nep-dev New Economics Papers
on Development
Issue of 2006‒02‒26
24 papers chosen by
Jeong-Joon Lee
Towson University

  1. Fiscal Decentralization and Economic Growth: A Comparative Study of China and India By Jorge Martinez-Vazquez; Mark Rider
  2. China's Fiscal System: A Work in Progress By Richard Bird; Christine C.P.Wong
  3. Spillovers from Foreign Direct Investment: Within or between Industries? By Maurice Kugler
  4. Urban Social Exclusion in Transitional China By Bingqin Li
  5. Poverty and Inequality and Social Policy in China By Bingqin Li; David Piachaud
  6. Growth and Inequality: A Demographic Explanation By Kazutoshi Miyazawa
  7. Political Selection and the Quality ofGovernment: Evidence from South India By Timothy Besley; Rohini Pande; Vijayendra Rao
  8. The Effect of the One-Child Policy on Fertility in China: Identification Based on the Differences-in-Differences By Hongbin Li; Junsen Zhang; Yi Zhu
  9. Why Does Spousal Education Matter for Earnings? Assortative Mating or Cross-productivity By Chong Huang; Hongbin Li; Pak Wai Liu; Junsen Zhang
  10. Mother's Education and Child Health: Is There a Nurturing Effect? By Yuyu Chen; Hongbin Li
  11. Total Factor Productivity Growth and Employment: A Simultaneous Equations Model Estimate By Maria Gabriela Ladu
  12. Growth and Employment: A survey on the Demand Side of the Labour Market By Maria Gabriela Ladu
  13. Convergence and divergence in Neoclassical Growth models with human capital By Adriana Di Liberto
  14. Collateral and Risk Sharing in group lending: evidence from an urban microcredit program By Maurice Kugler; Rossella Oppes
  15. Agglomeration and Growth in the NEG: a critical assessment By Fabio Cerina; Francesco Pigliaru
  16. Banks, Financial Markets and Growth By Luca Deidda; Bassam Fattouh
  17. RELATIVE AND ABSOLUTE POVERTY. THE CASE OF MÉXICO, 1992-2004 By Javier Ruiz-Castillo Ucelay
  18. Parental Attitudes toward Children and Child Labor: Evidence from Rural India By Shunsuke Sakamoto
  19. Attracting FDI: Further Evidence on Infrastructure, Corruption, and Taxes from Panel Data By Timothy J. Goodspeed
  20. India's Patterns of Development: What Happened, What Follows By Kalpana Kochhar; Utsav Kumar; Raghuram Rajan; Arvind Subramanian
  21. The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India By Philipee Aghion; Robin Burgess; Stephen Redding; Fabrizio Zilibotti
  22. Legal-Political Factors and the Historical Evolution of the Finance-Growth Link By Michael D. Bordo; Peter L. Rousseau
  23. Economic Transformation, Population Growth and the Long-Run World Income Distribution By Marcos Chamon; Michael Kremer
  24. Exports and Slow Economic Growth in the Lower South Region, 1720-1800 By Peter C. Mancall; Joshua Rosenbloom; Thomas Weiss

  1. By: Jorge Martinez-Vazquez (Andrew Young School of Policy Studies); Mark Rider (Andrew Young School of Policy Studies)
    Abstract: Although there are obvious differences in the political systems of China and India, there are surprising similarities in their respective approaches to decentralization. Both countries face similar design issues with their intergovernmental systems, such as the lack of clear expenditure assignments, high transfer dependency, low revenue autonomy, and soft budget constraints. As a result, in both countries there is a lack of aggregate fiscal discipline among sub-national governments, and the quality of sub-national government service delivery is poor. Poor service delivery and the lack of fiscal discipline threaten the ability of both countries to sustain high rates of economic growth.
