nep-dev New Economics Papers
on Development
Issue of 2005‒10‒29
twenty-two papers chosen by
Jeong-Joon Lee
Towson University

  3. Structural Change in a Multi-Sector Model of Growth By L. Rachel Ngai; Christopher A. Pissarides
  4. Robust Multidimensional Spatial Poverty Comparisons in Ghana, Madagascar, and Uganda By Jean-Yves Duclos; David Sahn; Stephen D. Younger
  5. Too much consensus could be harmful : measuring the degree of implementation of the Washington consensus and its impact on economic growth By Eric Berr; François Combarnous; Eric Rougier
  6. Foreign Direct Investment, Regional Geographical and Market Conditions, and Regional Development: A Panel Study on China By Mei Wen
  7. Knowledge, Technology Adoption and Financial Innovation By Ana Fernandes
  8. An Empirical Test of a New Theory of Economic Growth ? The Relationship Between External Debt and Economic Development By Carolyn Currie
  11. Coordinating Development: Can Income-based Incentive Schemes Eliminate Pareto Inferior Equilibria? By Philip Bond; Rohini Pande
  12. Do Cash Transfers to Farmers Reduce Migration? Procampo in Mexico By Gabriel Gonzalez-Konig; Quentin Wodon
  13. Remittances and Inequality By Gabriel Gonzalez-Konig; Quentin Wodon
  14. Sources of TFP Growth: Occupational Choice and Financial Deepening By Hyeok Jeong; Robert M. Townsend
  15. Theory and Measurement of Modern Transition By Hyeok Jeong; Yong Kim
  16. Popular Attitudes, Globalization, and Risk By Marcus Noland
  17. Notes on an Endogenous Growth Model with two Capital Stocks II: The Stochastic Case By Dirk Bethmann
  18. The Effects of Structural Reforms on Productivity and Profitabality Enhancing Reallocation: Evidence from Colombia By Eslava, Marcela; Haltiwanger, John; Kugler, Adriana; Kugler, Maurice
  19. Collateral and Risk Sharing in Group Lending: Evidence from an Urban Microcredit Program By Kugler, Maurice; Oppes, Rossella
  20. Regional integration and economic development: A theoretical approach By David-Pascal Dion
  21. Trade, growth and geography: A synthetic By David-Pascal Dion
  22. Measurement Error in Education and Growth Regressions By Miguel Portela; Coen Teulings; Rob Alessie

  1. By: Jorge Higinio Maldonado
    Abstract: Increased access to education will be key in any efforts to improve the quality of rural life and the welfare of the next generation in developing countries. Microfinance programshave been among components of strategies for poverty alleviation that have attempted to address this challenge. This essay uses data from three different surveys of households of clients of microfinance Organizations (MFOs) in Bolivia to examine several channels through which microfinance may exert an influence on Education outcomes. Five channels are identified, designated as income, risk-management, child-labor demand, gender, and information effects. Based on an econometric specification that explains schooling decisions at the household level, regression models are used to examine determinants of education achievements and to make inferences about the potential influence of microfinance, through these channels, on those achievements. The results challenge usual assumptions in microfinance programs. In particular, for some ranges of household income and some types of borrowers, access to loans has conflicting effects on school enrollment. On the one hand, loans increase the demand for education as a result of income, risk-management, gender, and information effects. On the other hand, credit-constrained households that cultivate land or operate labor-intensive microenterprises discover new demands for child labor, either for farming, working in the microenterprise, or taking care of siblings while the mothers operate the new or expanded business. Significant program and policy consequences are derived from these paradoxical results.
    Keywords: microfinance
    JEL: C25
    Date: 2005–08–10
  2. By: Jeffrey G. Williamson
    Abstract: Between 1810 and 1940, a large GDP per capita gap appeared between the industrial core and the poor periphery, the latter producing, increasingly, primary products. Over the same period, the terms of trade facing the periphery underwent a secular boom then bust, peaking in the 1870s or 1890s. These terms of trade trends appear to have been exogenous to the periphery. Additionally, the terms of trade facing the periphery exhibited relatively high volatility. Are these correlations spurious, or are they causal? This Figuerola Lecture, to be given at Carlos III University (Madrid) , argues that they are causal, that secular growth and volatility in the terms of trade had asymmetric effects on core and periphery. On the upswing, the secular rise in its terms of trade had powerful de - industrialization effects in the periphery. Over the full cycle 1810-1940, terms of trade volatility suppressed accumulation and growth in the periphery as well.
