Convergence under the Effects of Bilateral Trade

Agreements
(1980-2005)

Abstract
This paper studies the linkage between international trade and income convergence across
countries. Different theories offer conflicting predictions regarding how they might affect
each other. This paper, using logistic regression during sample period 1980 to 2005 and
under a sample of 82 countries around the world, found that Bilateral Trade variable could
led to income convergence but its impact is small, but instead, the regional trade agreements
and regional effect will be higher and also significant.
Introduction
Income convergence across countries has been a fascinating subject of research for decades
in growth and development economics, especially after the seminal work of Solow (1956).
The original Solow model predicts that, due to decreasing returns to capital, income levels
across countries converge conditional on their saving rates, population growth and
technologies. Despite of the seemingly increasing income gaps across countries after the
World War II and the critiques from the new growth theory, the implications of the Solow
model for conditional income convergence has received strong empirical support. The
original Solow model, however, is in a closed economy setting and most of the early research
on income convergence neglects the role of trade. But, even the Solow model with
technology predicts that countries with a high rate of technological progress are likely to
grow faster.
Where in other side international trade, after the World War II has been increasing sharply
due to lower transportation costs and trade barriers. Trade not only fundamentally alters the
production and consumption patterns of trading nations, but also influences national
economies by imposing more rigorous competition, facilitating the spillover of technologies
and the exchange of ideas, constraining the governments domestic policies and harmonizing
international rules and institutions. It is important to understand whether and how
international trade might affect income convergence.
Different theories on their linkages, however, provide conflicting predictions
1
. It is largely an
empirical question how trade might affect income convergence. Similar to the theoretical
literature, the existing empirical studies also offer mixed results on the impact of trade on
income convergence.

1
Liu, Xuepeng (2009) Trade and Income Convergence: Sorting out the causality. Journal of International
Trade and Economic Development 18(1) 169-195 (pp.169)
In this paper, we adopt a bilateral trade analysis to address the causality problem between Trade
and Convergence. We use aggregate trade data by country and we take advantage of these data
that provide a convenient way to sort out the causality. The idea goes as follows. Using the
definition of Beta Convergence, formulated by Barro and Sala--Martin (1992), we created our
dependent variable convergence. Our independent variable will be averaged bilateral trade
divided by GDP-PPP for our defined rich countries
2
. We are going to test robustness of the
model using trade agreement (RTA) signed and enforced until 2003, as additional variable we
tested the regional effect as a dummy variable into the model.
The rest of this paper is organized as follows. In Section 2, we review the theoretical and
empirical literature on trade and income convergence. In Section 3, we discuss the methodology
and the strategies to resolve our problem between trade and convergence. Section 4 describes the
data and their sources. Section 5 shows the empirical results and some robustness checks are
performed too. Section 6 concludes.
2.-Literature review
In the existing theoretical literature, trade can affect income convergence; and the effect can
be positive or negative. The primary goal of this paper is to solve this causality relation under
a new perspective between them. Therefore the literature on their linkage in these directions
will be discussed.
Solow proposes to use the factor-price equalization (FPE) theorem which shows that free
trade tends to equalize (or converge) factor prices and endowments across countries
3
. Per
capita income convergence arises from per capita capital stock convergence. Those countries
concerned tend to move towards a similar capital-labor ratio and similar factor prices. Under
Solow perspectives Slaughter (1997) shows three possible ways that international trade likely
to have an impact on per capita income; enforcing the FPE theorem, mediating international
flows of technology, and trading capital goods. However, the FPE theory only addresses the
factor prices, not factor quantities. It does show outcomes in steady state free trade
equilibrium but not the process of trade liberalization. Empirical studies accommodate the
above issues in their analytical framework by considering proxies such as high levels of trade
between countries and the removal of obstacles to trade.