    Keywords: China, India, Fiscal Decentralization, Economic Growth, Intergovernmental fiscal
    Date: 2005–10–01
  2. By: Richard Bird (Andrew Young School of Policy Studies); Christine C.P.Wong (University of Washington)
    Abstract: We argue in this paper that unless China begins to tackle more systematically the serious problems that have emerged in the finances of its various levels of sub-national government the problems to which the present unsatisfactory system give rise will over time increasingly distort resource allocation, increase distributional tensions, and slow down the impressive recent growth of the Chinese economy. Despite the lack of solid and reliable information on the size and nature of China’s real fiscal system, we show that the evidence available is generally consistent with this pessimistic reading. China’s fiscal and – in time – economic future thus rests to some extent on reforms to key aspects of its fiscal system, especially its intergovernmental finances. Moreover, a more consistent and purposive framework to this complex of problems seems needed. Given the scale and scope of China’s underlying public finance problems, the ‘reactive gradualism’ evidenced in recent ad hoc reforms to this or that piece of the fiscal system has, we suggest, run its course.
    Keywords: Chima. Sun-national government, Fiscal system, China's fiscal system
    Date: 2005–11–01
  3. By: Maurice Kugler
    Abstract: This paper contributes an estimation framework to measure both technological and linkage externalities from foreign direct investment (FDI). Empirical research dealt mainly with intra-industry spillovers from FDI with restrictive treatment of inter-industry effects until recently. However, as optimal organization of the multinational corporation (MNC) involves minimization of profit losses due to leakage of technical information to competitors, host country firms within the MNC’s sector experience limited productivity gains ensuing FDI. Host-country producers in other sectors may benefit. For example, MNCs transfer knowledge to local downstream clients, or outsource to local upstream suppliers. Hence, FDI substitutes within-sector domestic investment but complements it across sectors. The net impact on aggregate capital formation by host-country producers hinges on the interaction between linkages and spillovers. Estimations based on the Colombian Manufacturing Census yield the sectoral pattern of FDI spillovers displaying knowledge propagation between but not within industries. The findings reveal outsourcing relationships of MNCs with local upstream suppliers as a channel of diffusion.
    Keywords: Foreign direct investment, inter-industry spillovers; generic technology; vertical linkages; absorptive capacity.
    JEL: O41 F43 F21 F23 C52
  4. By: Bingqin Li
    Abstract: This paper demonstrates that urban social exclusion in China does not only include restricted participation by the ¿underclass¿ in urban life, but also the deprivation of certain political, social and economic rights. In addition, the paper describes how the character of urban social exclusion has changed over time. The author also examines the social exclusion of rural workers living and working in urban areas. The paper concludes by arguing that urban social exclusion in China needs coordinated reforms that target the whole set of problems in the urban ¿underclass¿ lacking political rights, social protection and economic opportunities.
    Keywords: social exclusion, urban China, rural to urban migrants
    JEL: J43 R23 I30
    Date: 2004–03
  5. By: Bingqin Li; David Piachaud
    Abstract: Despite prolonged economic growth, poverty has become a more notable and noted feature of Chinese society. The paper examines three phases of development since the foundation of the People's Republic: the central planning era (1949 -1978); the pro-urban growth model (1978 - 1999); and more recent changes (1999 - 2004). For each phase the nature of the economic and social policies are described and the effects on poverty and inequality are examined. The limitations of a social policy that is subservient to the economic strategy are considered. The alternative of a model of social development based on the livelihood approach is analysed and its potential to reduce poverty and inequality are considered.
    Keywords: poverty, inequality, social policy, China, livelihoods, social development
    JEL: I3
    Date: 2004–11
  6. By: Kazutoshi Miyazawa
    Abstract: This paper investigates the relationship between growth and inequality from a demographicpoint of view. In an extended model of the accidental bequest with endogenous fertility, weanalyze the effects of a decrease in the old-age mortality rate on the equilibrium growth rateas well as on the income distribution. We show that the relationship between growth andinequality is at first positive and then may be negative in the process of population aging. Theresults are consistent with the empirical evidence in some developed countries.
