nep-dev New Economics Papers
on Development
Issue of 2005‒03‒13
nineteen papers chosen by
Jeong-Joon Lee
Towson University

  1. The Missing Link By Zoltan J. Acs; Bo Carlsson; Pontus Braunerhjelm; David B. Audretsch
  2. Changes in the world distribution of output-per-worker 1960-98: how a standard decomposition tells an unorthodox story By ; Paul Beaudry; ; Fabrice Collard; ; David A. Green
  3. Growth, distance to frontier and composition of human capital By ; Jérôme Vandenbussche; Philippe Aghion; Costas Meghir
  4. Understanding Export Led Growth and Late Industrialisation to Explain the Differences in the Post Reform Performance of India and China By Morris Sebastian
  5. Regionalism in West Africa: Do Polar Countries Reap the Benefits? A Role for Migration By Konseiga, Adama
  6. Capital-Skill complementarity? Evidence from a Panel of Countries By Chris Papageorgiou; John Duffy; Fidel Perez-Sebastian
  7. Can Transition Dynamics Explain the International Output Data? By Chris Papageorgiou; Fidel Perez-Sebastian
  8. Forms of Democracy, Policy and Economic Development By Torsten Persson
  9. The Barrier Model of Productivity Growth: South Africa By Torfinn Harding; Jørn Rattsø
  10. Productivity Growth in Backward Economies and the Role of Barriers to Technology Adoption By Hildegunn Ekroll Stokke
  11. Reform, FDI and Economic Growth: Tale of the Tortoise and the Hare By Bruno Merlevede; Koen Schoors
  12. Financial Development and Technology By Solomon Tadesse
  13. Redistribution via Taxation: The Limited Role of the Personal Income Tax in Developing Countries By Richard M. Bird; Eric M. Zolt
  14. The determinants of occupational choice in Colombia : an empirical analysis By Guillaume Destré; Valentine Henrard
  15. Regional convergence, trade liberalization and agglomeration of activities : an analysis of NAFTA and MERCOSUR cases By Nicole Madariaga; Sylvie Montout; Patrice Ollivaud
  16. Core labour standards and economic growth By Remi Bazillier
  17. On the role of inequalities and public education expenditures in human capital investment : a theoretical approach By Mohamed Ben Mimoun
  18. Natural resources and the wealth of nations in a globalized world economy By Matteo Cervellati; Piergiuseppe Fortunato
  19. Second-Best Optimal Taxation of Capital and Labor in a Developing Economy By Cecilia Garcia Penalosa; Stephen J. Turnovsky

  1. By: Zoltan J. Acs; Bo Carlsson; Pontus Braunerhjelm; David B. Audretsch
    Abstract: The intellectual breakthrough contributed by the new growth theory was the recognition that investments in knowledge and human capital endogenously generate economic growth through the spillover of knowledge. Endogenous growth theory does not explain how or why spillovers occur. The missing link is the mechanism converting knowledge into economically relevant knowledge. This paper develops a model that introduces a filter between knowledge and economic knowledge and identifies entrepreneurship as a mechanism that reduces the knowledge filter. A cross-country regression analysis over the period 1981-2001 provides empirical support for the model. We conclude that public policies facilitating knowledge spillovers through entrepreneurship may be an important new approach to promoting economic growth.
    Keywords: Endogenous growth, knowledge, innovation and entrepreneurship
    JEL: O10 L10
  2. By: ; Paul Beaudry; ; Fabrice Collard; ; David A. Green
    Abstract: Why have some countries done so much better than others over the recent past? In order to shed new light on this issue, this paper provides a decomposition of the change in the distribution of output-per-worker across countries over the period 1960-98. The main finding of the paper is that most of the change in shape of the world distribution of income between 1960-1998 can be accounted for by a very substantial and previously unrecognized change in the parameters driving the growth process. In particular, we show that the role of capital deepening forces - that is the role of investment rates and population growth in affecting output - increased dramatically over the period 1978-98 versus 1960-78, and that this increase can account for almost all the observed changes in the world distribution. In contrast, we do not find any significant effects coming through non-linear convergence mechanisms or increased importance of education; both of which have played prominent roles in recent discussion of economic performance. Our results therefore highlight that the period 1978-98 was particularly advantageous to countries which strongly favored capital accumulation and hence suggests that research aimed at understanding recent differences in economic performances across countries needs to focus on explaining why the social returns to physical capital accumulation where abnormally high over the period 1978-98.