    Date: 2005–10
  3. By: L. Rachel Ngai (CEP, London School of Economics and CEPR); Christopher A. Pissarides (CEP, London School of Economics, CEPR and IZA Bonn)
    Abstract: We study a multi-sector model of growth with differences in TFP growth rates across sectors and derive sufficient conditions for the coexistence of structural change, characterized by sectoral labor reallocation, and balanced aggregate growth. The conditions are weak restrictions on the utility and production functions commonly applied by macroeconomists. Per capita output grows at the rate of labor-augmenting technological progress in the capitalproducing sector and employment moves to low-growth sectors. In the limit all employment converges to two sectors, the slowest-growing consumption-goods sector and the capitalgoods sector.
    Keywords: multi-sector growth, structural change, balanced growth, sectoral employment, unbalanced growth
    JEL: O41 O14
    Date: 2005–10
  4. By: Jean-Yves Duclos; David Sahn; Stephen D. Younger
    Abstract: We investigate spatial poverty comparisons in three African countries using multidimensional indicators of well-being. The work is analogous to the univariate stochastic dominance literature in that we seek poverty orderings that are robust to the choice of multidimensional poverty lines and indices. In addition, we wish to ensure that our comparisons are robust to aggregation procedures for multiple welfare variables. In contrast to earlier work, our methodology applies equally well to what can be defined as "union", "intersection", or "intermediate" approaches to dealing with multidimensional indicators of well-being. Further, unlike much of the stochastic dominance literature, we compute the sampling distributions of our poverty estimators in order to perform statistical tests of the difference in poverty measures. We apply our methods to two measures of well-being, the log of household expenditures per capita and children's height-for-age z-scores, using data from the 1988 Ghana Living Standards Survey, the 1993 Enquêtes Permanente auprès des Ménages i Madagascar, and the 1999 National Household Survey in Uganda. Bivariate poverty comparisons are at odds with univariate comparisons in several interesting ways. Most importantly, we cannot always conclude that poverty is lower in urban areas from one region compared to rural areas in another, even though univariate comparisons based on household expenditures per capita almost always lead to that conclusion.
    Keywords: Multidimensional Poverty, Stochastic Dominance, Ghana, Madagascar, Uganda
    JEL: D31 D63 I31 I32
    Date: 2005
  5. By: Eric Berr (CED / IFReDE-GRES, Université Montesquieu Bordeaux IV); François Combarnous (CED / IFReDE-GRES, Université Montesquieu Bordeaux IV); Eric Rougier (CED / IFReDE-GRES, Université Montesquieu Bordeaux IV)
    Abstract: In this paper, we construct a unique quantitative measure of the depth and pace of all aspects of IFI programs — the Washington consensus index (WCI), and we investigate their whole impact on economic growth. Two main conclusions emerge. Firstly, among observed countries, those who come up to Consensus expectations maintain a relatively high degree of government involvement. Secondly, when combined with usual explanatory variables, WCI presents a significant non-linear relation with the probability of getting a higher growth than others get. Thus, it seems that a “too fast” and/or a “too far” implementation of IFI programs, especially in regard of deregulation and monetary orthodoxy, can harm growth in developing countries. L’objectif de ce papier est double. Dans un premier temps, nous construisons un indicateur quantitatif mesurant le degré d’application des programmes des IFI – l’indicateur du consensus de Washington – pour ensuite évaluer par ce biais l’impact de ces programmes sur la croissance économique d’un certain nombre de pays en développement. Deux principales conclusions apparaissent. D’une part, parmi les pays observés, ceux qui répondent le mieux aux attentes des IFI le font en maintenant un certain degré d’implication de l’Etat. D’autre part, une fois introduit dans un modèle usuel de croissance, notre indicateur présente une relation non-linéaire avec la probabilité de bénéficier d’un taux de croissance économique supérieur à celui des autres pays. Ainsi, il apparaît qu’une mise en œuvre trop rapide ou trop importante des programmes des IFI, particulièrement en termes de déréglementation et de politique monétaire, nuit à la croissance des pays en développement. (Full text in english)
    JEL: O11 O19
    Date: 2005–09
  6. By: Mei Wen
    Abstract: This paper uses regional panel data to investigate the mechanism of how FDI has contributed to China’s regional development through quantifying regional marketization level. It is found that FDI inflow generates a demonstration effect in identifying regional market conditions for investment in fixed assets and hence affects industrial location. In addition, its effects on regional export and regional income growth varied across east, central and west China since the second half of the 1990s, depending on FDI-orientation in different regions. In east China, geographical advantage in export attracts FDI inflow and FDI promotes export. In addition, rise of FDI-GDP ratio increases regional share in industrial value added in east China. These effects contribute positively to regional income growth in east China although there is a direct crowding out effect between FDI and domestic investment (as input) in growth. In contrast, the negative impact of FDI inflow in central China on regional export orientation weakens its contribution to regional income growth. Furthermore, contribution of improvement of market mechanism to regional development is evidenced in attracting FDI, in promoting export and directly contributing to regional income growth.
