Article

Regional Integration and Economic Global Business Review

19(6) 1–13
Growth in Southeast Asia © 2018 IMI
SAGE Publications
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DOI: 10.1177/0972150918794568
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Angkeara Bong1
Gamini Premaratne1

Abstract
Southeast Asia has experienced an economic growth since the 1980s. This growth triggered by reforms
to increasing global and regional integration has been remarkable. This article aims to examine whether
regional integration promotes economic growth in Southeast Asia. It further investigates whether the
economic and social factors affect economic growth. The panel data were collected over 43 years
(1970–2013) in Southeast Asia. We employ a cross-country growth model using a generalized method
of moments in the dynamic panel framework to empirically examine the impact of regional integration
on economic growth. Our results found that regional integration had a significant effect on economic
growth. More specifically, our empirical results suggest that, in order to enhance regional integration
and economic growth in the region, public institutions should work towards eliminating corruption and
stabilizing macroeconomics and political stability while promoting international trade among member
countries. This article sheds light on the key determinants of economic growth and policy formulations
to achieve higher economic growth in Southeast Asia.

Keywords
Regional integration, economic growth, international trade, Southeast Asia

Introduction
Southeast Asia has experienced an economic growth since the 1980s. The average growth of gross
domestic product (GDP) was 5.5 per cent in Southeast Asia over 1970–2013. The growth was triggered
by reforms increasing global and regional integration through trade, financial flows, foreign direct
investment (FDI) and other forms of economic and social exchanges (Asian Development Bank [ADB],
2008). However, the average growth fell to −2 per cent during the Asian financial crisis and also 2 per
cent during the global financial crisis (Figure 1). Regional integration appealed as a concept that helped
promote growth, well-being and economic development among members (Peters-Berries, 2010). It may
also foster a variety of non-economic objectives, including promoting regional security and political
coordination among members (Carbaugh, 2004). Its success may result in enhancing macroeconomic

1
UBD School of Business and Economics, Universiti Brunei Darussalam, Gadong, Brunei Darussalam.

Corresponding author:
Gamini Premaratne, UBD School of Business and Economics, Universiti Brunei Darussalam, Gadong, BE1410, Brunei Darussalam.
E-mail: gamini.premaratne@ubd.edu.bn
2 Global Business Review 19(6)

Figure 1. Average GDP Growth Rate in Southeast Asia (1970–2013)

Source: ADB (2016); IMF (2016); UNCTAD (2015); UNESCO (2016); and WDI (2016).

coordination, competition, FDI and growth (Kahouli & Kadhraoui, 2012). The Association of Southeast
Asian Nations (ASEAN)1 is one of the successful regional groups, which contributed to regional harmony
and prosperity (Hill & Menon, 2010). Most of the member countries have achieved economic development
over the past two decades. Therefore, promoting regional integration is significant to building a stronger
and more resilient economy.
Regional integration and economic growth remain a central aspect of integration schemes raising the
question whether regional integration affects growth for the countries involved (Lombaerde & Langenhov,
2005). The empirical studies, which examined the impacts of regional integration on growth, remain
disputed (Te Velde, 2011). Although the role of regional integration contributing to growth was partly
acknowledged, the empirical studies in Southeast Asia have not yet been properly examined. Therefore,
this article aims to examine whether regional integration promotes growth by observing the level of
initial GDP per capita, physical and human capital, population growth, inflation and trade openness.
This article further investigates whether the economic and social factors affect economic growth in
Southeast Asia.
This article consists of five sections. The second section reviews the empirical literatures. The third
section presents a proposed model, data analysis and empirical results. The fourth section offers a
conclusion. The fifth and final section provides policy implications.

Review of Literature
In this section, we observe the literatures relevant to regional integration and economic growth. Pinder
(1969) and Carbaugh (2004) defined regional integration as a process of reducing restriction on
Bong and Premaratne 3

