Article

Analysis of Growth South Asian Journal of

Macroeconomics
Accounting and and Public Finance
9(2) 237–262, 2020
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Panel Cointegration DOI: 10.1177/2277978720968416

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Approach

Mushtaq Ahmad Malik 1

and Tariq Masood1

Abstract
The objective of this study is to investigate the sources of output
growth and their convergence in the Middle East and North African
countries over the period 1970–2017. Towards this end, the study
employs Levin et al. (2002, Journal of Econometrics, vol. 108, pp. 1–24),
Fisher-type (Choi, 2001, Journal of International Money and Finance,
vol. 20, pp. 249–272) and Im et al. (2003, Journal of Econometrics, vol.
115, pp. 53–74) panel unit root tests and Pedroni (2004, Econometric
Theory, vol. 20, pp. 597–625), Kao (1999, Journal of Econometrics, vol. 90,
pp. 1–44) and Johansen–Fisher cointegration tests. After estimating the
production function using random effects estimator to obtain the share
of physical capital in output, we employed standard growth account-
ing approach to measure and decompose growth of total output
into contributions from growth in physical capital, labour, human capi-
tal and total factor productivity (TFP). Further, the study discusses the

1
Economics, Department of West Asia and North African Studies, Aligarh Muslim
University, Aligarh, Uttar Pradesh, India.

Corresponding author:
Mushtaq Ahmad Malik, Economics, Department of West Asia and North African Studies,
Aligarh Muslim University, Aligarh, Uttar Pradesh 202001, India.
E-mail: malikmushtaq10@gmail.com
238 South Asian Journal of Macroeconomics and Public Finance 9(2)

existence of stochastic and deterministic convergence of real output

per worker and its sources (physical capital per worker, human capital
and TFP). The statistical results of the article can be summarized as fol-
lows: The contribution of physical capital to output growth is found to
be positive and higher than the contribution of labour, whereas the con-
tribution of TFP was negative across the region with the exception of
Egypt, Morocco, Tunisia and Turkey. However, when the contribution
of human capital is netted out, the contribution of TFP becomes nega-
tive in all the countries except for Tunisia. In addition, the study found
no clear evidence of deterministic convergence in output per worker
(but stochastic convergence), human capital and factor productivity.
However, the statistical results provide overwhelming evidence for sto-
chastic and deterministic convergence in physical capital per worker.

Keywords
Growth accounting, stochastic convergence, deterministic convergence,
panel unit root testing, panel cointegration, MENA
JEL Classification: O4, O40, O47

Introduction
A stable and sustained increase in factor productivity is essential for
achieving long-run economic growth. According to the neoclassical
growth model (Solow, 1957), differences in productivity (technology)
play an important role in long-term variations in growth across countries
and over time. However, the model remained naive to explain what
determines productivity. Later developments in economic literature have
introduced endogenous growth models (Lucas, 1988; Romer, 1986) that
postulate investments in technological factors (research and develop-
ment) determine productivity or technology. In both the neoclassical and
endogenous growth models, technological factors are the key determi-
nants of long-run economic growth. Therefore, knowledge of the contri-
bution of factor inputs and productivity to the output growth have policy
implications for achieving sustainable growth. Furthermore, other impli-
cations of the neoclassical growth model suggest that in the long-run,
poor and rich countries will converge towards steady state due to dimin-
ishing returns to capital. In contrast, the endogenous growth model sug-
gests no convergence, implying that rich countries remain rich and poor
Malik and Masood 239

ones remain poor. By relying on the predictions of the Solow model, the
purpose of this study is to analyse the following:

1. Long-run trend of economic growth in the Middle East and North

African (MENA henceforth) countries;
2. sources of economic growth in the MENA region and the relative
contribution of factor accumulation and factor productivity using
cointegration tests and a growth accounting framework; and
3. existence of convergence of real output per worker and its sources
in MENA countries using panel unit root tests.

Middle East and North African countries account for approximately 61

percent and 45 percent of global oil and natural gas reserves, respec-
tively (Arab Monetary Fund, 2018)1. As such, according to the classical
growth theory, natural resource endowments of MENA countries are
believed to allow sustained growth over a long period. Nevertheless, past
literature provided mixed results on the growth performance of MENA
countries (Abu-Qarn & Abu-Bader, 2007; Barlow, 1982; Esfahani, 2009;
Hakura, 2004; Makdisi et al., 2007; Sala-i-Martin & Artadi, 2003). The
individual countries in the region are substantially different in terms
of resource endowments, population, economic size, living standards,
public–private sector balance, and trade and financial connections with
other parts of the world. For a better analysis of growth record, we divide
the region into two sets of countries, like net oil-exporting and net oil-
importing countries2. MENA countries are vulnerable to high economic
performance volatility owing to excessive dependence on natural
resources (mainly oil sector) to fuel economic development. Excessive
dependence on natural resources is estimated to cause Dutch disease,3
weak human capital, lack of incentive towards work, volatility in reve-
nues, political authoritarianism, corruption and violence and conflict.
It constrains economic diversification as well. All these problems are

