nep-dev New Economics Papers
on Development
Issue of 2005‒06‒14
twenty-six papers chosen by
Jeong-Joon Lee
Towson University

  1. Natural Resources and Economic Growth: From Dependence to Diversification By Gylfason, Thorvaldur
  2. Growth, Distance to Frontier and Composition of Human Capital By Aghion, Philippe; Meghir, Costas; Vandenbussche, Jérôme
  3. Child Labour, Crop Shocks and Credit Constraints By Beegle, Kathleen; Dehejia, Rajeev H; Gatti, Roberta
  4. Does Longevity Cause Growth? By Hazan, Moshe; Zoabi, Hosny
  5. Forms of Democracy, Policy and Economic Development By Persson, Torsten
  6. Neoclassical Growth and the 'Trivial' Steady State By Hakenes, Hendrik; Irmen, Andreas
  7. The Early Modern Great Divergence: Wages, Prices and Economic Development in Europe and Asia, 1500-1800 By Broadberry, Stephen N; Gupta, Bishnupriya
  8. The Need for Institutional Changes in the Global Financial System: An Analytical Framework By Claessens, Stijn; Underhill, Geoffrey R D
  9. Reforming the Formula: A Modest Proposal for Introducing Development Outcomes in IDA Allocation Procedures By Kanbur, Ravi
  10. The Impact of TFP Growth on Steady-State Unemployment By Pissarides, Christopher; Vallanti, Giovanna
  11. The Effects of Technical Change on Labour Market Inequalities By Hornstein, Andreas; Krusell, Per; Violante, Giovanni L
  12. The Replacement Problem in Frictional Economies: An 'Equivalence Result' By Hornstein, Andreas; Krusell, Per; Violante, Giovanni L
  13. Global View of Economic Growth By Ventura, Jaume
  14. Political Predation and Economic Development By Azam, Jean-Paul; Bates, Robert H; Biais, Bruno
  15. Gifted Kids or Pushy Parents? Foreign Acquisitions and Plant Performance in Indonesia By Arnold, Jens; Javorcik, Beata Smarzynska
  16. India's De-Industrialization Under British Rule: New Ideas, New Evidence By Clingingsmith, David; Williamson, Jeffrey G
  17. Economic Transition and Growth By Peter C.B. Phillips; Donggyu Sul
  18. The Method of Endogenous Gridpoints for Solving Dynamic Stochastic Optimization By Christopher D. Carroll
  19. Corruption, Inequality and Fairness By Alberto Alesina; George-Marios Angeletos
  20. Wealth, Poverty and Sustainable Development By David Barkin
  21. THE NEW GROWTH THEORIES AND THEIR EMPIRICS, Discussion Paper in Economics, University of Glasgow, N. 2005-04 ( By Rosa Capolupo
  22. Another look at the inflation-productivity trade-off By Georgios Bitros; Epaminondas Panas
  23. Social Connections and Group Banking By Dean S. Karlan
  24. The Balassa-Samuelson Hypothesis Forty Years Later By Berthold Herrendorf; Akos Valentinyi
  25. Shadow Economies of 145 Countries all over the World: What Do We Really Know? By Friedrich Schneider
  26. Regional redistribution policy and welfare in a two-region endogenous growth model By Yutaro Murakami

  1. By: Gylfason, Thorvaldur
    Abstract: This Paper reviews the relationship between natural resource dependence and economic growth, and stresses how natural capital intensity tends to crowd out foreign capital, social capital, human capital, physical capital, and financial capital, thereby impeding economic growth across countries. Specifically, the Paper presents empirical cross-country evidence to the effect that nations that depend heavily on their natural resources tend to have (a) less trade and foreign investment, (b) more corruption, (c) less equality, (d) less political liberty, (e) less education, (f) less domestic investment, and (g) less financial depth than other nations that are less well endowed with, or less dependent on, natural resources. This matters for long-run growth because empirical evidence also suggests that trade, honesty, equality, liberty, education, investment, and financial maturity are all positively and significantly related to economic growth across countries. Before concluding, the Paper briefly compares and contrasts the experience of the OPEC countries with that of Norway, a singularly successful oil producer.