    JEL: O33 O41
    Date: 2004–09
  3. By: ; Jérôme Vandenbussche; Philippe Aghion (Institute for Fiscal Studies and Harvard University); Costas Meghir (Institute for Fiscal Studies and University College London)
    Abstract: We examine the contribution of human capital to economy-wide technological improvements through the two channels of innovation and imitation. We develop a theoretical model showing that skilled labor has a higher growth-enhancing effect closer to the technological frontier under the reasonable assumption that innovation is a relatively more skillintensive activity than imitation. Also, we provide evidence in favor of this prediction using a panel dataset covering 19 OECD countries between 1960 and 2000 and explain why previous empirical research had found no positive relationship between initial schooling level and subsequent growth in rich countries. In particular, we show that in OECD economies it is crucial to isolate the two separate margins of primary/secondary and tertiary education. Interestingly, the latter type of schooling proves to be a factor of economic divergence.
    Date: 2004–08
  4. By: Morris Sebastian
    Abstract: Both India and China began to reform in the early eighties, with the Indian reforms being very slow until 1991-92 after which they 'take-off' While there are many differences the crucial difference is that China adopted the same export led growth (ELG) policies of the successful East Asian economies - South Korea, Taiwan, Singapore, Hong Kong and Thailand, while Indian policies have been distinctly laissez-faire. Orthodoxy’s false understanding of ELG (the East Asian trade strategy), which was as far from laissez faire as can be imagined, is the root cause of the failure of other diversified economies in their pursuit of open door policies. Purposeful and massive under valuation of their currency was part of the East Asian strategy, which while making the ratio of exportables to importables close to their international prices, provided for simultaneous export growth and import substitution; something not possible in orthodoxy’s standard work horse -the 2x2x2 model of international trade. Simultaneous import substitution and export production is theoretically possible for economies with idle resources, with the introduction of third non-traded goods sector. ELG can therefore with compatible with little or no protectionism. This aspect of the East Asian trade (and development) strategy has been poorly understood even by the structuralists who otherwise (on the aspect of the state’s involvement) had demolished the liberal laissez-faire thesis. India's reforms have resulted in considerable discrimination against the manufacturing enterprises. Exports have grown far more slowly than was otherwise possible. The more equal distribution of income in China, and the differences in the macroeconomic policies explain most of the other observed performance differences between the two countries on aspects such as the inward flow of FDI, investment, savings, growth of particular industries. Some of he crucial dimensions of the macroeconomic policies consistent with ELG in the context of China are brought out. These are structural undervaluation of the currency, expansionary monetary policy and exchange rate targeting with only one way openness to the capital account, if at all. The character of FDI itself, which differs sharply between the two countries is related to the differences in the macro economic policies. The Chinese and the East Asian success extends the notion of 'late industrialisation' to one where external demand (along with domestic demand) is realised for the high speed expansion of manufacturing ELG. The supply side of the same strategy is build on exploiting ‘idle’ and underutilised labour which alone is capable of generating the vast gains from trade. Standard models gains from trade are incomparable small in relation. A significant part of the gains do accrue to the destination countries in the from of falling prices so that there are few political difficulties in the pursuit of ELG even by large countries like China. Thus ELG is more akin to a Lewisian process that employs previously underemployed labour for tradables goods production with rising (to high level) investment rates. India is more than ripe for ELG. It can ignore the lessons from the Chinese experience only at much cost to its growth. High growth in excess of 9% is possible with ELG since even with conservatism it is achieving 6+ %. This paper also argues that the mistaken pursuit of laissez-faire as being export led growth in India would only result in the further hollowing out of manufacturing.