international trade, factor mobility and increasing economic activities among members. It is a policy
designed to eliminate economic frontiers and trade barriers to the free flow of goods and services among
members2 (Ramon & Yiju, 2009). Theoretically, regional integration follows the classical theory of
international trade. The empirical studies that examined the relationship between regional integration
and growth in developing countries produced mixed results. Previous studies found regional integration
fostered growth through its positive effect on trade and investment (Balassa, 1961; Haveman, Lei, &
Netz, 1998; Levine & Renelt, 1992). Balassa (1961) employed a sectoral approach to integration to
investigate the effect of foreign trade on growth. The author recognized the dynamic impacts of regional
integration on growth through technological progress, economies of scale and competition3. Thus,
increased foreign trade is beneficial through technology transfer and competition (Shahbaz & Rahman,
2004). However, the lack of coordination in monetary and fiscal policies likely causes difficulties under
the sectoral approach. Levine and Renelt (1992) used a cross-country gross regression to examine the
robustness of growth determinants. They found free international trade indirectly affects growth through
investment. This means countries that have low trade barriers invest more and hence grow faster.
However, the effects of political factors were not considered. Haveman et al. (1998) adopted a panel data
approach to observe the growth effects of various forms of international integration over 1970–1989.
The results confirmed trade intensity had a positive effect on growth. However, the potential importance
of social and political factors was ignored. Thus, our study added to the current debates on regional
integration and growth in Southeast Asia.
Recent studies examined the relationship between international trade and economic growth
(Nuh, 2011; Rodriguez & Rodrik, 2000; Tahir & Khan, 2014). Rodriguez and Rodrik (2000) used a
cross-national evidence approach to investigate the relationship between trade policy and growth over
1970–1989. The authors recognized that foreign trade is among the most important factors promoting
growth and convergence in developing countries. Nuh (2011) employed the Johansen test of co-integration
and the Granger causality test to examine the correlation between trade openness, FDI, gross domestic
investment (GDI) and growth in Thailand over 1970–2008. The result confirmed trade openness,
FDI and GDI contributed to growth. However, the variance decomposition analysis indicated FDI is the
key determinant of Thailand’s GDP per capita growth. Likewise, Tahir and Khan (2014) employed a
two-stage least squares method to investigate the trade openness impacts on growth in the Asian region.
Their results indicated trade openness and domestic investment contributed to the growth process of
developing countries. Therefore, it is significant for the policymakers to see that liberalizing trade among
members enhances higher growth. In addition, the dynamic growth was affected by physical and human
capital accumulation due to an increase in domestic and foreign saving rate, technological progress and
macroeconomic policy (Kreinin, 1998; Maitra, 2016). The real exchange rate of relative trade prices
could enhance the growth process in developing countries (Easterly, 2005). Hodge, Shankar, Prasada
Rao, and Duhs (2009) argued corruption may hamper growth through adverse impacts on investment in
physical and human capital, and political instability. High inclination of government instability and
unstable political environment may reduce investment and economic development. Thus, uncertain
political stability results in lower growth (Alberto, Ozler, Roubini, & Swagel, 1996).
However, the empirical studies also found regional integration had no impact on economic growth
(Berthelon, 2004; Te Velde, 2008; Vamvakidis, 1999). Berthelon (2004) employed a cross-country
growth regression and recognized a positive relationship between regional integration and growth among
developed countries, but the effects in developing countries were ambiguous. However, given the
simultaneous dependence of the growth rate on several factors, the endogenous growth literature that
analyses regional integration was ambiguous. De Melo, Panagariya, and Rodrick (1993) assessed the
regional integration on growth. Their findings suggest that regional integration had no impact on
4 Global Business Review 19(6)

economic growth in the developing countries. Vamvakidis (1999) estimated the growth performance that
liberalized to the world trade or joined regional agreement. The results found the negative effect of
regional integration on growth because the economic trading arrangement was small and had similar
economies among members. Similarly, Te Velde (2008) used the standard growth model to examine
whether regional integration leads to convergence and growth among developing countries over 1970–
2004. The author cannot establish the positive effects of regional integration on growth at the aggregation
level. However, the country-specific growth diagnostics suggest regional integration can be a key if not
constraint to growth.

Research Objectives
There are two main objectives of this article. First, this article examines the effect of regional integration
on economic growth in Southeast Asia by observing the level of initial GDP per capita, physical and
human capital, population growth, inflation and trade openness. Second, this article further investigates
whether the economic and social factors affect economic growth.

Rationale of the Studies

Based on the literature reviews, the empirical studies found the results of the relationship between
regional integration and growth are mixed. On the one hand, some studies found regional integration
fostered growth (Balassa, 1961; Haveman et al., 1998; Levine & Renelt, 1992). On the other hand, some
authors found regional integration had no impacts on growth (Berthelon, 2004; Te Velde, 2008;
Vamvakidis, 1999). Therefore, examining the effect of regional integration on growth in Southeast Asia
is critical for the policymakers to formulate future policies to achieve higher growth. This article
contributes to the literatures by exploring the relationship between regional integration and economic
growth, specifically the effect of economic and social factors on economic growth in Southeast Asia.

