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on Development |
| By: | Kenneth Kletzer (University of California Santa Cruz) |
| Abstract: | Capital account liberalization in financially repressed economies often leads to a period of rapid capital inflows followed by financial crisis. This paper considers the vulnerability of the Indian economy to financial crises with international financial integration and the policy agenda for further liberalization of capital flows. The legacy of financial repression on fiscal and financial policies poses the primary challenge to stable integration of the domestic financial markets of India with international capital markets. Brief overviews of the theory and experience of liberalization elsewhere and of the recent liberalization by India frame the discussion of the risks of liberalization and sequencing of policy reforms. |
| Date: | 2004–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucscec:1006&r=dev |
| By: | Joshua Aizenman (University of California, Santa Cruz); Brian Pinto (World Bank); Artur Radziwill (Center for Social and Economic Research. Warsaw, Poland) |
| Abstract: | This paper proposes a new method for measuring the degree to which the domestic capital stock is self-financed. The main idea is to use the national accounts to construct a self-financing ratio, indicating what would have been the stock of tangible capital supported by actual past national saving, relative to the actual stock of capital. We use the constructed measure of self-financing to evaluate the impact of the growing global financial integration on the sources of financing domestic capital stocks in developing countries. On average, 90% of the stock of capital in developing countries is self-financed, and this fraction was surprisingly stable throughout the 1990s. The greater integration of financial markets has not changed the dispersion of self-financing rates, and the correlation between changes in de-facto financial integration and changes in self-financing ratios is statistically insignificant. There is no evidence of any "growth bonus" associated with increasing the financing share of foreign savings. In fact, the evidence suggests the opposite: throughout the 1990s, countries with higher self-financing ratios grew significantly faster than countries with low self-financing ratios. This result persists even after controlling growth for the quality of institutions. We also find that higher volatility of the self-financing ratios is associated with lower growth rates, and that better institutions are associated with lower volatility of the self-financing ratios. These findings are consistent with the notion that financial integration may have facilitated diversification of assets and liabilities, but failed to offer new net sources of financing capital in developing countries. |
| Keywords: | financial integration, self-financing, diversification, saving, investment, |
| Date: | 2004–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucscec:1007&r=dev |
| By: | Yin-Wong Cheung (University of California, Santa Cruz); Menzie Chinn (University of Wisconsin, Madison); Eiji Fujii (University of Tsukuba, Japan) |
| Abstract: | The linkages between the People's Republic of China and the other Chinese economies of Hong Kong and Taiwan are assessed, and compared against those with Japan and the US. We first characterize the time series behavior of three criteria of integration, namely real interest parity, uncovered interest parity, and relative purchasing power parity. There is evidence that these parity conditions tend to hold over longer periods between the People's Republic of China and all other economies, although they do not hold instantaneously. Overall, the magnitude of deviations from the parity conditions is shrinking over time. Amongst all, however, Hong Kong exhibits indications of a more advanced level of integration with the mainland. We also find that evidence is surprisingly positive for integration with the US. We then turn to examining the determinants of the degree of integration. Regression results suggest that the degrees of financial and integration depend upon the extent of capital controls, foreign direct investment linkages as well as exchange rate volatility. |
| Keywords: | uncovered interest parity, real interest parity, purchasing power parity, exchange rates, capital mobility, market integration, |
| Date: | 2003–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucscec:1032&r=dev |
| By: | Gaofeng Han (University of California Santa Cruz); Kaliappa Kalirajan (Foundation for Advanced Studies on International Development, Tokyo.); Nirvikar Singh (University of California, Santa Cruz) |
| Abstract: | This study compares the sources of growth in East Asia with the rest of the world, using a methodology that allows one to decompose total factor productivity (TFP) growth into technical efficiency changes (catching up) and technological progress. It applies a varying coefficients frontier production function model to aggregate data for the period 1970-1990, for a sample of 45 developed and developing countries. Our results are consistent with the view that East Asian economies were not outliers in terms of TFP growth. Of the high-performing East Asian economies, our methodology identifies South Korea as having the highest TFP growth, followed by Singapore, Taiwan and Japan. Our methodology also allows us to separately estimate technical efficiency change, which is a component of TFP growth, and we find that, in general, the estimated technical efficiency of the high-performing East Asian economies was not out of line with the rest of the world. |