    Keywords: India, China, Pure trade theory, multidimensional issues in trade, non-tradables, undervalued exchange rate, Export led growth, import substituion, open economy, development, late-industrialisation
    Date: 2005–03–07
  5. By: Konseiga, Adama (Center for Development Research (ZEF) and IZA Bonn)
    Abstract: In the present globalization era an increasing attention is paid to the ambiguous relationship between international migration, brain drain, and economic growth, but few papers analyzed the growth impact of skilled migration. The paper filled the research gap by building the first dataset on brain drain from seven countries of the western African Union (WAEMU) and highlighted the size of the brain loss toward Côte d’Ivoire and France. Burkina Faso shows a more severe brain drain to Cote d’Ivoire compare to other similar sahelian countries whereas the reverse holds when considering the destination France. The subsequent empirical strategy consists in comparing the growth performance of an economy without migration to the counterpart economy. The regional growth convergence analysis shows higher convergence rate once the brain circulation is accounted for. However, the effect of brain gain holds only for countries with migration outside WAEMU toward an industrialized country (France) and failed when migration, as is the case for Burkina Faso, flows into Cote d’Ivoire the polar economy of the Union. Therefore, migration can be used as a powerful force working toward income convergence between capital-rich and capital-poor countries.
    Keywords: economic growth, brain drain, human capital formation, measurement error, panel estimation
    JEL: E13 F22 J24 C23 O15 C82
    Date: 2005–03
  6. By: Chris Papageorgiou; John Duffy; Fidel Perez-Sebastian
  7. By: Chris Papageorgiou; Fidel Perez-Sebastian
  8. By: Torsten Persson
    Abstract: The paper combines insights from the recent research programs on constitutions and economic policy, and on history, institutions and growth. Drawing on cross-sectional as well as panel data, it presents new empirical results showing that the form of democracy (rather than democracy vs. non-democracy) has important consequences for the adoption of structural polices that promote long-run economic performance. Reforms into parliamentary (as opposed to presidential), proportional (as opposed to majoritarian) and permanent (as opposed to temporary) democracy appear to produce the most growth-promoting policies.
    JEL: F43 H11 O57
    Date: 2005–03
  9. By: Torfinn Harding (Statistics Norway and Department of Economics, Norwegian University of Science and Technology); Jørn Rattsø (Department of Economics, Norwegian University of Science and Technology)
    Abstract: The barrier model of productivity growth suggests that individual country productivity is related to the world technology frontier disturbed by national barriers. We offer a country study of the barrier model exploiting the dramatic changes in the linkages to the world economy in South Africa. The productivity growth in the manufacturing sector panel for 1970-2003 covers a period of political and economic turbulence and international sanctions. The econometric analysis uses tariffs as measure of barrier and fixed effects estimation to concentrate inference to time series properties. The model shows how productivity growth can be understood as a combination of world frontier growth and the tariff barrier to international spillovers. The estimates establish a long run relationship where domestic productivity follows the world frontier and with change of the barrier affecting transitional growth.
    Keywords: Barriers to growth; technology spillover; South Africa; total factor productivity; econometric analysis.
    JEL: F13 F43 O11 O33 O55
    Date: 2005–02–16
  10. By: Hildegunn Ekroll Stokke (Department of Economics, Norwegian University of Science and Technology)
    Abstract: We offer a barrier model of growth with a broader understanding of the sources of productivity growth. Organizational change is suggested as an alternative to innovation and technology adoption. Domestic and international barriers (related to the level of human capital and the trade share) determine the timing and pace of technological catch-up, and as opposed to the catchingup hypothesis backward economies may get stuck in a poverty trap. Growth in lagging economies is not driven by adoption of foreign technology due to inappropriateness. The large technological distance forces the economy to rely more on own productivity improvements through organizational change. Trade liberalization in backward economies does not give the expected boost to productivity growth, because of low capability to take advantage of the frontier technology. Economies can escape the poverty trap by reducing trade barriers, but the benefits from an open economy is highest in middle-income economies, which have both the potential and capability to adopt foreign technology.
    Keywords: Ramsey-model; sources of growth; trade barriers; poverty trap
    JEL: O3 O4
    Date: 2005–02–16
  11. By: Bruno Merlevede; Koen Schoors
    Abstract: Our main interest is the impact of the choice of the speed of economic reform on economic growth. We estimate a system of 3 equations where economic growth, economic reform and FDI are jointly determined. We find that new reforms affect economic growth negatively but attract FDI, whereas the level of past reform leads to higher growth. This means that the immediate adjustment cost of new reforms is counterbalanced by an immediate increase in FDI inflows and higher growth in the future through a higher level of past reform. Reform reversals contribute to lower growth. We use the model to simulate the impact of big bang reform and gradualist reform on economic growth. This is only meaningful in the presence of reform reversals, which requires aggregate uncertainty about the appropriate reform path. Using the coefficients from the empirical model we find that even relatively small ex ante reversal probabilities suffice to tilt the balance in favour of gradualism. This could be reinforced by the shortsightedness of policymakers, but may be moderated by voter myopia.