    Keywords: economic growth; natural resources
    JEL: O11
    Date: 2004–12
  2. By: Aghion, Philippe; Meghir, Costas; Vandenbussche, Jérôme
    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 labour has a higher growth-enhancing effect closer to the technological frontier under the reasonable assumption that innovation is a relatively more skill intensive activity than imitation. Also, we provide evidence in favour 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.
    Keywords: convergence; economic growth; education; human capital; imitation; innovation; technological frontier; wave
    JEL: I20 O30 O40
    Date: 2005–01
  3. By: Beegle, Kathleen; Dehejia, Rajeev H; Gatti, Roberta
    Abstract: This paper examines the relationship between household income shocks and child labour. In particular, we investigate the extent to which transitory income shocks lead to increases in child labour and whether household access to credit mitigates the effects of these shocks. Using data from a household panel survey in Tanzania, we find that both relationships are significant. We provide evidence that credit constraints could plausibly account for our results, but also discuss alternative interpretations.
    Keywords: child labour; credit constraints; income shocks
    JEL: D13 J22 O16
    Date: 2005–01
  4. By: Hazan, Moshe; Zoabi, Hosny
    Abstract: This article challenges conventional wisdom by arguing that greater longevity cannot explain the significant accumulation of human capital during the transition from stagnation to growth. This is because greater longevity raises children’s future income proportionally at all levels of education, leaving the relative return between quality and quantity unaffected. This result is consistent with historical evidence that longevity began to increase long before education did. Our theory also casts doubts on recent findings about a positive effect of health on education. This is because health raises the marginal return on quality and quantity, resulting in an ambiguous effect on the accumulation of human capital. We conclude that longevity and health have had a minor effect, if any, on the transition from stagnation to growth via investment in education.
    Keywords: education; fertility; growth; health; longevity
    JEL: I10 I20 J10 O11 O40
    Date: 2005–02
  5. By: Persson, Torsten
    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.
    Keywords: democratic institutions; economic performance; growth promoting policy
    JEL: F43 H11 O57
    Date: 2005–02
  6. By: Hakenes, Hendrik; Irmen, Andreas
    Abstract: If capital is an essential input, the neoclassical growth model has a steady state with zero capital. From this, one is inclined to conclude that an economy starting without capital can never grow. We challenge this view and claim that, if the production function satisfies the Inada conditions, a take-off is possible even though the initial capital stock is zero and capital is essential. Since the marginal product of capital is initially infinite, the ‘trivial’ steady state becomes so unstable that the solution to the equation of motion involves the possibility of a take-off, even without capital. When it happens, the take-off is spontaneous; there is no causality.
    Keywords: capital accumulation; industrializtion; neoclassical growth model
    JEL: N60 O11 O14 O41
    Date: 2005–03
  7. By: Broadberry, Stephen N; Gupta, Bishnupriya
    Abstract: Contrary to the claims of Pomeranz, Parthasarathi and other ‘world historians’, the prosperous parts of Asia between 1500 and 1800 look similar to the stagnating southern, central and eastern parts of Europe rather than the developing northwestern parts. In the advanced parts of India and China, grain wages were comparable to those in northwestern Europe, but silver wages, which conferred purchasing power over tradable goods and services, were substantially lower. The high silver wages of northwestern Europe were not simply a monetary phenomenon, but reflected high productivity in the tradable sector. The ‘Great Divergence’ between Europe and Asia was already well underway before 1800.
    Keywords: asia; development; europe; prices; wages
    JEL: N10 N30 O10
    Date: 2005–03
  8. By: Claessens, Stijn; Underhill, Geoffrey R D
    Abstract: The international financial system has been the subject of much debate following the financial crises of the 1990s. While many reforms have been proposed for and implemented by mostly developing countries, few changes have been made to the international financial system itself. Fundamentally, the design, institutions, and governance of the international system remain very similar to those of two decades ago. The major changes in global financial markets, financial services industries and economies during this period, however, have rendered the international financial system and its governance of out date. In this paper, we analyse the causes and consequences of the failure to reform. We highlight the forces driving the need for changes in the governance of the international financial system, in particular the combination of the global integration processes and the increased role of the private sector. We then provide insights into the desirable institutional structure for international financial decision-making, also as it relates to the legitimacy of the international system in the eyes of the public worldwide. We also discuss the (political economy) factors inhibiting reform. We conclude with suggestions for future research.
