Estimating Regional Integration Using the Bayesian State-Space Approach

ESTIMATINGREGIONALINTEGRATIONUSING THEBAYESIANSTATE-SPACEAPPROACH ManuelLeonardAlbis,MaraClaireTayag,andJongWooKang NO.712 January2024 ADBECONOMICSWORKINGPAPERSERIES ASIANDEVELOPMENTBANK ADBEconomicsWorkingPaperSeries EstimatingRegionalIntegration UsingtheBayesianState-SpaceApproach ManuelLeonardAlbis,MaraClaireTayag,andJongWooKang TheADBEconomicsWorkingPaperSeriespresentsresearchinprogresstoelicitcommentsandencouragedebateondevelopmentissuesinAsiaandthePacific.TheviewsexpressedarethoseoftheauthorsanddonotnecessarilyreflecttheviewsandpoliciesofADBor itsBoardofGovernorsorthegovernmentstheyrepresent. No.712|January2024 ManuelLeonardAlbis(mfalbis@up.edu.ph)isanassistantprofessorattheSchoolofStatistics, UniversityofthePhilippines.MaraClaireTayag(mtayag@adb.org)isasenioreconomicsofficerandJongWooKang(jkang@adb.org)isthedirectoroftheRegionalCooperationandIntegrationDivision,EconomicResearchandDevelopmentImpactDepartment,AsianDevelopmentBank. ASIANDEVELOPMENTBANK CreativeCommonsAttribution3.0IGOlicense(CCBY3.0IGO) ©2024AsianDevelopmentBank 6ADBAvenue,MandaluyongCity,1550MetroManila,PhilippinesTel+63286324444;Fax+63286362444 www.adb.org Somerightsreserved.Publishedin2024. ISSN2313-6537(print),2313-6545(electronic)PublicationStockNo.WPS230622-2 DOI:http://dx.doi.org/10.22617/WPS230622-2 TheviewsexpressedinthispublicationarethoseoftheauthorsanddonotnecessarilyreflecttheviewsandpoliciesoftheAsianDevelopmentBank(ADB)oritsBoardofGovernorsorthegovernmentstheyrepresent. ADBdoesnotguaranteetheaccuracyofthedataincludedinthispublicationandacceptsnoresponsibilityforanyconsequenceoftheiruse.ThementionofspecificcompaniesorproductsofmanufacturersdoesnotimplythattheyareendorsedorrecommendedbyADBinpreferencetoothersofasimilarnaturethatarenotmentioned. Bymakinganydesignationoforreferencetoaparticularterritoryorgeographicarea,orbyusingtheterm“country”inthispublication,ADBdoesnotintendtomakeanyjudgmentsastothelegalorotherstatusofanyterritoryorarea. ThispublicationisavailableundertheCreativeCommonsAttribution3.0IGOlicense(CCBY3.0IGO)https://creativecommons.org/licenses/by/3.0/igo/.Byusingthecontentofthispublication,youagreetobeboundbythetermsofthislicense.Forattribution,translations,adaptations,andpermissions,pleasereadtheprovisionsandtermsofuseathttps://www.adb.org/terms-use#openaccess. ThisCClicensedoesnotapplytonon-ADBcopyrightmaterialsinthispublication.Ifthematerialisattributedtoanothersource,pleasecontactthecopyrightownerorpublisherofthatsourceforpermissiontoreproduceit.ADBcannotbeheldliableforanyclaimsthatariseasaresultofyouruseofthematerial. Pleasecontactpubsmarketing@adb.orgifyouhavequestionsorcommentswithrespecttocontent,orifyouwishtoobtaincopyrightpermissionforyourintendedusethatdoesnotfallwithintheseterms,orforpermissiontousetheADBlogo. CorrigendatoADBpublicationsmaybefoundathttp://www.adb.org/publications/corrigenda.Note: Inthispublication,“$”referstoUnitedStatesdollars. ABSTRACT Estimatingregionalintegrationfaceschallengesbecauseofincompletedatafrommissingvaluesandinsufficienttimespans.AkeyadvantageofadynamicfactormodelestimatedusingtheBayesianstate-spaceapproachisitsabilitytohandlemissingvaluesandaggregationoftheregionalintegrationindicators.Thisapproachyieldsestimatesofbilateraleconomicintegration(BEI)usingregionalintegrationindicatorsonfourdimensions:trade,foreigndirectinvestments,finance,andmigration.Theregionalintegrationindex(RII)isderivedbyapplyingnetworkdensitytotheBEIestimatestorepresentthestrengthofregionalintegrationwithinAsiaandthePacific.TheBEIindexesnotonlyservetoestimatetheoverallRIIbutenabletheidentificationofeconomypairsanddimensionsthataredrivingregionalintegrationinAsiaandthePacific.TheestimatedRIIforAsiaandthePacificdeclinedslightlyinrecentyears,andtheintegrationnetworkbecamemorecenteredaroundthePeople’sRepublicofChina. Keywords:Bayesianstate-spacemodel,networkdensity,regionalintegrationindex JELcodes:F02,F15,C8,C11 TheauthorsthankJoshuaGapay,KevinQuizon,DonnaBajaro,andDominiqueSyfortheirexcellentresearchsupport. 1.Introduction Complete,comprehensive,andcomparativeregionalintegrationindexes(RIIs)canplayanimportantroleinmonitoringtheprogressinregionalintegrationandderivingpolicyimplicationsonregionalcooperation.Thesuccessoftargetedregionaldevelopmentprogramsandpoliciescandependonaccurateassessmentofaspecificeconomyacrossdifferentaspectsofintegration.However,estimatingthedegreeofregionalintegrationisnosimplematter.Theavailabilityofnumerousintegrationindicators,questionsabouthowsuchindicatorsareaggregated,andincompletedata—resultingfrommissingvaluesandinadequatetimespans—areamongfactorsthatcreatechallenges. Thispaper,inacknowledgingthecomplexities,aimstooutlinemethodstogenerateregionalintegrationmeasuresattheeconomy-pairlevel.ThiscanbeusedtocreateanRIIdescribingthecollectiveeconomiccohesivenessofalleconomiesinAsiaandthePacific.1 AdynamicfactormodelestimatedthroughtheBayesianstate-spaceapproachisusedtogenerateindexesfromseveralregionalintegrationindicatorsofAsianeconomies.Akeyadvantageoftheappro