Int. j. econ. manag. soc. sci., Vol(3), No (9), September, 2014. pp.

500-507

TI Journals

International Journal of Economy, Management and Social Sciences

www.tijournals.com

ISSN:
2306-7276

Copyright 2014. All rights reserved for TI Journals.

Comparing the Economic Convergence of Iran with South East and

South West Asia Countries with an Emphasis on Synchronization of
Business Cycles
Samaneh Derakhshideh *
Ph.D. Student in Economic, Science and Research branch, Islamic Azad University, kerman, Iran.

Sayyed Abdolmajid Jalaee

Associate Professor in Economic, Shahid Bahonar University of Kerman-Iran.
*Corresponding author: samaneh_derakhshideh@yahoo.com

Keywords

Abstract

international trade
investigation
South East Asia Countries
South West Asia Countries
synchronization of business cycles

Regarding the widespread and close competition inside the new atmosphere of global trade, forming business
blocks can contribute a lot to increasing the competitive capability of countries. Accordingly, in the current
study in order to compare the economic convergence of Iran with the countries located in South East and South
West Asia, two models including generalized gravity model and spatial econometric model are utilized
separately. The obtained results indicate the economic convergence between Iran and countries in South East
and South West Asia. Regarding the countries in South East Asia there is no significant convergence. Hence,
the economic convergence of Iran with the countries of South East Asia should nob a priority. According to the
results, the business cycles synchronization variable does not have a significant impact on bilateral trade procedure.

1.

Introduction

One of the most important features of the international system in today's world of globalization is the formation of regional convergence in the
framework of international organizations and national efforts to eliminate tariff and non-tariff barriers in different parts of the world. Given the
widespread and intense competition in the new global economic environment and given that developing countries cannot compete in the
international arena without previous preparation; the formation of trade blocks can help countries to increase competitiveness, and strengthen the
comparative advantages of member countries in international trade.(jalaee&derakhshideh,2014)
Since the World War II, due to the increase in the number of countries in global arena and the formation of regional unions, the concept of
regional convergence has gained a special position among the international relations theorists. Concern for the costs and consequences of global
approach and business liberation through joining The World Trade Organization (WTO) along with the considerations after the Cold War caused
the world countries to consider the regionalism approach and form economic-trade blocks as a first step for globalization in order to maintain
their trade relations as well as their position in contemporary economic and political blocks in global arena (Fathi, 2002). In this line, in 1967 in
South East Asia, Association of South East Asian Nations (ASEAN) was formed which currently consists of ten members (Vietnam, Thailand,
Malaysia, Cambodia, Indonesia, Laos, The Philippines, Singapore, Brunei and Burma or Myanmar) and nowadays is considered one of the
successful examples of regional convergence (Kulaee and Sazman, 2011). On the other hand the sensitive and strategic region of South Western
Asia, which was once the cradle of ancient civilizations and the birth place of the major religions, still possesses utmost prominence as the center
of international politics. This region, roughly covering 12 million square kilometers, consists of 25 countries including Islamic Republic of Iran,
Saudi Arabia, Iraq, Pakistan, Turkey, Afghanistan, Kazakhstan, Yemen, Turkmenistan, Uzbekistan, Oman, Kyrgyzstan, Syria, Tajikistan,
Jordan, Azerbaijan, United Arab Emirates, Georgia, Armenia, Cyprus, Palestine, Kuwait, Qatar, Lebanon and Bahrain with the population of
roughly 530 million people includes five important geopolitical regions of the world (Central Asia, the Caucasus, the Indian subcontinent, the
Persian Gulf and Middle East) and is located among continents of Africa, Europe and the territory of Russia, China and India. In this region,
there are always oil and gas sources of Persian Gulf and Caspian Sea as well as uranium, coal, gold, silver, zinc, manganese and business
markets under consideration and discussion (Rahbar and Akhund Mehrizi, 2008). Due to special geopolitical position, this region has a grave
role in cultural, business and trade relations. Based on the perspective document for Islamic Republic of Iran in 2025, Iran should be a developed
country with a first economic, scientific and technological position in the region. Another goal of this document is to reach effective and positive
international relationships.
Similarity and correlation of business cycles of countries that tend to be located within a block or economic cooperation can play an important
role in economic integration between countries; in case of periodic correlation between member states of a block, the possible costs of using
counter-cyclical economic policies will become minimum. Synchronization of business cycles means that the ups and downs of cycle are the
same over time. Also, the meaning of synchronization of business cycles is the correlation between changes in GDP between the two countries in
a period of time. (jalaee&derakhshideh,2014)
Regarding the effective role of Iran in Asian economy; investigating the convergence of Iran in this region is of utmost importance. Accordingly,
in the current study the two models including generalized gravity model and spatial econometric model are separately used in order to compare
the economic convergence of Iran with the South Eastern and South Western countries of Asia. This study tries to answer questions such as: Is
there any economic convergence between Iran and South Eastern and South Western countries of Asia? Is economic convergence confirmed by
the spatial approach? Accordingly in order to answer these questions, the study framework has been set up in a way that after the introduction, in
the second section a review of the previous literature is presented. In the third section model specifications, in the fourth section the model
estimations and in the last section, the conclusions are presented.

