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6.4 (2) Fisher-Type
6.4 (2) Fisher-Type
Abstract
The objective of this study is to investigate the sources of output
growth and their convergence in the Middle East and North African
countries over the period 1970–2017. Towards this end, the study
employs Levin et al. (2002, Journal of Econometrics, vol. 108, pp. 1–24),
Fisher-type (Choi, 2001, Journal of International Money and Finance,
vol. 20, pp. 249–272) and Im et al. (2003, Journal of Econometrics, vol.
115, pp. 53–74) panel unit root tests and Pedroni (2004, Econometric
Theory, vol. 20, pp. 597–625), Kao (1999, Journal of Econometrics, vol. 90,
pp. 1–44) and Johansen–Fisher cointegration tests. After estimating the
production function using random effects estimator to obtain the share
of physical capital in output, we employed standard growth account-
ing approach to measure and decompose growth of total output
into contributions from growth in physical capital, labour, human capi-
tal and total factor productivity (TFP). Further, the study discusses the
1
Economics, Department of West Asia and North African Studies, Aligarh Muslim
University, Aligarh, Uttar Pradesh, India.
Corresponding author:
Mushtaq Ahmad Malik, Economics, Department of West Asia and North African Studies,
Aligarh Muslim University, Aligarh, Uttar Pradesh 202001, India.
E-mail: malikmushtaq10@gmail.com
238 South Asian Journal of Macroeconomics and Public Finance 9(2)
Keywords
Growth accounting, stochastic convergence, deterministic convergence,
panel unit root testing, panel cointegration, MENA
JEL Classification: O4, O40, O47
Introduction
A stable and sustained increase in factor productivity is essential for
achieving long-run economic growth. According to the neoclassical
growth model (Solow, 1957), differences in productivity (technology)
play an important role in long-term variations in growth across countries
and over time. However, the model remained naive to explain what
determines productivity. Later developments in economic literature have
introduced endogenous growth models (Lucas, 1988; Romer, 1986) that
postulate investments in technological factors (research and develop-
ment) determine productivity or technology. In both the neoclassical and
endogenous growth models, technological factors are the key determi-
nants of long-run economic growth. Therefore, knowledge of the contri-
bution of factor inputs and productivity to the output growth have policy
implications for achieving sustainable growth. Furthermore, other impli-
cations of the neoclassical growth model suggest that in the long-run,
poor and rich countries will converge towards steady state due to dimin-
ishing returns to capital. In contrast, the endogenous growth model sug-
gests no convergence, implying that rich countries remain rich and poor
Malik and Masood 239
ones remain poor. By relying on the predictions of the Solow model, the
purpose of this study is to analyse the following:
1
These figures reflect the data on the following countries: Algeria, Bahrain, Egypt, Iran,
Iraq, Kuwait, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates (UAE),
Libya, Sudan and Yemen.
2
Oil-exporting countries include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE, Iran,
Iraq and Algeria whereas, oil-importing countries include Turkey, Tunisia, Egypt, Jordan,
Morocco and Syria.
3
Domestic currency appreciates in response to large export of natural resource and revenue
inflows making tradable goods less competitive in world markets. Dutch disease is named
after this phenomenon occurred in Dutch economy after discovery of huge natural gas field.
240 South Asian Journal of Macroeconomics and Public Finance 9(2)
as follows. The next section provides a brief review of past studies on the
growth performance of MENA countries. The third section discusses the
methodology. We discuss the variables and data sources in the fourth
section. The empirical results and their discussion are presented in the
fifth section. The conclusion and policy implications are presented in the
sixth section.
Countries C(1) 1970–1979 C(2) 1980–1989 C(3) 1990–1999 C(4) 2000–2017 C(5) 1970–2017 C(6) Volatility4 C(7)
Oil-exporting countries
Bahrain 8.15 −1.56 7.80 10.53 5.79 2.23
Kuwait 1.50 −4.07 9.63 10.84 2.65 5.22
Oman 14.84 1.29 5.84 11.93 8.05 1.42
Qatar 5.22 −2.59 10.26 20.69 7.69 1.81
Saudi Arabia 8.02 −3.55 1.95 11.81 3.48 2.41
UAE 15.41 −2.94 4.37 7.00 4.56 2.28
Iran 2.40 2.16 9.71 5.96 5.36 2.71
Iraq 11.08 1.48 11.86 15.36 4.05 2.43
Algeria 9.27 −1.82 2.02 5.87 2.90 1.63
Oil-importing countries
Turkey 4.28 4.96 3.68 6.77 3.91 1.24
Tunisia 7.20 4.69 6.25 3.55 5.05 0.82
Egypt 4.86 5.51 10.93 9.44 8.32 0.81
Jordan 7.43 4.22 4.36 14.18 6.19 1.35
Morocco 5.71 7.52 2.26 6.27 4.52 1.11
Syria 2.70 −2.52 6.32 −6.98 3.79 3.74
MENA 4.97 0.80 5.23 8.53 4.39 1.20
Oil_exp 5.27 −1.90 5.21 9.17 4.11 1.61
Oil_imp 4.30 5.09 5.23 7.53 4.90 0.86
Source: Penn World Tables (9.1) and authors own calculations.
