Grier and Tullock had a same conclusion after using data of 115 countries in their study which extended the Kormedi and Meguire (1985) form Barth and Bradley (1987) found a same result for 16 OECD countries in the period 1971-1983

f International openness

The relationship between international openness and economic growth is one of oldest issues in economics Trade openness and growth has complicated relationship (Yanikkaya, 2003) In the extended neoclassical growth model, opening an economy can help the economy to temporarily increase the growth rate (Srinivasan and Bhagwati, 1980) In the newer model, endogenous growth model, the role of international openness has changed when the theories said that openness facilitates the transmission of technology from other countries (Lucas 1988, Young 1991), direct resources toward other more research inten-sive sectors (Grossman and Helpman, 1991) and increase market size (Rivera-Batiz and Romer, 1991) However, the overall impact of trade on growth can

be positive or not clear, depending on the models and national characteristics: tariffs and trade restrictions

The explanatory variable includes a measure of the extent of international openness, calculated by the ratio of exports plus imports to GDP

g Investment ratio

In recent growth model, investment has been one of main factors using to explain economic growth Young (1994) concluded that “investment was the main source of growth in the experience of the East Asian economies” Others have found that there are a positive correlation between growth and investment (Kahn and Kumar, 1997; Kahn and Reinhart, 1990; Serven and Solimano, 1992; Greene and Villanueva, 1991)

In neoclassical growth model, the economy is closed So, the saving rate is exogenous and equal to the ratio of investment In this research, the effect of the saving rate is measured empirically by the ratio of real investment to real GDP And, because of the effect of the saving rate on growth, in this case, we will use lagged values, the lagged investment ratio, as instruments to enter to the basic equation

The expected sign of this variables to economic growth is positive

h Inflation rate

There are a lot of different conclusions about the relationship between the growth and inflation In neoclassical growth model, technological change be-came the primary factor explaining long-term growth and was assumed to be exogenous, that is, to be independent of all other factors, including inflation (Todaro, 2000) Mundell (1963) used his model to state the negative relation-ship between inflation and people’s wealth So, people have to increase saving

to get desired wealth and leading to faster output growth Sidrauski (1967) posed the next major development The main result of Sidrauski is that the in-flation rate does not affect the steady state capital stock, output and economic growth

pro-mechanism with regards to capital accumulation They showed that increase in inflation rate leads the level of output permanently fall

In endogenous growth model, the growth rate depends on the rate of return

on capital So, inflation decrease that rate, which in turn reduces capital mulation and decrease the growth rate And, when this model is set within mon-eytary exchange framework, the inflation rate lowered both the return on all capital and the growth rate (Lucas 1980, Lucas and Stokey 1987, McCallum and Goodfriend 1987)

accu-In this research, we predict that the inflation has a negative relationship to the growth rate Inflation rate will be enters into the basic system in the form

of the average inflation rate, and used as a measure of macroeconomic stability Table 3.1 Summary of variables:

pected sign

Ex-Main empirical reference

GDP_Growth Growth of per capita

GDP

Barro (1995, 1997, 2003), Bülent Ulaşan (2012)

capita GDP

-

Lucas (1988), Rebelo (1991), Caballe and Santos (1993), Mulligan and Sala-i-Martin (1993), Barro and Sala-i-Martin (1995), Barro (2003), Nel-son and Phelps (1966), Ben habib and Spiegel (1994)

- Secondary-school enrollment rate

Life

Expec-tancy

the reciprocal of life

Barro (2003),Daron Acemoglu and Simon Johnson (2006), David de la Croix and Omar Licandro (1999)

-

Barro and Sala-i-Martin (1995), Barro (2003), Quamrul H Ahraf, Da-vid N Weil and Joshua Wilde (2012)

govern-ment consumption to

Barro (1991, 1995), Sala-i-Martin (1995), Landau (1983), Grier and Tullock (1987), Kormedi and Meguire (1985), Barth and Bradley (1987)

interna-tional openness

+/-

Yanikkaya (2003), Barro (1995), cas (1988), Young (1991), Rivera-Batiz and Romer (1991), Grossman and Helpman (1991), Coe and Help-man (1995), Bülent Ulaşan (2012)

Inflation the inflation rate

-

Fisher (1993), Barro (1995), Lucas (1980), Lucas and Stokey (1987), McCallum and Goodfriend (1987)