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Comparing the Economic Convergence of Iran with South East and South West Asia Countries with an Emphasis on Synchronization of Business Cycles
International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.

2.

Literature Review

In recent years models used in international studies have had a considerable progress and with a reciprocal trade approach between countries and
regional blocks, the factors affecting international trade have been estimated. Deadorff (1998), completed the theoretical basis of the gravity
model by showing that the equation of gravity is perfectly consistent with the trade model of Pomfret (2005) studied the trade policy in Central
Asia and showed that unilateralism through WTO in homogeneous goods with complete competition.
Husseini Nasab et al (2010) in order to discuss the formation and deviation of business inside the frameworks of three trade treaties including
ECO Trade Agreement, ACEAN and GCC, used a generalized gravity model. The results of their study showed that the variables of gross domestic
product (GDP) population, tax, exchange rate and the distance between countries, the area of the countries and their common language had a
significant impact on the trade volume among the countries. In the studied time period all three selected organizations of Asia had business
deviations. In other words, increasing the trade volume among the member states of these agreements led to a decrease in trade volume with
non-member states. Seif Zadeh (2009) in a study titled regional convergence in Iranian foreign policy, by investigating the South Western
Asia, showed that this region faced some challenges regarding regional convergence. In this regard, the historical complications in the
relationships between the countries of this region and the presence of some tensions are among the main reasons that slow down the process of
convergence in the region. Shakibaee and Bata (2009) in order to determine the potential success or failure of a regional block for Iran in the
South Western region of Asia, using a gravity model investigated the economic convergence of Iran in this region and during the time period
between 1995 and 2006. The results showed that model estimation without counting Iran showed more convergence and a regional block would
increase trade among the member states up to 71 percent. Shakibaee and Shah Sanaee (2012) investigated economic convergence and business
cycles synchronization in Shanghai Group using a generalized gravity model. The results showed that there was no economic convergence
between Iran and the member states of Shanghai Group. Moreover, there was a negative relationship between business cycles synchronization
and the convergence of these countries. Using gravity model, Shing Hung Deng., (2003) carried out a study to find the trade blocks in Eastern
Asia along with China, Taiwan, Hong Kong, Japan and South Korea. In this study, special attention is on the role of free Mainland China in
terms of trade patterns in East Asia. The study showed that per capita GDP and GNP and common border increases the size of the bilateral trade
and transportation distances have a negative effect on trade size. Dr Mohammad Reza Lotfali poor et al (2011) examined the economic
convergence between Iran and Latin American countries in terms of trade block formation. In fact, the main objective of this paper is
investigation of success or failure of block formation and its impact on the increase of bilateral trade between Iran and these countries. The
results showed that the existence of economic cooperation between Iran and Latin America will lead to a significant increase in bilateral trade
flows. In other words, trade block can increase the amount of trade among the member countries up to 89 percent. Also Jalaei and Soleimani
(2006) in an article entitled Irans trade integration with ECO countries, using the gravity model of bilateral trades between Iran and the
countries of the ECO evaluated this integration and then compared this integration with the integration between Iran and member states of the
Euro. Results indicate that the business model of Iran generally follows the Haksher-Uhlin type. So Iranian trade flows are mostly dependent on
factors like comparative advantage and different stages of development with regard to economic scale with different productions. Results have
shown that the convergence of Iran with the ECO member countries is more than the convergence of this country with the euro member