Note: Oil_exp and oil_imp denote oil-exporting and oil-importing countries, respectively.4
4
See Malik et al. (2020b) for volatility and structural breaks in growth performance of MENA countries.
Table 2. Average Annual Growth of GDP Per Capita
stagnated to 0.80 percent, reflecting the poor (even negative) growth per-
formance of oil-exporting countries, whereas growth in the oil-importing
countries was positive. The following decade of the 1990s witnessed a
moderate recovery in growth performance because of the rise in oil prices.
Oil has been perceived as being used to fuel development in the MENA
region. Our analysis has partially confirmed this empirical observation;
look at the last two decades (columns 4 and 5 in Table 1) of high growth
following a rise in oil prices. Furthermore, volatility in GDP growth rates
is larger in oil-exporting countries (1.61) relative to oil-importing coun-
tries (0.86). This high volatility in growth rates is attributable to several
factors that are peculiar to the region. The most prominent among others
include lack of diversification which in turn increases vulnerability to
external shocks (Malik & Masood, 2020a), perennial regional conflict,
political instability (Makdisi et al., 2007), low-quality investment projects,
low human capital, underdeveloped financial institutions and a large share
of the government in economic activities (Sala-i-Martin & Artadi, 2003).
Table 2 shows the growth rates of per capita GDP across the MENA
region. Several stylized features are emerging from Table 2. The annual
growth rates are highly volatile for the overall period. The volatility in oil-
exporting countries (3.88) is higher than the regional (2.36) and oil-
importing countries (1.40). Ramey and Ramey (1995) found a statistically
significant negative relationship between volatility and growth. Large
volatility, coupled with low growth rate, which is very evident in the case
of oil-exporting countries, serves as an indication of the ‘natural resource
curse’ phenomena. Hnatkovska and Loayza (2004) assert that this negative
link is not only statistically but also economically significant. They argued
that negative relationship becomes stronger for countries with underdevel-
oped institutions, low financial development and countries that are unable
to conduct countercyclical fiscal policies. Hnatkovska and Loayza (2004)
estimated that a 1 percent increase in volatility decreases growth by 1.3
percentage points, which represents a significant drag on growth. Table 2
shows that the region as a whole is showing a common trend of growth
performance which is very disappointing.
Methodology
Y = AK a L1 - a(1)
ln y it = n it + a ln k it + f it(2)
Y = AK a (LH) 1 - a(3)
ln y it = n it + a ln k it + f it(4)
2 ln Y 2 ln A 2 ln K 2 ln H 2 ln L
= +a# + (1 - a) # + (1 - a) # (6)
2t 2t 2t 2t 2t
Equation (5) decomposes growth in output into contributions from
growth in technological progress (TFP), physical capital and labour,
respectively, whereas Equation (6) decomposes growth in output into
contributions from growth in technological progress (TFP), physical
capital, human capital and labour, respectively. Information on capital
share and the growth rates of the variables under investigation can be
used to obtain the growth of TFP as a residual in Equations (5) and (6) as
follows (Solow, 1957):
2 ln A 2 ln Y 2 ln K 2 ln L
= -a# - (1 - a) # (7)
2t 2t 2t 2t
2 ln A 2 ln Y 2 ln K 2 ln L 2 ln H
= -a# - (1 - a) # - (1 - a) # (8)
2t 2t 2t 2t 2t
Convergence
The literature provides two indicators of cross-country convergence such
as β-convergence and σ-convergence. β-convergence postulates that
Malik and Masood 247
countries with low levels of output tend to grow faster than countries
with high output levels. Therefore, we assume a negative relationship
between the level of output and its growth rate. In essence, β-convergence
involves estimation of the regression equation such as gi = α + βlnyi0 +
δXi + εi0. The dependent variable on the left-hand side of the equation
represents the average annual growth rate of output for country i over the
sample period, and the independent variables on the right-hand side
include the initial value of the output and a vector of variables that affect
steady-state output level. εi0 denotes idiosyncratic term. β is a parameter
testing the null hypothesis of no convergence. β < 0 and δ = 0 suggest
absolute convergence, whereas β < 0 and δ ≠ 0 suggest conditional con-
vergence. However, estimation of β-convergence regression is problem-
atic because it imposes homogenous β across all countries and uses
initial values of explanatory variables which are less representative of
the entire period, and vector of Xi is assumed to explain all cross-country
income differentials.