| Keywords: | Total factor productivity growth, technical efficiency change, technical progress, sources of growth, varying coefficients frontier production functions, |
| Date: | 2003–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucscec:1040&r=dev |
| By: | Kristin Forbes (MIT); Menzie Chinn (University of Wisconsin, Madison) |
| Abstract: | This paper tests if real and financial linkages between countries can explain why movements in the world's largest markets often have such large effects on other financial markets, and how these cross-market linkages have changed over time. It estimates a factor model in which a country's market returns are determined by: global, sectoral, and cross-country factors (returns in large financial markets), and country-specific effects. Then it uses a new data set on bilateral linkages between the world's 5 largest economies and about 40 other markets to decompose the cross-country factor loadings into: direct trade flows, competition in third markets, bank lending, and foreign direct investment. Estimates suggest that both cross-country and sectoral factors are important determinants of stock and bond returns, and that the U.S. factor has recently gained importance, while the Japanese and U.K. factors have lost importance. From 1996-2000, real and financial linkages became more important determinants of how shocks are transmitted from large economies to other markets. In particular, bilateral trade flows are large and significant determinants of cross-country linkages in both stock and bond markets. Bilateral foreign investment is usually insignificant. Therefore, despite the recent growth in global financial flows, direct trade still appears to be the most important determinant of how movements in the world's largest markets affect financial markets around the globe. |
| Keywords: | trade linkages, bank lending, factor models, financial integration, interdependence, |
| Date: | 2003–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucscec:1041&r=dev |
| By: | Bengtsson, Mikael (Department of Economics); Berggren, Niclas (The Ratio Institute); Jordahl, Henrik (Department of Economics) |
| Abstract: | We conduct an extensive robustness analysis of the relationship between trust and growth for a later time period (the 1990s) and with a bigger sample (63 countries) than previous studies. In addition to robustness tests that focus on model uncertainty, we use Least Trimmed Squares, a robust estimation technique, to identify outliers and investigate how they affect the results. We find that the trust-growth relationship is less robust with respect to empirical specification and to countries in the sample than previously claimed, and that outliers affect the results. Nevertheless trust seems quite important compared with many other growth-regression variables. |
| Keywords: | trust; growth; robustness analysis; extreme bounds analysis; social capital; least trimmed squares; outliers |
| JEL: | O40 Z13 |
| Date: | 2005–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uunewp:2005_001&r=dev |
| By: | Berggren, Niclas (Ratio Institute); Jordahl, Henrik (Department of Economics) |
| Abstract: | We present new evidence on how generalized trust is formed. Unlike previous studies, we look at the explanatory power of economic institutions, we use newer data, we incorporate more countries, and we use instrumental variables to handle the causality problem. A central result is that legal structure and security of property rights (area 2 of the Economic Freedom Index) increase trust. The idea is that a market economy, building on voluntary transactions and interactions with both friends and strangers within the predictability provided by the rule of law, entails both incentives and mechanisms for trust to emerge between people. |
| Keywords: | social capital; trust; economic freedom; rule of law; property rights; legal system |
| JEL: | K42 O40 Z13 |
| Date: | 2005–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uunewp:2005_002&r=dev |
| By: | Romain Ranciere; Aaron Tornell; Frank Westermann |
| Abstract: | In this paper, we document the fact that countries that have experienced occasional financial crises have, on average, grown faster than countries with stable financial conditions. We measure the incidence of crisis with the skewness of credit growth, and find that it has a robust negative effect on GDP growth. This link coexists with the negative link between variance and growth typically found in the literature. To explain the link between crises and growth we present a model where weak institutions lead to severe financial constraints and low growth. Financial liberalization policies that facilitate risk-taking increase leverage and investment. This leads to higher growth, but also to a greater incidence of crises. Conditions are established under which the costs of crises are outweighed by the benefits of higher growth. |
| JEL: | F34 F36 F43 O41 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11076&r=dev |
| By: | Boyan Jovanovic; Peter L. Rousseau |
| Abstract: | Electricity and Information Technology (IT) are perhaps the two most important general purpose technologies (GPTs) to date. We analyze how the U.S. economy reacted to them. The Electricity and IT eras are similar, but also differ in several important ways. Electrification was more broadly adopted, whereas IT seems to be technologically more "revolutionary." The productivity slowdown is stronger in the IT era but the ongoing spread of IT and its continuing precipitous price decline are reasons for optimism about growth in the 21st century. |