    Keywords: international financial arrangements; international financial institutions; international governance; legitimacy; political economy
    JEL: F33 F34 K33 N20 O19 P50
    Date: 2005–03
  9. By: Kanbur, Ravi
    Abstract: This paper develops a modest proposal for introducing final outcome indicators in the IDA aid allocation formula. It starts with a review of the current formula and the rationale for it. It is argued that this formula, and in particular the Country Policy and Institutional Assessment (CPIA) part of it, implicitly relies too heavily on a uniform model of what works in development policy. Even if this model were valid ‘on average’, the variations around the average make it an unreliable sole guide to the country-specific productivity of aid in achieving the final objectives of development. Rather, it is argued that changes in the actual outcomes on these final objectives could also be used as part of the allocation formula. A number of conceptual and operational objections to this position are considered and debated. The paper concludes that there is much to be gained by taking small steps in the direction of introducing outcome variables in the IDA formula, and assessing the experience of doing so in a few years' time.
    Keywords: IDA; performance-based aid allocation
    JEL: O19
    Date: 2005–03
  10. By: Pissarides, Christopher; Vallanti, Giovanna
    Abstract: Theoretical predictions of the impact of TFP growth on unemployment are ambiguous, and depend on the extent to which new technology is embodied in new jobs. We evaluate a model with embodied and disembodied technology, capitalization, and creative destruction effects by estimating the impact of TFP growth on unemployment in a panel of industrial countries. We find a large negative impact which implies that embodied technology and creative destruction play no role in the steady-state dynamics of unemployment. Capitalization effects explain some of the estimated impact but a part remains unexplained.
    Keywords: capitalization effect; creative destruction; embodied technology; TFP growth; unemployment
    JEL: E24 J64 O51 O52
    Date: 2005–04
  11. By: Hornstein, Andreas; Krusell, Per; Violante, Giovanni L
    Abstract: In this chapter we inspect economic mechanisms through which technological progress shapes the degree of inequality among workers in the labour market. A key focus is on the rise of US wage inequality over the past 30 years. However, we also pay attention to how Europe did not experience changes in wage inequality but instead saw a sharp increase in unemployment and an increased labour share of income, variables that remained stable in the US We hypothesize that these changes in labour market inequalities can be accounted for by the wave of capital-embodied technological change, which we also document. We propose a variety of mechanisms based on how technology increases the returns to education, ability, experience, and ‘luck’ in the labour market. We also discuss how the wage distribution may have been indirectly influenced by technical change through changes in certain aspects of the organization of work, such as the hierarchical structure of firms, the extent of unionization, and the degree of centralization of bargaining. To account for the US-Europe differences, we use a theory based on institutional differences between the United States and Europe, along with a common acceleration of technical change. Finally, we briefly comment on the implications of labour market inequalities for welfare and for economic policy.
    Keywords: inequality; institutions; labour market; skills; technological change
    JEL: D30 J30 O30
    Date: 2005–04
  12. By: Hornstein, Andreas; Krusell, Per; Violante, Giovanni L
    Abstract: We examine how technological change affects wage inequality and unemployment in a calibrated model of matching frictions in the labour market. We distinguish between two polar cases studied in the literature: a ‘creative destruction’ economy where new machines enter chiefly through new matches, and an ‘upgrading’ economy where machines in existing matches are replaced by new machines. Our main results are: (i) these two economies produce very similar quantitative outcomes, and (ii) the total amount of wage inequality generated by frictions is very small. We explain these findings in light of the fact that, in the model calibrated to the US economy, both unemployment and vacancy durations are very short, i.e., the matching frictions are quantitatively minor. Hence, the equilibrium allocations of the model are remarkably close to those of a frictionless version of our economy where firms are indifferent between upgrading and creative destruction, and where every worker is paid the same market-clearing wage. These results are robust to extensions of the benchmark model that incorporate machine-specific and match-specific heterogeneity.
