Growth Convergence and Convergence Clubs in SAARC

We test for output convergence during 1960 - 2014 amongst the leading member countries of the South Asian Association for Regional Cooperation (SAARC): Bangladesh, India, Nepal, Pakistan and Sri Lanka. The context is SAARC‘s commitment to eventual monetary union. We test for stationarity of relative per capita output by applying established unit root tests. The results do not support the convergence hypothesis, even when structural breaks are permitted. We then use two more recently developed approaches, both of which introduce some flexibility in the depiction of convergence. The method developed by Enders and Lee (2011) allows for a smoothly evolving trend rather than a (possibly breaking) linear trend. The technique introduced by Phillips and Sul (2007, 2009) allows for the possibility of convergent sub-groups. Even with these more flexible test procedures, there is minimal evidence of growth convergence within the full SAARC membership. We find some empirical grounds for arguing that the countries considered can be allocated to two non-overlapping convergence clubs, with India and Sri Lanka enjoying a more favourable growth path than do the other member countries. This finding raises questions regarding the current feasibility of monetary union for SAARC.