    Keywords: policy reform, gradualism, big bang, FDI, economic growth
    JEL: O57 P21 P26 P27
    Date: 2004–11–01
  12. By: Solomon Tadesse
    Abstract: Research in development economics reveals that the bulk of cross-country differences in economic growth is attributable to differences in productivity. By some accounts, productivity contributes to more than 60 percent of countries’ growth in per capita GDP. I examine a particular channel through which financial development could explain cross-country and crossindustry differences in realized productivity. I argue that financial development induces technological innovations – a major stimulus of productivity - through facilitating capital mobilization and risk sharing. In a panel of industries across thirty eight countries, I find that financial development explains the cross-country differences in industry rates of technological progress, rates of real cost reduction and rates of productivity growth. I find that the effect of financial development on productivity and technological progress is heterogeneous across industrial sectors that differ in their needs for financing innovation. In particular, industries whose younger firms depend more on external finance realize faster rate of technological change in countries with more developed banking sector.
    Keywords: Financial Development, Productivity Growth, Technological Progress, Innovation
    JEL: G1 G21 G32 E44 O14 O31 O34 O4
    Date: 2005–02–01
  13. By: Richard M. Bird (International Tax Program, Rotman School of Management, University of Toronto); Eric M. Zolt (University of California, Los Angeles)
    Abstract: In developed countries, the income tax, especially the personal income tax, has long been viewed as the primary instrument for redistributing income and wealth. This article examines whether it makes sense for developing countries to rely on the income tax for redistributive purposes. We put forth three propositions. First, the personal income tax has done little to reduce inequality in many developing countries. This failure is not surprising given that in many countries personal income taxes are neither comprehensive nor very progressive - they often amount to little more than withholding taxes on labor income in the formal sector. Moreover, the personal income tax plays such a small role in the tax systems of developing countries that it would be unrealistic to believe that this tax could have a meaningful impact on distribution. Second, it is not costless to pretend to have a progressive personal income tax system. Tax systems generate real administrative, compliance, economic efficiency and political costs. The costs associated with badly designed and badly administered personal income tax systems likely exceed the costs associated with other taxes. There are opportunity costs as well. Third, given the ineffectiveness of the personal income tax, if countries want to use the fiscal system to reduce poverty or reduce inequality, alternative approaches merit consideration. Countries need to make better use of their expenditure programs in targeting resources to the poor. Given the dominance of taxes on consumption in the tax structure of developing countries, the distributional consequences of consumption taxes are of far greater importance than those of the personal income tax. Countries can also make greater use of benefit taxation and in particular fiscal decentralization may allow for better matching of those who benefit and those who pay for government activity. Finally, countries can consider alternatives to taxing income other than the current comprehensive income approach.
    Keywords: redistribution, progressivity, developing countries, tax policy, personal income tax, benefit taxation
    JEL: H22 H24 O15 O17 O23
  14. By: Guillaume Destré (TEAM); Valentine Henrard (TEAM)
    Abstract: This economic study focuses on the determinants of self-employment / wage-work choice using a large sample of Colombian men. The econometric model is based on simultaneous determination of the choice of employment status and potential earnings, it accounts for self-selectivity. Our major findings are : (1) relative potential earnings are the main determinant of occupational choice. (2) Unlike previous studies of self-employment choice, we find a negative selection bias into self-employment. It suggests that in Colombia the decision of becoming independent might be constrained. (3) The differences in potential earnings between the two sectors are mostly due to unobserved factors.
