Convergence across SAARC and its Observer Countries: Some new evidence

Mansoor Ali Seelro1, Iqbal Hassan Jamro2, Zulfiqar Ali Magsi3

ABSTRACT
This paper examines the issue of income convergence across six SAARC and two of its Observer countries, a total sample of eight countries. Data were extracted from Databank of World Bank from 1980 to 2009. Two convergence concepts were tested namely convergence and conditional convergence. Our empirical results reveal that during the sample period of 30 years, convergence has failed to take place, whereas results support the evidence of conditional convergence across the selected countries. This was because of inclusion of control variable namely annual population growth rate that enabled the eight countries to experience conditional convergence.

Key words: SAARC Countries, Observer Countries, Convergence, Solow Growth Model.

1. INTRODUCTION
The Solow Neoclassical Growth Model is the basic framework for the study of convergence across countries. Solow model is sometimes called an exogenous growth model to be contrasted with endogenous growth theory (or new growth theory). Much of the research has been conducted on the concepts of convergence and economic growth which is grounded either on neo-classical economic growth theories (Solow) or endogenous growth theories (Romer). Since focus of this paper is convergence and conditional convergence (c convergence), so we start first by distinguishing between the two convergence concepts. Second, we move to how the two contrasting models (Solow vs. Romer) can be applied to explain either of the convergence concepts. convergence demonstrates the tendency for poor countries to grow faster than rich countries particularly when the economies are similar with respect to savings rate, population growth rate, depreciation rate, and technology (Barro & Sala-i-Martin, 1992). On the other hand, c convergence is same as convergence, but it requires a set of control variables that are likely determinants of steady-state level of per
1 2 3

Author is student of BBA (HRM) at Sukkur IBA. Author is student of BBA (Finance) at Sukkur IBA. Author is student of BBA (Marketing) at Sukkur IBA.

capita income. Thats why in the latter concept economies still converge, but to their own different respective steady states. Because absolute convergence is the strongest version of convergence concept, so in reality, rarely is the case of absolute convergence. However, in study of selected Caribbean countries, absolute convergence is tested for the reason that the countries form a club and share some similar aspects. Well.., we move to these studies and their findings in detail in literature review section. Moving towards the second point, Solow neoclassical growth model assumes diminishing returns to investing in human and physical capital separately, while constant returns to investing jointly in both. Literature on convergence enlightens the convergence concepts by assuming two types of economies i.e.; one is rich and other is poor economy. Since rich economies have potential to invest, while poor economies dont have. If this is the case, poor economies will grow faster than rich ones, and we say convergence should occur. Conversely, endogenous growth theory assumes constant or increasing returns to investing in human and physical capital, again if this is the case, we say there is no evidence of convergence, and rather divergence may result. This is closely consistent with what MANCUR OLSON JR., NAVEEN SARNA & ANAND V. SWAMY (1998) postulate that neoclassical models lead us to expect that capital-poor low income countries should grow more rapidly than well-endowed rich countries. In support we say that this is somehow evidence that neo-classical theories are in action and convergence may be predicted. In contrast, they argue that endogenous models lead us to expect that well-endowed rich countries should be among the fastest growing countries, and this implies no convergence. The point is that convergence takes place through catch-up process. The innovation in our paper is the inclusion of two Observers of SAARC apart from six SAARC countries. Our study tries to find out whether or not SAARC (Pakistan, Bangladesh, India, Nepal, Bhutan*, Maldives, Sri Lanka and Afghanistan*) and its Observer countries (Iran and China) are converging in terms of income. The rationale behind considering only Iran and China as Observers is simple i.e. they have geographical contiguity to SAARC countries.