2
See Section 3.1
3
Solow, R, (1956) A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics
70(1):65-94
Bernard and Jones (1996) provide some evidence that free trade diverges income across
countries. They document that cross-country productivity levels (measured as either labor or
total-factor productivity) for individual manufacturing industries since 1970 have been either
not converging or even diverging. In contrast, since 1970 cross-country productivity levels in
services have been converging. To reconcile these facts Bernard and Jones hypothesize that
international trade might be causing the divergence: in the tradable-goods sectors,
comparative advantage leads to specialization, and to the extent that countries are producing
different goods, there is no a priori reason to expect the technologies of production to be the
same or to converge over time.
In contrast with these results, Ben-David (1993, 1996) and Sachs and Warner (1995) present
evidence linking trade to income convergence. These studies document historical episodes of
income convergence across a group of countries that were relatively open to each other
(Sachs and Warner, 1995), that liberalized trade policy among each other (Ben-David, 1993),
or that trade a lot with each other (Ben-David, 1996). The common conclusion of these
papers is that international trade causes convergence. These papers contribute to the
convergence literature by explicitly considering a role for trade. But their research design
leaves their evidence somewhat open to interpretation. Using several criteria addressing trade
and finance policies and outcomes, Sachs and Warner classify each country in 1970 as either
open or closed. From 1970 to 1989 only in the group of open countries did the poorer
countries in 1970 tend to grow faster over the next 19 years. They conclude that the open
economies display a strong tendency towards economic convergence . . . We suggest that the
most parsimonious reading of the evidence is that . . . the convergence club is the club of
economies linked together by international trade.
Ben-David (1996) hypothesizes that countries which trade with each other a great deal, tend
to converge. BD1996 further analyses the relationship between trade liberalization and
income convergence and suggests that it is the former that produces the latter, rather than the
other way around.
Ben-David (1993) analyzes five episodes of post-1945 trade liberalization, and finds that per
capita income dispersion among liberalizing countries generally shrank after liberalization
started. Ben-Davids primary evidence that liberalization causes convergence is that during
liberalizations, countries converged. He does make some comparisons of post-liberalization
convergence either to the pre-liberalization experience of liberalizers or to a set of control
countries. But these comparisons give only limited information.
Recent literature tends to focus its evidence on globalization to international income
convergence while Pritchett (1997), Baddeley (2006) and Ghose (2004) arrived at mixed
results. Pritchett (1997) and Baddeley (2006) showed that wealthier countries grew faster
than poor countries and the current era of globalization has not been associated with
convergence in economic outcomes. In contrast Ghose (2004) concludes that improved
performance stemming from trade liberalization stimulated growth across those countries
concerned, and reduced international inequality without reducing inter-country inequality.
The convergence hypothesis says that poor economies within regional trade agreements
(RTAs) are expected to grow faster than wealthier economies in the process of regional
integration. There are three arguments from the literature survey to support this. First, poor
economies can easily adopt existing technologies that pioneers previously developed. Trade
raises factor prices for rich economies and thus per capita income. Second, because growth
theory assumes diminishing returns to factor inputs, capital productivity is higher among
poor countries who are subjected to scarce capital. The expectation is that the capital-labor
ratio converges across a region and thus per capita income converges. Third, workers are
likely to move from low productivity agricultural activities to various ranges of high
productivity manufacturing and service sectors where there are cost advantages (
Jayanthakumaran, K. and Verma, R, 2008).
These arguments are subject to criticism as wealthier countries in the region have (a) their
accumulated experience of developing leading edge technologies, (b) poor economies tend to
adopt labor-intensive technology instead of capital-intensive technology and, (c) accessing
increasing returns to factor inputs (Slaughter 1997; Ghose 2004). The convergence
hypothesis can not only be interpreted in terms of the growth aspect but also as distributional
outcomes, widely known as the income trickledown effect. It is expected that the higher the
integration across a region, the higher will be the trickledown effect as regionally oriented
trade and investment reforms tend to allocate resources internally in response to comparative
advantages, and then incomes trickledown over time to the respective growing sectors.
In summary, the existing empirical studies estimating the impact of trade on convergence are
large and differ from one to another.
3.-Methodology
The primary purpose for this project is to provide a descriptive relationship between trade
and income disparity. The contribution of this paper is solely within the realm of empirically
ascertaining the existence of such a relationship. The bilateral trade between countries as well
as the RTAs (Regional Trade Agreements) and regional effect will be the key evidence for
examining the impact on income convergence differentials.
The method applied to investigate causal relation between the binary convergence variable
and the bilateral trade will be Logistic Procedure. The basic principle of Logistic regression
is predicting a dichotomous outcome (see Appendix B).
3.1 Dependent Variable Convergence:
There are two main concepts of convergence: The first one is that convergence applies if
poor economies tend to grow faster than rich ones. That is to say that a poor country tends to
catch up with a rich one in terms of the level of per-capita income. Barro and Sala-i-Martin
(2004) called this phenomenon | Convergence, but this processed is offset by new
disturbances that tend to increase dispersion. This concept is what we are interested in
explaining under our hypothesis.
The second concept of convergence is related to the dispersion in the world distribution of
income. This concept is usually called sigma-convergence. We say that this type of
convergence exist if the standard deviation of real GDP per-capita for a group of economies
is falling over time. Nevertheless, this second concept of convergence will be not part of this
project.
In order to build our dependent variable, we used the following argument:
We defined a richer country as one that has a higher GDP per capita in the initial period
0
1980 t = . After defining which country is richer, we ranked the list of countries based on
GDP per capita 1980 for each country, where the first country will be the richest country of
our sample (see appendix A for ranking of countries).

The Convergence exists if only if for each pair of countries the follow relation is true:

,2005 ,2005
,1980 ,1980
R P
R P
GDP GDP
GDP GDP
<

We will find only two possible values:
1 if exist convergence between Rich and Poor
o.w.
Convergence
O

=

The final matrix of convergence for these years will be one of 82 rows and 82 columns,
where each cell represents the convergence relationship between two countries, one poor the
other rich.