    Keywords: Export-oriented FDI and import substitute FDI, marketization, industrial location, and regional growth
    JEL: F23 O53 P52 R11
    Date: 2005
  7. By: Ana Fernandes
    Abstract: Why are new financial instruments created? This paper proposes the view that financial development arises as a response to the contractual needs of emerging technologies. Exogenous technological progress generates a demand for new financial instruments in order to share risk or overcome private information, for example. A model of the dynamics of technology adoption and the evolution of financial instruments that support such adoption is presented. Early adoption may be required for financial markets to learn the technology; once learned, financial innovation boosts adoption further. Financial learning emerges as a source of technological diffusion. The analysis identifies a causality link from technology to growth which is nonetheless consistent with empirical findings of a positive effect of current financial development on future growth
    Keywords: Technology adoption; financial innovation; learning
    JEL: G20 N20 O30
    Date: 2005–06
  8. By: Carolyn Currie (School of Finance and Economics, University of Technology, Sydney)
    Abstract: Analyses of the nature of debt relying on the theory of rational expectations conclude that the burden of public debt need not fall on future generations if the present generation anticipates the higher taxes needed in the future for debt servicing. However, there have been many instances where increases in budget deficits have been followed by a decrease in the savings propensity of the private sector. Foreign exchange earnings also have to be set aside. It appears that the main problem for countries in an early stage of economic development, is that often the borrowings have not been productively employed so that a national debt crises results. Foreign lenders become increasingly reluctant to lend further amounts to a country, which has been a net capital importer. This paper puts forward a methodology of testing a new theory of economic growth that emphasises key factors determining the success or failure of policies that change underlying economic structures, and hence would lead to an intrinsic monitoring of ?over-borrowing?.
    Keywords: economic growth; debt burden; regulation; ownership structures
    JEL: L33 O11 O38 O47 P11 P52
    Date: 2005–09–01
  9. By: Sarbajit Chaudhuri (Dept. of Economics, Calcutta University, India); Manash Ranjan Gupta (Economic Research Unit, Indian Statistical Institute, Kolkata, India)
    Abstract: The paper analyzes the implications of trade liberalization on the incidence of child labour in a two-sector general equilibrium framework. The supply function of child labour has been derived from the utility maximizing behaviour of the working families. The paper finds that the effect of trade liberalization on the incidence of child labour crucially hinges on the relative factor intensities of the two sectors.
    Keywords: Child labour, general equilibrium, trade liberalization
    JEL: F10 J10 J13 I28
    Date: 2005–10–23
  10. By: Sarbajit Chaudhuri (Dept. of Economics, Calcutta University, India); Ujjaini Mukhopadhyay (Dept. of Economics, Calcutta University, India)
    Abstract: The paper purports to examine the implications of a free education policy and trade liberalization on the child and adult labour markets in the set-up of a Harris-Todaro type general equilibrium model. It has been found that a hike in the education subsidy or inflow of foreign capital may produce counterproductive results on the supply of child labour in the urban area. Moreover, these policies mar raise the level of urban unemployment of adult labour even when two types of labour are not substitutes to each other. The average income of the urban poor families may also decrease as a consequence.
    Keywords: Child labour, urban unemployment of adult labour, general equilibrium, education subsidy, trade liberalization
    JEL: F10 J10 J13 I28
    Date: 2005–10–23
  11. By: Philip Bond (Wharton School, University of Pennsylvania); Rohini Pande (Economic Growth Center, Yale University)
    Abstract: Individuals’ inability to coordinate investment may significantly constrain economic development. In this paper we study a simple investment game characterized by multiple equilibria and ask whether an income-based incentive scheme can uniquely implement the high investment outcome. A general property of this game is the presence of a crossover investment point at which an individual’s incomes from investment and non-investment are equal. We show that arbitrarily small errors in the government’s knowledge of this crossover point can prevent unique implementation of the high investment outcome. We conclude that informational requirements are likely to severely limit a government’s ability to use income-based incentive schemes as a coordination device.