1.1 About SAARC

Theories of globalism and regionalism4 have provoked to hit upon the grounds for regional cooperation in South Asia. The evolution of SAARC goes by 4 phases namely Conception (1977-80), The Meetings of Foreign Secretaries (1981-83), The Meetings of Foreign Ministers (1983-85) and The Summits (1985-2004). On 2nd May, 1980, late president of Bangladesh, Zia-ur-Rahman, made the first proposal for setting up a background for regional cooperation in South Asia. Here are some of the major

* Bhutan & Afghanistan are excluded from this study something we justify in subsequent sections. 4 For details of globalism and regionalism concepts, refer to article SAARC: Origin, Growth, Potential and Achievements by Muhammad Jamshed Iqbal.

factors that have likely incited president Zia-ur-Rahmans thoughts about establishing a regional association in South Asia during 1975-1979: 1. Change in the political leadership in South Asian countries and demonstration of accommodative diplomacy by the new leaders; 2. An acute balance of payment crisis of almost all South Asian countries which was further aggravated by the second oil crisis in 1979. The proposal was promptly endorsed by Nepal, Sri Lanka, the Maldives and Bhutan. India and Pakistan were skeptical initially. But finally it was agreed that Bangladesh would prepare the draft of a working paper for discussion among the foreign secretaries of South Asian countries. Between 1980 and 1983, four meetings at the foreign secretary level (April 21-23, 1981, Colombo; November 2-4, 1981, Kathmandu; August 7-8, 1982, Islamabad; March 2830, 1983, Dhaka) took place to establish the principles of organization and identify areas for cooperation. In several other meetings and conferences, the declaration was made for the name of the organization as South Asian Regional Cooperation (SARC). But later on, it was changed to South Asian Association for Regional Cooperation (SAARC). The change in the acronym was based on the thinking that while SARC refers to the process of South Asian Regional Cooperation, SAARC marks the establishment of an association (organization) to promote and develop such cooperation. Finally, the first summit meeting of the heads of state/government of South Asian countries was held at Dhaka from December 7 through 8, 1985.

1.1.1 Aims and Objectives of the SAARC

The South Asian Association for Regional Cooperation (SAARC) comprising Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, Sri Lanka and Afghanistan, is a dynamic institutionalized regional cooperation in South Asia, basically perceived as an economic grouping to work together for accelerating the pace of socio-economic and cultural development. The objectives of the association as defined in the SAARC Charter are: To promote and strengthen collective self-reliance among the countries of South Asia. To contribute to develop mutual trust, understanding and appreciation of one anothers problem. To promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields. To strengthen cooperation with other developing countries. To strengthen cooperation among themselves in international forums on matters of common interest. To cooperate with international and regional organizations with similar aims and purposes.

Cooperation in the SAARC is based on respect for the principles of sovereign equality, territorial integrity, political independence, noninterference in internal affairs of the member states and mutual benefit. Regional cooperation is seen as a complement to the bilateral and multilateral relations of SAARC members. Decisions are taken on the basis of unanimity. Bilateral and contentious issues are excluded from the deliberations of SAARC.

1.2 About Observers

Barring the literal meaning of observer, it means a country or an organization, which sends its representative to attend the conference of an international or regional organization for the purpose of watching its deliberations, but does not participate in its decision making process due to definitional constraints of that conference or meeting. The countries that send their observers to attend the meetings of international or regional functional organizations are motivated by numerous factors. For instance, they have traditional and venerable political, economic and cultural links with the region, which is characterized by a particular organization. Apart from that, the countries that want to get observer status basically seek membership in SAARC. SAARC has been confronted with the issue of membership and observers from the very beginning. Certain states like Afghanistan were desirous for entering into SAARC from the day of its inception in 1985. The case of Afghanistan was based on geographical contiguity, traditional, social, cultural and economic links; and India and Pakistan being markets for Afghan commodities.

China: Peoples Republic of China expressed its interest in joining SAARC as a member on
the basis of geographical contiguity, historical, cultural links and rapidly growing trade and commercial relations with South Asian countries, particularly India, Pakistan, Bangladesh and Nepal. The candidature of Peoples Republic of China received support from Pakistan and Bangladesh, while India was initially reluctant to accept prospects of China becoming a member of SAARC.