3.2 Explanatory Variables
3.2.1. Bilateral Trade
In order to observe the volume of trade between each pair of countries during the period 1980
to 2000 we need to identify a variable that measure the relationship of trade between two
countries
4
.
Such measure is the average ratio of volume of trade respect to total income of rich country,
where the idea is measure the trade relation between two countries, in average, weighted by
the richest of them.
( )
2000
1980
,

Bilateral Trade between two coutries diveded the GPD of rich country at period
Export of Country ith to country jth
ij ji
t
Richest i j
t
ij ji
X M
GDP
Bilateral Trade
N
Bilateral Trade t
X M
=
| |
+
|
|
\ .
=
=
+ =

( )
plus Import from country jth to country ith
Total number of periods 1980,1985,1990,1995, 2000 N =
Finally, we will finish at one matrix called Bilateral Trade with 82 rows and 82 columns.
The source used for the construction of this variable was the IMF as stated under the
Direction of Trade Statistics
5
. The IMF provides the volume of Bilateral Trade between

4
We consider the period 1980-2000 because we want to avoid global distortions as Iraq War.
5
http://www2.imfstatistics.org/DOT/
countries in millions of U.S dollars. The GDP per country was obtained by Penn World
Table version 6.3
6
.
For our purposes we want to see how the predictor variable (Trade) will affect our binary
response (Convergence).
3.2.2. Regional Trade Agreement (RTA)
The second independent variable will be the RTA between two countries. The source for this
variable was the Participation of Regional Trade Agreements (Goods and Services)
7
provided
by the World Trade Organization.
RTA variable was constructed as a matrix where if a trade agreement exist between two
countries and was enforce during the period 1980 to 2003, we considered the variable as with
the value of one, otherwise the variable will have a value of zero.
Each cell of this matrix will represent the existence or not of RTA between two countries.
3.2.5 Interaction Term
The interaction term tries to capture the joint effect between bilateral trade and RTA
variables. This variable is merely the product of these other two variables; if the joint effect
is significant under our hypothesis then it will be not possible to identify the main effect for
each variable (RTA and Bilateral Trade) individually.
3.2.4 Dummy Regional Effect:
This variable is a measure of the regional effect over the income convergence variable.
We used eight regions defined by IMF Direction of Trade Statistics
8
. Each one of our
countries belongs to one of these regions.
The construction of our dummy variables was using pair-wise relation between our 8 regions:
8
Total Dummies= 8 36
2
| |
+ =
|
\ .

These 36 possible dummies will show the relation from one country that belong to a specific
region AND other country that belongs to the same or different region, in both cases we
collect this information as one for each country, zero for the others (See Appendix A).

6
http://pwt.econ.upenn.edu/php_site/pwt_index.php
7
http://www.wto.org/english/tratop_e/region_e/rta_participation_map_e.htm?country_selected=GHA&sense=b
8
A=Asia (14), E=Europe (21) , NA= North America (3), CAC=Central America/ Caribbean (6), SA=South
America (9), AF=Africa/Sub-Sahara (15), NAME=North Africa/Middle East (12), AU=Australia/Oceania
(2). Total of (82) countries
From the 36 possible dummies variables we select one as our control, this was South
America to South America
Summarizing or dummy variables, they try to measure, in the most efficient way, the effect
that each region will have into convergence between a pair of countries.
3.3 Model
Our model will be answering the question to see if bilateral trade agreement will lead us to
income convergence in the period 1980 to 2005.
Under the previous hypothesis we defined our model under Logistic distribution as:
( ) ( )
0 1
1 P Convergence F X | | = = +
Where F represents the CDF (cumulative density function) of the logistic distribution and the
matrix of explanatory variables, called X will be:
{ } , , , Re X BilateralTrade RTA Interaction Dummy gions =

The full model represented in a linear form will be


And, the reduced model will be

( )
( ) ( )
( )
: Convergence between countries ,
1: Averaged Bilateral Trade between countries , diveded by GDP Rich country among ,
: Regional trade agreement between countries ,
: Interaction
Conv i j
BT i j i j
RTA i j
INT ( ) ( )
( ) ( )
ij
term between countries ,
: Regional dummy for countries , on regions ,
: Error term
1 to 82
1 to 82
1 to 8
1 to 8
BTxRTA i j
DR i j k l
i
j
k
l
c
=
=
=
=

