Does the formation of RTA support the neoclassical growth theory and convergence hypothesis?

Abstract

Purpose – The authors considered three regional trading agreements (RTAs): European Union (EU-25), ASEAN Free Trade Area (AFTA), and South Asian Free Trade Area (SAFTA) to test the hypothesis that poor members within a RTA catch rich members and thereby follow the path of income convergence. Of particular interest is to test whether partial openness (i.e. formation of RTAs) or openness or political conditions are conducive to economic growth among the member countries of RTAs. The paper aims to discuss these issues. Design/methodology/approach – The authors used pooled datasets from three different RTAs, namely the EU-25, the AFTA, and the SAFTA. Taking five years average for all variables, starting from 1961 to 1965 and extending to 2001-2005, the authors tested the hypothesis that the growth rate of per capita GDP is negatively related to the initial level of per capita GDP. Constructing a dynamic behavioral equation and forming the reduced form equation, the authors calculated the s-convergence, and both conditional and unconditional convergence. Findings – The authors found that both the EU-25 and the AFTA exhibit s-convergence, and both conditional and unconditional convergence, while the reverse evidence was observed in the case of the SAFTA. However, the speed of convergence of the AFTA was found to be much higher than that of the EU-25. Originality/value – Formation of RTA by countries should be considered as an essential condition to achieve sustained economic growth. In addition, political rights, trade openness, and more importantly benevolence of the member countries within the RTA must be shown to sustain economic growth and convergence; otherwise with the passage of time, divergence among the RTA members will be evident.