| JEL: | O3 N2 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11093&r=dev |
| By: | Claudio Bravo-Ortega; Daniel Lederman |
| Abstract: | Calculations of marginal welfare effects suggest that agricultural development has had important positive effects on national welfare, especially in developing countries. Latin American and Caribbean countries have also benefited from agricultural growth, but nonagricultural production has had marginal welfare effects that are greater in magnitude than those provided by agricultural activities. In contrast, the industrialized, high-income countries experienced marginal welfare gains from nonagricultural activities that are much greater than those derived from agriculture, whose impact is actually negative. These calculations of marginal welfare effects across regions depend on econometric estimates of elasticities linking agricultural and nonagricultural economic activities to four elements in a national welfare function: national GDP per capita, average income of the poorest households within countries, environmental outcomes concerning air and water pollution and deforestation, and macroeconomic volatility. The econometric analyses are motivated by theoretical treatments of key issues. The empirical models are estimated with various econometric techniques that deal with issues of causality and international heterogeneity. This paper—a product of the Office of the Chief Economist, Latin America and the Caribbean Region—is part of a larger effort in the region to study the rural contribution to development. |
| Keywords: | Agriculture; Environment; Macroecon & Growth; Poverty; Rural Development |
| Date: | 2005–01–24 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3499&r=dev |
| By: | Ali Zafar |
| Abstract: | Using data collected during several missions, Zafar finds that the principal reasons for low revenue mobilization are (1) the adverse fiscal impact of trade liberalization, (2) the defiscalization of agriculture in the 1970s, (3) the collapse of the uranium boom in the 1980s, and (4) the poor record of the VAT in mobilizing revenue. The large reduction in tariffs during the 1980s and 1990s in the context of structural adjustment programs and West African regional integration initiatives had adverse effects on trade tax revenue during the period 1980–2003. But higher import levels after 1994 succeeded in partially mitigating the revenue losses. The experience of Niger shows that without accompanying macroeconomic policies, parallel improvements in tax and customs administration, and success in mobilizing domestic taxes, most notably the VAT, trade reform can have adverse fiscal consequences. Using a SMART model partial equilibrium analysis developed by UNCTAD for researchers and negotiators at multilateral trade rounds, the author simulated three different tariff shocks to test the fiscal and trade implications of additional trade liberalization in Niger. First, the preferred tariff regime in terms of overall fiscal and job creation impact was the harmonized Swiss formula in contrast to a 10 and 15 percent uniform tariff. Second, a possible Regional Economic Partnership Agreement (REPA) between the European Union and l’Union Économique et Monétaire Ouest-Africaine (UEMOA) by 2015 that would abolish duties on EU imports to the UEMOA countries would have negative fiscal effects on Niger of more than 1 percent of GDP, positive effects on trade creation of about 1.5 percent of GDP, and ambiguous effects on local industry. While there will be some welfare gains for consumers and importers from lower import tariffs and the possibility of trade creation, the fiscal losses and adjustment costs would be significant, particularly in the machinery and transport sectors. Third, there are asymmetric gains and losses from regional integration and tariff changes, and a 10 percent uniform tariff would have the greatest impact on Benin and Senegal and some impact on Niger and Togo. In sum, further trade liberalization in Niger will have significant fiscal costs, partially offset by trade creation through increased imports. This paper—a product of Poverty Reduction and Economic Management 3, Africa Technical Families—is part of a larger effort in the region to understand the reasons for low resource mobilization. |
| Keywords: | International Economics; Macroecon & Growth; Globalization |
| Date: | 2005–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3500&r=dev |
| By: | Günther Rehme (Department of Economics, Darmstadt University) |
| Abstract: | Many theoretical models show that redistribution causes low growth or capital outflows even though empirically redistribution and growth are often found to be positively associated across countries. This paper argues that tax competition and the danger of capital outflows leads optimizing governments to pursue high growth, no redistribution policies in technologically similar economies. However, the government of a technologically superior economy may attract foreign and domestically owned capital and may have relatively higher GDP growth and more resources for redistribution than in a closed economy. Thus, redistributing governments may have a relatively stronger interest in technological advance or high economic integration. The results imply that one may well observe a positive association between redistribution and growth across countries. |
| Keywords: | Growth; Redistribution; Tax Competition; Capital Mobility |
| JEL: | O4 H21 D33 C72 C21 F21 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:tud:ddpiec:141&r=dev |