The reduced model intended to answer what will be the total relationship that Bilateral Trade
had over convergence, using Bilateral Trade as unique explanatory variable.
We know that Logistic Regression is special case of GLM (General Linear Model) with
Binomial distribution on the dependent variable and it is not linear. Then, in order to solve
the non-linear equation we are going to use Maximum Likelihood Estimators (MLE)
technique, using SAS version 9.2 as our computational tool.
In order to test the diagnostic of the model we are going to test a goodness of fit
( )
2 2
Pseudo- as well as Chi-Square test R
o
_ for the Logistic Models (see appendix B).
4.- The Data
Some countries converge between them under particular. For example, we can say that many
countries of the OECD could present Income Convergence between them, given certain
particular characteristics as its the case with their volume of bilateral trade which has
increased over the time. One factor that could explain this increase in international trade
could be that trade barriers between them are reduced over time because Regional Trade
Agreements are increasing, or that some other special characteristics exist like regional
effects in many countries members, for example.
Our countries sample size was based on the need for all countries from 1980 to 2005 that
have data for each country have been recognized as a country before 1980 and to not have
dissolved between 1980 and 2005. At the same time, these countries had to have to submit
official trade statistics to IMF Trade section. We gathered data on the GDP PPP per capita
for 1980 and 2005. The same was done for the Bilateral Trade and the Regional Trade
Agreements between them to analyze the link between the convergence and trade
9
.
In order to define our sample size of countries, we started using all countries reported by
Penn World Tables v.6.3, which totaled 146 countries
10
. After discard countries that were
dissolved before 2005, new countries created after 1980, countries with incomplete
information over GDP for the period (1980-2005) and countries that did not reported official
information to IFM-DOTS during the same time period, we finished with a sample size of 82
countries from eight different regions. The countries are listed in Appendix A.


9
The GDP PPP p-c was collected from Penn World Tables. For Bilateral Trade we used the data base IMF
DOTS (Directional of Trade Statistics) in millions of dollars. For Regional Trade Agreements we used
World Trade Organization-Participation in Regional Trade Agreements.
10
Penn World Tables Information document
Economic Performance
4.1 Convergence
Our response variable called convergence was created using the levels of productivity per
capita from 1980 and 2005 presented in the Penn World Tables for 2011. We created a match
pair matrix with dimensions 82 rows and 82 columns, where the upper matrix is the same as
the bottom, under the principal diagonal. Every cell in this particular matrix was filled with a
binary response; zero if was not possible to find convergence and one if convergence existed.
When a country is richer than another, that country will show a higher ranking. This ranking
was the result after sorting the GDP per capita for 1980, where a country that has the biggest
GDP per capita will show ranking one and the country that presents the lowest GDP per
capita will show ranking 82.
The next graph shows the total points of convergence for each country during the period of
interest. Qatar, ranked 1, present 77 points of convergence, Kuwait, ranked at 2, as well as
China ranked 77 present 76 points of convergence, the country with lowest level is Ethiopia
ranked 80 with only 11 points of convergence. Recall that countries are ranked based of its
GDP per capita 1980. The average number of convergence between countries is 38.

Source: Penn World Table v.6.3. Relation country versus points of convergence
31
43
32
33
35
30
26
37
46
22
33
45
76
33
34
21
36
34
38
60
29
11
35
41
51
42
29
37
40
25
28
32
29
63
58
47
28
32
37
35
40
24
48
76
21
43
40
43
40
34
30
33
46
37
34
26
21
38
54
32
37
27
33
38
77
22
28
36
35
57
37
55
28
60
32
50
46
37
36
29
35
49
Algeria
Argentina
Australia
Austria
Bangladesh
Benin
Bolivia
Brazil
Bulgaria
Cameroon
Canada
Chile
China
Colombia
Costa Rica
Cote d`Ivoire
Cyprus
Denmark
Ecuador
Egypt
El Salvador
Ethiopia
Finland
France
Gabon
Germany
Ghana
Greece
Guatemala
Honduras
Hong Kong
Hungary
Iceland
India
Indonesia
Iran
Ireland
Israel
Italy
Japan
Jordan
Kenya
Korea
Kuwait
Malawi
Malaysia
Malta
Mauritius
Mexico
Mongolia
Morocco
Mozambique
Nepal
Netherlands
New Zealand
Nigeria
Norway
Oman
Pakistan
Panama
Peru
Philippines
Poland
Portugal
Qatar
Senegal
Singapore
South Africa
Spain
Sri Lanka
Sweden
Switzerland
Tanzania
Thailand
Trinidad &Tobago
Tunisia
Turkey
Uganda
United Kingdom
United States
Uruguay
Venezuela
Convergence Between Countries
By grouping the countries based on regions at which each country belongs to (see appendix
A), then the levels of convergence for each region will be:

Source: WTO Where A: Asia with 14 countries, E: Europe with 21, NA: North America with 3, CAC: Central
America/ Caribbean with 6 members, SA: South America with 9 countries, AF: Africa/Sub-Sahara have 15
samples, NAME: North Africa/Middle East with 12, AU: Australia/Oceania with 2 countries.

