Growth Convergence and Divergence in SAARC

Abstract

We test for output convergence during 1960-2017 amongst the leading member countries of the South Asian Association for Regional Cooperation (SAARC): Bangladesh, India, Nepal, Pakistan and Sri Lanka. The context is SAARC’s commitment to eventual monetary union. Existing research, using established unit root tests, finds little support for the convergence hypothesis, even when structural breaks are permitted. We use two more recently developed approaches, both of which allow greater flexibility in the depiction of convergence. The method developed by Enders and Lee (2011) allows for a smoothly evolving trend in relative per capita incomes, rather than a (possibly breaking) linear trend. The technique introduced by Phillips and Sul (2007, 2009) allows for the possibility of convergent sub-groups. Even with these more accommodating test procedures, we find minimal evidence of growth convergence within the full group of countries. We find that these countries can be allocated to two non-overlapping convergence clubs, with India and Sri Lanka enjoying the more favourable growth path. These findings raise questions regarding the current feasibility of monetary union for SAARC.