1
  These figures reflect the data on the following countries: Algeria, Bahrain, Egypt, Iran,
Iraq, Kuwait, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates (UAE),
Libya, Sudan and Yemen.
2
  Oil-exporting countries include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE, Iran,
Iraq and Algeria whereas, oil-importing countries include Turkey, Tunisia, Egypt, Jordan,
Morocco and Syria.
3
  Domestic currency appreciates in response to large export of natural resource and revenue
inflows making tradable goods less competitive in world markets. Dutch disease is named
after this phenomenon occurred in Dutch economy after discovery of huge natural gas field.
240 South Asian Journal of Macroeconomics and Public Finance 9(2)

evident in the MENA region. Moreover, political events in the form of

war, revolution and violent conflicts are also detrimental to regional
development. Sustaining long-run economic growth is one of the key
challenges facing most MENA countries.
The past literature on economic growth resorted to the ‘resource curse’
hypothesis to explain the sluggish growth of the MENA countries. While
analysing economic growth in the Middle East, Barlow (1982) pointed
out that the oil industry has made a significant contribution, either directly
or indirectly, to both groups of economies. However, this windfall of oil
wealth was not translated into improving the living standards of the
masses and achieving sustained growth rates. Accordingly, the region
observed high rates of unemployment, low quality of education and
less skilled workforce (Arab Monetary Fund, 2018). It is established and
confirmed that the MENA countries are cursed by resource (oil) dependency
(Malik & Masood, in press). Through a study to analyse the long-run
growth of 16 MENA countries over the period 1980–2000, Hakura (2004)
also verified the weak growth performance of both oil-resource-rich and
poor countries. Large-scale intervention of the government sector in
economic activities of Gulf Corporation Council (GCC) countries, poor
institutional quality and political instability have constrained the growth
record of the MENA region as a whole. When analysing the determinants
of economic growth, Makdis et al. (2007) concluded that conventional
input factors of physical capital and international trade played a minimal
role in the output growth of MENA countries. The study further noted that
external shocks in terms of volatile oil prices, low levels of human capital
and the negative role of total factor productivity (TFP) have had a
substantial negative impact on the growth of the region.
The present research departs from the past studies on the MENA
region in several ways. First, we have adopted a robust methodology
(including a battery of panel unit root and cointegration tests) to estimate
the share of capital in total output, in contrast to the previous studies
which used a prior share of capital. Second, we used improved notions
of convergence that utilize the time series property of the variables under
investigation, like stochastic and deterministic convergence tests,
whereas the majority of the previous studies have employed conven-
tional tests of beta-convergence (β-convergence) and sigma-convergence
(σ-convergence) (Andreano et al., 2013; Guetat & Serranito, 2007;
Péridy & Bangoulla, 2012). Furthermore, we investigated the conver-
gence in the sources of output per worker, such as physical capital per
worker, human capital and TFP. The remainder of the study is organized
Malik and Masood 241

as follows. The next section provides a brief review of past studies on the
growth performance of MENA countries. The third section discusses the
methodology. We discuss the variables and data sources in the fourth
section. The empirical results and their discussion are presented in the
fifth section. The conclusion and policy implications are presented in the
sixth section.

Middle East and North Africa: Economic Growth

Performance Review
Here we restrict our focus to track the economic growth of the individual
MENA countries over a long time along with two subgroups of oil-
exporting and oil-importing countries. Over the last three to four dec-
ades, economic growth in the MENA countries has remained quite
disappointing despite having two-thirds of the world’s proven oil
reserves. Table 1 displays average growth rates for all MENA countries
from 1970 to 2017. There is a great diversity in growth rates across the
region. GDP increased rapidly over the sample period, as shown in col-
umn 6 of Table 1. The sharp rise in oil prices during the 1970s led to
annual GDP growth of 4.97 percent in the region because of higher oil
revenues and expansionist government expenditures that were almost
entirely financed by oil revenues.
In the 1970s, GDP growth rates in the oil-exporting countries (except
Kuwait and Iran) were significantly higher than the regional and oil-
importing average growth rates. Also, non-oil exporting countries,
except Syria, performed relatively well during the 1970s mainly due to
the rapid increase in workers’ remittances, foreign aid, foreign invest-
ment and trade flow from oil-exporting countries (Al-rawashdeh et al.,
2013). Ilahi and Shendy (2008) pointed out that real GDP growth rates,
private consumption and private investment in the oil-importing MENA
countries are significantly explained by financial and remittance out-
flows from GCC countries. The growth elasticity of financial flows is
estimated at about 0.17–0.21, while the growth elasticity of remittances
is positive and statistically significant with a coefficient of 0.07–0.09.
For the region as a whole, when oil prices plummeted in the 1980s,
GDP growth rates declined sharply. However, there were significant dif-
ferences across the oil-exporting and oil-importing countries (see Table 1,
column 3). During the 1980s, MENA region’s overall growth performance
Table 1.  Average Annual GDP Growth Rates

Countries C(1) 1970–1979 C(2) 1980–1989 C(3) 1990–1999 C(4) 2000–2017 C(5) 1970–2017 C(6) Volatility4 C(7)
Oil-exporting countries
Bahrain 8.15 −1.56 7.80 10.53 5.79 2.23
Kuwait 1.50 −4.07 9.63 10.84 2.65 5.22
Oman 14.84 1.29 5.84 11.93 8.05 1.42
Qatar 5.22 −2.59 10.26 20.69 7.69 1.81
Saudi Arabia 8.02 −3.55 1.95 11.81 3.48 2.41
UAE 15.41 −2.94 4.37 7.00 4.56 2.28
Iran 2.40 2.16 9.71 5.96 5.36 2.71
Iraq 11.08 1.48 11.86 15.36 4.05 2.43
Algeria 9.27 −1.82 2.02 5.87 2.90 1.63
Oil-importing countries
Turkey 4.28 4.96 3.68 6.77 3.91 1.24
Tunisia 7.20 4.69 6.25 3.55 5.05 0.82
Egypt 4.86 5.51 10.93 9.44 8.32 0.81
Jordan 7.43 4.22 4.36 14.18 6.19 1.35
Morocco 5.71 7.52 2.26 6.27 4.52 1.11
Syria 2.70 −2.52 6.32 −6.98 3.79 3.74
MENA 4.97 0.80 5.23 8.53 4.39 1.20
Oil_exp 5.27 −1.90 5.21 9.17 4.11 1.61
Oil_imp 4.30 5.09 5.23 7.53 4.90 0.86
Source: Penn World Tables (9.1) and authors own calculations.
Note: Oil_exp and oil_imp denote oil-exporting and oil-importing countries, respectively.4