The graphs show that almost all regions present a percent convergence between 40 to 60
percent, except by Africa region. North Africa-Middle East presents the highest level of
convergence given the high influence of countries as Kuwait and Qatar.
4.2 Bilateral Trade
Later we calculated the bilateral trade volume between two countries as we explain in section
3.2.1. In order to test our hypothesis about convergence leaded by trade, we consider the
averaged bilateral trade between the 82 countries during 1980 and 2005. The information
required to construct Bilateral Trade variable between the 82 countries was obtained from
IMF-DOTS.
The next graph represents the average volume of bilateral trade for each country expressed in
terms of the one richest country.
From this graph we observed that almost all countries present the same percent of bilateral
trade with respect to real GDP. The highest variation between years is presented by
Singapore. It was also evident that countries as Hong Kong and Singapore present the highest
volume of trade during 1980 to 2000. Still, Ethiopia remained the country with the lowest
percent (0.18 percent)

A AF AU CAC E NA NAME SA
56%
35%
40%
39%
44%
41%
59%
46%
% Convergence per Region
4.3 Regional Trade Agreements
The RTA variable was build using the World Trade Organization data set and represented as
1 if exist RTA between country i and country j
o.w.
i j
RTA
O

=

We consider only RTAs that were signed before or during 1980 and at least enforced until
2003.
The Regional Trade Agreements graph shows than countries as Mexico, Morocco and
Tunisia present the higher number of RTA signed and enforced during our period. Countries
as Malta, Poland not present any RTA because they were integrated to European Community
in 2004, before of that not exist a register of RTA for this countries.




Source: IFM-DOTS for Bilateral 1980 to 2000 and Penn-World Tables
0.0000 0.0500 0.1000 0.1500 0.2000 0.2500 0.3000 0.3500 0.4000 0.4500 0.5000
ALGERIA
ARGENTINA
AUSTRALIA
AUSTRIA
BANGLADES
BENIN
BOLIVIA
BRAZIL
BULGARIA
CAMEROON
CANADA
CHILE
CHINA
COLOMBIA
COSTA RICA
COTE' IVOIRE
CYPRUS
DENMARK
ECUADOR
EGYPT
EL SALVADOR
ETHIOPIA
FINLAND
FRANCE
GABON
GERMANY
GHANA
GREECE
GUATEMAL
HONDURAS
HONG KONG
HUNGARY
ICELAND
INDIA
INDONESIA
IRAN
IRELAND
ISRAEL
ITALY
JAPAN
JORDAN
KENYA
KOREA
KUWAIT
MALAWI
MALAYSIA
MALTA
MAURITIUS
MEXICO
MONGOLIA
MOROCCO
MOZAMBIQ
NEPAL
NETHERLAN
NEW ZEAL
NIGERIA
NORWAY
OMAN
PAKISTAN
PANAMA
PERU
PHILIPPINES
POLAND
PORTUGAL
QATAR
SENEGAL
SINGAPORE
SOUTH AFRICA
SPAIN
SRI LANKA
SWEDEN
SWITZERL
TANZANIA
THAILAND
TRIN&TOB
TUNISIA
TURKEY
UGANDA
UNITED KINGDOM
UNITED STATES
URUGUAY
VENEZUELA
Averaged Bilateral Trade with Respecto to Rich
Country

Source: WTO RTA in force until 2003
34
31
2
22
35
32
31
33
0
31
5
36
4
31
6
4
0
22
31
42
6
5
22
22
1
22
32
22
4
4
0
0
21
32
30
31
22
30
22
1
24
6
34
7
8
30
0
8
55
0
50
33
4
22
2
32
21
7
34
1
33
33
0
22
7
4
36
17
22
32
22
21
35
30
30
50
29
6
22
4
17
31
Algeria
Argentina
Australia
Austria
Bangladesh
Benin
Bolivia
Brazil
Bulgaria
Cameroon
Canada
Chile
China
Colombia
Costa Rica
Cote d`Ivoire
Cyprus
Denmark
Ecuador
Egypt
El Salvador
Ethiopia
Finland
France
Gabon
Germany
Ghana
Greece
Guatemala
Honduras
Hong Kong
Hungary
Iceland
India
Indonesia
Iran
Ireland
Israel
Italy
Japan
Jordan
Kenya
Korea
Kuwait
Malawi
Malaysia
Malta
Mauritius
Mexico
Mongolia
Morocco
Mozambique
Nepal
Netherlands
New Zealand
Nigeria
Norway
Oman
Pakistan
Panama
Peru
Philippines
Poland
Portugal
Qatar
Senegal
Singapore
South Africa
Spain
Sri Lanka
Sweden
Switzerland
Tanzania
Thailand
Trinidad &Tobago
Tunisia
Turkey
Uganda
United Kingdom
United States
Uruguay
Venezuela
Regional Trade Agreements
4.4 Descriptive Statistics
The first analysis of our variables is represented by the next table:


Our data sets are balanced, each variable have the same number observations 6642 for the 82
countries ( ) 82 82 82 x .
We found a level of income convergence for almost 47% of the observations (i.e. 3118
observations found convergence). When looking at Average Bilateral Trade weighted by
Rich country GDP 1980-2000 the biggest result is in the Standard Deviation (0.00297) which
compared to its Mean shows a high variation around the mean. The RTA variable shows that
in average our sample present almost 25% (i.e.1642 observations present RTA).

