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The impact of trade liberalization and the fiscal equalization transfer policy on provincial income disparities in Canada: an application of GMM estimation


  • Alexander Bilson Darku


This article uses the Solow growth model and the panel data method to examine the effect of trade liberalization and the federal equalization transfers on income convergence among Canadian provinces between 1981 and 2006. Estimation problems of weak instruments and endogenous regressors are addressed by the use of a system Generalized Method of Moment (GMM) estimator. The results from the empirical analysis indicate that the current rate of convergence of Personal Income (PI) in Canada is 4.41% per year. This rate is considerably higher than the range of 1.80 and 2.41% per year that previous studies using least-square estimators have reported. The findings from the policy analysis show that the launching and expansion of the North America regional integration have de-accelerated the convergence speed for Canadian provinces by 3.99 and 3.15% per year, respectively. However, consistent with the results from previous studies, the fiscal transfers, which are part of the federal equalization programme, have accelerated the convergence speed for Canadian provinces.

Suggested Citation

  • Alexander Bilson Darku, 2011. "The impact of trade liberalization and the fiscal equalization transfer policy on provincial income disparities in Canada: an application of GMM estimation," Applied Economics, Taylor & Francis Journals, vol. 43(13), pages 1679-1689.
  • Handle: RePEc:taf:applec:v:43:y:2011:i:13:p:1679-1689
    DOI: 10.1080/00036846.2010.491465

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    References listed on IDEAS

    1. Mukesh Ralhan & Ajit Dayanandan, 2005. "Convergence of Income Among Provinces in Canada – An Application of GMM Estimation," Econometrics Working Papers 0502, Department of Economics, University of Victoria.
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    Cited by:

    1. Evan Capeluck, 2014. "Convergence Across Provincial Economies in Canada: Trends, Drivers, and Implications," CSLS Research Reports 2014-03, Centre for the Study of Living Standards.
    2. Jonathan Eberle & Thomas Brenner, 2016. "More bucks, more growth, more justice? The effects of regional structural funds on regional economic growth and convergence in Germany," Working Papers on Innovation and Space 2016-01, Philipps University Marburg, Department of Geography.
    3. repec:taf:applec:v:50:y:2018:i:8:p:855-869 is not listed on IDEAS

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