4  
See Malik et al. (2020b) for volatility and structural breaks in growth performance of MENA countries.
Table 2.  Average Annual Growth of GDP Per Capita

Country 1970–1979 1980–1989 1990–1999 2000–2017 1970–2017 Volatility

Oil-exporting countries
Bahrain 2.22 −4.62 4.68 4.24 0.02 5.32
Kuwait −7.62 −8.00 10.06 5.19 −2.13 25.86
Oman 9.40 −2.99 4.04 7.04 2.06 2.58
Qatar −1.52 −9.42 7.85 7.76 −0.63 6.86
Saudi Arabia 2.33 −8.13 −0.65 8.94 −0.13 7.69
UAE −0.54 −8.24 −0.84 −2.51 −2.39 6.10
Iran −8.03 −1.64 8.01 4.71 1.59 5.20
Iraq 7.59 −0.92 8.50 12.16 1.18 3.62
Algeria 6.21 −4.64 0.23 4.19 1.19 3.49
Oil-importing countries
Turkey 1.88 2.84 2.07 5.27 2.69 2.06
Tunisia 4.77 2.06 4.59 2.52 2.61 1.19
Egypt 2.58 2.73 8.88 7.37 3.14 1.12
Jordan 4.36 0.33 1.04 10.25 2.02 2.61
Morocco 3.36 5.23 0.79 5.07 2.45 1.68
Syria −5.60 −5.66 3.46 −6.51 0.48 8.87
MENA 2.09 −1.09 3.26 6.51 2.01 2.36
Oil_exp 1.69 −5.34 3.12 6.76 1.35 3.88
Oil_imp 1.88 2.56 3.36 5.83 2.82 1.40
Source: Penn World Tables (9.1) and authors own calculations.
244 South Asian Journal of Macroeconomics and Public Finance 9(2)

stagnated to 0.80 percent, reflecting the poor (even negative) growth per-
formance of oil-exporting countries, whereas growth in the oil-importing
countries was positive. The following decade of the 1990s witnessed a
moderate recovery in growth performance because of the rise in oil prices.
Oil has been perceived as being used to fuel development in the MENA
region. Our analysis has partially confirmed this empirical observation;
look at the last two decades (columns 4 and 5 in Table 1) of high growth
following a rise in oil prices. Furthermore, volatility in GDP growth rates
is larger in oil-exporting countries (1.61) relative to oil-importing coun-
tries (0.86). This high volatility in growth rates is attributable to several
factors that are peculiar to the region. The most prominent among others
include lack of diversification which in turn increases vulnerability to
external shocks (Malik & Masood, 2020a), perennial regional conflict,
political instability (Makdisi et al., 2007), low-quality investment projects,
low human capital, underdeveloped financial institutions and a large share
of the government in economic activities (Sala-i-Martin & Artadi, 2003).
Table 2 shows the growth rates of per capita GDP across the MENA
region. Several stylized features are emerging from Table 2. The annual
growth rates are highly volatile for the overall period. The volatility in oil-
exporting countries (3.88) is higher than the regional (2.36) and oil-
importing countries (1.40). Ramey and Ramey (1995) found a statistically
significant negative relationship between volatility and growth. Large
volatility, coupled with low growth rate, which is very evident in the case
of oil-exporting countries, serves as an indication of the ‘natural resource
curse’ phenomena. Hnatkovska and Loayza (2004) assert that this negative
link is not only statistically but also economically significant. They argued
that negative relationship becomes stronger for countries with underdevel-
oped institutions, low financial development and countries that are unable
to conduct countercyclical fiscal policies. Hnatkovska and Loayza (2004)
estimated that a 1 percent increase in volatility decreases growth by 1.3
percentage points, which represents a significant drag on growth. Table 2
shows that the region as a whole is showing a common trend of growth
performance which is very disappointing.

Methodology

Specification of the Production Function

The core arguments in the Solow (1957) model can be approximated by
a simple Cobb–Douglas production function with capital and labour as
two critical inputs, given by the following equation:
Malik and Masood 245

Y = AK a L1 - a(1)

where Y is real output, K is real physical capital and L is labour force. A

measures TFP or technical progress. TFP or technical progress indicates
an increase in output as a result of improvements in methods of produc-
tion (efficiency), while holding inputs as constant. α is the share of capi-
tal in total output. The process of estimating Equation (1) is described as
follows.
In order to estimate the output elasticity of capital and labour, two
specifications of the production function (Equation 1) are used. The first
specification estimates production function with labour and physical
capital as the only two inputs, that is, y = Akα. In this case, TFP can be
Y K
obtained as A = y/kα where y = and k = . We denote this estimate of
L L
TFP as TFP1. Moreover, in order to estimate α, the following panel
regression equation is estimated:

ln y it = n it + a ln k it + f it(2)

The second specification of the production function assumes the inclu-

sion of human capital as a labour-augmenting input. In this case, we
consider the following version of Equation (1):

Y = AK a (LH) 1 - a(3)

where H represents the measure of human capital and LH represents

human capital augmented labour force. TFP can be obtained as A = y/Kα
Y K
where y = and k = . We denote this estimate of TFP as TFP2.
HL HL
For the estimation of α, the following regression equation is estimated:

ln y it = n it + a ln k it + f it(4)

For the purpose of growth accounting exercise, we proceed as follows:

Taking the natural log of Equation (1) and differentiating it with
respect to time, we get
2 ln Y 2 ln A 2 ln K 2 ln L
= +a# + (1 - a) # (5)
2t 2t 2t 2t
Similarly, taking the natural log of Equation (3) and differentiating it
with respect to time, we get
246 South Asian Journal of Macroeconomics and Public Finance 9(2)

2 ln Y 2 ln A 2 ln K 2 ln H 2 ln L
  = +a# + (1 - a) # + (1 - a) # (6)
2t 2t 2t 2t 2t
Equation (5) decomposes growth in output into contributions from
growth in technological progress (TFP), physical capital and labour,
respectively, whereas Equation (6) decomposes growth in output into
contributions from growth in technological progress (TFP), physical
capital, human capital and labour, respectively. Information on capital
share and the growth rates of the variables under investigation can be
used to obtain the growth of TFP as a residual in Equations (5) and (6) as
follows (Solow, 1957):
2 ln A 2 ln Y 2 ln K 2 ln L
= -a# - (1 - a) # (7)
2t 2t 2t 2t

2 ln A 2 ln Y 2 ln K 2 ln L 2 ln H
= -a# - (1 - a) # - (1 - a) # (8)
2t 2t 2t 2t 2t

Estimation Methods for the Model

Equations (2) and (4) are estimated for the MENA countries over the
period 1970–2017. It is a panel data set with large T and small N. To
avoid the problem of spurious regression, we test for the presence of unit
root in output per (skilled) worker and capital per (skilled) worker using
Levin et al. (2002) (Levin–Lin–Chu [LLC]), Choi (2001) (henceforth
Fisher-type tests) and Im et al. (2003) (Im–Pesaran–Shin [IPS]) unit root
tests. If the variables are stationary, we employ fixed effects and random
effects estimators. In the case of nonstationary variables, we procced for
cointegration testing. To this end, we use three types of tests: Pedroni
(2004), Kao (1999) and Johansen–Fisher test. If these tests confirm the
presence of cointegration between the variables, we will use dynamic
ordinary least squares (DOLS) and fully modified ordinary least squares
(FMOLS) techniques to estimate long-run relationship, as they ensure
consistent estimators.

Convergence
The literature provides two indicators of cross-country convergence such
as β-convergence and σ-convergence. β-convergence postulates that
Malik and Masood 247

countries with low levels of output tend to grow faster than countries
with high output levels. Therefore, we assume a negative relationship
between the level of output and its growth rate. In essence, β-convergence
involves estimation of the regression equation such as gi = α + βlnyi0 +
δXi + εi0. The dependent variable on the left-hand side of the equation
represents the average annual growth rate of output for country i over the
sample period, and the independent variables on the right-hand side
include the initial value of the output and a vector of variables that affect
steady-state output level. εi0 denotes idiosyncratic term. β is a parameter
testing the null hypothesis of no convergence. β < 0 and δ = 0 suggest
absolute convergence, whereas β < 0 and δ ≠ 0 suggest conditional con-
vergence. However, estimation of β-convergence regression is problem-
atic because it imposes homogenous β across all countries and uses
initial values of explanatory variables which are less representative of
the entire period, and vector of Xi is assumed to explain all cross-country
income differentials.
In addition, σ-convergence evaluates the inter-temporal variation in
regional income distribution. In this context, convergence occurs if the
dispersion measured, for example, by the standard deviation or coefficient
of variation of output per capita across a group of countries or regions,
declines over time (Sala-i-Martin, 1996). However, σ-convergence is more
a statistical exercise than an econometric estimation.
To overcome the various limitations of β-convergence and
σ-convergence tests, the present study will examine the existence of sto-
chastic convergence (Carlino & Mills, 1993) and deterministic conver-
gence (Li & Papell, 1999), as used in Hernández-Salmerón and
Romero-Ávila (2015). Stochastic convergence suggests that shocks to
the log of per worker output levels of a given country relative to the
sample average (i.e., y it /yr l) are temporary, leading the series to converge
towards their respective equilibrium level of income. On the other
hand, deterministic convergence suggests that relative income series
(i.e., y it /yr l) is mean stationary, implying that yit will move parallel to yr l
over the long run. In practice, stochastic and deterministic convergence
testing methodology tests the null hypothesis of a unit root in the relative
per worker output series. The underlying idea in both notions of conver-
gence is to perform an augmented Dickey–Fuller test using the following
regression equation:
m
DX it = a i + t i t + b i X i, t - 1 + | i ik DX i, t - k + f it
k=1
248 South Asian Journal of Macroeconomics and Public Finance 9(2)

We note that the stochastic convergence represents a weak notion of con-

vergence because it allows for a linear trend in the deterministic part of
the trend function, whereas deterministic convergence represents a
strong notion of convergence which eliminates both the deterministic
and stochastic trends in the relative income series. Therefore, for conver-
gence testing, the present study employs various panel unit root tests5
such as LLC, Fisher-type and IPS. The failure to reject the null hypoth-
esis of unit root suggests that per worker output diverges, whereas the
rejection of the null hypothesis implies that per worker output converges.
Note that the absence of unit root in the relative series provides evidence
of cointegration between yit and yr l .

Data and Variables Employed

The selection of countries is based on the availability of continuous and
comparable data. For economic growth and convergence analysis, we
used data on aggregate output, population and workers. For growth
accounting exercise, data of inputs (labour, physical capital and human
capital) are also needed. This research uses annual time series data on
real GDP, labour, physical capital stock and human capital for a sample
of 15 MENA countries6 over the period 1970–2017. The relevant data
are drawn from Penn World Tables version 9.1 (Feenstra et al., 2015).

GDP/output: Output is measured by output-side real GDP7 at chained

purchasing power parity (in million 2011 US$).

