Determinants of Economic growth in a panel of Asean and developing countries

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIET NAM THE NETHERLANDS VIET NAM –THE NETHERLANDS PROGRAMME FOR MASTER OF DEVELOPMENT ECONOMICS DETERMINANTS OF ECONOMIC GROWTH IN A PANEL OF ASIA PACIFIC COUNTRIES FINAL THESIS Supervisor: Nguyen Hoang Bao Student: Tran Luu Quoc Vuong Class: MDE-16 -HO CHI MINH CITY, DECEMBER 2013 APPENDICES A: List of chosen countries and territories in Asia Pacific Region 51 B: Scatterplot matrix of variables 52 C: Tests 53 LIST OF FIGURES Figure 3.1 Conceptual framework of the study 14 Figure 4.1 Growth rate versus Level of Per capita GDP (simple relation) 27 LIST OF TABLES Table 3.1 Summary of variables 20 Table 4.1 Summary Statistic on the sample observations 29 Table 4.2 Correlation on the sample observations 30 Table 4.3 Basic Cross-Country Growth Regression 31 Table 4.4 Heteroskedasticity – White test 32 Table 4.5 Basic Cross-Country Growth Regression (robust) 33 Table 4.6 Multicollinearity testing 34 Table 4.7 Restricted Model (1) 35 Table 4.8 Restricted Model (2) 36 Table 4.9 Model Comparison 37 Table 4.10 Extended models 43 ABBREVIATIONS IMF : International Monetary Fund WB : World Bank UN : United Nations GDP : Gross Domestic Products GNP : Gross National Products R&D : Research and Development OECD : The Organization for Economic Co-operation and Development Table of Contents CHAPTER 1: INTRODUCTION 1.1 Problem statement 1.2 Objectives of study 1.3 Research questions 1.4 Scope of the research 1.5 Structure of the thesis CHAPTER 2: THEORETICAL AND EMPIRICAL BACKGROUND 2.1 Theoretical background: 2.2 Empirical review 2.3 Summary 12 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 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 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal 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 REFERENCES 48 Tran Luu Quoc Vuong – MDEk16 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal 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), developing 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 provided acceptable explanation for a particular phenomenon of recent decades: the great divergence in economic performance But, indeed, the income of underdeveloped 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 There were a lot of researches discuss about this problem, such as: Solow (2000), Aghion and Howitt (1998), Kenny and Williams (2001), Temple (1999), Tran Luu Quoc Vuong – MDEk16 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal Bosworth and Collins (2003) and Rogers (2003) They identified main contributions to the recent growth literature, especially relevant institution factors The main objects these economists aimed were developing countries in the Asian Pacific area They wanted to understand how recent developments in the growth literature contribute to economic development of Asian Pacific countries In this study, the research examine the relationship between per capita growth rate to a set of quantifiable explanatory variables with a conditional convergence 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 regression to examine the determinants of the growth rate The regression, which uses panel data, has many advantages with regards to typical cross-country regression 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 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 to GDP and the inflation rate In the case of the terms of trade and the extent of Tran Luu Quoc Vuong – MDEk16 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal 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 developed 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 characteristics (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 problems 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 Tran Luu Quoc Vuong – MDEk16 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal shows a brief