Iran: After Afghanistans membership of SAARC, The Islamic Republic of Iran has the
distinction of having common borders with two of the eight members of the regional grouping. Besides geographical contiguity, Iran and South Asia have had trade and commercial links since ancient times. Iran has also strong cultural, economic and political relations with Afghanistan, Pakistan and India. In February 2005, Iran made a formal request for SAARC membership when its Foreign Minister, Kamal Kharrazi, indicated Irans interest in joining SAARC by saying that his country could provide the region with East-West connectivity. On March 3, 2007, Iran submitted a formal request for an Observer status in SAARC. The request was approved during the 14th summit of SAARC held in New Delhi during April 2007.

US, Japan, South Korea, EU and Russia: Likewise US, Japan and South Korea were
also interested to seek observer status at SAARC summits. But the decision on the issue was delayed because of prevalence of the view in some member countries that extension of membership and admission of more observers might impinge on the progress of SAARC to a certain extent because the focus on the region would get diluted. By the improvement in
relations between India and Pakistan, Russia too expressed curiosity in joining SAARC as an observer. In addition, European Union (EU) was also showing concern for being observer in

SAARC summits. Thus, the 14th Summit of SAARC had the unique distinction of being attended for the first time by five observer states, namely, the U.S., European Union, China, Japan and South Korea. There could be cooperation between SAARC and these countries in trade and counterterrorism as well as social and economic sectors.

2. LITERATURE REVIEW
Rich literature on cross-country convergence is available which supports conditional convergence hypothesis because of heterogeneity in determinants of steady states level of per capita income. However, studies have also focused on absolute convergence where there are homogeneous economies. In this piece, we show some studies that have focused on either convergence concept. But, more literature goes to conditional convergence. SERGE COULOMBE (2000) uses conditional convergence hypothesis across 10 Canadian provinces and finds an annual 5% rate of convergence among the provinces. In contrast, FIONA ATKINS & DERICK BOYD (1998) in case of selected Caribbean countries and its observers test for absolute convergence, and not for conditional convergence. They do this because they argue that the countries at issue form a club. They define club as A club consists of countries with similar levels of technology, propensities to save, levels of capital, population growth, knowledge, etc, so that there should be absolute convergence to the same steady state. They state further that any club should therefore demonstrate the validity of the Solow-Swan model. This is closely consistent with as already identified by MANCUR OLSON JR., NAVEEN SARNA & ANAND V. SWAMY (1998) that neo-classical models lead us to expect that capital-poor low income countries should grow more rapidly than well-endowed rich countries. Conversely, endogenous models lead us to expect that well-endowed rich countries should be among the fastest growing countries, and this implies no convergence. Because selected Caribbean countries shared similar characteristics like size, level of development and patterns of trade dependence. Apart from that the group also had a significant institutional and social homogeneity deriving from shared historical experiences as European colonies which obtained independence in the 1960s and 1970s. All this is sufficient to form a club and to test for absolute convergence rather than conditional. They conclude that countries form a growth club, within which convergence should occur. This is supported mainly by economic policies and institutional arrangements rather than initial endowments and automatic forces. However, long run convergence is not supported