    Keywords: Coordination, Public Policy, Income Taxation, Implementation
    JEL: O21 H23
    Date: 2005–10
  12. By: Gabriel Gonzalez-Konig (School of Economics, Universidad de Guanajuato); Quentin Wodon (The World Bank)
    Abstract: This paper provides a theoretical model to suggest that if cash transfers for farmers have or are perceived to have conditionalities in terms of location (whereby at least some household members must remain at the place of origin to benefit from the transfers), their impact on temporary and permanent migration is uncertain a priori. To test empirically what the impact of the transfers could be, we use data on Procampo, a large transfer program for rural farmers in Mexico implemented since 1994. We find that the impact of Procampo on both permanent and temporary migration has been negative.
    JEL: O15 Q18 J61
  13. By: Gabriel Gonzalez-Konig (School of Economics, Universidad de Guanajuato); Quentin Wodon (The World Bank)
    Abstract: The impact of remittances on inequality is uncertain a priori. However, at the margin, remittances are likely to be more inequality increasing (or less inequality decreasing) in poorer as opposed to richer areas. This is suggested with a simple theoretical model, and tested empirically using survey-based estimates of the Gini income elasticity of remittances in Honduras. The results are robust to alternative distribution weights used for measuring inequality.
    Keywords: Migration, Remittances, Income Distribution.
    JEL: J61 O15
  14. By: Hyeok Jeong; Robert M. Townsend
    Abstract: We develop a method of growth accounting based on the integrated use of transitional growth models and micro data. We decompose total factor productivity (TFP) growth into the occupational-shift effect, financial-deepening effect, capital-heterogeneity effect, and sectoral-Solow-residuals. Applying this method to Thailand, which experienced rapid growth with enormous structural changes between 1976 and 1996, we find that 73 percent of TFP growth is explained by occupational shifts and ?nancial deepening, without presuming exogenous technical progress. Expansion of credit is a major part. We also show the role of endogenous interaction between factor price dynamics and the wealth distribution for TFP.
    Keywords: Total Factor Productivity, Occupation Choice, Financial Deepening
    JEL: O47 O16 J24 D24
    Date: 2005–03
  15. By: Hyeok Jeong; Yong Kim
    Abstract: The process of modernization is neither instantaneous nor homogeneous across countries. Given the large productivity growth gap between traditional and modern sectors, the gradual and varying degree of transition between these technologies seems puzzling. We develop a theory of transition that resolves this puzzle. The key forces are sector-specific complementarity between work-experience and labor, and exogenous technical progress present only in the modern sector. Using nationally representative micro data from the Socio-Economic Survey of Thailand (1976-1996), we measure the theory by estimating cross-sectional earnings functions, and assess if the model captures the observed dynamics of transition. The model jointly explains the gradual and S-shaped transition, stagnant growth of aggregate earnings, and the rise and fall of experience-earnings profiles in Thailand.
    Keywords: Modern Transition, Sector-Specific Complementarity, TFP and Inequality
    JEL: O11 O47 J31 O15
    Date: 2005–08
  16. By: Marcus Noland (Institute for International Economics)
    Abstract: Popular opposition to globalization may be interpreted as xenophobia or hostility to market economics and signal country risk, including the degree of security risk - the possibility that local staff of facilities could be subject to discriminatory treatment, harassment, or attack. This paper integrates the Pew Global Attitudes data into a series of economic models on foreign direct investment (FDI), sovereign ratings, and local entrepreneurship and finds that some responses correlate with economic variables of interest, conveying information beyond what can be explained through standard models. More tolerant countries attract more FDI, obtain better ratings, and exhibit more entrepreneurship.
    Keywords: Globalization, risk, foreign direct investment, sovereign ratings, entrepreneurship
    JEL: F2 O24 M13
    Date: 2004–08
  17. By: Dirk Bethmann
    Abstract: This paper extends the class of stochastic AK growth models with a closed-form solution to the case where there are two capital goods in the model. To be precise, we consider the Uzawa-Lucas model of endogenous growth with human and physical capital. The extension holds, even if an external effect in the use of human capital in goods production occurs. Using the “guess and verify” method, we determine the value function of the social planner in the centralized economy and the value function of the representative agent in the decentralized case. We show that the introduction of income taxes on wages and of a subsidy on physical capital earnings is able to help the decentralized economy in reaching the social optimum, while keeping the policy maker’s budget balanced. Then the time series implications of the model’s solution are derived. In Appendix to the paper the uniqueness of the value functions is proved by using an alternative method.