view of theoretical background of growth model, from the neoclassical 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 In chapter three, we will highlight the research methodology, including conceptual framework and variable descriptions We will have a briefly discussion about the reason why we choose these variables, how to enter them into the equations after introducing the general econometrics model Besides, the process outline 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 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 chapter also identifies the limitation and implications for further study Tran Luu Quoc Vuong – MDEk16 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal 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 technological progress is assumed to be exogenous and there are same technical opportunities 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 assumed 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 decides the growth rate of the steady state Thus, we can use model of growth to explain everything but long-run growth Tran Luu Quoc Vuong – MDEk16 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal  Romer, Paul M (1990) “Endogenous Technological Change,” Journal of Political Economy, 98, (October), part II, S71–S102  Schumpeter, Joseph A (1934) “The Theory of Economic Development”, Cambridge MA, Harvard University Press  Solow, Robert M (1956) “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics, 70, (February), 65–94  Summers, R and A Heston, 1991, The Penn world table (Mark 5): An expanded set of international comparisons, 1950-1988 Quarterly Journal of Economics, May, 327-368  Swan, Trevor W (1956) “Economic Growth and Capital Accumulation,” Economic Record, 32 (November), 334–361  Uzawa, Hirofumi (1965) “Optimal Technical Change in an Aggregative Model of Economic Growth,” International Economic Review, (January), 18–31  Vikesh Gokal, Subrina Hanif (2004) “Relationship between Inflation and Economic Growth,” Economics Department, Reserve Bank of Fiji, April  World Bank Development Indicators Tran Luu Quoc Vuong – MDEk16 51 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal APPENDICES APPENDICEX A: List of Asia Pacific countries and territories LIST OF COUNTRIES AND TERRITORIES Australia 14 Mongolia Bangladesh 15 Nepal Bhutan 16 New Zealand Brunei Darussalam 17 Pakistan China 18 Papua New Guinea Fiji 19 Philippines Hong Kong SAR, China 20 Singapore India 21 Sri Lanka Indonesia 22 Thailand 10 Japan 23 Tonga 11 Lao PDR 24 Vanuatu 12 Macao SAR, China 25 Vietnam 13 Malaysia Tran Luu Quoc Vuong – MDEk16 52 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal APPENDICEX B: Scatterplot matrix of variables growth log_init_gdp 150 pri_school 100 50 200 sec_school 100 02 expectancy 015 01 log_fertility 30 20 gov_share 10 400 openness 200 50 investment inflation 0 05 152 50 100 1500 Tran Luu Quoc Vuong – MDEk16 100 200 01 015 020 10 10 20 300 200 4000 50 53 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal APPENDIX C: Appendix C.1: Basic Cross-Country Growth Regression reg growth p_log_init_gdp pri_school expectancy log_fertility p_gov_share p_openness p_investment inflation cyear Source SS df MS Number of obs = F( 9, 31) = Model 011161776 001240197 Prob > F Residual 010025756 31 000323411 R-squared 41 3.83 = 0.0024 = 0.5268 Adj R-squared = 0.3894 Total 021187532 40 000529688 Root MSE Std Err P>t growth Coef p_log_init_gdp -.052423 -3.78 0.001 -.0806843 -.0241618 pri_school -.0000761 0002161 -0.35 0.727 -.0005169 0003647 expectancy 3806465 3.557968 0.11 0.915 -6.875878 log_fertility -.1121092 0331433 -3.38 0.002 -.1797054 -.0445129 p_gov_share 0004222 000927 0.46 0.652 -.0014685 0023129 p_openness 0000179 0000535 0.34 0.740 -.0000911 p_investment 0002587 0009789 0.26 0.793 -.0017378 0022552 inflation -.052122 0465441 -1.12 0.271 -.1470492 0428053 cyear 0105059 0063167 1.66 0.106 -.0023771 _cons 2784087 1037485 2.68 0.012 