Labour input: Labour input is proxied by employment series, which

gives the total number of persons engaged in economic activity.

5 
 We can also use unit root test in time series framework to draw inference on (non)
existence of convergence. However, the present study used panel unit root tests because
they serve two purposes: first, panel unit root tests perform better than time series tests;
second, panel unit root tests are a prerequisite for testing cointegration among the variables.
6
  Algeria, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates, Iran, Iraq,
Turkey, Tunisia, Egypt, Jordan, Morocco and Syria. The other remaining countries of the
region are not included in the analysis due to lack of relevant data.
7
  Output-side real GDP allows comparison of productive capacity across countries and
over time. It is estimated by using prices for final goods, exports and imports that are
constant across countries (Feenstra et al., 2015).
Malik and Masood 249

Physical capital: The stock of real physical capital is obtained for the
period 1970–2017 for each country by using the perpetual inventory
method as follows:

Kt = It + (1 – δ)Kt–1

where Kt is the capital stock at time t, Kt–1 is the capital stock at time t−1,
δ is a constant depreciation rate and It is the investment at time t.

Human capital: The human capital index is calculated on the basis of

average years of schooling for the population aged 15 and above, and an
assumed rate of return for primary, secondary and tertiary education, as
provided by Psacharopoulos’ (1994) survey of wage equations. The
annual data series on average years of schooling were interpolated from
the quinquennial data series provided by Barro and Lee (2013). Using
these inputs, the human capital index can be constructed as follows:
h it = e Q (s it) where sit represents the average number of schooling years of
workers in the labour force in country i and Q (s it) is a piecewise linear
function, with a zero intercept and a slope of 0.13 through the fourth year
of education, 0.10 for the next 4 years and 0.07 for education beyond the
eighth year.

Empirical Results and Discussion

Panel Unit Root Tests

This section discusses the results of the unit root tests. To this end, we use
LLC, Fisher-type and IPS unit root tests. The LLC unit root test assumes
the null hypothesis that each time series contains a unit root against the
alternative hypothesis that each time series is stationary. On the other hand,
Fisher–ADF, Fisher–PP and IPS unit root tests assume that the countries
have individual unit root process implying that some of the countries have
a unit root, while others do not have a unit root. Table 3 shows the results
of the unit root tests.
All the unit root test types show that output per worker is nonstation-
ary at the levels. However, after the first differencing, output per worker
becomes stationary. Therefore, we can conclude that output per worker
follows I(1) processes. Similarly, capital per worker is nonstationary at
levels but becomes stationary after the first differencing, implying that
capital per worker also follows I(1) processes.
250 South Asian Journal of Macroeconomics and Public Finance 9(2)

Table 3.  Panel Unit Root Testing Summary

LLC Fisher–ADF Fisher–PP IPS

Level Decision
lny 3.591 27.293 27.229 −1.266 lny is I(1)
(0.999) (0.607) (0.622) (0.1026)
D.lny −11.618 804.121 767.911 −3.495
(0.000***) (0.000***) (0.000***) (0.000***)
lnk 4.528 7.960 11.379 −0.641 lnk is I(1)
(1.000) (1.000) (0.999) (0.260)
D.lnk −12.980 472.063 497.040 −3.779
(0.000***) (0.000***) (0.000***) (0.000***)
lny' −2.531 61.77 63.105 −0.1402 lny' is I(1)
(0.005) (0.000***) (0.004**) (0.444)
D.lny' −20.590 646.580 740.190 −14.503
(0.000***) (0.000***) (0.000***) (0.000***)
lnk' 0.670 25.434 31.810 −0.189 lnk' is I(1)
(0.748) (0.703) (0.376) (0.424)
D.lnk' −13.591 459.339 505.541 −10.082
(0.000***) (0.000***) (0.000***) (0.000***)
Source: The authors.
Notes: Figures in parenthesis show the probability of failing to reject the null hypothesis.
***, ** and * Significant at 1%, 5% and 10%, respectively.
Y K Y K
y= , k = , yl = and k l =
L L HL HL
Fisher–ADF and Fisher–PP assume: H0: all panels contain unit roots and H1: at least one
panel is stationary. LLC assumes: H0: panels contain unit roots and H1: panels are stationary.
IPS assumes: H0: all panels contain unit roots and H1: some panels are stationary.
Automatic lag length selection based on AIC with a maximum of eight lags.

Panel Cointegration Test Results

From Table 3, we found that the variables under consideration are non-
stationary; therefore, we proceed for testing cointegration which reflects
the existence of a long-run relationship between the variables. To this
end, we employ Pedroni (2004), Kao (1999) and Johansen Fisher-type
tests. Pedroni and Kao’s tests assume the null hypothesis of no cointegra-
tion, while Johansen’s test assumes the null hypothesis that there is at
most k cointegrating vectors (k = 0, 1 as there are only two variables in
the model). Tables A1–A3 in Appendix A present the results of various
panel cointegration tests. Pedroni test reveals that we fail to reject the
null hypothesis of no cointegration. Kao test shows that the null
Malik and Masood 251

hypothesis of no cointegration can be rejected at 1 percent level of

significance. On the other hand, Johansen test also shows that there is no
cointegrating relationship. As a robust check, Table A3 shows individual
cross-section cointegration results. It also indicates that the null
hypothesis of no cointegration can be rejected only in six countries at 5
percent level. Therefore, it is more robust to conclude the existence of no
cointegration among the variables under consideration.