5.- Empirical Analysis
Table 2 describes regression based on reduced model equation
11
. The Column refers to
Convergence as a function of Average Bilateral Trade by Rich. The Maximum Likelihood
Estimator is positive which suggest a positive influence in convergence between countries,
but our Pseudo R-Square value
( )
2
0.0028 R = suggest AVGBTR as not important variable to
explain by itself convergence.


11
Reduced Model section 3.3
Table1-Variables
Variable Name Source
Mean Variance Lower Upper
CONVERG Convergence 1980-2005
Penn-Worl d tabl es v.6.3 (growth
GDP per capi ta from 1980 to
2005)
0.4694369 0.2491034 0.4574318 0.4814421
BTAVGR
Average Bi l ateral Trade by ri ch
country 1980-2000
I MF-DOTS (Mi l l i ons of Dol l ars) 0.000671647 8.80E-06 0.000600302 0.000742992
RTA
Regi onal Trade Agreement 1980-
2003
WTO- Parti ci pati on of RTA 0.2472147 0.1861276 0.2368374 0.257592
I_BTAVGR_RTA I nteracti on Term by country Author 0.000388144 7.55E-06 0.000322041 0.000454247
Confidence Interval


Table 3 present the effect of the rest of the variables into the model.
Models (2) to (5) were building after add additional variables. All models are well specified
under Likelihood Ratio but the impact to explain our dependent variable is quite small. The
effect of the regional dummy variable overall will have a high impact to explain convergence
between countries for our sample period but the individual dummy impact is not clear given
the structure of regional dummy variable (i.e. interaction between regions).
The RTA variable is statistic significant and says that when RTA increases for one unit the
odds of Income Convergence is 1.3 to 0.7 times.
The Interaction has a consistent significant impact over Convergence for our sample period.
Observing Odds value for Interaction term it will be almost zero, which suggest that working
together both variables will is significant to explain Convergence but the impact to increase
the levels of convergence is small.

Table-2: Convergence Regression Analysis
Dependent Variable: Convergence between countries 1980 to 2005
Variable Estimators (1)
MLE 42.3232
Odd rati o >999.999
P-val ue (0.0001)**
Chi -Square 18.3695
P-val ue (0.0001)**
Pseudo R-Square 0.0028
Observati ons 6642
The P-val ue correspond to Chi -Square to each esti mator appear i n parenthesi s
*Si gni fi cant at 5%
**Si gni fi cant at 1%
BTAVGR
Li kel i hood Rati o


We have tested different ways of our covariance matrix. Instead of RTA as ones or zeros we
weighted by the number of years of pair of countries signed and enforced the agreement.
Our Bilateral Trade variables was measure as averaged against poor countries instead of rich
as consequence our interaction variables was changed too. But all results not show any
different result as before. Results are showed in Appendix A.
6.-Conclusions
This paper provides a new method to sort out the causality between bilateral trade and income
convergence by using averaged bilateral trade by rich countries data. Although our bilateral trade
variable per itself not explain quite well the levels of convergence between countries we found
that additional covariance as Regional Trade Agreements helps to explain our bilateral
convergence but still is not quite enough to explain the biggest change in our convergence
variable, is the regional effect that explain better the convergence between countries under the
period 1980 to 2005.



Table-3: Convergence Analysis
Dependent Variable: Convergence between countries 1980 to 2005
Variable Estimators (2) (3) (4) (5)
MLE 33.5797 271.6 123.1
Odd rati o >999.999 >999.999 >999.999
P-val ue (0.002)** (0.0001)** (0.0006)**
MLE 0.2828 0.2459 0.3696 -0.2658
Odd rati o 1.327 1.279 1.447 0.767
P-val ue (0.0001)** (0.0001)** (0.0001)** (0.0003)**
MLE -267.6 -122
Odd rati o <0.001 <0.001
P-val ue (0.0001)** (0.0009)**
MLE
Odd rati o YES
P-val ue
Chi -Square 24.6544 36.2849 96.2757 1327.5446
P-val ue (0.0001)** (0.0001)** (0.0001)** (0.0001)**
Pseudo R-Square 0.0037 0.0054 0.0144 0.1812
Observati ons 6642
The Chi -Square val ues appear i n parenthesi s
*Si gni fi cant at 5% and ** Si gni fi cant at 1%
SA_SA Control Regi on Dummy
BTAVGR
RTA
I _BTAVGR_RTA
Region_Dummy
(35)
Li kel i hood Rati o
Bibliography

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Jayanthakumaran, K. and Verma, R. International Trade and Regional Income
Convergence. The ASEAN-5 EvidenceASIAN Economic Bulletin Vol.25, No2 pp 179-
194, 2008