especially during post independence era. BASIL JONES (2002), on the other hand, finds evidence of 2% convergence across ECOWAS (Economic Community of West African States) economies. However, they too find evidence for unconditional convergence when they tested for a group of homogenous economies. KHORSHED CHOWDHURY (2004) could not find evidence for convergence, be it convergence, convergence, or conditional convergence (c) across 7 SAARC countries (Pakistan, Bangladesh, India, Nepal, Bhutan, Sri Lanka and Maldives). The possible reasons he identifies to be trade links among the countries, governance extent and others. LAURA SOLANKO (2008) in the study of 76 Russian regions finds that there is evidence of unconditional and conditional convergence among those regions which are initially richer. He argues that this might be due to migration from poorer regions to wealthier and climatically favorable regions during the period (1990s). Moreover, literature on Russian regions also reveals that industrial structure also significantly positively affects the growth. SAJJAD AHMAD JAN & A. R. CHAUDHARY (2011) in their study of testing conditional convergence hypothesis across 4 Pakistani provinces, find evidence of 11% convergence per annum among the provinces to their respective steady states level of per capita income, that is, conditional convergence. Factors that influence growth and convergence patterns, especially in case of Pakistan, were found to be human capital, Gross Provincial Product (GPP), industrialization, urbanization, etc. Researchers have shown that the two Pakistani provinces namely Sindh and Punjab almost lead in all these factors as shown by SAJJAD AHMAD JAN and A. R. CHAUDHARY (2011). Nevertheless, provinces still converge, but not to the common steady states, rather to different steady states since all 4 provinces have independent growth paths. This prompted them to test for conditional convergence hypothesis rather than absolute convergence. Different researchers have used different variables, in other words, determinants, for relative rates of growth. In a number of cross-country studies, urbanization has been found significantly related to convergence. In case of Canadian provinces, SERGE COULOMBE (2000) makes his paper innovative by including urbanization variable and structural breaks. He uses dummy variables (for Alberta & Qubec) for supply/production shocks to control the steady state levels of incomes of the Canadian provinces. SUZANNE McCOSKEY & CHIHWA KAO (1998) also find positive role of urbanization in their study of 30 developing countries and 22 developed countries and put forward that long-run relationship between urbanization and growth cannot be rejected. RICCARDO DICECIO & CHARLES S. GASCON (2008) in case of US states find positive role of urbanization to growth since metropolitan states grow faster than the national average and non-metropolitans. Plus metropolitans experience population decline. Whereas non-metropolitan states experience both income and population decline. ROBERTO EZCURRA & PEDRO PASCUAL (2005), in their research article, have examined the regional distribution of income inequality in the European Union between 1993 and 1998 using ECHP (European Community Household Panel) data. Rresults show that a process of convergence exists in regional inequality levels in the European regions. Basically, this was due to reduction in the degree of income dispersion registered by regions with relatively high levels of inequality in 1993. However, MATTHEW A. COLE & ERIC NEUMAYER (2003) demonstrate that it is inaccurate to conclude that gap between the rich and the poor is increasing solely on country-based convergence. Country-based convergence on its own does

not assess the income gaps. They suggest that then it is necessary to weight for differences in population size i.e. consider population weighted income levels. Besides, institutional structure, policies, quality of governance, the level of corruption, and a number of other related factors also add to growth and convergence. MANCUR OLSON JR., NAVEEN SARNA & ANAND V. SWAMY (1998) in the study of 68 countries, argue that a subset of developing countries is growing very rapidly due to differences in the quality of governance. Particularly, the three fastest growing developing countries (China, Korea, and Thailand) grew on average more than twelve times as fast as the three countries with the highest per capita incomes (Canada, Switzerland, and the US). They say that certain factors like constitutional and legal systems, extent of corruption in government, the quality of educational systems, the degree of protectionism, the prevalence of government intervention in markets, etc, must be considered in this regard. Finally, they conclude that productivity growth is higher in better-governed countries. These results (i.e., governance quality) are steady to what KHORSHED CHOWDHURY (2004) found in study of SAARC countries. MICHAEL BRUNINGER & ANNEKATRIN NIEBUHR (2005) also postulate the importance of such types of factors. They find the importance of spillover effects and space i.e., both matter for growth. They hypothesize that much of the spatial dependence that marks regional growth in Europe seems to base on differences in national policies, legislation and institutions. LEO MICHELIS, ATHANASIOS P. PAPADOPOULOS & GREGORY T. PAPANIKOS (2004) argue that idea of regional convergence across 15 regions of Greece cant be rejected. They assert that this was due to a number of structural policies undertaken during 1980s when Greece joined European Economic Community (EEC). DR. NAVED AHMAD (2006) finds corruption as the factor having relation with convergence. He finds that corrupt and less corrupt countries are C-diverging in corruption rankings, which reduces the speed of convergence process in per capita GDP. Furthermore, his results suggest that corrupt countries are indeed C-converging forming a corrupt club. ALFREDO MARQUES & ELIAS SOUKIAZIS (1998) results across countries show that there was a moderate divergence in the period 1975-1995. However, they find convergence in the years 1975-1982 and 1986 1991 and divergence over the periods 1983-1985 and 1991-1995. With regard to the convergence, the evidence is different, suggesting a convergence for the whole period which appears to be stronger in the years 1985-1995 and weaker in the period 1975-1984. In the long run, however convergence is not ensured both across EU countries as well as regions. The possible uncertainties that they identify lie with the problem of efficiency of regional policies exercised by individual member states. Capital stock (human as well as physical), labor productivity and technology, which are core factors when we talk about neoclassical growth theories, have been taken into account and found considerably to be the determinants of growth and convergence across counties. LORENZO SERRANO (1999) using aggregate production function that usually is used by Solow neoclassical growth models, concludes that out of three convergence or divergence sources (i.e., human capital, physical capital and labor productivity), TFP (Total Factor Productivity) growth stands out as the main driving force of the process of labor productivity convergence. Finally, he states that capital accumulation has lost its importance as a source of