Output Per Worker Model (Equations [2] and [4])

Form the unit root testing, it is found that the variables follow I(1) pro-
cesses. However, the two variables are not cointegrated. Therefore, the
relationship between the variables is estimated after transforming the vari-
ables in first differences to ensure stationarity. Accordingly, first difference

Table 4.  Results of Estimation of Equations (2) and (4)

1. Dependent Var.= Growth in Output

Per Worker Fixed Effect Random Effect
Growth in capital per worker 0.597*** 0.604***
(0.063) (0.060)
Constant −0.0081** −0.0084**
(0.003) (0.003)
R-squared 0.593 0.611
Hausman (1978) Specification Test
|2(1) 1.09
Prob > |2 0.2969
Decision Random effects model is appropriate
2. Dependent Var.= Growth in Output Per Skilled Worker
Growth in capital per skilled worker 0.621*** 0.603***
(0.0625) (0.0598)
Constant −0.0138*** −0.0138***
(0.0034) (0.0034)
R-squared 0.564 0.571
Hausman (1978) Specification Test
|2(1) 0.41
Prob > |2 0.5225
Decision Random effects model is appropriate
Source: The authors.
Notes: Standard errors in parentheses.
*** p < 0.01, ** p < 0.05 and * p < 0.1.
252 South Asian Journal of Macroeconomics and Public Finance 9(2)

of output per worker and capital per worker series is used to estimate
Equations (2) and (4). The model is estimated by fixed effects and ran-
dom effects regression estimators. We used the Hausman (1978) test to
choose between fixed effects and random effects estimators. It is impor-
tant to note that for long panel dataset, fixed effects and random effects
estimators provide the same results. The results of fixed effects and ran-
dom effects estimators are shown in Table 4. On the basis of Hausman
test, the null hypothesis of random effects model cannot be rejected
(p-value = 0.296 for Equation [2] and p-value = 0.5225 for Equation [4]);
therefore, random effects model is appropriate for the present study.
From the random effects model, the share of capital in output is found to
be 60 percent in the MENA countries. The share of labour is correspond-
ingly taken as 40 percent during the 1970–2017 period.

Estimating the Contribution of Physical Capital, Labour and

Human Capital
In this section, the growth accounting exercise is conducted to determine
whether the growth in output per worker of the MENA countries is more
due to factor accumulation growth or factor productivity growth. Table 5
shows GDP growth rates and its decomposition into growth in the physi-
cal capital stock, labour force, TFP1, human capital and TFP2. The share
of capital is taken as 60 percent from random effects model (Table 4).
TFP1 shows calculations of TFP when the contribution of human capital
is not netted out. Accordingly, TFP1 confounds the effects of human
capital. However, in TFP2, we have assumed human capital as a separate
factor of production that augments the contribution of the labour force.
Table 5 shows that physical capital (investment) makes a large contri-
bution to the growth of output followed by labour and human capital.
However, the contribution of TFP1 is found to be negative for all the
countries except Egypt, Morocco, Tunisia and Turkey. The contribution
of TFP1 to growth is strong in Tunisia (1%) followed by Turkey (0.50%),
Egypt (0.40%) and Morocco (0.10%). However, TFP1 masquerades the
effect of human capital and accordingly, when the contribution of human
capital is netted out, TFP2 becomes negative in all the countries except
for Tunisia (0.30%). The negative growth in factor productivity indicates
that the MENA countries failed to improve efficiency over time, imply-
ing that the efficiency of countries has digressed between consecutive
periods.
Malik and Masood 253

Table 5.  Results of Growth Accounting

Contribution from
GDP Physical Human
Country Growth Capital Labour TFP1 Capital TFP2
Oil-exporting countries
Bahrain 4.20 3.50 2.30 −1.60 0.50 −2.10
Kuwait 1.50 3.30 1.80 −3.60 0.40 −4.00
Oman 6.00 3.50 2.90 −0.50 0.50 −1.00
Qatar 6.10 5.20 3.20 −2.20 0.60 −2.80
Saudi Arab 3.50 3.70 2.10 −2.20 0.50 −2.70
UAE 5.40 3.10 3.10 −0.80 0.60 −1.40
Iran 2.40 2.50 0.90 −1.00 0.70 −1.60
Iraq 4.60 3.70 1.30 −0.40 0.60 −1.00
Algeria 3.40 2.30 1.40 −0.30 0.60 −0.90
Oil-importing countries
Turkey 4.50 3.20 0.70 0.50 0.50 0.00
Tunisia 4.40 2.40 0.90 1.00 0.70 0.30
Egypt 5.30 3.90 1.00 0.40 0.70 −0.30
Jordan 4.40 3.60 1.70 −0.90 0.60 −1.50
Morocco 4.20 2.90 1.20 0.10 0.50 −0.40
Syria 2.70 2.70 0.70 −0.70 0.60 −1.30
Source: The authors.
Y K
Notes: TFP1 is calculated using A = y/ka where y = and k = .
L L
Y K
TFP2 is calculated using A = y/k where y = and k =
HL HL

Convergence
This section discusses the (non)existence of stochastic (weak) and deter-
ministic (strong) notions of convergence using a battery of panel unit
root tests. We present the results of the log of relative GDP per worker
and its sources such as a log of relative physical capital per worker,
human capital and TFP. In practice, we test whether the relative series
contains a unit root. Suppose it does contain a unit root, then we reject
the hypothesis of convergence. The test statistic and p-value associated
with the panel unit root tests of LLC, Fisher–ADF, Fisher–PP, and IPS
are presented in Table 6.
Stochastic Convergence
Convergence in output (GDP) per worker: As reported in Table 6, all
panel unit root tests, including those of LLC, Fisher–ADF, Fisher–PP
254 South Asian Journal of Macroeconomics and Public Finance 9(2)