0668122 4900051 Tran Luu Quoc Vuong – MDEk16 0138569 t = 01798 [95% Conf Interval] 7.637171 000127 0233888 54 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal Appendix C.2: Basic Cross-Country Growth Regression (robust) reg growth p_log_init_gdp pri_school expectancy log_fertility p_gov_share p_openness p_investment inflation cyear, vce(robust) Linear regression Number of obs = F( 9, 31) = Prob > F R-squared Root MSE P>t 6.13 = 0.0001 = 0.5268 = 01798 growth Coef RobustStd Err p_log_init_gdp -.052423 0137314 -3.82 0.001 -.0804285 -.0244176 pri_school -.0000761 0001879 -0.41 0.688 -.0004594 0003072 expectancy 3806465 3.509894 0.11 0.914 -6.77783 7.539123 log_fertility -.1121092 0371288 -3.02 0.005 -.1878339 -.0363844 p_gov_share 0004222 0007607 0.56 0.583 -.0011292 0019737 p_openness 0000179 0000468 0.38 0.704 -.0000775 p_investment 0002587 001414 0.18 0.856 -.0026252 0031426 inflation -.052122 0552661 -0.94 0.353 -.1648379 060594 cyear 0105059 0053372 1.97 -.0003794 0213912 _cons 2784087 0996637 2.79 0.009 Tran Luu Quoc Vuong – MDEk16 t 41 0.058 [95% Conf Interval] 0001134 0751431 4816742 55 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal Appendix C.3: Variable tests //significant test for expectancy variable reg growth expectancy Source SS df MS Number of obs = F( 1, 48) = Model 000317519 000317519 Prob > F Residual 029515868 48 000614914 R-squared 50 0.52 = 0.4759 = 0.0106 Adj R-squared = -0.0100 Total 029833387 49 000608845 growth Coef expectancy 1.293174 1.799614 0.72 0.476 -2.325193 4.91154 _cons 0321776 1.16 0.252 -.0236197 0879748 Std Err .027751 t Root MSE P>t = 0248 [95% Conf Interval] test expectancy ( 1) expectancy = F( 1, 48) = 0.52 Prob > F = 0.4759 Tran Luu Quoc Vuong – MDEk16 56 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal //significant test for log_fertility variable reg growth log_fertility Source SS df MS Number of obs = F( 1, 48) = Model 000676218 000676218 Prob > F Residual 029157169 48 000607441 R-squared 50 1.11 = 0.2967 = 0.0227 Adj R-squared = 0.0023 Total 029833387 49 000608845 growth Coef Std Err t P>t Root MSE = 02465 [95% Conf Interval] log_fertility -.0180065 0170663 -1.06 0.297 -.0523206 0163075 _cons 6.58 0.000 0423836 0796606 0610221 00927 test log_fertility ( 1) log_fertility = F( 1, 48) = 1.11 Prob > F = 0.2967 Tran Luu Quoc Vuong – MDEk16 57 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal //significant test for p_log_init_gdp variable reg growth p_log_init_gdp Source SS df MS Number of obs = F( 1, 48) = Model 0037523 0037523 Prob > F Residual 026081087 48 000543356 R-squared 50 6.91 = 0.0115 = 0.1258 Adj R-squared = 0.1076 Total 029833387 growth Coef 49 000608845 Root MSE Std Err t p_log_init_gdp -.0154946 0058962 -2.63 0.012 -.0273498 -.0036395 _cons 0211835 1069489 P>t = 02331 [95% Conf Interval] 5.05 0.000 0643565 1495412 test p_log_init_gdp ( 1) p_log_init_gdp = F( 1, 48) = 6.91 Prob > F = 0.0115 Tran Luu Quoc Vuong – MDEk16 58 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal reg p_log_init_gdp expectancy Source SS df MS Number of obs = F( 1, Model 10.1534406 Residual 5.4756652 50 48) = 89.01 10.1534406 Prob > F 48 114076358 R-squared = 0.0000 = 0.6496 Adj R-squared = 0.6424 Total 15.6291058 p_log_init_gdp 49 318961344 Root MSE P>t = 33775 Coef Std Err t [95% Conf Interval] expectancy -231.2484 24.51151 -9.43 0.000 -280.5321 -181.9648 _cons 7.086339 3779811 18.75 0.000 6.326357 7.846321 reg p_log_init_gdp log_fertility Source SS df MS Number of obs = F( 1, 50 48) = 51.98 Model 8.12543957 8.12543957 Prob > F Residual 7.50366628 48 156326381 R-squared = 0.0000 = 0.5199 Adj R-squared = 0.5099 Total 15.6291058 p_log_init_gdp Coef 49 318961344 Std Err t Root MSE = 39538 P>t [95% Conf Interval] log_fertility -1.973833 2737809 -7.21 0.000 -2.524306 -1.42336 _cons 1487105 30.55 0.000 4.243405 4.542407 Tran Luu Quoc Vuong – MDEk16 4.84141 59 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal reg expectancy log_fertility