In addition, σ-convergence evaluates the inter-temporal variation in
regional income distribution. In this context, convergence occurs if the
dispersion measured, for example, by the standard deviation or coefficient
of variation of output per capita across a group of countries or regions,
declines over time (Sala-i-Martin, 1996). However, σ-convergence is more
a statistical exercise than an econometric estimation.
To overcome the various limitations of β-convergence and
σ-convergence tests, the present study will examine the existence of sto-
chastic convergence (Carlino & Mills, 1993) and deterministic conver-
gence (Li & Papell, 1999), as used in Hernández-Salmerón and
Romero-Ávila (2015). Stochastic convergence suggests that shocks to
the log of per worker output levels of a given country relative to the
sample average (i.e., y it /yr l) are temporary, leading the series to converge
towards their respective equilibrium level of income. On the other
hand, deterministic convergence suggests that relative income series
(i.e., y it /yr l) is mean stationary, implying that yit will move parallel to yr l
over the long run. In practice, stochastic and deterministic convergence
testing methodology tests the null hypothesis of a unit root in the relative
per worker output series. The underlying idea in both notions of conver-
gence is to perform an augmented Dickey–Fuller test using the following
regression equation:
m
DX it = a i + t i t + b i X i, t - 1 + | i ik DX i, t - k + f it
k=1
248 South Asian Journal of Macroeconomics and Public Finance 9(2)
5
We can also use unit root test in time series framework to draw inference on (non)
existence of convergence. However, the present study used panel unit root tests because
they serve two purposes: first, panel unit root tests perform better than time series tests;
second, panel unit root tests are a prerequisite for testing cointegration among the variables.
6
Algeria, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates, Iran, Iraq,
Turkey, Tunisia, Egypt, Jordan, Morocco and Syria. The other remaining countries of the
region are not included in the analysis due to lack of relevant data.
7
Output-side real GDP allows comparison of productive capacity across countries and
over time. It is estimated by using prices for final goods, exports and imports that are
constant across countries (Feenstra et al., 2015).
Malik and Masood 249
Physical capital: The stock of real physical capital is obtained for the
period 1970–2017 for each country by using the perpetual inventory
method as follows:
Kt = It + (1 – δ)Kt–1
where Kt is the capital stock at time t, Kt–1 is the capital stock at time t−1,
δ is a constant depreciation rate and It is the investment at time t.
of output per worker and capital per worker series is used to estimate
Equations (2) and (4). The model is estimated by fixed effects and ran-
dom effects regression estimators. We used the Hausman (1978) test to
choose between fixed effects and random effects estimators. It is impor-
tant to note that for long panel dataset, fixed effects and random effects
estimators provide the same results. The results of fixed effects and ran-
dom effects estimators are shown in Table 4. On the basis of Hausman
test, the null hypothesis of random effects model cannot be rejected
(p-value = 0.296 for Equation [2] and p-value = 0.5225 for Equation [4]);
therefore, random effects model is appropriate for the present study.
From the random effects model, the share of capital in output is found to
be 60 percent in the MENA countries. The share of labour is correspond-
ingly taken as 40 percent during the 1970–2017 period.
Contribution from
GDP Physical Human
Country Growth Capital Labour TFP1 Capital TFP2
Oil-exporting countries
Bahrain 4.20 3.50 2.30 −1.60 0.50 −2.10
Kuwait 1.50 3.30 1.80 −3.60 0.40 −4.00
Oman 6.00 3.50 2.90 −0.50 0.50 −1.00
Qatar 6.10 5.20 3.20 −2.20 0.60 −2.80
Saudi Arab 3.50 3.70 2.10 −2.20 0.50 −2.70
UAE 5.40 3.10 3.10 −0.80 0.60 −1.40
Iran 2.40 2.50 0.90 −1.00 0.70 −1.60
Iraq 4.60 3.70 1.30 −0.40 0.60 −1.00
Algeria 3.40 2.30 1.40 −0.30 0.60 −0.90
Oil-importing countries
Turkey 4.50 3.20 0.70 0.50 0.50 0.00
Tunisia 4.40 2.40 0.90 1.00 0.70 0.30
Egypt 5.30 3.90 1.00 0.40 0.70 −0.30
Jordan 4.40 3.60 1.70 −0.90 0.60 −1.50
Morocco 4.20 2.90 1.20 0.10 0.50 −0.40
Syria 2.70 2.70 0.70 −0.70 0.60 −1.30
Source: The authors.