and IPS reject the null hypothesis of no convergence at all levels of sig-
nificance. Therefore, the evidence of stochastic convergence in output
per worker across the MENA countries over the last four decades is
overwhelming.
Convergence in the sources of output per worker: Table 6 shows that
all unit root tests of the log of relative physical capital per worker reject
the null hypothesis of no convergence at a 10 percent significance level.
Therefore, the evidence of stochastic convergence in physical capital per
worker is supported even at 10 percent significance level. As regards
human capital, Table 6 shows that the evidence on stochastic conver-
gence in mixed. On the one hand, panel unit root tests of LLC, inverse
chi-square and modified inverse chi-square tests of Fisher–ADF and
Fisher–PP, respectively, reject the null hypothesis of no convergence at
10 percent level. On the other hand, inverse normal and inverse logit
tests of Fisher–ADF and Fisher–PP provide evidence of a lack of sto-
chastic convergence. Hence, the overall evidence of stochastic conver-
gence in human capital across the MENA countries appears mixed.
Finally, the evidence shown in Table 6 fails to reject the null hypothesis
of stochastic convergence in the log of relative TFP2 levels. Therefore,
evidence of a lack of stochastic convergence is overwhelming.
Overall, the results presented in Table 6 support the presence of sto-
chastic convergence in output per worker and physical capital per worker
across the MENA countries during the past four decades. However, the
evidence of stochastic convergence in human capital is mixed, whereas
the results lend support to a lack of stochastic convergence in TFP2
levels.
Deterministic Convergence
The debate on convergence across the MENA countries can be com-
pleted with the notion of (strong) deterministic convergence, which
allows for cointegration between individual country series and the aver-
age value across countries over the period 1970–2017. Unit root tests
provide mixed evidence regarding the stronger notion of deterministic
convergence in output per worker across the MENA countries (Table 6).
However, as regards physical capital per worker, unit root tests over-
whelmingly favour the existence of deterministic convergence. As far as
human capital and TFP2 are concerned, the evidence favours the unit
root hypothesis consistent with the absence of deterministic convergence
across the MENA countries because all of the unit root tests fail to reject
the null hypothesis.
Table 6.  Results of Stochastic and Deterministic Convergence

Stochastic Convergence Deterministic Convergence

GDP pw Capital pw Human Capital TFP2 GDP pw Capital pw Human Capital TFP2
LLC −5.626 −7.229 −3.82 −0.838 −2.398 −4.082 −2.732 −0.663
(0.001) (0.009) (0.039) (0.018) (0.058) (0.035) (0.001) (0.143)
Fisher–ADF
Inverse |2 64.678 41.760 47.138 27.872 45.927 48.797 32.841 29.815
(0.000) (0.075) (0.024) (0.577) (0.031) (0.016) (0.329) (0.475)
Inverse normal −3.882 −1.670 −0.310 2.506 −2.413 −2.366 −0.002 −0.387
(0.000) (0.047) (0.378) (0.993) (0.007) (0.009) (0.499) (0.349)
Inverse logit −3.965 −1.686 −0.326 2.137 −2.333 −2.336 0.142 −0.394
(0.000) (0.047) (0.372) (0.982) (0.011) (0.011) (0.556) (0.347)
Modified inv. |2 4.476 1.518 2.212 −0.247 2.056 2.426 0.366 −0.023
(0.000) (0.064) (0.013) (0.608) (0.019) (0.007) (0.356) (0.509)
Fisher–PP
Inverse |2 56.519 152.254 41.850 19.866 23.960 90.219 19.272 30.390
(0.002) (0.000) (0.073) (0.920) (0.773) (0.000) (0.934) (0.445)
Inverse normal −3.550 −7.114 1.333 2.533 0.341 −4.399 3.365 0.376
(0.000) (0.000) (0.908) (0.994) (0.633) (0.000) (0.999) (0.646)
Inverse logit −3.456 10.273 0.953 2.657 0.323 −5.334 (3.544 0.290
(0.000) (0.000) (0.828) (0.995) (0.626) (0.000) (0.999) (0.613)
(Table 6 continued)
(Table 6 continued)

Stochastic Convergence Deterministic Convergence

GDP pw Capital pw Human Capital TFP2 GDP pw Capital pw Human Capital TFP2
Modified inv. |2 3.423 15.783 1.529 −1.308 −0.779 7.774 −1.385 0.050
(0.000) (0.000) (0.063) (0.904) (0.782) (0.000) (0.917) (0.479)
IPS −4.117 −4.933 0.964 0.280 −0.892 −3.641 −0.464 0.869
(0.090) (0.00) (0.832) (0.997) (0.481) (0.147) (0.137) (0.646)
Source: The authors.
Notes: p-Values in parenthesis.
Fisher–ADF and Fisher–PP assume: H0: all panels contain unit roots and H1: at least one panel is stationary. LLC assumes: H0: panels contain unit roots.
H1: panels are stationary IPS assumes: H0: all panels contain unit roots. H1: some panels are stationary.
Automatic lag length section based on AIC.
Malik and Masood 257

Overall, we find that there is no clear-cut evidence of deterministic

convergence in output per worker, human capital and factor productivity.
This implies that the estimated results support a lack of deterministic
convergence across MENA countries over the past four decades.
However, the statistical results provide overwhelming evidence for
deterministic convergence in physical capital per worker.