    Keywords: creative destruction; inequality; technical change; unemployment; upgrading
    JEL: J41 J64 O33
    Date: 2005–04
  13. By: Ventura, Jaume
    Abstract: This paper integrates in a unified and tractable framework some of the key insights of the field of international trade and economic growth. It examines a sequence of theoretical models that share a common description of technology and preferences but differ on their assumptions about trade frictions. By comparing the predictions of these models against each other, it is possible to identify a variety of channels through which trade affects the evolution of world income and its geographical distribution. By comparing the predictions of these models against the data, it is also possible to construct coherent explanations of income differences and long-run trends in economic growth.
    Keywords: economic growth; globalization; international trade
    JEL: F10 F15 F40 F43 O11 O40 O41
    Date: 2005–05
  14. By: Azam, Jean-Paul; Bates, Robert H; Biais, Bruno
    Abstract: Economic growth occurs as resources are reallocated from the traditional sector to the more productive modern sector. Yet, the latter is more vulnerable to political predation. Hence, political risk hinders development. We analyse a politico-economic game between citizens and governments, whose type (benevolent or predatory) is unknown to the citizens. In equilibrium, opportunistic governments mix between predation and restraint. As long as restraint is observed, political expectations improve and the economy grows. Once there is predation, the reputation of the current government is ruined and the economy collapses. If citizens are unable to overthrow this government, the collapse is durable. Otherwise, a new government is drawn and the economy can rebound. Equilibrium dynamics are characterized as a Markov chain. Consistent with stylized facts, equilibrium political and economic histories are random, unstable and exhibit long-term divergence. Our theoretical model also generates new empirical implications on the joint dynamics of income inequality, output and political variables.
    Keywords: Economic Development; Political Economy; political predation; reputation
    JEL: D82 H11 O00 O17
    Date: 2005–05
  15. By: Arnold, Jens; Javorcik, Beata Smarzynska
    Abstract: This paper uses micro data from the Indonesian Census of Manufacturing to analyse the causal relationship between foreign ownership and plant productivity. To control for the possible endogeneity of the FDI decision, a difference-in-differences approach is combined with propensity score matching. An advantage of this method, which has not been previously applied in this context, is the ability to follow the timing of observed changes in productivity and other aspects of plant performance. The results suggest that foreign ownership leads to significant productivity improvements in the acquired plants. The improvements become visible in the acquisition year and continue in subsequent periods. After three years, the acquired plants outperform the control group in terms of productivity by 34 percentage points. The data also suggest that the rise in productivity is a result of restructuring, as acquired plants increase investment outlays, employment and wages. Foreign ownership also appears to enhance the integration of plants into the global economy through increased exports and imports.
    Keywords: acquisition; foreign direct investment; productivity
    JEL: D24 F23 O33
    Date: 2005–05
  16. By: Clingingsmith, David; Williamson, Jeffrey G
    Abstract: India was a major player in the world export market for textiles in the early 18th century, but by the middle of the 19th century it had lost all of its export market and much of its domestic market. Other local industries also suffered some decline, and India underwent secular de-industrialization as a consequence. While India produced about 25% of world industrial output in 1750, this figure fell to only 2% by 1900. We use an open, specific-factor model to organize our thinking about the relative role played by domestic and foreign forces in India’s de-industrialization. The construction of new relative price evidence is central to our analysis. We document trends in the ratio of export to import prices (the external terms of trade) from 1800 to 1913, and that of tradable to non-tradable goods and own-wages in the tradable sectors going back to 1765. With this new relative price evidence in hand, we ask how much of the de-industrialization was due to local supply-side influences (such as the demise of the Mughal empire) and how much to world price shocks (such as world market integration and rapid productivity advance in European manufacturing), both of which had to deal with an offset – the huge net transfer from India to Britain before 1815. Whether the Indian de-industrialization shocks and responses were big or small is then assessed by comparisons with other parts of the periphery.