    Keywords: Inequality, Growth, Fertility, Accidental bequest
    JEL: D31 J13 O41
    Date: 2005–07
  7. By: Timothy Besley; Rohini Pande; Vijayendra Rao
    Abstract: This paper uses household data from India to examine the economic and socialstatus of village politicians, and how individual and village characteristics a®ectpolitician behavior while in o±ce. Education increases the chances of selectionto public o±ce and reduces the odds that a politician uses political poweropportunistically. In contrast, land ownership and political connections enableselection but do not a®ect politician opportunism. At the village level, changesin the identity of the politically dominant group alters the group allocation ofresources but not politician opportunism. Improved information °ows in thevillage, however, reduce opportunism and improve resource allocation.
    Date: 2005–08
  8. By: Hongbin Li; Junsen Zhang; Yi Zhu
    Abstract: This paper measures the effect of China's one-child policy on fertility by exploring the natural experiment that has been created by China's unique affirmative birth control policy, which is possibly the largest social experiment in human history. Because the one-child policy only applied to Han Chinese, but not to ethnic minorities, we construct a differences-in-differences estimator to identify the effect of the policy on fertility. Such a natural experiment is a rare opportunity, whether for the analysis of the effect on fertility or for the analysis of economics in general. Using two rounds of the Chinese Population Census, we find that the one-child policy has had a large effect on fertility. The average effect on the post-treatment cohorts on the probability of having a second child is as large as -11 percentage points. We also find that the magnitude is larger in urban areas and for more educated women. Our robustness tests suggest that our differences-in-differences estimates of the effect of the one-child policy are not very likely to be driven by other policy or socio-economic changes that have affected the Han and the minorities differently.
    JEL: J13 J15 J18 O10
    Date: 2005–08
  9. By: Chong Huang; Hongbin Li; Pak Wai Liu; Junsen Zhang
    Abstract: In interpreting the positive relationship between spousal education and one's earnings, economists have two major hypotheses: cross-productivity between couples and assortative mating. However, no prior empirical study has been able to separate the two effects. This paper empirically disentangles the two effects by using twins data that we collected from urban China. We have two major innovations: we use twins data to control for the unobserved mating effect in our estimations, and we estimate both current and wedding-time earnings equations. Arguably, the cross-productivity effect takes time to be realized and thus is relatively unimportant at the time of the wedding. Any effect of spousal education on wedding-time earnings should more likely be the mating effect. We find that both cross-productivity and mating are important in explaining the current earnings. Although the mating effect exists for both husbands and wives, the cross-productivity effect only runs from Chinese husbands to wives. We further show that the cross-productivity effect is realized by increasing the hourly wage rate rather than working hours.
    JEL: J31 O15 P20
    Date: 2006–01
  10. By: Yuyu Chen; Hongbin Li
    Abstract: In this paper, we examine the effect of maternal education on the health of young children by using a large sample of adopted children from China. As adopted children are genetically unrelated to the nurturing parents, the educational effect on them is most likely to be the nurturing effect. We find that the mother's education is an important determinant of the health of adopted children even after we control for income, the number of siblings, health environments, and other socioeconomic variables. Moreover, the effect of the mother's education on the adoptee sample is similar to that on the own birth sample, which suggests that the main effect of the mother's education on child health is in post-natal nurturing. Our work provides new evidence to the general literature that examines the determinants of health and that examines the intergenerational immobility of socioeconomic status.
    JEL: I12 I21 O15
    Date: 2006–02
  11. By: Maria Gabriela Ladu
    Abstract: This paper provides a structural estimation of the recent model proposed by Pissarides and Vallanti, a simplified equilibrium model which draws heavily on models with frictions and quasi-rents. The structural model is a system of three equations. The estimation method is a three-stage least squares. My empirical results find that although faster TFP growth temporarily decreases employment, most likely be- cause job destruction reacts faster to schocks than job creation does, after the first year I do not find any statistically significant effect of growth on employment.