    Keywords: closed-form solution, value function, saddle path stability, endogenous growth
    JEL: C61 C62
    Date: 2005–06
  18. By: Eslava, Marcela; Haltiwanger, John; Kugler, Adriana; Kugler, Maurice
    Abstract: Estimates for the U.S. suggest that in some sectors productivity enhancing reallocation is the dominant factor in accounting for productivity growth. An open question is whether reallocation is always productivity enhancing. Specifically, in developing countries, market concentration, or barriers to competition, may imply that the reallocation process is not fully efficient. Using a unique plant-level longitudinal dataset for Colombia for the period 1982-1998, we use plant-level quantities and prices to implement a novel sequential methodology to estimate productivity and demand shocks at the plant level. First, we estimate total factor productivity (TFP) with plant-level physical output data, where we use downstream demand to instrument inputs. We then turn to estimating demand shocks and mark-ups with plant-level price data, using TFP to instrument for output in the inverse-demand equation. Market reforms, introduced in the early 1990's, are associated with rising overall productivity that is largely driven by reallocation away from low- and towards high-productivity businesses. Our evidence also points to allocation of activity across businesses being less driven by demand factors after reforms. JEL Classification: F43, L16, O14, O40.
    Keywords: Productivity growth, structural reforms, reallocation, profitability, entry and exit.
    Date: 2004–05–24
  19. By: Kugler, Maurice; Oppes, Rossella
    Abstract: Empirical research on group lending is extensive, but without allowance for collateral to mitigate strategic default. Indeed, lack of credit access has motivated microcredit in rural areas of developing countries, where agents with collateral are very rare. As rural communities have tight-knit hierarchical structures information about borrowers is accessible and enforcement of social sanctions makes collateral superfluous. First, we illustrate in a model how collateral mitigates group default. Second, we study a group lending program in Cotonou, the largest city in Benin with 1.1 million inhabitants. Results show diversification within groups facilitating risk pooling but also increasing expected default costs for safe borrowers. Risky borrowers offset group-default negative spillovers default with collateral, and facilitate credit access to safe borrowers. We find joint liability to be a mechanism for risk sharing in a setting where poor households lack resources for collateral and insurance markets are missing.
    Keywords: Group lending, mutual cosigners, collateral, risk sharing, strategic default, bailout costs. JEL Codes: O12, O17, G20, D82
    Date: 2005–04–01
  20. By: David-Pascal Dion (Department of Economics, University of Mannheim)
    Abstract: We use a model of combined endogenous growth and economic geography to study the impact of regional economic integration on the member and non-member countries of a regional union. Regional integration affects growth through interregional technology diffusion symbolized by knowledge spillovers generated at home and spreading to the partner countries. Spillovers flow from the leader to the follower. Following integration, the lagging country has access to a bigger stock of knowledge that fosters an increase in its rate of growth and extends the diversity of its products. Trade in goods - or in FDI - and flows of ideas are two faces of the same coin. We show that the progressive decrease in transaction costs through the phasing out of barriers to trade together with product imitation can foster growth and convergence in the member countries. However, in order to avoid eventual trade and investment diversions, the non-member should envisage to join the integrated zone.
    Keywords: regional economic integration, endogenous growth, economic geography
    JEL: F12 F15 F43 O18 O30 O41 R11 R12 R13
    Date: 2004–03
  21. By: David-Pascal Dion (Department of Economics, University of Mannheim)
    Abstract: Economic integration affects economic development through two main channels: growth and localization of the economic activities. The theories of endogenous growth and economic geography enable us to understand these mechanisms. We study in this paper their similarities and specificities before suggesting their useful combination within a single model. Indeed, both theories are based on the same Spence-Dixit-Stiglitz monopolistic competition framework. However, they suggest two different approaches to deal with the impact of economic integration. We consider that a third path, by proposing a synthetic approach, better answers the issues raised in terms of economic convergence and divergence by these two sets of models.
    Keywords: regional economic integration, endogenous growth, economic geography
    JEL: F12 F15 F43 O18 O30 O41 R11 R12 R13
    Date: 2004–03
  22. By: Miguel Portela; Coen Teulings; Rob Alessie
    Abstract: The perpetual inventory method used for the construction of education data per country leads to systematic measurement error. This paper analyses the effect of this measurement error on GDP regressions. There is a systematic difference in the education level between census data and observations constructed from enrolment data. We discuss a methodology for correcting the measurement error. The standard attenuation bias suggests that using these corrected data would lead to a higher coe.cient. Our regressions reveal the opposite. We discuss why the measurement error yields an overestimation. Our analysis contributes to an explanation of the difference between regressions based on 5 and on 10 year first--differences.
    Keywords: growth, education, measurement error
    JEL: I2 O4
    Date: 2004–04

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