convergence. XUEMEI BAI & GANG LI (2004) in case of 30 Chinese provinces and autonomous regions, find no evidence of unconditional convergence (absolute convergence), whereas evidence is found for 1.3% conditional convergence (conditional convergence) per annum for the whole period under discussion (19851999) using augmented Cobb-Douglas production function, which includes a human capital variable. The findings emphasize the importance of human capital in contributing to elimination of productivity differentials between Chinese regions. Moreover, implications for government are that it must try to pay attention to improve labor quality. VITTORIO DANIELE (2009) using panel data technique, finds the existence of a significant process of Convergence in productivity across Italian regions. However, during the period 1980-2007, finds a weak evidence for convergence process. He argues that non-convergence in per capita GDP is due to counterbalance of productivity convergence by an increase in employment rate disparities. Moreover, from his study, evidence shows an urban bias where high developed regions received, on average, higher public expenditures than less developed ones. Moreover, when entire sample is considered 20 regions, relationship is found to be positive between public expenditures and productivity growth. But when, sample is divided into two groups northern and southern, results are different, i.e. show some urban bias. GEORGIOS FOTOPOULOS (2010) finds entrepreneurship and human capital to be positively related to economic growth. Findings of THORSTEN WICHMANN (1996) postulate that an optimal technological gap between technological leader and technological follower will persist implying that full convergence or catch-up will never go on under normal state of affairs if new agricultural technologies have to be adapted to local conditions. Main thing he discusses is that in agriculture necessity for adaptation is important, but not that much important in industry since climate matters for agriculture. The idea is that technology is not easily transferable in agriculture while it can be somewhat easy in industry. He further argues that transferring agricultural technology from industrialized to developing countries can be costly and lengthy process. Trade and exports also determine growth and convergence across countries. These factors have been widely used by many researchers. DAN BEN-DAVID & AYAL KIMHI (2004) conclude that an increase in trade between major trade partners and, in particular, increased exports by poorer countries to their wealthier partners is shown to be related to an increase in the rate of convergence between the countries. This again supports the possible reasons (i.e., trade links) for non-convergence across SAARC countries study by KHORSHED CHOWDHURY (2004). Also XUEPENG LIU (2009) finds relation between trade, growth and convergence. But his findings of paper suggest that free trade for a country alone cant assure guarantee-growth and convergence; however it also requires a host of much other domestic and external institutional support. At this point, were of the opinion that exogenous theory should play its role by considering and allowing for external forces like FDI. In addition, FARHAD RASSEKH (1992) also concludes that international trade has contributed to income convergence across OECD Countries (1950-1985). SHIN-ICHI FUKUDA & HIDEKI TOYA (1995) also emphasized the export-oriented economic growth rather than economic growth only. This is again consistent with studies we just mentioned above regarding links between