3.3 Data

The dataset consists of 25 Asian Pacific countries and territories We lect their data in the period of 1990 - 2010 The panel data from various sources but mainly draws from World Bank’s World Development Indicators (WDI, 2012) The definition and exact calculated measurement present in the next part 3.4 below

col-3.4 Econometric model

Based on neoclassical growth model, a country’s per capita growth rate in period t, Dyt, can be express as:

Dyt = f(yt-1,ht-1) (1) Where:

the output, y, for given y*

 yt is the level of per capita output at time t, the years end of each period

 y* is the long-run or steady state level of per capita output The target value y* depends on an array of choice and environmental variables, include saving rates, labor supply, fertility rates, government spending, tax rates, the extent of distortions of markets and business decisions, maintenance of the rule of law and property rights, the degree of polit-ical freedom, terms of trade and so on

From the equation (1) and review of empirical study, the most general econometric form testing the determinants of economic growth can be ex-pressed as following:

β4/expectancy + β5*log(fertility) + β6*gov_share + β7*openness + β8vestment + β9*inflation

 Pri_school: is the ratio of total enrollment in primary education in 1990 and 2000, regardless of age, expressed as a percentage of the population

of official primary education age

 Sec_school: is the ratio of total enrollment in secondary education in

1990 and 2000, regardless of age, expressed as a percentage of the ulation of official secondary education age

pop- Expectancy: is the life expectancy at birth This variable is used as an instrument and uses data of the year 1985 and 1995

 Fertility: total lifetime live births for the typical woman over her pected lifetime This variable appears in instrument list and uses data

ex-of the year 1985 and 1995

 Gov_share: are the averages for 1990-1999 and 2000-2009 of the

gov- Openness: The degree of international openness is measured by the tio of exports plus imports to GDP for 1990-1999 and 2000-2009 This variable is also includes as an instrument by using lagged value, aver-age value for 1985-1989 and 1995-1999

ra- Investment: The ratio of real gross domestic investment (private plus public) to real GDP enters into the regressions as averages for 2 ten-year periods (1990-1999 and 2000-2009) This variable is also included

as an instrument by using lagged value, average value for 1985-1989 and 1995-1999

 Inflation: is the average rate of retail price inflation over each of the ten-year periods (1990-2000 and 2000-2010)

This research uses three-stage least squares to estimate the determinants of the growth rate with a list of instruments To illustrate the objectives of the study, we will focus on some tasks as following First, we will find out the relation between variables and its instruments, such as: the initial level of per capita GDP, the investment rate, the government consumption ratio and the extent of international openness by regressing the endogenous predictors on the exogenous variables Next, we predict the values of these variables based on the results of those regressions And the third step, we use the predicted varia-ble as the instrumented variables in our model During analysis process, we will apply White test and Wald test to checking

3.5 Summary

In this chapter, conceptual framework establishes based on the empirical studies and theoretical background of convergence hypothesis in growth model The growth rate of per capita GDP is chosen as dependent variables and

a set of quantifiable variables is used as explanatory variables We discussed about variables and their empirical studies’ results, identified their roles and

reference for all variables showed in table 3.1 above In the end of chapter, we have a brief introduction about what we do next and some test we will use

4 CHAPTER 4: DATA ANALYSIS

4.1 Growth rate and convergence

In the neoclassical growth model of Ramsey (1928), Solow (1956), Swan (1956), Koopmans (1965) and Cass (1965), there was a hypothesis called ab-solute convergence This hypothesis said that “poorer economies typically grow faster per capita and tend there by to catch up to the richer economies”

It mean that the growth rate of real per capita GDP from 1985 to 2010 would have an inverse relationship to the level of real per capita GDP in 1985 The figure 4.1 below expresses the relation between the growth rate of per capita GDP from 1985 to 2010 and the log of per capita GDP in 1985 With the cor-relation -0.327, we can see that, for the 25 countries of Asia Pacific region, the absolute convergence is available However, with the extent of neoclassical growth model and the endogenous growth model, growth theorists initiated an-other concept: conditional convergence The relation between the growth rate and the starting position has to be examined under the situation of holding con-stant a set of variables that discriminate the countries

Figure 4.1 Growth rate versus Level of Per Capita GDP (simple relation)

