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

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 B: Scatterplot matrix of variables C: Tests LIST OF FIGURES Figure 3.1 Conceptual framework of the study Figure 4.1 Growth rate versus Level of Per capita GDP (simple relation) LIST OF TABLES Table 3.1 Summary of variables Table 4.1 Summary Statistic on the sample observations Table 4.2 Correlation on the sample observations Table 4.3 Basic Cross-Country Growth Regression Table 4.4 Heteroskedasticity – White test Table 4.5 Basic Cross-Country Growth Regression (robust) Table 4.6 Multicollinearity testing Table 4.7 Restricted Model (1) Table 4.8 Restricted Model (2) Table 4.9 Model Comparison Table 4.10 Extended models ABBREVIATIONS IMF WB UN GDP GNP R&D OECD 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 CHAPTER 3: RESEARCH METHODOLOGY 3.1 Conceptual framework 3.2 Variables 3.2.1Dependent variables 3.2.2Explanatory variables 3.3 Data 3.4 Econometric model 3.5 Summary CHAPTER 4: DATA ANALYSIS 4.1 Growth rate and convergence 4.2 Descriptive analysis 4.3 Regression Results for Growth rate 4.3.1Basic Regression 4.3.2Hypothesis tests 4.3.3The Determinants of Growth rate 4.3.4The extended models 4.4 Summary Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal CHAPTER 5: CONCLUSION AND POLICY IMPLICATIONS 5.1 Main findings and policy implications 5.2 Limitation of the research and Recommendation fo REFERENCES 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), 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 pro-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 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 contribu-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 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 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 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 chap-ter 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 APPENDICEX B: Scatterplot matrix of variables growth log_init_gdp 150 50 200 100 02 015 01 30 20 10 400 200 50 0 05 Tran Luu Quoc Vuong – MDEk16 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 Model Residual Total growth p_log_init_gdp pri_school expectancy log_fertility p_gov_share p_openness p_investment inflation cyear _cons Tran Luu Quoc Vuong – MDEk16 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 growth p_log_init_gdp pri_school expectancy log_fertility p_gov_share p_openness p_investment inflation cyear _cons Tran Luu Quoc Vuong – MDEk16 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 Model Residual Total growth expectancy _cons 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 Model Residual Total growth log_fertility _cons 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 Model Residual Total growth p_log_init_gdp _cons 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 Model 10.1 Residual 5.47 Total 15.6 p_log_init_gdp expectancy _cons reg p_log_init_gdp log_fertility Source Model Residual Total p_log_init_gdp log_fertility _cons Tran Luu Quoc Vuong – MDEk16 59 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal reg expectancy log_fertility Source Model 000 Residual 000 Total 000 expectancy log_fertility _cons 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 Model 000 Residual 021 Total 022 growth pri_school _cons 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 growth p_log_init_gdp p_gov_share p_openness p_investment inflation cyear _cons Tran Luu Quoc Vuong – MDEk16 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 Model Residual Total growth p_openness _cons 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_invest-ment inflation cyear, vce(robust) Linear regression growth p_log_init_gdp pri_school p_gov_share p_openness p_investment inflation cyear _cons Tran Luu Quoc Vuong – MDEk16 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 growth p_log_init_gdp p_gov_share p_investment inflation cyear _cons Tran Luu Quoc Vuong – MDEk16 65 ... 15 Determinants of economic growth in a panel of Asia Pacific countries Thesis Proposal In this research, we use education attainment and health to measure human capital, one of two state variables... Conceptual framework of the study State Variables Initial per capita GDP - Initial human capital Education Health Panel Data Approach Policy Variables & National Characteristics International Openness... variables and the stock of human capital) and group of policy variables and national characteristics State variables used in this paper are the initial levels of per capita GDP in the form of