This paper examines the growth experience of seven developing island economies of the South Pacific--Fiji, Kiribati, Papua New Guinea, Solomon Islands, Tonga, Vanuatu, and Western Samoa--and their developed neighbors, Australia and New Zealand, during the period 1971-93. The Solow-Swan neoclassical growth model provides the analytical framework for this study, and the implications of this model are tested using both the cross-sectional and time-series dimensions of the data. The econometric technique employed in the paper is Chamberlain’s Π-matrix estimator, which accounts for unobserved country-specific heterogeneity in the growth process and any bias resulting from errors in the measurement of real per capita GDP.
After controlling for investment and migration, as well as for unobserved country-specific effects, the paper finds that the nine island economies have been converging at a relatively rapid speed--about 4 percent per year--toward their respective steady-state levels of per capita GDP.
When analyzing measures of the cross-sectional dispersion of national income, the paper finds that net private and official transfers have ensured that the dispersion of real per capita national disposable income in the region has remained relatively constant over the 1971-93 period. However, the dispersion of countries’ real per capita GDP, which excludes such transfers, clearly widened over this same period.