Methodology

Model Specification
The growth theory suggests the importance of growth in terms of labour supply, including population
growth and labour productivity as the factors of economic growth. The labour productivity growth
results from physical and human capital and technological progress. This means that access to a larger
technological base through integration arrangements may accelerate growth. Assuming a Cobb–Douglas
production function with constant returns to scale, the aggregate output is expressed as follows:

Y = AK a L1 - a(1)

In Equation (1), Y denotes GDP, A is technological progress, K is physical capital stock and L is labour
force. From Equation (1), the logarithm can be written as follows:

ln (Yt) = ln (A) + a ln (K t) + (1 - a) ln (L t)(2)

Bong and Premaratne 5

ln (Yt) = a + b 1 ln (K t) + b 2 ln (L t)(3)

where a0 = ln(A), b1 = a and b2 = (1 – a). We extended a cross-country growth function to model the
impact of regional integration on growth by examining explanatory variables, including initial GDP per
capita (initial GDPPC), physical capital (K), human capital (HC), population growth (n), inflation (INF)
and trade openness (OPEN), which consider the factors and effects of the growth process. Lagged
GDPPC represents the initial level of real GDPPC growth of the member countries. The growth of
K stock was considered as one of the primary factors explaining long-term growth (Todaro, 2000). More
capital means more productions and output, and thus enhances growth. HC represents the roles of
education in growth (Barro & Sala-I-Martin, 1995). n captures whether it propels or impedes to its
economic development (Barro, 1991). INF captures the stability of macroeconomics (Ghosh & Phillips,
1998). OPEN represents the level of regional integration (Pinder, 1969). Thus, the functional form is
expressed as follows:

GDPPC i, t = f (GDPPC i, t - 1, K i, t, HC i, t, n i, t, OPEN i, t, INFi, t, ASEAN i, t)(4)

Taking the logarithm from the Equation (4), we adopt our econometric model in Equation (5).

GDPPC i, t = b 0 + b 1 GDPPC i, t - 1 + b 2 K i, t + b 3 ln HC i, t + b 4 n i, t + b 5 OPEN i, t + b 6 INFi, t +

(5)
b 7 ASEAN i, t + f i, t
where ln represents the natural logarithm of the respective variables; GDPPCi,t denotes real GDPPC
growth; GDPPCi,t–1 is lagged GDPPC to represent the initial level of GDPPC growth. K is the growth
rate of capital stock. lnHC is the growth rate of human capital, which is represented by growth in
secondary school enrolment. n is the rate of population growth during the period of the study. OPEN is
a measure of trade openness (exports + imports)/GDP. Inflation is denoted by INF. ASEAN is a time
dummy variable. ASEAN = 1, since the country becomes a member of ASEAN, and 0 otherwise. b0 is
the constant term. i and t denote countries and time respectively. fi,t is the error term. This article further
examines whether the economic and social factors affect growth by examining exchange rate (lnER),
control of corruption (Cor) and political stability(Pol). lnER was included to capture the financial
stability among member countries, whereas Cor represents the perceptions to which public power is
exercised for private gain or any forms of corruption. Pol shows the perceptions that the government
could be destabilized via unconstitutional or violent means. Thus, from Equation (5), we adopt our
econometric model:
GDPPC i, t = b 0 + b 1 GDPPC i, t - 1 + b 2 K i, t + b 3 ln HC i, t + b 4 n i, t + b 5 OPEN i, t + b 6 INFi, t +
(6)
b 7 ln ER i, t + b 8 Cori, t + b 9 Pol i, t + b 10 ASEAN i, t + f i, t
where lnER, Cor and Pol denote exchange rate, control of corruption and political stability, respectively.
Unlike the previous studies, we employ the Generalized Method of Moments (GMM) in the dynamic
panel framework to examine the relationship between regional integration and growth (Mankiw, Romer,
& Weil, 1992; Seetanah & Sawkut, 2010). GMM is used to overcome the problem of endogeneity
(Hansen, 1982). Suppose the data consist of T observations {Yt}t = 1,…,T, moment condition for the
GMM model can be written as

m (i 0) = E [g (Yt, i 0)] = 0(7)

where i denotes a vector of parameter, E is an expectation, g is a dimension of vector and Yt is an

observation. Then, the sample moments:
6 Global Business Review 19(6)

t (i) = 1 | Tt = 1 g (Yt, i)(8)

m
T
The GMM estimator can be written as:

it = argmin ifH b | t = 1 g (Yt, i)l Wt b | t = 1 g (Yt, i)l(9)

1 T l 1 T

T T
where Wt denotes a weighting matrix.