trade and convergence. The authors argue that previous evidences rejected convergence hypothesis in East Asian countries, but when they considered export-GDP ratios i.e. exportoriented economic growth, they found evidence of strong conditional convergence hypothesis. Moreover, RAFI CHAUDHURY (2009) uses dual-model approach to measuring income convergence sustainability in European and Asian emerging economies. He concludes that both regions show reasonably rapid convergence due to constructive (favorable) export demand, technological dissemination and total factor productivity. He also took into account the technology and the productivity as the determinants of convergence like aforementioned a number of studies. The case of linearity and nonlinearity tests and different estimation techniques has also been in consideration when testing for cross-country income gaps. Just as SERGE COULOMBE (2000) in case of Canadian provinces uses two types of linearity tests i.e. Phillips Perron (PP) and Augmented Dickey Fuller (ADF) tests. VENUS KHIM-SEN LIEW & YUSUF AHMAD (2009), in the case of Nordic countries (Denmark, Finland, Norway and Sweden), on the other hand, argue that linear tests and nonlinear tests results can be in sharp contrast when nonlinearity is present in income gaps. They recommend that linear tests should be applied when gaps are linear, conversely when gaps are nonlinear, nonlinear tests should be applied, like they did using KSS nonlinearity test. STEPHEN DOBSON, JOHN GODDARD & CARLYN RAMLOGAN (2003) using dynamic panel unit root tests find some evidence of conditional convergence for Africa and Latin America/Caribbean and weak evidence for Asia/Pacific covering 80 developing countries bifurcated broadly as: Asia/Pacific, Africa and Latin America/Caribbean. They postulate that traditional cross-section unconditional models produce no evidence of intra-regional convergence. They too, somewhat like MANCUR OLSON JR., NAVEEN SARNA and ANAND V. SWAMY (1998), KHORSHED CHOWDHURY (2004) and ALFREDO MARQUES & ELIAS SOUKIAZIS (1998) reason when analyzing patterns of per capita GDP growth in these developing countries, that factors like low educational achievement, low investment, inadequate social infrastructure, ethno-linguistic diversity and out of place government policies have played a part in low growth in Africa. MATTHEW J. HIGGINS, DANIEL LEVY & ANDREW T. YOUNG (2006) in case of US country-level using two least squares methods find different evidences for the two methods. He first uses OLS and finds evidence of 2% convergence across United States, while using 3SLS (3-Stage Least Squares) method, they find evidence of 6-8% across the States. They, find that the size of the public sector at all levels (federal, state and local) is negatively correlated with economic growth. On the other hand, it is found that the presence of the finance, insurance, and real estate industry and the entertainment industry is positively correlated with economic growth. SANDRA BULLI (2001) emphasizes the importance of Distribution Dynamics method. He is of the opinion that many different approaches have been used to analyze convergence issues, which often give controversial results. The method under discussion describes the dynamics of income across countries taking into account entire cross-sectional distribution of per capita incomes. The method is useful when traditional econometric techniques fail to identify some important features in the evolution of cross country income distribution. LEI DING, KINGSLEY E. HAYNES & YANCHUN LIU (2007) using GMM (Generalized Method of Moments) estimation find the positive role of

telecommunications infrastructure in generating economic growth across various regions in China. Their results suggest that GMM estimation is more likely to produce consistent and efficient estimates than OLS and fixed-effect estimation. Studies also show that the countries to a great extent have performed well during and after reform periods. ASTHA AGARWALLA & PREM PANGOTRA (2011) while testing for convergence across Indian states, find that states have experienced different tempo of economic growth, with some states showing fast progress and others languishing behind. In other words data on states reveal divergence in regional state products. However, they find that during structural reforms periods 1992-2006 in India, there is evidence for convergence for special category states only, and divergence for non-special category states. CHUN KWOK LEI & SHUJIE YAO (2006) using both parametric and non-parametric analyses find that income inequality between China and its two SARs (Special Administrative Regions i.e. Hong Kong & Macau) has risen in pre-reforms periods, but started to decline substantially from 1980, which implies that after reforms period gap has declined. AKI KANGASHARJU (1999) in case of 88 Finnish sub-regions finds evidence of convergence, but the convergence was found to be non-linear since during growth periods, poorer regions grew faster than the rich ones. He also finds that the catch-up process is stronger from 1964 and onwards than 1934-1964. Globalization is another factor that might affect income convergence in light of endogenous theory. Just as JARITA DUASA (2010) in case of 10 selected OIC countries finds that results support endogenous theory which predicts that globalization is likely to cause income divergence rather than convergence, furthermore it is shown that selected countries have experienced income divergence except for three countries namely Bangladesh, Burkina Faso and Benin.