    Keywords: Total Factor Productivity, Job Creation, Job De-struction, Employment
    JEL: E24 J64 O40 O52
    Date: 2005
  12. By: Maria Gabriela Ladu
    Abstract: Until recently, the neoclassical growth theory and the neoclassical labour market theory have independently evolved over time without communicating to each other. The neoclassical growth theory (Solow, 1956), born after the second world war, assumes full employment. On the other hand, the unemployment theory (Friedman, 1968) turned the attention to the problem of inflation, ignoring that one of growth. In this paper I present recent contributions suggesting that such a sharp division may be unjustified from a theoretical viewpoint.
    Keywords: Growth, Embodied and Disembodied Technological change, Employment
    JEL: E24 J64 O40
    Date: 2005
  13. By: Adriana Di Liberto
    Abstract: Among the determinants of the growth and convergence processes identified by the theoretical literature, human capital is certainly one of the most important. This paper offers a selective survey of the more recent contributions of the theory of human capital and growth. In particular, our aim is to provide the necessary link between the theory on growth, convergence and human capital and the empirics of convergence. Summarising with a play on words, we might conclude that during the last fifteen years there has been a convergence of ideas between endogenous and exogenous models with respect to the convergence hypothesis where human capital plays an important role. Despite the still theoretically important difference between models that assume exogenous versus models that assume endogenous long-run growth rates, both theories predict that a mechanism of convergence is possible, but it will only be so among similar economies. In particular, most theoretical literature assumes that similar levels of human capital are fundamental for catch up to take place. Therefore, both theories are currently able to explain a stylised fact of the empirical literature on growth, namely the observed convergence among groups of homogeneous countries and the absence of convergence when large and heterogeneous data sets are introduced. This observation explains why, with current econometric techniques, it is not possible to discriminate endogenous versus exogenous models by simply using a convergence regression.
    JEL: O40 O15 O33
    Date: 2005
  14. By: Maurice Kugler; Rossella Oppes
    Abstract: Empirical research on the impact and determinants of group lending is by now substantial. However, very little is known about the possible role of collateral to mitigate incentive problems in group lending. This is because microcredit programs have normally been implemented in rural areas of developing countries. Indeed, the reason for this choice is lack of credit access since agents with collateral are very rare. Also, to the extent that rural communities have tight-knit hierarchical structures information about borrowers is accessible and the enforcement of sanctions via social networks makes collateral superfluous for default mitigation. Yet, in an urban setting in which information is more atomized and social sanctions are not as powerful, collateral may have an important role in group lending. First, we illustrate in a model the role of collateral to mitigate group default. Second, we use data from a group lending program implemented in 2001 in Cotonou, the largest city in Benin with more than one million inhabitants. We empirically explore the risk profile of individual borrowers and resulting group heterogeneity to identify the role of personal contributions to investment projects. Our evidence suggests that while diversification within groups facilitates risk pooling, it also increases expected bailout or group default costs for low risk borrowers. Collateral helps offset and alleviate potential negative spillovers from group default induced by membership of borrowers with risky projects. The presence of borrowers with collateral facilitates access to credit for group members without collateral, who in turn provide insurance against group default. 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
    JEL: O12 O17 G20 D82
    Date: 2005
  15. By: Fabio Cerina; Francesco Pigliaru
    Abstract: This chapter is divided into two parts. In the first part we review the main results of a typical "New Economic Geography and Growth" (NEGG) model (Baldwin and Martin, 2003) and assess the contribution of this literature to the issue of long-run income gaps between countries. In the second part we discuss the robustness in some results of these models which are directly linked to important policy implications and we show that these results crucially depend on very restrictive values of some parameters of the model. In particular, depending on the different values of the degree of love for variety and the elasticity of substitution between traditional and manufacturing goods, our analytical examples reveal that: a) when trade is costly enough the symmetric equilibrium might not be stable also when capital is perfectly mobile; b) the rate of growth might depend on the geographical allocation of industries also when spillovers are global and, c) when industrial firms are concentrated in only one region, countries might not grow at the same rate in real terms.