Data Source
The panel data were collected over 43 years (1970–2013) in Southeast Asia, including, Brunei, Cambodia,
Indonesia, Lao, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. GDPPC was
sourced from Asian Development Bank (ADB), International Monetary Fund (IMF), United Nations
Conference on Trade and Development (UNCTAD) and World Development Indicators (WDI). K was
obtained from United Nations Statistics (UN Stats) and WDI. lnHC was collected from ADB, United
Nations Educational, Scientific, and Cultural Organization (UNESCO) and WDI. n is obtained from
UNCTAD and WDI. INF is collected from IMF, UNCTAD and WDI. OPEN was sourced from ADB,
UNESCAP, UNCTAD and WDI. lnER is collected from Penn World Tables (PWT) and WDI. Cor and
Pol were collected from Worldwide Governance Indicator (WGI) and the country’s indicator scores
ranged from −2.5 to 2.5.

Empirical Analysis

Stationary Test
We conduct a panel unit root test to check whether the variables were stationary. The rejection of null
hypothesis in Table 1 show GDPPC, K, n, INF, OPEN and lnHC are stationary at 1 per cent level.
Therefore, it makes sense both from a theoretical and statistical viewpoint to include these variables in
the model.
Table 2 shows the regression results of the regional integration impact on growth. In models 1–7, the
results show the signs are consistent and statistically significant at 1 per cent, including initial GDPPC,
K, OPEN and ASEAN dummy variables when additional explanatory variables are added. The adjusted

Table 1. Results of Panel Unit Root Test at Level

Variable Levin, Lin & Chu Im, Pesaran & Shin W-Stat ADF-Fisher Chi-square
GDPPC 0.0000* 0.0000* 0.0000*
K 0.0000* 0.0000* 0.0000*
n 0.0005* 0.0000* 0.0000*
INF 0.0000* 0.0000* 0.0000*
OPEN 0.0003* 0.0000* 0.0007*
LnHC 0.0000* 0.0000* 0.0000*
Source: The authors.
Notes: The numbers given in the table record the p-value. * indicates statistically significant at 1%.
Bong and Premaratne 7

Table 2. Regional Integration and Economic Growth (1970–2013)

Dependent variable: GDPPC

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8
Variables: Coef. Coef. Coef. Coef. Coef. Coef. Coef. Coef.
GDPPCt−1 1.5126* 0.4282* 0.4285* 0.3910* 0.3851* 0.3579* 0.3573* 0.3249*
(0.0480) (0.0471) (0.0472) (0.0460) (0.0458) (0.0467) (0.0469) (0.0480)

K 0.0863* 0.0866* 0.0963* 0.0963* 0.0983* 0.0979* 0.1003*

(0.0132) (0.0133) (0.0129) (0.0129) (0.0128) (0.0128) (0.1003)
lnHC 0.0535 −0.1870 −0.3602 −0.9316** −0.9550** −1.6376*
(0.3586) (0.3486) (0.3540) (0.4215) (0.4303) (0.4957)
n −1.1634* −1.1523* −1.1253* −1.2948* −1.2792*
(0.2280) (0.2264) (0.2250) (0.2325) (0.2304)
INF −0.0327 −0.0222 −0.0243*** −0.0128
(0.0139) (0.0144) (0.0143) (0.0147)
OPEN 0.0053* 0.0058*
(0.0022) (0.0022)
ASEAN 1.6834* 1.8406*
(0.6864) (0.6827)
Constant 1.7318 1.4215 1.2045 4.5155 5.4958 6.2511 7.5503 8.5764
Adj. R2 0.2568 0.3409 0.3389 0.3865 0.3949 0.4042 0.4247 0.4152
DW stat4 2.0898 1.9973 1.9979 1.9993 1.9904 1.9792 1.9757 1.9703
P-Value 0.1915 0.1424 0.1213 0.0414 0.1602 0.4297 0.4526 0.9436
(J-stat)5
Obs. no. 327 327 327 327 327 327 327 327
Source: The authors.
Notes: The standard error is in parentheses. Model 8 includes a time dummy variable ASEAN. *, ** and *** indicate statistically
significant at 1%, 5% and 10% levels, respectively.

