THE CONVERGENCE CLUB OF MALAYSIA

Abstract

Issues in regional disparity have gained vast interest among the policy makers and the academician. Despite various efforts by the government, the income disparity between states in Malaysia has continued to promote inequality and imbalance growth within Malaysia. Being recorded to have the highest poverty rate in Malaysia (World Bank Malaysia Economic Monitor 2010) Sabah has continuously attracted the concern of the state and federal authority in promoting the inequality of growth in Malaysia. Thus, the objective of this paper is to address the question whether Sabah has been converging, diverging or catching up with the other states in Malaysia. Using annual data for the period 1965 to 2010, panel of full convergence result suggests that states in Malaysia shows divergence. Therefore the null hypothesis of convergence is rejected. However, as Phillip and Sul (2007) suggest that there is possibility of subgroups convergence via adapting non linear time varying factor model. The result suggests that the states are divided into five clubs. The core group consists of Selangor, Wilayah Persekutuan, Johor, Sarawak and Penang. The second club consists of Sabah and Perak which also shows convergence while the third club only consists of Pahang that diverge from the rest. The fourth club is Negeri Sembilan, Kedah, Melaka, Terengganu and Kelantan which converge in slow speed. The last club consists of Perlis which shows divergence with the other states. These findings should help policy makers for both target groups in designing appropriate growth-oriented programme as well as in setting priorities in their implementation.