countries, the reason being closeness of Iranian economy with the economies of ECO member countries and also the closer cultural and religious
commonalities between these countries. Nikbakht (2011) in an article entitled Analysis of economic integration (bilateral foreign direct
investment) in D8 group of countries using the generalized gravity modelinvestigated the convergence of Islamic countries of D8 group and
showed that GDP of capital (as mass of goods) guest and host countries and their geographical distance (as distance) are consistent with the
theory of gravity. Andeconomic structure difference indicator and economic openness indicator play a positive role in bilateral trade flows. And
the group moves towards convergence and can increase economic cooperation between members to move towards globalization. Sologa and
Winters (1998) used the following gravity model to study the new preferential agreements that began in the early 90s. Based on the findings,
forming a block has not led to increased foreign trade volume. In European Union and Free Trade Area of EFTA, trade diversion was detected
and after controlling for gravity variables, the imports of European Union and EFTA have dropped significantly. In Latin American, the
tendency to increase the exports has generally been accompanied by the increasing trend toward imports which shows the strong effects of their
general trade liberalization. Mohammad Mafizur Rahman (2009) using the generalized gravity model and using panel data investigated the
factors affecting on the imports of Bangladesh from its major commercial partners and the results of the study indicate that the determinants of
imports of this country are the inflation rate of countries, the differences in per capita income, and the degree of their openness. The shared
borders between the countries had also a considerable impact on a country's imports from its trading partners. First time in 1988, Professor
Anselin presented a perfect framework of spatial econometric facts in the book called "Spatial Econometrics, Methods and Models". In the past
few years enjoying this way has been taken into consideration by the scholars of the regional science. In the study of Beugelsdijk and Van
Schaik (2005), they examined the relationship between social capital and economic growth in 54 regions of Europe using a spatial model survey
and concluded that social capital has a significant positive effect on economic growth; So that a standard deviation of group activities increases
the economic growth to 0.03%. Barro and Sala (1991) studied the economic convergence of the states of America and achieved the convergence
rate of the U.S. as 1.9% . Akbari and Farahmand (2005) in a study examined the economic integration among Muslim countries with an
emphasis on the role of the Persian Gulf states. For this purpose spatial econometric methods were used. The results showed that the structural
transformation of the global economy in recent years made the economies more dependent and made influence on each other. And economic
cooperation can increase trade, Economies of scale, technology transfer and improvement of economic prosperity and growth. Akbari and
Moallemi (2005) investigated the effects of economic integration in the countries of the Persian Gulf on the international trade flows. These
countries have a common border and therefore spatial dependence between them have an impact on trade flows. Also, the coefficient of dummy
variable of integration indicates the fact that the volume of trade between countries in the Persian Gulf is less than the gravity model variables
and to increase it, the countries must remove the trade barriers of cooperation contracts and use the potential and the benefits to each other.
Sameti and Behnud (2012) in a study entitled the effects of economic instability on human development in selected Asian countries examined
the effects of inflation, unemployment, stagnation in production, budget deficits and exchange rate fluctuations on human development through
geographically weighted regression approach on spatial econometrics as a branch of study in selected countries in Asia. The results show that
due to the spatial data, spatial econometric is superior to general econometric and geographically weighted regression as a sub-branch of spatial
econometric method to GLOBAL. The spatial anisotropy of exchange rate parameters and budget deficits are confirmed but spatial dependence
of human development has not been approved.