3. VARIABLES AND DATA DESCRIPTION

In this paper we tried to test convergence hypotheses across eight SAARC and two its Observer countries, a total of ten countries. But we were to exclude two SAARC countries namely Bhutan and Afghanistan because data for these countries was largely missing. We left with a total of eight countries in question, six SAARC and two Observer countries. Total variables included were nine for all eight selected countries, but again we dropped savings variable for Maldives because it was not available for 20 years out of 30. One of the nine variables namely population growth (annual percentage) was used as a control variable in testing for conditional convergence. Other variables included were GDP per capita, gross domestic savings, labor participation rate, merchandise trade, primary school enrollment, trade in services, military expenditures and unemployment. Prior to 1980, there was paucity of data almost on all the variables selected for all sampled countries. Thus our sample period started from 1980 and the data from 1980 to 2009 on all these variables were extracted from Databank of World Bank.

4. CONVERGENCE HYPOTHESES AND EMPIRICAL TESTS

In this section we test for two convergence concepts i.e. convergence and conditional convergence. Testing for conditional convergence calls for estimating convergence first, so we first need to estimate convergence which can be tested by running the following regression of growth of per capita GDP across countries under discussion:

(yit yi, t-T) = + yi, t-T + ut

(1)

Where t indicates the end of the time interval while (t-T) is the beginning of the time interval and ut is the stochastic error term. Since Solow growth model says that the per capita growth rate tends to be inversely related to the starting level of output or income per person, therefore, a negative, but significant value implies convergence, while 0 implies nonconvergence. Estimating conditional convergence requires a set of control variables (say xi) to be included (e.g. savings variable, investment, population growth variable, etc) that are likely to determine the steady-state growth of per capita income. Hence, c convergence can be tested by estimating the following model that is augmented form of equation (1):

(yit yi, t-T) = + yi, t-T + xi + ut

Where

(2)

is coefficient on control variables

c

xi

and, as stated previously, a negative, but

significant value means convergence holds conditionally when 0.

5. RESULTS AND DISCUSSION

Data for annual per capita GDP for eight selected countries from 1980 to 2009 are taken out from the World Bank's World Tables. Results are conferred in turn for each convergence concept.

convergence:
TABLE I presents results of convergence (given by equation 1) using three initial reference periods 1980, 1990 and 2000. A careful look at the table reveals that has not been found to be negative as well as significant except for first three time periods namely 1980-1990,

1980-1994 and 1980-1999. It implies that convergence takes place across the sampled countries during these time periods while it fails to take place during rest of the periods. Altogether, weight of evidence does not seem to support convergence across the selected SAARC and its Observer countries. This finding looks pertinent to Solow neo-classical growth model which predicts that the per capita growth rate tends to be inversely related to the starting level of output or income per person initially poorer countries will grow faster than initially richer ones, in particular, when economies are similar with respect to savings rate, population growth rate, depreciation rate, and technology (Barro & Sala-i-Martin, 1992). In this case, however, the sampled countries differ largely in terms of these variables.

TABLE I: Regression Results of convergence

Period RP=1980
1980-1990 1980-1994 1980-1999 1980-2004 1980-2009

-0.20981 (0.084906) -0.26529 (0.132702) -0.32079 (0.174063) -0.33657 (0.215529) -0.40056 (0.268875)

t-Value
-2.47105 -1.99914 -1.84296 -1.5616 -1.48976

R2
0.504381 0.399792 0.361465 0.288981 0.270018

RP=1990
1990-2000 1990-2004 1990-2009
-0.0719 (0.136268) -0.06235 (0.181429) -0.10462 (0.253692) -0.52766 -0.34367 -0.41237 0.044347 0.019305 0.027561

RP=2000
2000-2004 2000-2009
0.044942 (0.049851) 0.060759 (0.126427) 0.901525 0.480584 0.119298 0.037067

Standard errors in parenthesis ( ).

c convergence:
The estimation results of equation (2) for c convergence are reported in TABLE II. The control variable included to test for conditional convergence is population growth (annual percentage) given by . The results clearly show that is negative and significant for all sampled periods except for 1980-1990, where is not significant. Since 0 in any case, taken as a whole conditional convergence takes place with the exception of period 19801990 which can be ignored because data in this decade was missing almost for all the sample of countries. A valid reason for conditional convergence holds seems the inclusion of control variable e.g. population growth rate. The concept of conditional convergence is same as convergence, but conditional on other variables being held constant control variables. Since the economies in question share different population growth rates, controlling this variable contributes to the evidence of conditional convergence as substantiated by the empirical results.