R-squared improves notably, varying from 0.25 to 0.42. The negative signs of lnHC, n and INF are also
consistent, except lnHC in model 3. The J-stat suggests the models are correctly specified. In model 8,
the effect of initial GDPPC is positive and statistically significant at 1 per cent. Specifically, holding
other effects constant, if initial GDPPC is increased by 1 unit, we expect GDPPC to increase by
0.32 unit. This implies initial GDPPC has a significant impact on growth. The effect of K on GDPPC is
also positive and statistically significant at 1 per cent. If K increases by 1 unit, GDPPC rises by 0.10 unit.
This suggests that increasing physical capital goods expands the productive capacity of the economy and
thus enhances growth.
The effect of trade openness (OPEN) is positive and statistically significant at 1 per cent, which is in
line with the predicted theory. This suggests developing countries could benefit from a knowledge stock
of the trading partners (Ramessur-Seenarain & Durbarry, 2007). ASEAN is positive and statistically
significant at 1 per cent. The result suggests that joining as a member of ASEAN has a significant effect
on growth. This result is in line with the view that regional integration enhances growth through trade
openness (Sachs & Warner, 1995). The results found a negative relationship between n and GDPPC.
It is statistically significant at 1 per cent. If n is increased by 1 unit, GDPPC would decrease by 1.27
units. This suggests higher population growth may burden the natural resources and thus may reduce
public and private capital (Klasen & Lawson, 2007). The growth theory also suggested higher population
8 Global Business Review 19(6)

Table 3. Regional Integration and Economic and Social Factors

Dependent variable: GDPPC

Model 9 Model 10 Model 11 Model 12 Model 13 Model 14
Variables: Coef. Coef. Coef. Coef. Coef. Coef.
GDPPCt−1 0.3084* 0.2839* 0.3129* 0.2812* 0.2837* 0.2812*
(0.0486) (0.0494) (0.0486) (0.0495) (0.0494) (0.0496)
K 0.1008* 0.1023* 0.1011* 0.1023* 0.1023* 0.1023*
(0.0126) (0.0126) (0.0127) (0.0126) (0.0126) (0.0126)
lnHC −1.6861* −1.7789* −1.6708* −1.7845* −1.7832* −1.7879*
(0.4946) (0.4921) (0.4955) (0.4925) (0.4927) (0.4932)
n −1.1785* −1.1498* −1.2112* −1.1209* −1.1631* −1.1344*
(0.2360) (0.2317) (0.2349) (0.2354) (0.2334) (0.2376)
INF −0.0161 −0.0133 −0.0135 −0.0146 −0.0130 −0.0143
(0.0148) (0.0146) (0.0147) (0.0147) (0.0146) (0.0147)
OPEN 0.0071* 0.0096* 0.0068* 0.0098* 0.0097* 0.0098*
(0.0023) (0.0025) (0.0023) (0.0025) (0.0025) (0.0025)
lnER 0.1084*** 0.0457 0.0431
(0.0593) (0.0642) (0.0646)
Pol −0.4192*** 0.1934 0.1710
(0.2951) (0.3732) (0.3750)
Cor −0.9354* −0.8368** −1.0653* −0.9573**
(0.3155) (0.3448) (0.4032) (0.4347)
ASEAN 1.7394** 1.6903* 1.8067** 1.6634* 1.6851* 1.6603*
(0.6820) (0.6780) (0.6773) (0.6789) (0.6825) (0.6764)
Const. 8.1839 8.6271 8.4921 8.4560 8.6730 8.5065
Adj. R2 0.4194 0.4291 0.4170 0.4282 (1.8161) 0.4268
DW stat 1.9617 1.9733 1.9724 1.9678 1.9715 1.9665
P-Value (J-stat) 0.9012 0.7965 0.9387 0.8660 0.7690 0.7787
Obs. no. 327 327 327 327 327 327
Source: The authors.
Notes: The standard error is in parentheses. *, ** and *** indicate statistically significant at 1%, 5% and 10% level, respectively.