Samaneh Derakhshideh *, Sayyed Abdolmajid Jalaee

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International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.

3.

The clarification of model

Accordingly, in the current study in order to compare the economic convergence of Iran with the countries located in South East and South West
Asia, two models including generalized gravity model and spatial econometric model are utilized separately.
3.1 gravity model
The simple form of the gravity model is defined as follows which has been adopted from the Newtonian gravity model. This model describes the
distant gravitation between two or more substances. And asserts that the gravitational force between two materials is proportional to their
weights and inversely proportional to the square of the distance between these two materials. To estimate international commercial flows in the
simplest case where there is no obstacle and encouraging, using these models, bilateral trade flows can be considered as a direct function of
economic size of the two countries and an inverse function of the geographic distance between the two countries:
Tij

GDPi

.GDPj
Dij

(1)

Although the gravity equation initially did not have theoretical basis, but relatively large R2s have led many researchers to use the gravity
equation as a measure for bilateral trade volume. For the first time, the gravity model was proposed to measure certain bilateral trade examples
and to justify commercial blocks and then it was also used to examine the effects of regional integrations on foreign reciprocal investment. In its
simplest form, the gravity model was originally developed by Tinbergen (1962) in economics which is directly derived from Newton's theory of gravity.
(2)
Tij c1 c2Yi c3Yj c4POPi c5POPj c6Dcu c7Dlan c8Dd .....Uij
In this equation, Tij is exports (imports) of country i to (from) j, Yi is income of country i, Yj is income of country j, POPi is population of
country i and POPj is population of country j which appear as explanatory variables on the right side. Y i and Y j are considered as mass variables
in Newtons relation and demographic variables are two other scale variables. Following these variables, a set of dummy variables will be added
to explain other effects on reciprocal trade flows between the two countries. Dcu is the dummy variable added to explain the other effects of the
two countries' mutual trade blocks. D lan is the dummy variable for the common language between the two countries and D d is the dummy
variable related to the distance or proximity of the two countries. The model used in this paper is generalized gravity model and is specified as
follows:
(3)
ln XMijt ij 1 ln GNPit 2 GNPjt 3 ln laborforce 4 DISij 5 LINijt 6 SYNCHij Uijt
XMij: exports plus imports of the country at time t and shows the bilateral trade flows between exporter countries (i) and the importing countries
(j). ij: an abscissa that represents the specific effects of each of the partner countries and may vary depending on the trade orientation. GNPit
andGNPjt : real GDPs of country i and country j at time t which express the country's economic size. labor force: Represents the labor force
participation rate in the country and is considered as one of the factors of production preceding a significant role to play in economic
development. Dij: Geographical distance between economic centers (capitals of the two exporter and importer countries) of the two countries of
i and j. Since the greater distance will impose higher transportation costs, it is expected to have negative effects on trade flows.
LINijt: is Linder variable.In order to express the economic similarities between each pair of trading partner countries, Linder variable as a
function of per capita GDP for each pair of countries, is entered into the model:
2
GDPit
GDPjt
(4)

linderijt LN

GDPjt
POPiit

According to Linder trade theory, it is expected that the coefficient of this variable is negative. According to this theory, similar countries have
more tendency to trade with each other than with other dissimilar countries (Arnon et al, 1996).
CY NCH ij : Indicator of trade cycle synchronization between countries i and j. Kalemli-Ozcan, Sebnem. Elias, Papaioannou. luis, Peydro
(2009) have calculated it as follows:
SYNCHij ln Y i ,t ln Y i , t 1 ln Y j , t ln Y j ,t 1

(5)

in which Yit is the real GDP of country i at time t and Yjt is the real GDP of country j at time t. The more the value of this index in terms of the
algebra and the closer to zero is, the greater would be the synchronization of trade cycles between the two countries.
According to Mandel and McKinnon, the synchronization of trade-cycles is a precondition for integration and cooperation of countries into a
regional trade agreement; because the possible cost of anti-cycle economic policies are reduced with simultaneous trade cycles.
3.2 Spatial econometric model
Conventional econometric technique that is based on assumptions of Gauss-Markov is flawed for regional studies. Research done in the area of
the regional science, are dependent on sample data of the area that were collected due to the measurement location as a spot in space. In this
case, the researcher faced with two phenomena in regional study data as: 1) the spatial dependence between observations, and 2) spatial
heterogeneity.
3.2.1 Spatial Dependence
In a set of sample data to mean that the observations in place I depend on other observation in place j. in other words:

Yi f (Yj ) i=1,2,3,4,5,. ,n i j
It is expected that the sample data observed at a point in space is related to the observed values in other locations.

(6)

3.2.2 Spatial heterogeneity

Refers to the deviation between the observations are related to the level of geographic locations. (Lessage 1999) linear relationship is depicted as follows:

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Comparing the Economic Convergence of Iran with South East and South West Asia Countries with an Emphasis on Synchronization of Business Cycles
International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.

Yi f ( X i i i )

(7)

where i represents observations obtained in i=1,2,3,4,5,. ,n points in space, xi represents Vector (k n) from explanatory variables with

parameters

related to it, Yi is the dependent variable I the observation or place I, and

Represents the random error. In general, the

spatial anisotropy violates the linear relationship with constant variance exists between sample observations. If the equation changes with the
move between the spatial sample data spatial econometric estimation models will model these changes.
3.2.3 Spatial lag
One of the basic concepts associated with space is spatial lag. Spatial lags are similar to the backward transfer in time series analysis and unlike
the time series that lag occurs within the time, in spatial econometric interruption means the transmission over the space. So that yt y t 1
epresents the first lag and

p
yt

y t p represents the pth lag. The concept of spatial lag is used for the relations "neighbors than neighbors".

