Investigating the Presence of Regional Economic Growth Convergence in the Philippines using Kalman Filter

This paper investigates the presence of stochastic and dynamic convergence of the 14 regional economies in the Philippines in terms of per capita Gross Regional Domestic Product (GRDP) using regional panel data from 1988 to 2007. Stochastic convergence, which indicates convergence of regions in the long-run, is tested using Levin, Lin & Chu (LLC) and Im, Pesaran & Shin (IPS) panel unit root tests. The presence of convergence, on one hand, indicates that the economically laggard regions are gaining on the economically better-performing regions with respect to per capita GRDP. On the other hand, the lack of convergence indicates a need to reevaluate existing regional and national economic policies on development. Dynamic convergence reveals several convergence characteristics of individual regions over time. Dynamic convergence is determined by the time-varying parameter (TVP) model derived using the Kalman Filter. The paper proceeds to examine the individual convergence behavior of each region based on the value of the estimate of the parameter of the TVP. The results show that out of the 14 regions studied, seven regions are found to converge towards the average of the national per capita GDP growth rate over 1988 to 2007 while six regions lag behind the average of the national per capita GDP growth rate over the same period. No region converges towards the economic growth rate of National Capital Region, the lead region used in the study.