growth could lead to higher or lower growth (Barro, 1989). This means that n is positive when it enhances
its economic development and growth. lnHC has a negative relationship with GDPPC and is statistically
significant at 1 per cent. If human capital increases by 1 per cent, GDPPC would decrease by 0.0163.
This suggests lnHC has a significant effect on growth. The result is consistent with the previous studies
(Barro, 1997; Tahir & Khan, 2014). lnHC affected economic growth on the conditions of workers with
higher level of education (Barro, 1997). Tahir and Khan (2014) found a negative and statistically
significant relationship between human capital and growth, despite they captured various proxies of
lnHC, including tertiary and primary education, mean years of schooling and expenditures on education.
We found INF is negative, but statistically insignificant. However, INF is statistically significant at
10 per cent in model 7. This implies higher inflation may result in slower economic growth (Ghosh &
Phillips, 1998).
In model 9, lnER is positive and statistically significant at 10 per cent. If lnER is increased by 1 per
cent, GDPPC would increase by 0.0010. The real lnER of relative trade prices could enhance the growth
process in developing countries (Easterly, 2005). This suggests that the higher exchange rate affects
Bong and Premaratne 9

economic growth. However, lnER is statistically insignificant in models 12 and 14. In model 10, Cor is
negative and statistically significant at 1 per cent. If Cor is increased by 1 unit, GDPPC would decrease
by 0.93 unit. The result suggests that corruption may hamper growth through adverse impacts on
investment in physical and human capital and political instability (Hodge et al., 2009).
In model 11, Pol is negative and statistically significant at 10 per cent. If Pol is increased by 1 unit,
GDPPC would decrease by 0.41 units. According to Alberto et al. (1996), the political instability results in
lower growth. This suggests high inclination of government instability and unstable political environment
may reduce investment and economic development. However, Pol is statistically insignificant in models 13
and 14 (see Table 3 for models 9–14). Moreover, we also take into consideration that GDPPC is treated as
independent variable and regional integration as principal independent variable in model 15 (see Table 4).
The results found GDPPC is positive and statistically significant at 10 per cent. This suggests GDPPC also
contributed to regional integration. LNHC and N are positive and statistically significant at 1 per cent, while
K and ASEAN are statistically insignificant. This implies K and ASEAN may result in slower regional inte-
gration. This likely results in various dynamic factors, including the structure and large-scale economies,
and social factors (Balassa, 1961). Moreover, we also examined whether slow or negative growth could
lead to political instability in model 16 (see Table 5). Our results found GDPPC is negative and statistically
significant at 1 per cent. This implies slower growth likely results in the political instability.

Robust Testing
The results remain unchanged, although we drop lnER or Pol in models 12 and 13, except the p-value of
Cor changes from 5 per cent to 1 per cent. In model 14, we include all variables in the model. In model 8,
the coefficients and significances of all variables remain unchanged. The results remain positive and
statistically significant, including initial GDPPC, K and OPEN. Notably, with the exogenous variables
in the model, the results show the negative signs of lnHC and n remain unchanged. However,

Table 4. Regional Integration and Economic Growth (1970–2013)

Dependent Variable: OPEN (Model 15)

Variable Coef Std. Error
GDPPC 1.5696*** 0,8393
K −0.2385 0.2412
LNHC 63.5991* 6.6636
N 11.6128* 3.9652
INF −0.6721* 0.1804
ASEAN12.5022 11.6051
Constant −16.2900* 23.0495
Adj. R2 0.3320
DW Stat6 0.1493
P-Value (J-stat)7 0.0000
Obs. no. 427
Source: The authors.
Notes: Model 15: economic growth is treated as independent variable
and regional integration as principal dependent variable. *, **
and *** indicates statistically significant at 1%, 5% and 10% level,
respectively.
10 Global Business Review 19(6)

Table 5. Political Instability and Economic Growth (1970–2013)

Dependent Variable: POL (Model 16)

Variable Coef. Std. Error
GDPPC −0.0235* 0,0097
K 0.0024 0.0025
LNHC −0.0472 0.0906
N 0.1545* 0.0448
INF −0.6721 0.0027
ASEAN −0.1178 0.1247
Constant −0.2789 0.3440
Adj. R2 0.1790
DW Stat8 0.7768
P-Value (J-stat)9 0.0000
Obs. no. 332
Source: The authors.
Notes: Model 16: political instability and economic growth. *, ** and
*** indicate statistically significant at 1%, 5% and 10% levels,
respectively.