    Keywords: 18th and 19th century; de-industrialization; globalization; India; price shocks
    JEL: F10 N70 O20
    Date: 2005–05
  17. By: Peter C.B. Phillips (Cowles Foundation, Yale University); Donggyu Sul (Dept. of Economics, University of Auckland)
    Abstract: Some extensions of neoclassical growth models are discussed that allow for cross section heterogeneity among economies and evolution in rates of technological progress over time. The models offer a spectrum of transitional behavior among economies that includes convergence to a common steady state path as well as various forms of transitional divergence and convergence. Mechanisms for modeling such transitions and measuring them econometrically are developed in the paper. A new regression test of convergence is proposed, its asymptotic properties are derived and some simulations of its finite sample properties are reported. Transition curves for individual economies and subgroups of economies are estimated in a series of empirical applications of the methods to regional US data, OECD data and Penn World Table data.
    Keywords: Economic growth, Growth convergence, Heterogeneity, Neoclassical growth, Relative transition, Transition curve, Transitional divergence
    JEL: O30 O40 C33
    Date: 2005–06
  18. By: Christopher D. Carroll
    Abstract: This paper introduces a method for solving numerical dynamic stochastic optimization problems that avoids rootfinding operations. The idea is applicable to many microeconomic and macroeconomic problems, including life cycle, buffer-stock, and stochastic growth problems. Software is provided.
    JEL: C6 D9 E2
    Date: 2005–06
  19. By: Alberto Alesina; George-Marios Angeletos
    Abstract: Bigger governments raise the possibilities for corruption; more corruption may in turn raise the support for redistributive policies that intend to correct the inequality and injustice generated by corruption. We formalize these insights in a simple dynamic model. A positive feedback from past to current levels of taxation and corruption arises either when wealth originating in corruption and rent seeking is considered unfair, or when the ability to engage in corruption is unevenly distributed in the population. This feedback introduces persistence in the size of the government and the levels of corruption and inequality. Multiple steady states exist in some cases.
    JEL: D31 E62 H2 P16
    Date: 2005–06
  20. By: David Barkin (Universidad Autonoma Metropolitana, Xochimilco, Mexico)
    Abstract: An analysis of the underlying causes of environment destruction debunks the idea that the poor are the principal cause of environmental degradation in present-day societies. The paper also identifies some of the major areas of economic theory and institutional biases in market economies that generate obstacles to the 'proper' functioning of markets. As a result, even the more advanced prescriptions of modern environmental economics are incapable of explaining the deepening of social and economic polarization and the worsening of the environmental conditions in which poor people must exist. The paper ends with a proposal for overcoming this growing crisis through local participation and action.
    Keywords: political ecology; sustainability; polarization; heterodox economics; development alternatives
    JEL: Q
    Date: 2005–06–09
  21. By: Rosa Capolupo (Dipartimento di Scienze Economiche)
    Abstract: The aim of this paper is to update the reviews on endogenous growth theories in order to explore whether recent empirical studies are more supportive of their main predictions. Among the core topics studied in the growth econometric framework, namely, convergence, identifications of growth determinants and factors responsible of growth differences in the data, the primary focus of this paper is on the last two. Since the use of econometrics was originally motivated by convergence issues, in this work we will review econometric studies that test primarily the relevance of endogenous models in terms of significance and robustness of growth’s determinant coefficients. We argue that: (i) causal inference drawn from the empirical growth literature remains highly questionable, ii) there are estimates for a wide range of potential factors but their magnitude and robustness are still under debate. Overall, however, if properly interpreted, endogenous growth models' predictions are increasingly gaining empirical support.