3.2.4 Diagnostic tests of spatial autocorrelation

Moran test: Is used to diagnose the spatial autocorrelation regression disturbing components. This test demonstrates the spatial correlation is
disturbing in parts. Statistic Moran is achieved as follows.

e We
e e

(8)

Where e represents the regression disturbing components

Likelihood ratio and Wald test: These tests are used to test for spatial correlation in the disturbance components according to the difference
between the likelihood logarithm of spatial error model and the likelihood logarithm of least squares regression.
Lagrange multiplier test: is conducted based on the residual least squares and calculation of the spatial weight matrix W. In this study to detect
spatial autocorrelation in the disturbance components, Moran tests, likelihood ratio and Wald and Lagrange multiplier tests are used to identify
the appropriate model to address spatial autocorrelation.
3.2.5 First order spatial regression model (FAR)
The main application of this model is to detect the spatial correlation between neighbors. This model indicates the y changes as a linear
combination of latitude and longitude.
n

yi j 1 W ij y j i Wy i

(9)

i N (0, 2 )
W contains information about latitude and longitude of the country. We introduced Wy as a spatial lag variable.
3.2.6 Mixed regression - autoregressive model (SAR)
In this model y is a linear combination of neighboring countries such as auto regression time series and since covariance in this model is not a
diagonal matrix, estimation is done as inconsistent OLS and Maximum likelihood method is used in this model to estimate the parameters. The
model is as follows.
yi

n
j 1

W ij y

K
K 1

k X

ki

(10)

i Wy X i

i N (0, 2 I n )
3.2.7 Model Explicitaion
For estimating, the model can be explicated as follows:
XMijt

0 ( GNP

ln XMijt

) 1 ( laborforce

ij 1 ln GNP

) 2 ( SYN

) 3 ( 4 LIN

ln laborforce

ijt

(11)

3 SYN 4 LIN

ijt

Uijt

(12)

The statistical population of the current study includes the countries of South East and South West regions of Asia. The South Western Asia
region includes: Islamic Republic of Iran, Saudi Arabia, Iraq, Pakistan, Turkey, Afghanistan, Kazakhstan, Yemen, Turkmenistan, Uzbekistan,
Oman, Kyrgyzstan, Syria, Tajikistan, Jordan, Azerbaijan, United Arab Emirates, Georgia, Armenia, Cyprus, Palestine, Kuwait, Qatar, Lebanon
and Bahrain and South Eastern Asia includes Vietnam, Thailand, Malaysia, Cambodia, Indonesia, Laos, The Philippines, Singapore, Brunei and
Burma or Myanmar. The three countries including Afghanistan, Palestine and Burma or Myanmar were not included in the study due to the lack
of valid statistics. The data are extracted from compact discs of WDI, IMF, PC-TAS and UNCTAD.

Samaneh Derakhshideh *, Sayyed Abdolmajid Jalaee

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International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.

4.

Estimating the model

In this study, the issues raised in the first section of the gravity equation will be used to estimate and then the economic integration is being
estimated using the spatial econometric model.
4.1 Estimating the gravity model
Using the explicated equation (Equation 2) gravity model is examined by Hausman test and estimating the values of the coefficients and then
estimating the model.
4.1.1 Hausman test
In panel data method, both random and fixed effects estimations are discussed. Due to the fact that sometimes a huge difference exists between
the estimates obtained from these two methods; Hausman test is used to choose between the two methods. Based on the results presented in
Table 1, it can be mentioned that there is no potential reason for rejecting the null hypothesis H0 which indicates the random effects against the
fixed effects in estimating the model related to South Eastern Asia and the random effects method which possesses a higher explanatory power is
preferred. Regarding the estimation of the model related to the countries of South Western Asia, the fixed effects method has a higher
explanatory power.
Table 1. Results of pattern selection (bounded F-test and Hausman test)
p-value