Slaughter, M. Per Capita Income Convergence and the Role of International TradeThe
American Economic Review, Vol.87 No2 pp. 194-199, 1997

Slaughter, M. Trade liberalization and per capita income convergence: a difference-in-
differences analysis Journal of International Economics Vol.55, Issue 1,
pp.203228, 2001

Barro, R.J., Sala-i-Martin, X.,. Convergence Journal of Political Economy Vol.100
No.2,pp. 223251, 1992

Ben-David, D., Equalizing exchange: trade liberalization and income convergence.
..Quarterly Journal of Economics Vol.108 Issue 3, pp. 653-679, 1993

Ben-David, D., Trade and convergence among countries. ..Journal of International
Economics Vol.40 Issue 3-4, 279298, 1996

Bernard, A.B., Jones, C.I., Comparing apples to oranges: productivity convergence and
measurement across industries and countries American Economic Review, Vol.86, No.5
12161238, 1996

Pritchett, L., Divergence, big time... Journal of Economic Perspectives Vol.11, No. 3, pp.
3-17, 1997.

Baddeley. M. Convergence or divergence? The impacts of globalization on growth and
inequality in less developed countries International Review of Applied Economics Vol.
20 No. 3, pp. 391-410, 2006

Ghose. A, K. Global inequality and International trade Cambridge Journal of
Economics Vol.28, No. 2, pp. 229-52, 2004.

A. Appendix
Countries List
Countries ranked under GDP PPP per capita 1980
12




12
A=Asia (14), E=Europe (21) , NA= North America (3), CAC=Central America/ Caribbean (6),
SA=South America (9), AF=Africa/Sub-Sahara (15), NAME=North Africa/Middle East (12),
AU=Australia/Oceania (2). Total of (82) countries
Rank Region Country Rank Region Country Rank Region Country
74 A Bangladesh 37 CAC Costa Rica 51 NAME Algeria
77 A China 55 CAC El Salvador 66 NAME Egypt
20 A Hong Kong 45 CAC Guatemala 52 NAME Iran
73 A India 60 CAC Honduras 23 NAME Israel
65 A Indonesia 50 CAC Panama 43 NAME Jordan
15 A Japan 25 CAC Trinidad &Tobago 2 NAME Kuwait
48 A Korea 57 NAME Morocco
44 A Malaysia 9 E Austria 27 NAME Oman
69 A Mongolia 53 E Bulgaria 70 NAME Pakistan
76 A Nepal 33 E Cyprus 1 NAME Qatar
58 A Philippines 14 E Denmark 54 NAME Tunisia
26 A Singapore 17 E Finland 56 NAME Turkey
64 A Sri Lanka 12 E France
61 A Thailand 11 E Germany 29 SA Argentina
18 E Greece 59 SA Bolivia
78 AF Benin 32 E Hungary 38 SA Brazil
62 AF Cameroon 6 E Iceland 41 SA Chile
63 AF Cote d`Ivoire 24 E Ireland 49 SA Colombia
80 AF Ethiopia 16 E Italy 46 SA Ecuador
31 AF Gabon 36 E Malta 47 SA Peru
75 AF Ghana 8 E Netherlands 35 SA Uruguay
67 AF Kenya 5 E Norway 28 SA Venezuela
79 AF Malawi 40 E Poland
42 AF Mauritius 30 E Portugal
72 AF Mozambique 22 E Spain
71 AF Nigeria 13 E Sweden
68 AF Senegal 3 E Switzerland
39 AF South Africa 19 E United Kingdom
82 AF Tanzania
81 AF Uganda 7 NA Canada
34 NA Mexico
10 AU Australia 4 NA United States
21 AU New Zealand