Y K
Notes: TFP1 is calculated using A = y/ka where y = and k = .
L L
Y K
TFP2 is calculated using A = y/k where y = and k =
HL HL
Convergence
This section discusses the (non)existence of stochastic (weak) and deter-
ministic (strong) notions of convergence using a battery of panel unit
root tests. We present the results of the log of relative GDP per worker
and its sources such as a log of relative physical capital per worker,
human capital and TFP. In practice, we test whether the relative series
contains a unit root. Suppose it does contain a unit root, then we reject
the hypothesis of convergence. The test statistic and p-value associated
with the panel unit root tests of LLC, Fisher–ADF, Fisher–PP, and IPS
are presented in Table 6.
Stochastic Convergence
Convergence in output (GDP) per worker: As reported in Table 6, all
panel unit root tests, including those of LLC, Fisher–ADF, Fisher–PP
254 South Asian Journal of Macroeconomics and Public Finance 9(2)
and IPS reject the null hypothesis of no convergence at all levels of sig-
nificance. Therefore, the evidence of stochastic convergence in output
per worker across the MENA countries over the last four decades is
overwhelming.
Convergence in the sources of output per worker: Table 6 shows that
all unit root tests of the log of relative physical capital per worker reject
the null hypothesis of no convergence at a 10 percent significance level.
Therefore, the evidence of stochastic convergence in physical capital per
worker is supported even at 10 percent significance level. As regards
human capital, Table 6 shows that the evidence on stochastic conver-
gence in mixed. On the one hand, panel unit root tests of LLC, inverse
chi-square and modified inverse chi-square tests of Fisher–ADF and
Fisher–PP, respectively, reject the null hypothesis of no convergence at
10 percent level. On the other hand, inverse normal and inverse logit
tests of Fisher–ADF and Fisher–PP provide evidence of a lack of sto-
chastic convergence. Hence, the overall evidence of stochastic conver-
gence in human capital across the MENA countries appears mixed.
Finally, the evidence shown in Table 6 fails to reject the null hypothesis
of stochastic convergence in the log of relative TFP2 levels. Therefore,
evidence of a lack of stochastic convergence is overwhelming.
Overall, the results presented in Table 6 support the presence of sto-
chastic convergence in output per worker and physical capital per worker
across the MENA countries during the past four decades. However, the
evidence of stochastic convergence in human capital is mixed, whereas
the results lend support to a lack of stochastic convergence in TFP2
levels.
Deterministic Convergence
The debate on convergence across the MENA countries can be com-
pleted with the notion of (strong) deterministic convergence, which
allows for cointegration between individual country series and the aver-
age value across countries over the period 1970–2017. Unit root tests
provide mixed evidence regarding the stronger notion of deterministic
convergence in output per worker across the MENA countries (Table 6).
However, as regards physical capital per worker, unit root tests over-
whelmingly favour the existence of deterministic convergence. As far as
human capital and TFP2 are concerned, the evidence favours the unit
root hypothesis consistent with the absence of deterministic convergence
across the MENA countries because all of the unit root tests fail to reject
the null hypothesis.
Table 6. Results of Stochastic and Deterministic Convergence
Acknowledgement
We thank anonymous referees of this journal for useful inputs. We would also
like to thank Managing Editor, Prof Saibal Kar for editorial assistance as well as
inputs on earlier versions of the article.
Funding
The authors received no financial support for the research, authorship and/or
publication of this article.
ORCID iD
Mushtaq Ahmad Malik https://orcid.org/0000-0003-0978-174X
Appendix A
Variables: Log of output per worker and log of capital stock per worker
Alternative hypothesis: common AR coefs. (within-dimension)
Statistic Prob. Weighted Statistic Prob.
Panel v-statistic 0.954308 0.1700 0.313600 0.3769
Panel rho-statistic −0.730729 0.2325 0.173369 0.5688
Panel PP-statistic −1.371356 0.0851 −0.283911 0.3882
Panel ADF-statistic −1.909797 0.0281 −0.626891 0.2654
Alternative hypothesis: individual AR coefs. (between-dimension)
Statistic Prob. – –
Group rho-statistic 1.193884 0.8837 – –
Group PP-statistic 0.336111 0.6316 – –
Group ADF-statistic −0.308388 0.3789 – –
Kao residual cointegration test
ADF t-Statistic Prob. – –
−3.475776 0.0003 – –
Source: The authors.
Notes: Null hypothesis: No cointegration.
Trend assumption: No deterministic trend.
Automatic lag length selection based on AIC with a max lag of 8.
Newey–West automatic bandwidth selection and Bartlett kernel.
Malik and Masood 259
(Table A3 continued)
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