South East Asia

South West Asia

0.000
0.000
0.000
0.99

The value of Test statistic

1561.026
39.833
733.455
0.255

Test statistic

Test type

F
H
F
H

F-bound
Housman
F-bound
Housman

4.1.2 Estimating the Model

According to Table 2, the overall estimation results with R2 more than 94 percent for South East Asia & 84 percent for South West Asia ,
indicates that the Gravity model could explain the bilateral trade flows of Iran and groups . the coefficients are statistically examined at the 95%
confidence level.
Table 2. Results of the estimation
South East Asia
variable

Coefficients

t-statistics

Possibility
0.0000

LNGDPI
LN GDPj
LNLABOR
DIS
LIN
SYN

-0.13113
1.21166
-0.16646
1.01E-05
0.058110
2.61E-13

-6.132730
44.58257
-7.02744
0.433826
7.365819
0.861093

0.0000
0.0000
0.6650
0.0000
0.3904

South West Asia

c
LNGDPI
LNGDPj
LNLABOR
DIS
LIN
SYN

-0.885922
0.176484
0.837670
-0.021076
2.66E-05
0.018457
-0.316155

-0.633535
2.957255
31.21607
-0.605767
0.465277
1.913749
-0.930472

5268
0.0033
0.0000
0.5451
0.6420
0.0565
0.3528

Source: Calculations of the researcher

Based on the results of convergence estimation between Iran and the countries located in South Eastern Asia, the GDP coefficient as an
indication of the economic size of the country is negative which is not in line with the research hypothesis. The GDPs of the countries with
commercial ties with Iran have had a determining role in measuring the Iranian trade volume and has a positive coefficient which is in line with
the research hypothesis. The estimated coefficient means that by holding other variables constant, a one percent increase in the GDPs of member
states explains 1.21 percent of mutual trade procedures of Iran. The variable of distance statistically possesses a positive sign and is insignificant.
The Leander variable shows the effects of economic similarity of member states on trade flow. Based on the coefficient of this variable, the
economic similarity of member states has a positive effect on the foreign trade of the countries. The variable of business cycles synchronization
has a positive coefficient and is insignificant; hence the impact of business cycles synchronization on mutual trade volume of studied countries
does not seem that significant. Based on the results obtained from convergence estimation between Iran and countries of South Western Asia,
The GDPs of the countries with commercial ties with Iran have had a determining role in measuring the Iranian trade volume and has a positive
coefficient which is in line with the research hypothesis. The coefficient of gross domestic product for Iran also has the expected sign. The

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Comparing the Economic Convergence of Iran with South East and South West Asia Countries with an Emphasis on Synchronization of Business Cycles
International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.

variable of distance has a positive sign and is statistically insignificant. Regarding the appropriate position for transporting goods and the
advancement of technology and making products with less raw material and less volume, gradually the share of transportation costs is decreased
and the geographical distance will lose its significance. It can be said that the globalization trend has demoted the distance problem and the
distance complication cannot be a barrier against global trade. According to the coefficient of Leander variable, the economic similarity of
member states has a positive effect on foreign trade among the countries. The variable of business cycles synchronization has a negative sign;
hence, the synchronization of business cycles has a negative but insignificant impact. Therefore, the synchronization of business cycles does not
have an impact on the volume of mutual trade among the studied countries.
4.2 Estimation of spatial econometric model
According to the specified model, the following steps are taken to estimate the model:
4.2.1 Moran, likelihood ratio and Wald tests
The null hypothesis in all three tests is the absence of spatial autocorrelation in disturbing components and since the Moran statistic value is
greater than 1.96 and the likelihood ratio and Wald statistic values are greater than 6.635, the null hypothesis is rejected. By rejecting the null
hypothesis as the lack of spatial autocorrelation, spatial econometrics can be used.

Table 3. Results of Moran, likelihood ratio and Wald tests

Statistic Coefficients s
South East Asia

Moran I-statistic
Probability
Lratios
Probability
Walds
Probability

-4.4862
7.2507e-06
45.9242
1.2292e-11
547.3084
0

Moran I-statistic
Probability
Lratios
Probability
Walds
Probability

5.454
4.9030e-08
38.9535
4.3401e-10
265.6315
0

South West Asia

Source: Calculations of the researcher

4.2.2 Lagrange multiplier tests
The null hypothesis of lmerror and lmlag tests is the lack of spatial correlation in disturbing components and the lack of spatial dependence in
the dependent variable observations. Test results in Table 2 show that the SAR model should be used to remove the disturbing elements of
spatial autocorrelation.