    Keywords: endogenous growth, growth regressions, convergence
    JEL: O47 O41 C31
    Date: 2005–06–06
  22. By: Georgios Bitros (Athens University of Economics & Business); Epaminondas Panas (Athens University of Economics & Business)
    Abstract: Our aim in this paper is to test the robustness of the relation between total factor productivity growth and inflation to the specification of the model adopted for its identification. In doing so we estimate a generalized Box-Box cost function using data from the two-digit Standard Industrial Classification of manufacturing industries in Greece during the period 1964-1980. The results confirm that the acceleration of inflation from 1964-1972 to 1973-1980 reduced total factor productivity growth in a way that was both statistically significant and sizeable. In addition, they reveal that, even when the effect of inflation is separated from the effects of technical change and economies of scale, the choice of functional form is most crucial. The reason being that cost functions such as the translog, the generalized Leontief, and the generalized square root quadratic are not general enough to account for the sensitivity of estimates to model specification. On these grounds then we conclude that, for a precise estimation of the adverse impact of inflation on total factor productivity growth, it is imperative both to sort out the three effects involved and do so by adopting the most general flexible functional form available for the cost function.
    Keywords: inflation, total factor productivity, generalized Box-Cox cost function, economic growth
    JEL: E31 O47
    Date: 2005–06–02
  23. By: Dean S. Karlan (Economic Growth Center, Yale University)
    Abstract: Lending to the poor is expensive due to high screening, monitoring, and enforcement costs. Group lending advocates believe lenders overcome this by harnessing social connections. Using data from FINCA-Peru, I exploit a quasi-random group formation process to find evidence of peers successfully monitoring and enforcing joint-liability loans. Individuals with stronger social connections to their fellow group members (i.e., either living closer or being of a similar culture) have higher repayment and higher savings. Furthermore, I observe direct evidence that relationships deteriorate after default, and that through successful monitoring, individuals know who to punish and who not to punish after default.
    Keywords: Microfinance, Group lending, informal savings, social capital
    JEL: O12 O16 O17 Z13
  24. By: Berthold Herrendorf (W. P. Carey School of Business Department of Economics); Akos Valentinyi (University of Southampton)
    Abstract: It is well known that there are big cross-country differences in aggregate TFP. Are these differences uniform across sectors or are they driven by even larger TFP differences in specific sectors? Some forty years ago, Balassa and Samuelson hypothesized that the biggest TFP differences are in the tradable sectors. Providing empirical support for this hypothesis is hard because of the lack of data on sector inputs and outputs, at least outside the OECD. We get around this problem by employing economic theory to infer the missing information from the expenditure and price data of the 1996 Benchmark Study of the Penn World Tables. We distinguish between tradable and nontradable consumption and investment. We find that Balassa and Samuelson were right: the cross-country TFP differences are much larger in the tradable sectors than in the nontradables ones.
  25. By: Friedrich Schneider
    Abstract: Estimations of the size and development of the shadow economy for 145 countries, including developing, transition and highly developed OECD economies over the period 1999 to 2003 are presented. The average size of the shadow economy (as a percent of “official” GDP) in 2002/03 in 96 developing countries is 38.7%, in 25 transition countries 40.1%, in 21 OECD countries 16.3% and in 3 Communist countries 22.3%. An increased burden of taxation and social security contributions, combined with a labor market regulation are the driving forces of the shadow economy. Finally, the various estimation methods are discussed and critically evaluated.
    Keywords: shadow economy of 145 countries; tax burden; tax moral; quality of state institutions; regulation; DYMIMIC and other estimation methods
    JEL: O17 O5 D78 H2 H11 H26
    Date: 2005–06
  26. By: Yutaro Murakami (Graduate School of Economics, Osaka University)
    Abstract: This paper constructs a two-region endogenous growth model with productive government expenditure to analyze the relationship between regional redistribution of public input and the welfare of residents in each region. This paper shows that the redistribution policy may be Pareto improving if the distribution rate of a more populous region is increased because it raises the equilibrium growth rate. Furthermore, the higher the inequalities between the labor populations are, the greater the possibility of a Pareto improving policy.
    Keywords: Endogenous growth; Government expenditure; Regional distribution; Welfare; Pareto improving policy
    JEL: H53 O41 R58
    Date: 2005–03

This nep-dev issue is ©2005 by Jeong-Joon Lee. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.