4.2 Descriptive analysis

In this research, variables used to set up a framework can be split into two groups: group of initial levels of state variables (the stock of physical variables and the stock of human capital) and group of policy variables and national char-acteristics State variables used in this paper are the initial levels of per capita GDP in the form of log, ratio of primary and secondary schooling enrollment and the reciprocal of life expectancy at age one The second category comprises the ratio of domestic investment to GDP, the ratio of government consumption

to GDP, the extent of international openness, the fertility rate and inflation There are total 50 observations in the dataset, in which 25 Asia Pacific countries with two 10-year intervals Within the period 1990-2010, on average, the growth rate of this region is about 5.2% The country has fastest growth

0 0.02 0.04 0.06 0.08 0.1 0.12

Macao reached max nearly 64,000 US Dollars in 2010 while Nepal only got

521 US Dollars in 1990 The life expectancy of this region during period

1990-2010 is rather high, about 69.8 The countries has lowest value is Papua New Guinea with value of this measure about 59, and increased 6.7 only durng 20 years The countries has highest figure is Japan with the figure of 80.96, and increased 4.1 during this period This variable appears in instrument lists and

in the form of reciprocal of life expectancy

The measures of education, primary and secondary school enrollment, have average values at 99.89% and 61.91% respectively But, in comparison with primary school enrollment, the gap between min values and max value of secondary school enrollment variables is very large, 10.68 versus 161.74 In addition, standard deviation of this variable is very high, three times the min value The most important thing is the number of observations of this variable, only 35 while this figure of other variables is 50 Besides, when calculating the correlation between this variable to others, we found that these figures are so high and have negative impact to regression This problem will be discuss fur-ther later

Similarly, the gap between countries in the extent of international openness

is very high, 18.171 for lowest (Japan in 1990s) and 404.588 for highest gapore in 2000s) while value of standard deviation are so high, about 7.5 time

(Sin-of min value This gap will make some limitations when we examine the model, the result may be not precise and get bias We will discuss problems of these variables later

About investment and consumption, the average values are 26.04 and 13.48 respectively The country have highest ratio of investment is Bhutan (49.05% of GDP in 2000s in average), and the country with lowest figure is Brunei (14.33% of GDP in 2000s in average) Bangladesh is the country has the least ratio of real government consumption to real GDP, only 4.5% during

1990s and 5.2% during 2000s; while Brunei is the country consumes most (25.64% GDP during 1990s) About macroeconomic stability, Japan is the country has negative inflation rate (-2.59% during 2000s) although this figure was 1.2% for previous decade Mongolia has faced with 2-digit inflation (in average and highest at 268% in 1993) during 1990s, but economy has become better with inflation rate at 8.86% in next decade

The detail descriptive statistics of sample shows in the table 4.1 following Table 4.1 Summary Statistic on the sample observations

Variable Obs Mean Std Dev Min Max

In relation between the dependent variable, the growth rate, and a set of explanatory variables, the correlation is good, all the signs are as expected But,

the signs in relation between the growth rate and secondary school enrollment

rate is negative As above discussion, the number of observations of this

vari-able are too small, so it may affect the precision of the model

Table 4.2 Correlation on the sample observations

growth log_in~p pri_sc~l sec_sc~l expect~y log_fe~y gov_sh~e openness invest~t inflat~n growth 1 log_init_gdp -0.332 1

pri_school 0.098 0.081 1

sec_school -0.307 0.716 0.257 1

expectancy 0.119 -0.831 -0.303 -0.713 1

log_fertil~y -0.120 -0.757 -0.253 -0.566 0.812 1

gov_share -0.362 0.509 -0.112 0.439 -0.294 -0.122 1

openness 0.144 0.209 -0.015 -0.016 -0.186 -0.088 -0.008 1

investment 0.562 -0.183 -0.015 -0.149 0.077 -0.088 -0.064 0.109 1

inflation -0.190 -0.369 -0.020 -0.058 0.406 0.394 -0.055 -0.021 0.065 1

4.3 Regression Results for Growth rates

4.3.1 Basic Regression Our data consists of 25 Asia Pacific countries for two period: 1990-2000 and 2000-2010 with a set of 10 variables, including dependent variable But in

this model, from result of descriptive analysis above, I decided to drop the

sec-ondary school enrollment variable Moreover, we will not use the log of initial

level of per capita GDP, government consumption ratio, investment rate and

the extent of international openness to regression Instead of them, we will use