    Date: 2005
  16. By: Luca Deidda; Bassam Fattouh
    Abstract: We analyze the interaction between bank and market finance in a model where bankers gather information through monitoring and screening.We show that,if a market is established characterized by a disclosure law such that entrepreneurs wishing to raise market finance can credibly disclose their sources of financing,this might undermine bankers'incentive to screen,even when screening is effcient.Correspondingly,other things being equal,the change from a bank-based system to one in which market-finance and bank-finance coexist might have an adverse affect on economic growth.Consistent with this result,our empirical findings suggest that,althoug both bank and stock market development have a positive effect on growth, the growth impact of bank development is reduced by the development of the stock market.
    Keywords: Bank-finance, Market-finance, Economic Growth, Monitoring, Screening
    JEL: G10 G20 E44 O40
    Date: 2005
  17. By: Javier Ruiz-Castillo Ucelay
    Abstract: This paper advocates that although an absolute notion of poverty should remain an essential ingredient in the evaluation of the standard of living in developing and transition economies, it is time that relative poverty begins to be systematically estimated for those same economies. This prescription is applied to México for the 1992-2004 period, where the Fox Administration has fixed for the first time an absolute poverty line for 2000. To facilitate comparisons with developed countries, the relative poverty line is fixed at 50% of mean equivalent expenditures. Absolute and relative poverty behave in opposite ways during the 1992-2000 business cycle, but both decline significantly during the 2000-04 stagnation period. Relative poverty is above absolute poverty from 1992 to 1994, below it during 1996-98, and above it again in 2000-04. In any case, relative poverty in México is well above relative poverty in developed countries.
    Date: 2005–11
  18. By: Shunsuke Sakamoto
    Abstract: This paper empirically investigates the determinants of child labor in rural India using household survey data. While a growing number of empirical studies have shown that child labor in developing countries is associated with a variety of factors, such as household poverty, low parental educational attainment, and the absence of schools, this study pays particular attention to parents' attitudes toward children in the household as a crucial determinant of child labor. In order to examine the role of parental attitudes, we estimate a probit model, controlling for individual, household, and community characteristics, and find that children are more likely to work if their parents show less concern for them. We also show that children are more likely to work if their father has greater bargaining power in the household than their mother. Moreover, the results indicate that the incidence of child labor is positively associated with household poverty. These findings suggest that in order to reduce or eliminate child labor, the government should implement policies to address the various factors causing child labor, such as parents' lack of concern for their children, imbalances in the power structure within households, and household poverty.
    Date: 2006–01
  19. By: Timothy J. Goodspeed (Hunter College)
    Abstract: In this study we investigate the determinants of FDI inflows in an unbalanced panel data set of 47 countries from 1995-2002. We are especially interested in the role of corruption, taxes, and particularly infrastructure. We use fixed country and year effects and examine different infrastructure measures. The evidence indicates that lower taxes, lower corruption, and better infrastructure attract FDI. The magnitude of the response of FDI to our infrastructure measures is similar to that of corruption and taxes in elasticity terms.
    Keywords: FDI, Infrastructure, Determinants of FDI, Corruption, Taxes
    JEL: H O
  20. By: Kalpana Kochhar; Utsav Kumar; Raghuram Rajan; Arvind Subramanian
    Abstract: India seems to have followed an idiosyncratic pattern of development, certainly compared to other fast-growing Asian economies. While the emphasis on services rather than manufacturing has been widely noted, within manufacturing India has emphasized skill-intensive rather than labor-intensive manufacturing, and industries with typically higher average scale. We show that some of these distinctive patterns existed even prior to the beginning of economic reforms in the 1980s, and argue they stem from the idiosyncratic policies adopted soon after India's independence. We then look to the future, using the growth of fast-moving Indian states as a guide. Despite recent reforms that have removed some of the policy impediments that might have sent India down its distinctive path, it appears unlikely that India will revert to the pattern followed by other countries.
