A Study On The Nexus Between Economic Integration And Economic Convergence

Economic convergence hypothesis is a theoretical hypothesis in the research ofeconomic growth that receiving most debates, and is also an important research topicin macroeconomics. In the wave of the global economic and financial integration, thestudies of the impact of economic and financial integration on economic convergenceincrease, but their subjects are mainly Western developed countries. Compared withthe European Union, there are more differences among East Asian countries (regions)with respect to economic level, the degree of market maturity, social system andpolitical system, and at the same time, the integration process of the East Asianeconomy and the world economy is more complex. Therefore, in the case of East Asia,the relationship between economic integration and economic convergence may shownew features. This paper studies the relationship between economic integration andeconomic convergence in the case East Asia. The research carries out in two levels:the relationship between regional economic integration and regional economicconvergence, and between region-world economic integration and regional economyconvergence to the developed economies of the world. In the regional study, therelationships between economic integration and economic convergence amongmultinational regions and between one country and other regional countries are tested.This research consists of three parts. The first part examines whether theeconomic gap within East Asia economies displays convergence trend, and whetherthe nexus between economic integration and economic convergence exists. In this part,the tests are carried out not only taking all the sample economies as a whole, but alsodividing the samples according to their subregions and economic development levels;the second part further examines economic convergence as well as the economic andfinancial integration between China and other East Asian economies, and theirrelationship; besides examining economic convergence within the East Asianeconomies, in the third part, the “catch up effect” of the East Asian economies to theworld economic power represented by the United States is tested. Furthermore, theimpact of economic integration between East Asia and the world market on theconvergence of East Asian economies to the world economic power is studied,allowing it to differ with the level of economic development.Firstly, for the entire East Asian region, during the period1978-2011, on one hand, economic dispersion among East Asian economies has decreased, but economicdisparities will not completely disappear in the long run; on the other hand, tradeliberalization and financial integration among major East Asian economies hasincreased during this period. However, there is no causal relationship between EastAsian’s regional economic convergence and trade liberalization or financialintegration.Secondly, when dividing the East Asian economies into two groups according totheir geographical locations, economic convergence tests show that the degree ofEconomic dispersion in Northeast Asia tends to fall during1978-2011, but the percapita outputs of the economies in that region do not converge to the samesteady-state level in the long run, and only the weakest form ofconvergence—stochastic convergence—take places; for the five ASEAN countries,their economic dispersion rise continuously throughout the sample interval, displayingeconomic divergence feather. When examing the economic integration within EastAsia subregion, in absolute level, the degree of trade liberalization of Northeast Asiais higher than that of Southeast Asia, but the degree of financial integration ofNortheast Asia is lower than that of Southeast Asia; as for growth trend, both the tradeliberalization and financial integration within Northeast Asia show an upward trendduring the sample period, while the trade liberalization and financial integrationwithin Southeast Asia fluctuates around a constant level and does not appearsignificant rise. Causality tests show that the rising trends of trade liberalization andfinancial integration within Northeast Asia indeed play a positive role in regionaleconomy gap narrowing, and the role of trade liberalization is a long term one, whilethe role of financial integration is a short term one; as for Southeast Asia, there is nocausal link in any direction between trade liberalization and economic convergence,but financial integration can contribute to economic convergenc, and the stagnation offinancial integration is one of the causes of regional economic divergence. For theabove two regions, the impacts of trade liberalization and financial integration oneconomic convergence are one-way.Thirdly, when dividing Asian economies into two groups according to the levelof economic development, absolutely convergence exsits within both East Asia’s moredeveloped group and East Asia’s less developed group. Therefore, this study foundevidence of club convergence in East Asia, and that club is divided according to thelevel of economic development rather than geographical location. As for absolutelevel, the degree of trade liberalization and financial integration in East Asia’s more developed group is higher than that in East Asia’s underdeveloped group; as forgrowth trend, both trade liberalization and financial integration in the above twogroups display a rising trend. Causality tests show that for the East Asia’s moredeveloped groups and less developed group, the trade liberalization within each groupcan promote realization of economic convergence, however, despite the financialintegration within each group also has an upward trend, but there is no causal linkbetween financial integration and economic convergence.Fourthly, when tesing the relasionship between China and other East Asianeconomies, results show that there are three economies displaying convergencetendency with China, namely Japan, Indonesia and Thailand, but for the threeconvergence groups the mechanisms leading convergence are different. As for theChina-Japan group, trade liberalization has played a significant role in the process ofeconomic convergence between the two countries, but the impact of financialintegration on economic convergence has not yet appeared, and economicconvergence can promote the processes of trade liberalization and financialintegration between the two countries in the long run; as for the China-Indonesiagroup, there is an interaction between trade liberalization and economic convergence,but significant correlation between financial integration and economic convergencedoes not exist; as for the China-Thailand group, both trade liberalization and financialintegration of the two countries contribute to their economic convergence, andeconomic convergence also exerts influences on trade liberalization and financialintegration.Fifthly, Contrary to the previous conclusion for Europe, when testing the nexusbetween economic integration and eonomic convergence from the region-worldperspect, this study finds that the integration between East Asia and world propellscapital inflows for the East Asia’s more developed economies and capital outflows forthe East Asia’s less developed economies, contradicting the standard thoery. For mostEast Asian economies, the improvement of financial integration will hinder theirconvergence to the developed economies, which is represented by the United States,and only when the per capita GDP reach26935GK$(in2011price level), the impactof financial integration on economic convergence reverses from negative to positive.In this case, deepening financial integration is conducive to international capitalinflows, and thus will help to increase the speed of economic convergence todeveloped economies. In contrast, for most East Asian economies, trade liberalizationis helpful for them to use external resources to promote their own economy, and thus can speed up their convergence towards developed economies, and only when the percapita GDP rises to above23649GK$, this promotion effect changed to become ahinder.Overall, this study finds that the driven role of trade liberalization on economicconvergence is more obvious. For the economic convergence within Northeast Asia,East Asia’s club convergence and the bilateral convergence between China and othereconomies, East Asia’s more developed group, East Asia’s underdeveloped group,trade liberalization can be found to play a role in the process of economicconvergence, while the role of financial liberalization in driving economicconvergence is more limited, for it can only be found in Northeast Asia and the China-Thailand group, and for Northeast Asia, this effect is only short-term lasted. In theprocess of East Asia’s economy converging to the advanced world level, tradeliberalization plays a positive role, which is similar to case that within region,however, by contrast, the financial integration between East Asia and the world willlead capital outflows for most East Asia’s economies and capital inflows for only fewEast Asia’s more developed economies, thus hindering East Asia’s economyconverging to the advanced world level and widening the economic gaps within EastAsia.In order to coordinate the relationship between the economic integration andeconomic gap reduction, accelerate the realization of economic convergence withinthe East Asian, and promote the East Asian economy to catch up to the worlddeveloped economies, based on the research conclusions, policy recommendations areprovided in the final.