Table: Dummy Regions Variables
A_A AF_AF AU_AU CAC_CAC E_E NA_NA NAME_NAME
A_AF AF_AU AU_CAC CAC_E E_NA NA_NAME NAME_SA
A_AU AF_CAC AU_E CAC_NA E_NAME NA_SA
A_CAC AF_E AU_NA CAC_NAME E_SA
A_E AF_NA AU_NAME CAC_SA
A_NA AF_NAME AU_SA
A_NAME AF_SA
A_SA
Table: Aditional Convergence Analysis
Dependent Variable: Convergence between countries 1980 to 2005
Variable Estimators (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17)
MLE 5.3652 9.7312 10.7705 5.6341 10.6431 10.7285
Odd rati o 213.836 >999.999 >999.999 279.807 >999.999 >999.999
P-val ue **(0.0011) **(0.0001) 0.0001 **(0.0006) **(0.0001) **(0.0005)
MLE 29.73 158.8 75.4752
Odd rati o >999.999 >999.999 >999.999
P-val ue **(0.0059) **(0.0001) **(0.0018)
MLE 0.5147 0.4864 0.5813 -0.2109 0.5147 0.4589 0.6051 -0.2176
Odd rati o 1.673 1.626 1.788 0.81 1.673 1.582 1.831 0.804
P-val ue **(0.0001) **(0.0001) **(0.0001) (0.062) **(0.0001) **(0.0001) **(0.0001) *(0.0535)
MLE 0.2828 0.2647 0.3146 -0.281
Odd rati o 1.327 1.303 1.37 0.755
P-val ue **(0.0001) **(0.0001) **(0.0001) **(0.0001)
MLE -13.2944 -12.908
Odd rati o <0.001 <0.001
P-val ue **(0.0014) **(0.0049)
MLE -185.3 -92.8133
Odd rati o <0.001 <0.001
P-val ue **(0.001) **(0.0022)
MLE -9.7403 -9.0268
Odd rati o 0.001 <0.001
P-val ue **(0.004) *(0.0247)
MLE
Odd rati o
P-val ue
MLE
Odd rati o
P-val ue
MLE
Odd rati o
P-val ue
MLE
Odd rati o YES YES YES
P-val ue
Chi -Square 37.3521 49.2384 59.7768 1315.9817 37.3521 46.4715 87.1555 1310.292 24.6544 37.7246 46.3052 1326.6653
P-val ue **(0.0001) **(0.0001) **(0.0001) **(0.0001) **(0.0001) **(0.0001) **(0.0001) 0.0001 **(0.0001) **(0.0001) **(0.0001) '**(0.0001)
Pseudo R-Square 0.0056 0.0074 0.009 0.1797 0.0056 0.007 0.013 0.179 0.0037 0.0057 0.0069 0.1811
Observati ons 6642 6642 6642
The Chi -Square val ues appear i n parenthesi s
*Si gni fi cant at 5% and ** Si gni fi cant at 1%
SA_SA Control Regi on Dummy
I _BTP_RTA
I _BTR_RTA
BTAVGR
RTA
I _BTAVGR_RTA
Region_Dummy
(35)
Li kel i hood Rati o
BTAVGP
RTAW
I _BTAVGP_RTAW
I _BTAVGR_RTAW
I _BTAVGP_RTA
Appendix B.

Logistic Regression
The Logistic Equation can be represented in terms of the probability of success versus
probability of failure, in natural logarithms.
^
0 1 ^
ln
1
P
X
P
| |
(
(
= +
(

Where, theoretically we can compute the Parameter P as the expected probability that
our dependent variable equal one for a given value of X.
( )
( )
^
0 1
0 1
exp
1 exp
X
P
X
| |
| |
+
=
+ +

Because of these complicated algebraic translations, our regression coefficients are not as easy to
interpret. Our old maxim that | represents "the change in Y with one unit change in X" is no
longer applicable. Instead, we have to translate using the exponent function. And, as it turns out,
when we do that we have a type of "coefficient" that is pretty useful. This coefficient is called the
odds ratio.
The odds ratio is equal to ( ) exp B . So, if we take the exponent constant (about 2.72) and raise it
to the power of | , we get the odds ratio. For example, if the printout indicates the regression
slope is .75, the odds ratio is approximately 2.12 ( ( ) exp .75 2.12 = ). This means that the
probability that Y equals 1 is twice as likely (2.12 times to be exact) as the value of X is increased
one unit. An odds ratio of .5 indicates that Y=1 is half as likely with an increase of X by one unit
(so there is a negative relationship between X and Y). An odds ratio of 1.0 indicates there is no
relationship between X and Y.
With logistic regression, instead of
2
R as the statistic for overall fit of the model, we have
deviance instead. We use chi-square as a measure of model fit here in a similar way. It is the fit of
the observed values (Y) to the expected values
^
Y
| |
|
\ .
. The bigger the difference (or "deviance") of
the observed values from the expected values, the poorer the fit of the model. So, we want a small
deviance if possible. As we add more variables to the equation the deviance should get smaller,
indicating an improvement in fit.
Instead of using the deviance (2LL) to judge the overall fit of a model, however, another statistic
is usually used that compares the fit of the model with and without the predictor(s). This is similar
to the change in
2
R when another variable has been added to the equation. But here, we expect the
deviance to decrease, because the degree of error in prediction decreases as we add another
variable. To do this, we compare the deviance with just the intercept (2LLnull referring to 2LL of
the constant-only model) to the deviance when the new predictor or predictors have been added
(2LLk referring to 2LL of the model that has k number of predictors). The difference between
these two deviance values is often referred to as G for goodness of fit (important note: Gs
referred to as "chi-square in SAS printouts).
( ) ( )
( )
2
model w/o variable model w. variable
2 2
null k
G D D LL LL _ = = =
Where the ratio
null
D is the evidence for the constant only model an
k
D is the deviance for
the model containing K number of predictors. An equivalent formula is
2
2
null
k
L
G Ln
L
_
| |
= =
|
\ .