Conclusion and Policy Implications

In this research, we attempted to investigate the sources of real output
growth and their convergence for 15 MENA countries over the period
1970–2017. In particular, we sought to determine whether real growth in
MENA countries is contributed primarily by factor accumulation or
improvements in productivity. To this end, we employed a battery of
panel unit root and cointegration tests with a view to estimating produc-
tion function with real output per worker as a function of physical capital
per worker. Growth accounting exercise was then employed to measure
and decompose growth of total output into contributions from physical
capital, labour, human capital and TFP. Further, we examined the exist-
ence of stochastic and deterministic convergence in real output and its
sources across the MENA region. The statistical results of the article can
be summarized as follows: first, the variables under investigation were
found to be nonstationary at levels, but stationary after first differencing.
The results of cointegration tests reveal that there is no cointegration
between real output per worker and physical capital per worker. Then, we
employed the random effects model (on the basis of Hausman test) to
estimate the share of physical capital as 0.60 over the sample period.
Growth of TFP was negative across the region with the exception of
Egypt, Morocco, Tunisia and Turkey. However, when the contribution of
human capital was netted out from output growth, TFP growth becomes
negative for all the countries but Tunisia. Hence, growth in real output
across the region was driven more by factor accumulation, especially
capital accumulation rather than factor productivity. In addition, the study
found no clear evidence of deterministic convergence in output per
worker (but stochastic convergence), human capital and factor productiv-
ity. However, the statistical results provide overwhelming evidence for
stochastic and deterministic convergence in physical capital per worker.
Policymakers and governments need to implement strategies to increase
the contribution of TFP in order to achieve long-run growth and narrow
the technological gap across the countries that have not yet converged.
258 South Asian Journal of Macroeconomics and Public Finance 9(2)

Acknowledgement
We thank anonymous referees of this journal for useful inputs. We would also
like to thank Managing Editor, Prof Saibal Kar for editorial assistance as well as
inputs on earlier versions of the article.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research,
authorship and/or publication of this article

Funding
The authors received no financial support for the research, authorship and/or
publication of this article.

ORCID iD
Mushtaq Ahmad Malik https://orcid.org/0000-0003-0978-174X

Appendix A

Table A1.  Pedroni Residual Cointegration Test

Variables: Log of output per worker and log of capital stock per worker
Alternative hypothesis: common AR coefs. (within-dimension)
Statistic Prob. Weighted Statistic Prob.
Panel v-statistic 0.954308 0.1700 0.313600 0.3769
Panel rho-statistic −0.730729 0.2325 0.173369 0.5688
Panel PP-statistic −1.371356 0.0851 −0.283911 0.3882
Panel ADF-statistic −1.909797 0.0281 −0.626891 0.2654
Alternative hypothesis: individual AR coefs. (between-dimension)
Statistic Prob. – –
Group rho-statistic 1.193884 0.8837 – –
Group PP-statistic 0.336111 0.6316 – –
Group ADF-statistic −0.308388 0.3789 – –
Kao residual cointegration test
ADF t-Statistic Prob. – –
−3.475776 0.0003 – –
Source: The authors.
Notes: Null hypothesis: No cointegration.
Trend assumption: No deterministic trend.
Automatic lag length selection based on AIC with a max lag of 8.
Newey–West automatic bandwidth selection and Bartlett kernel.
Malik and Masood 259

Table A2.  Johansen–Fisher Panel Cointegration Test

Unrestricted cointegration rank test (trace and maximum eigenvalue)

Hypothesized Fisher Stat.* Fisher Stat.*
No. of CE(s) (from trace test) Prob. (from max-eigen test) Prob.
None 90.84 0.375 65.77 0.517
At most 1 80.97 0.878 80.97 0.315
Source: The authors.
Notes: Trend assumption: Linear deterministic trend.
Lags interval (in first differences): 1 1.
*Probabilities are computed using asymptotic chi-square distribution.

Table A3.  Individual Cross-section Results

Trace Test Max-Eigen Test

Cross Section Statistics Prob.* Statistics Prob.*
Hypothesis of no cointegration
Bahrain 5.7041 0.7302 4.0699 0.8519
Kuwait 13.0422 0.1133 9.1318 0.2753
Oman 8.8051 0.3837 8.4115 0.3384
Qatar 20.0189 0.0097 18.9290 0.0085
Saudi Arabia 10.0584 0.2762 7.4784 0.4342
UAE 10.7789 0.2255 5.6539 0.6579
Iran 26.0158 0.0009 15.5842 0.0308
Iraq 24.6908 0.0016 16.9166 0.0186
Algeria 16.0533 0.0412 9.9679 0.2140
Turkey 16.2108 0.0390 15.1593 0.0360
Tunisia 14.2207 0.0771 13.2691 0.0714
Egypt 20.4767 0.0081 16.1227 0.0251
Jordan 22.6091 0.0036 18.0924 0.0118
Morocco 5.6536 0.7360 5.4236 0.6877
Syria 10.3660 0.2536 7.5939 0.4215
Hypothesis of at most 1 cointegration relationship
Bahrain 1.6342 0.2011 1.6342 0.2011
Kuwait 3.9104 0.0480 3.9104 0.0480
Oman 0.3936 0.5304 0.3936 0.5304
Qatar 1.0899 0.2965 1.0899 0.2965
Saudi Arabia 2.5800 0.1082 2.5800 0.1082
UAE 5.1250 0.0236 5.1250 0.0236
Iran 10.4315 0.0012 10.4315 0.0012
Iraq 7.7742 0.0053 7.7742 0.0053
Algeria 6.0854 0.0136 6.0854 0.0136
(Table A3 continued)
260 South Asian Journal of Macroeconomics and Public Finance 9(2)

(Table A3 continued)

Trace Test Max-Eigen Test

Cross Section Statistics Prob.* Statistics Prob.*
Turkey 1.0515 0.3052 1.0515 0.3052
Tunisia 0.9517 0.3293 0.9517 0.3293
Egypt 4.3540 0.0369 4.3540 0.0369
Jordan 4.5167 0.0336 4.5167 0.0336
Morocco 0.2301 0.6315 0.2301 0.6315
Syria 2.7721 0.0959 2.7721 0.0959
Source: The authors.
Note: *MacKinnon–Haug–Michelis (1999) p-values.

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