    JEL: O14 O53
    Date: 2006–02
  21. By: Philipee Aghion; Robin Burgess; Stephen Redding; Fabrizio Zilibotti
    Abstract: We study the effects of the progressive elimination of the system of industrial regulations on entry and production, known as the "license raj," on registered manufacturing output, employment, entry and investment across Indian states with different labor market regulations. The effects are found to be unequal depending on the institutional environment in which industries are embedded. In particular, following delicensing, industries located in states with pro-employer labor market institutions grew more quickly than those in pro-worker environments.
    JEL: L10
    Date: 2006–02
  22. By: Michael D. Bordo; Peter L. Rousseau
    Abstract: Recent cross-country investigations of the role of institutional fundamentals such as the protection of property rights in promoting financial development have extended a literature that has for decades maintained that financial factors can affect real outcomes. In this paper we pursue this new direction by considering relationships between finance, growth, legal origin, and political environment in a historical cross-section of 17 countries covering the period from 1880 to 1997. We find that relationships between a county's legal origin (i.e., English, French, German, or Scandinavian) and financial development are roughly consistent with earlier findings but are not persistent. At the same time, political variables such as proportional representation election systems, frequent elections, universal female suffrage, and infrequent revolutions or coups seem linked to larger financial sectors and higher conditional rates of economic growth. Despite the explanatory power of some of our measures of the deeper "fundamentals," however, a significant part of the growth-enhancing role of financial development remains unexplained by them.
    JEL: E44 F3 N1 N2
    Date: 2006–02
  23. By: Marcos Chamon; Michael Kremer
    Abstract: This paper considers the long-run evolution of the world economy in a model in which countries' opportunities to develop depend on their trade with advanced economies. Trade opportunities in turn depend on the relative population of the advanced and developing world. As developing countries become advanced, they further improve the trade prospects for the remaining developing countries. As long as the population growth differential between developing and advanced countries is not too large, the rate at which countries transition to prosperity accelerates over time. However, if population growth differentials are large relative to the transition rate, the world economy converges to widespread prosperity if and only if the proportion of the world population in advanced countries is above a critical level. In our baseline calibration the world economy is below that critical level, but further declines in population growth in the developing world or rapid growth in China would bring it above that threshold. Even then, the share of the world population living in developing countries would decrease very slowly. Substantial narrowing of population growth differentials, increases in the transition rate or the rapid development of India could bring the world economy to a trajectory of accelerating development.
    JEL: J11 F43 O41
    Date: 2006–02
  24. By: Peter C. Mancall; Joshua Rosenbloom; Thomas Weiss
    Abstract: For the past generation scholars have emphasized that the Lower South was one of the most economically successful regions of British mainland North America, and perhaps the most successful. Planters, the primary economic actors, made extensive use of slave labor and created a successful staple-export sector, which by 1774 produced the highest levels of private wealth per capita in the colonies. Focusing on the rapid growth of the primary exports of the Lower South in the colonial period – rice and indigo – most scholars have concluded that standards of living for colonists in the region must have been rising rapidly. Elsewhere we have argued that the conventional view of the economy of the Lower South prior to 1800 is mistaken. Rather, per capita incomes were essentially stagnant from 1720 to 1770, and did not change appreciably between 1770 and 1800. Central to our interpretation is a revised understanding of the behavior of regional exports that indicates that they were much less important as a stimulus to economic growth than has heretofore been believed. This paper describes in greater detail our estimation of regional exports, and documents the reasons why they could not have been a stimulus to intensive growth within the region.
    JEL: N0 N1 N7 O1 O4
    Date: 2006–02

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