    Keywords: Self-employment; occupational choice; labour markets; Colombia
    JEL: J23 J24 O12
    Date: 2004–05
  15. By: Nicole Madariaga (TEAM); Sylvie Montout (TEAM); Patrice Ollivaud (OECD)
    Abstract: This study examines the theoretical and empirical link between trade integration, the density of activities and per capita income convergence within NAFTA members during the 1980-2000 period and within MERCOSUR partners from 1985 to 2000. We first build a two countries framework based on economic geography theory to explore this link. We introduce differences in wage levels between a rich and a poor region. We find that trade liberalization may have a positive impact on per capita income convergence if countries have initially similar wages and transaction costs are low. Second, the empirical approach refers to two different convergence concepts : homogenization and catch-up. We also determine activities' concentration trends within each trade agreement according to different measures of agglomeration. Afterwards, we use these measures to introduce an agglomeration variable in conditional convergence regressions. The analysis of the sigma and absolute beta-convergence concludes to a divergence between the two NAFTA partners. On the contrary, we observe a process of convergence in the MERCOSUR between 1985 and 2000 even if this process appears to slow down after 1991. Our conditional estimates also show that agglomeration plays a significant and positive role in growth after the implementation of treaties.
    Keywords: Growth; regional convergence; economic geography; trade integration
    JEL: F43 R11 R12 O40
    Date: 2004–04
  16. By: Remi Bazillier (TEAM)
    Abstract: The paper focuses on the impact of international core labour standards on economic growth. In a first step, we build a novel indicator, using correspondence analysis. The paper focuses on the four core labour standards recognized in the 1998 ILO Declaration on Fundamental Principles and Rights at Work. Our two models (modelling of the steady-state-per capita income and modelling of the transition of per-capita income to its steady state value) are estimated for a large panel of countries (108) and, then, only for developing countries, for the period 1960 -1996. We use the Two Stage Least Square Method, to correct for potential problems of endogeneity. For the first model, we find that countries with higher labour standards have a higher steady-state level, all things being equal. Labour standards have positive and robust effects on per-capita income both for the world and developing countries. In the second model, the effects are non-linear. The effects of labour standards are positive and significant but are stronger for countries with medium or good labour standards. Overall, a good compliance with fundamental rights of workers has a positive effect on the long-term income and long-term growth. Thus, the development of core labour standards should be one of the goals of the development strategies.
    Keywords: Economic growth; labour standards; economic development
    JEL: J80 J83 O11
    Date: 2004–03
  17. By: Mohamed Ben Mimoun (TEAM)
    Abstract: We show in this paper that greater inequality in the distribution of wealth implies lower investment in higher education levels and lower aggregate income. Liquidity constraints and indivisibility in human capital investment result in the long-run in multiple equilibria with poverty traps. Although the heterogeneity in individual abilities allows economic mobility is not full : poor individuals with low abilities remain poor forever. The effect of the fiscal redistribution on the level of human capital investment is ambiguous unless for higher levels of income inequality where this effect is positive. Education funding policies however, are shown to be more efficient in enhancing human capital investment and rising interclass and intergenerational economic mobility.
    Keywords: Wealth inequality; human capital; economic mobility; fiscal redistribution; public education expenditures
    JEL: H52 I21 I22 I28 O15
    Date: 2004–11
  18. By: Matteo Cervellati (Universitat Pompeu et Università di Bologna); Piergiuseppe Fortunato (EUREQua et Università di Bologna)
    Abstract: We study the long run relationship between natural resources abundance and wealth of countries producing diffetentiated products sold in the international market. When the price (terms of trade) of national products depend on the human capital used to produce them, natural resources may lead to inferior long run production. This is the case if natural resources are neither irrelevant nor focal for the production possibilities of the economy.
    Keywords: Natural resources; globalization; human capital
    JEL: O13 O42 F43
    Date: 2004–06
  19. By: Cecilia Garcia Penalosa (CNRS, GREQAM and IDEP); Stephen J. Turnovsky (University of Washington)
    Abstract: This paper examines how the tax burden in a developing economy should be distributed between capital income and labor income. We study a two-sector model, where the traditional sector is "informal" and consequently cannot be taxed by the government. In this set up, we find that the optimal (second-best) tax structure in order to raise a certain amount of revenue requires to tax capital income at least as much as labor income, and possibly more.
    Keywords: endogenous growth, optimal taxation, informal sector, developing economies.
    JEL: E62 O17 O23
    Date: 2003–05

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