Making Abundant Natural Resources Work for Developing Economies

Each of these procedures is discussed more thoroughly as follows:3.1 Determining the order of integrationTo identify a possible long run relationship between the variables, they need to beintegrated of order one, I (1), in levels. This is determined through the use of panelunit root tests which have better power than ADF tests, especially with a short timespan (t=20) as in our sample. The panel unit root tests used are those proposed by Im,Pesaran and Smith (IPS) (1997, 2003) and Hadri (2000). The use of more than onetest is motivated by the fact that the commonly used test, IPS , has low power if thedeterministic regressors are misspecified leading to a failure to reject the nullhypothesis of a unit root.For the IPS test, the null hypothesis is that of a unit root and it is reversed for theHadri test. The panel regression isyitpi= i yit−+ ∑j=1ρ 1 ϕ Δy+ z′γ + ε , (3)ijit−jitiitand we test the null hypothesis of H : ρ 1(there is a unit root, for all i) against an0 i =alternative hypothesis H : ρ 1(there is no unit root for at least one i, the test1 i