Does Trade, Structural Transformation and Income Convergence: Empirical Evidence from the EU and the ASEAN

The objective of the paper is to provide a comparative overview of per capita income convergence in the EU and the ASEAN nations over the period 2000-2014 and empirically assess the role of trade on income convergence. Previous studies on the issue of per capita income convergence was based on the concepts of beta and sigma convergence. In this paper, the convergence analysis in the EU and the ASEAN is done using measure of income inequality developed by Theil. Theil index of inequality is a multisectoral analytical approach that allows us to examine the process of structural changes that unfold in the EU and ASEAN by the forces of trade, factor movement and other policy changes. In order to examine the structural shift, we have decomposed income into its major components- agriculture, industry and services and panel data analysis is employed using individual theil ratios. The major finding of this paper is that trade is an important catalysis for per capita income convergence in the EU and the ASEAN countries, with international trade having greater impact than inter-regional trade. The difference in impact of extra-regional trade and intra-regional trade is higher in the case of EU than in the case of ASEAN. Further, trade has caused rise in per capita income in a greater extent in the lower income countries of the two groups in comparison with relatively higher income countries, leading to narrowing the gap in per capita income across countries. In addition to trade, factor mobility (capital and labour mobility) were also found to be determinants of per capita income convergence in the EU and the ASEAN. In order to capture policy variable, extended regression model is considered with government expenditure as one of the explanatory variable, in addition to trade and factor mobility. Government expenditure was found to have positive and significant impact on the per capita income convergence across the countries of the EU and ASEAN. However, the impact of government expenditure veils the impact of capital and labour mobility in the case of the EU and labour mobility in the case of the ASEAN.