lnER remains positive, but statistically insignificant. Pol is positive but statistically insignificant in
models 13 and 14. This may cause a major government change, which effects growth in the short run
(Alberto et al., 1996). The negative sign of Cor remains unchanged, but statistically significant at 5 per
cent. The J-stat tests the validity of the overidentifying restrictions and model misspecification (Nguyen &
Nilsson, 2014). The Durbin–Watson stat (DW stat) detects the presence of autocorrelation in the residuals,
and as a rough rule of thumb, there may be cause for alarm if the DW stat is less than 1 (Benchimol,
2013). The DW stat below 1.5 shows a strong indication of positive first-order serial correlation (Johnston
& DiNardo, 1997). In model 8, the DW stat is 1.97 and the p-value of J-stat is 0.94. This means that we
cannot reject the null hypothesis of the validity of overidentifying restrictions. Similarly, the DW stat is
1.96 and the p-value of J-stat is 0.77 in model 14. This implies that we cannot reject the null hypothesis,
and thus our model is valid.

Conclusion
This article examined whether regional integration affects economic growth in Southeast Asia.
We employed a cross-country growth model implementing GMM in the dynamic framework. The panel
data were collected over 43 years (1970–2013) in Southeast Asia. Our results found regional integration
has a significant effect on economic growth. Initial GDPPC, K and the level of openness to international
trade are one of the key determinants of growth during the studied period. Thus, investing in physical
capital goods expands the productive capacity of the economy. Moreover, our results suggested that by
integrating the economy into the regional level, there would also be economic growth in the region.
However, higher population growth may place a burden on the natural resources and reduce public
and private capital. The weakness of public institutions among members may lower growth due to
corruption, macroeconomic and political instability in the region. Thus, the public institutions should
pay attention to the other determinants of growth in order to promote long-term growth in the region.
This article contributes to the literatures by examining the effect of regional integration on economic
Bong and Premaratne 11

growth, and specifically the effect of economic and social factors. Therefore, this article sheds light on
the determinants of economic growth and policy formulations to achieve higher economic growth in
Southeast Asia.

Policy Implications
Regional integration could serve as an important vehicle not only for economic growth, but also for
better strategic partnership, especially to ensure peace and prosperity in the region. The implementation
of regional integration with international trade openness policy should be highly considered by public
institutions to enhance growth and social welfares in Southeast Asia. More specifically, our empirical
results suggest that, in order to enhance regional integration and economic growth, the government
should work towards eliminating corruption and stabilizing macroeconomics while also striving for
political stability. The government should also be promoting international trade among members.
The findings support policies of open international trade in Southeast Asia and the rest of the world.
Specifically, the findings are critical for policymakers to highlight the effects of regional integration and
towards the Trans-Pacific Partnership (TPP). However, further research could be considered to determine
to what extent the impact of regional integration and TPP has on economic growth in the region.

Acknowledgement
The authors are grateful to the Editor of the journal and the anonymous referees for their extremely useful
suggestions to improve the quality of the article. Usual disclaimers apply.

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 research for this article is carried under the Brunei Darussalam Government Scholarship through the Ministry
of Foreign Affairs and Trade and Ministry of Education, Brunei Darussalam.

Notes
1. ASEAN member countries include Brunei, Cambodia, Indonesia, Lao, Malaysia, Myanmar, Philippines,
Singapore, Thailand and Vietnam.
2. Balassa (1961) defined it as a process and as a state of affairs designed to abolish discrimination of various forms
of discrimination between national economies.
3. He examined various forms of integration with the focus on the EU, including free trade area, customs union,
common market, economics union and total integration.
4. Durbin–Watson stat (DW stat) detects the presence of autocorrelation in the residuals (Benchimol, 2013).
5. P (J-stat) tests the validity of the overidentifying restrictions and model misspecification (Nguyen & Nilsson,
2014).
6. The Durbin–Watson stat (DW stat) detects the presence of autocorrelation in the residuals (Benchimol, 2013).
7. P (J-stat) tests the validity of the overidentifying restrictions and model misspecification (Nguyen & Nilsson,
2014).
8. The Durbin–Watson stat (DW stat) detects the presence of autocorrelation in the residuals (Benchimol, 2013).
9. P (J-stat) tests the validity of the overidentifying restrictions and model misspecification (Nguyen & Nilsson,
2014).
12 Global Business Review 19(6)

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