Source SS df MS Number of obs = F( 1, 50 48) = 109.82 Model 00013212 00013212 Prob > F Residual 000057749 48 1.2031e-06 R-squared = 0.0000 = 0.6958 Adj R-squared = 0.6895 Total expectancy 00018987 Coef 49 3.8749e-06 Std Err t Root MSE P>t = 0011 [95% Conf Interval] log_fertility 0079592 0007595 10.48 0.000 0064321 0094864 _cons 0112909 0004126 27.37 0.000 0104614 0121204 Tran Luu Quoc Vuong – MDEk16 60 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal //significant test for pri_school variable reg growth pri_school Source SS df MS Number of obs = F( 1, 40) = Model 000270468 000270468 Prob > F Residual 02173119 40 00054328 R-squared 42 0.50 = 0.4845 = 0.0123 Adj R-squared = -0.0124 Total 022001658 41 000536626 growth Coef Std Err pri_school _cons Root MSE = 02331 t P>t [95% Conf Interval] 0001707 0002419 0.71 0.485 -.0003182 0331677 0244299 1.36 0.182 -.0162071 0825424 0006596 test pri_school ( 1) pri_school = F( 1, 40) = 0.50 Prob > F = 0.4845 Tran Luu Quoc Vuong – MDEk16 61 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal //drop the variable primary school enrollment reg growth p_log_init_gdp p_gov_share p_openness p_investment inflation cyear, vce(robust) Linear regression Number of obs = F( 6, 42) = Prob > F R-squared 7.40 = 0.0000 = 0.4380 Root MSE growth Coef Robust Std Err 49 = 01974 T P>t [95% Conf Interval] p_log_init_gdp -.0205683 0076162 -2.70 0.010 -.0359385 -.0051981 p_gov_share -.0017769 000457 -3.89 0.000 -.0026991 -.0008547 p_openness -.0000282 0000353 -0.80 0.429 -.0000994 000043 0046638 p_investment 0024468 0010985 2.23 inflation -.1179489 0585956 -2.01 0.051 -.2361996 0003019 cyear 007455 0053775 1.39 0.173 -.0033971 0183072 _cons 0923357 025738 3.59 0.001 0403943 1442771 Tran Luu Quoc Vuong – MDEk16 0.031 0002299 62 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal //significant test for the extent of international openness reg growth p_openness Source SS df MS Number of obs = F( 1, 48) = Model 000370042 000370042 Prob > F Residual 029463345 48 00061382 R-squared 50 0.60 = 0.4413 = 0.0124 Adj R-squared = -0.0082 Total 029833387 49 000608845 growth Coef Std Err t Root MSE P>t = 02478 [95% Conf Interval] p_openness -.0000346 0000446 -0.78 0.441 -.0001242 000055 _cons 9.67 0670213 0554863 005737 0.000 0439513 test p_openness ( 1) p_openness = F( 1, 48) = 0.60 Prob > F = 0.4413 Tran Luu Quoc Vuong – MDEk16 63 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal Appendix C.4: Restricted Growth Regression (robust) (1) reg growth p_log_init_gdp pri_school p_gov_share p_openness p_investment inflation cyear, vce(robust) Linear regression Number of obs = F( 7, 33) = Prob > F R-squared Root MSE growth Coef Robust Std Err t 41 3.99 = 0.0029 = 0.3416 = 02056 P>t [95% Conf Interval] p_log_init_gdp -.018994 0098853 -1.92 0.063 -.0391058 0011178 pri_school 0000867 0002353 0.37 0005654 p_gov_share -.0017048 0004746 -3.59 0.001 -.0026704 -.0007392 p_openness -.0000197 0000436 -0.45 0.653 -.0001084 0000689 p_investment 001629 1.23 0.227 -.0010611 0043192 inflation -.0937382 0565056 -1.66 0.107 -.2086997 0212233 cyear 0074448 0061662 1.21 0.236 -.0051005 0199901 _cons 0942606 0281618 3.35 0.002 036965 1515562 Tran Luu Quoc Vuong – MDEk16 0013223 0.715 -.0003919 64 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal Appendix C.5: Restricted Growth Regression (robust) (2) reg growth p_log_init_gdp p_gov_share p_investment inflation cyear, vce(robust) Linear regression Number of obs = F( 5, 43) = Prob > F growth Robust Coef 49 8.61 = 0.0000 R-squared = 0.4328 Root MSE = 0196 Std Err t P>t [95% Conf Interval] p_log_init_gdp -.0227588 0075849 -3.00 0.004 -.0380551 -.0074624 p_gov_share -.0016409 0004245 -3.87 0.000 -.002497 -.0007848 p_investment 0022903 0010121 2.26 0043315 inflation -.1175001 0575509 -2.04 0.047 -.2335625 -.0014377 cyear 0077636 0053052 1.46 0.151 -.0029353 0184625 _cons 0992838 0226643 4.38 0.000 0535768 1449908 Tran Luu Quoc Vuong – MDEk16 0.029 0002492 65