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

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This paper investigates the presence of stochastic and dynamic convergence in the 14 regional economies in the Philippines in terms of per capita gross regional domestic product (GRDP) using panel data from 1988 to 2007. Stochastic convergence, which indicates convergence of the regional per capita incomes in the long run, is tested using the Levin, Lin, and Chu (LLC) and Im, Pesaran, and 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 or convergence in the growth rates of per capita income is determined by the time-varying parameter (TVP) model estimated using the Kalman filter.

The paper proceeds to examine the dynamic convergence behavior of each region based on the value of the estimates of the parameters of the TVP. The results show that out of the 14 regions studied, seven regions are found to converge dynamically toward the average per capita national GDP growth rate while six regions lag behind. None of the growth rates in the per capita GRDP of the 13 regional economies converges toward the per capita growth rate of the National Capital Region, the lead region used in the study.