Table 4. Lagrange multiplier test

Statistic Coefficients s
South East Asia

Lmerror
Probability
Lmlag
Probability

13.1355
2.8975e-4
24.8430
6.2193e-7

Lmerror
Probability
Lmlag
Probability

36.3871
1.6177e-9
68.5193
1.1102e-16

South West Asia

Source: Calculations of the researcher

Samaneh Derakhshideh *, Sayyed Abdolmajid Jalaee

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International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.

4.2.3 Estimation of FAR model

The results from estimating the following equation in Table (5) show that the spatial coefficient for the countries of South Eastern Asia is
0.9779 and for the countries located at South Western Asia it is equal to 0.993996.which is statistically significant and indicates the positive
spatial correlation among the countries.

ln( ex im ) t ( w * ln( ex im ) t ) i (13)

i N (0, 2 I n )
Table 5. The results of estimating FAR model
Statistic Coefficients s
South East Asia

Asymptot t-stat
z-probability

0.973942
138/006430
0.000

Asymptot t-stat
z-probability

0.993996
654.073070
0.0000

South West Asia

Source: Calculations of the researcher

4.2.4 Estimation of SAR model
Table 6 represents the results of estimating the following equation.
ln XMt 0 1 ln( GNP ) t 2 ln( laborforce ) 3 ( lin ) t 4 ( syn ) Ut (14)
u t ( wu t ) t

i N (0, 2 I n )
Table 6. The results of estimating of SAR model
South East Asia
variable
constant
Ln(GDP)
Ln(labor force)
lin
SYN
W*dep.var

Coefficients
5.011
1.275
-0.295
0.795
-0.011
-0.268

t-statistics
4.159
47.876
-10.582
2.215
-1.530
-5.760

Possibility
0.000
0.000
0.000
0.026
0.125
0.000
R2=0.94 N=170

South West Asia

constant

2.149

1.581

0.113

Ln(GDP)

0.388

15.269

0.000

Ln(labor force)

0.234

5.482

0.000

lin

0.038

3.165

0.001

SYN
W*dep.var

0.170
0.343

0.3299
6.638

0.741
0.000
R2=0.57 N=340

Source: Calculations of the researcher

The results in Table (6) show the significant and positive coefficient for W*dep.var which indicates the influence of the neighboring countries of
the business status of each country. Statistically speaking the coefficients are analyzed in the significance level of 90%. For the countries of
South Eastern Asia, GDP had a significant role in determining the trade volume of Iran. The variable of business cycles synchronization has a
negative sign; hence, the impact of business cycles synchronization on mutual trade volume of selected countries is reciprocal. Therefore, the
synchronization of business cycles has a negative impact on economic convergence and the higher the synchronization of business cycles in
member states is, the lower the possibility of economic convergence would be. The variable of labor force is significant with a negative sign and
indicates the negative impact of increasing labor force participation rates on the mutual trade between countries. The countries with higher
participation rates can better utilize the economic index originated from their own internal markets and tend towards domestic production.
Regarding the results obtained from model estimation for the countries of South Western Asia, GDP has a positive coefficient and the variable of

507

Comparing the Economic Convergence of Iran with South East and South West Asia Countries with an Emphasis on Synchronization of Business Cycles
International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.

labor force is significant with a positive sign, which indicates the impact of increasing labor force participation rates on the mutual trade among
the countries. The synchronization of business cycles is not significant and has a positive sign.

5.

Conclusions

According to the fact that developing countries without enough preparation do not have the capacity for competing in global arena; the formation
of trade blocks can have a significant positive effect on increasing their competitive edge. Accordingly, in the current study, in order to compare
the economic convergence of countries located in South Eastern and South Western Asia, the two models of generalized gravity and spatial
econometric were utilized separately and the mutual trade flows of Iran with these two groups were evaluated. Regarding the positive and
significant coefficient of the GDPs of countries, the obtained result indicates that the economic convergence of Iran and countries of South
Western Asia is economically justified. These countries possess spatial correlation and the business status of each country is influenced by its
neighboring countries. Regarding the economic convergence of Iran with the countries of South Eastern Asia it can be said that according to the
results obtained from estimations there is no significant economic convergence. Generally the results show that the trade between Iran and
countries in South Western Asia, unlike the countries of South East Asia, can be an appropriate approach for unity and integration. These results
can help the economic outlook of Iran in Asia.

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