TABLE II: Regression Results of c convergence

Period RP=1980
1980-1990 1980-1994 1980-1999 1980-2004 1980-2009

-0.14419 (0.108644) -0.32622 (0.143918) -0.39853 (0.155526) -0.91176 (0.161352) -1.01541 (0.34046)

t-Value
-1.32715826 -2.2667296 -2.56244405 -5.65072081 -2.98246446

-0.21438 (0.080057) -0.32025 (0.104929) -0.32863 (0.125406) -0.40938 (0.087824) -0.39529 (0.176692)

t-Value
-2.67785363 -3.05210274 -2.62052131 -4.66133773 -2.23717967

R2
0.633491 0.703983 0.723963 0.903736 0.737324

RP=1990
1990-2000 1990-2004 1990-2009
-0.30678 (0.133515) -0.67433 (0.096871) -0.83887 (0.231988) -2.29774642 -6.96111645 -3.61601613 0.013233 (0.118187) -0.21318 (0.064529) -0.17201 (0.147346) 0.111962606 -3.30369081 -1.1673819 0.596741 0.908273 0.731007

RP=2000
2000-2004 2000-2009
-0.19631 (0.052587) -0.40135 (0.152174) -3.73301 -2.63742355 -0.03633 (0.035517) -0.04414 (0.097996) -1.02295993 -0.45038666 0.767445 0.597301

Standard errors in parenthesis ( ).

6. CONCLUSION
The issue of convergence has always been the focus in growth and development economics. Basically convergence concept has been derived from neo-classical growth models (Solow). Later on, much more work has been done on cross-country convergence studies and issues. In this article two concepts of convergence have been tested namely convergence and c convergence. These were tested for six SAARC and two of its Observer countries by using World Bank data from 1980-2009. Our empirical results reveal the absence convergence of income, while the results support the evidence of c convergence across the eight selected countries. While discussing the results, we identified four factors in the light of Solow neo-classical model where economies needed to be similar so that poor economies could grow faster than rich ones. This is directly or indirectly pertinent to convergence. A key point of Solow growth model is that it assumes diminishing returns to investing in human and physical capital separately, while constant returns to investing jointly in both. This means that returns to capital are higher in poor countries which are relatively poorly endowed with capital than in well endowed capital-rich economies. The four factors (e.g. savings rate, population growth rate, depreciation rate, and technology.) play a key role in understanding the convergence concepts. In our study, the countries differed largely in terms of these factors, so we could not observe convergence across these sampled economies. However, when we included a control variable (e.g. population growth rate), we could be able to find the evidence of c convergence across the countries. This was simply because the selected countries showed heterogeneous economies (in terms of the four factors just mentioned), and the conditional convergence is possible for only heterogeneous economies. If the economies had been homogeneous in terms of preferences and technology and the same four factors, we would have had evidence of convergence too. Another important point about Solow growth model is that it suggests a negative relationship between income per capita growth rate and the initial level of income for any economy. This is the rationale for coefficient to be negative in our estimation equations in order to hold convergence. Convergence will hold simply because initially poor countries will grow faster than initially rich countries. According to some reviewers, it is only income that we should be worried about. They argue that people in countries with higher GDPs per capita have longer life expectancies, lower infant mortality, better access to basic education, better protection of their political rights the list is not exhaustive. Even if income is not your chosen measure of quality of life, at first glance it appears that improving incomes will improve whatever your chosen measure happens to be, then. Given that, it is a simple step to the conclusion that, if income is diverging, so is the quality of life of citizens in different nations. Well.., to get still innovative results, it calls for further research in future across SAARC countries with some innovation like different set of variables, time periods, and entities that seek membership of SAARC i.e. Observers.

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