nep-dev New Economics Papers
on Development
Issue of 2006‒04‒01
thirteen papers chosen by
Jeong-Joon Lee
Towson University

  1. The Return to Capital in Ghana By Christopher Udry; Santosh Anagol
  2. Do Population Control Policies Induce More Human Capital Investment? Twins, Birthweight, and China's 'One Child' Policy By Mark R. Rosenzweig; Junsen Zhang
  3. The Effects of FDI Inflows on Host Country Economic Growth By Johnson, Andreas
  4. Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom By Chang-Tai Hsieh; Jonathan A. Parker
  5. Persistence of Power, Elites and Institutions By Daron Acemoglu; James A. Robinson
  6. Health, Education and Life-Cycle Savings in Different Stages of Development By K.K.Tang; Jie Zhang
  7. Determinants of Capital Flows: A Cross-Country Analysis By Mukesh Ralhan
  8. Legal knowledge and economic development : the case of land rights in Uganda By Yamano, Takashi; Ayalew, Daniel; Deininger, Klaus
  9. Early childhood development in Latin America and the Caribbean By Schady, Norbert
  10. Do minimum wages in Latin America and the Caribbean matter ? Evidence from 19 countries By Cunningham, Wendy; Kristensen, Nicolai
  11. Does rising landlessness signal success or failure for Vietnam’s agrarian transition? By van de Walle, Dominique; Ravallion, Martin
  12. Diversification, innovation, and imitation inside the Global Technological Frontier By Lederman, Daniel; Klinger, Bailey
  13. Productivity-Enhancing Reforms, Private Capital Inflows, and Real Interest Rates in Africa By Manoj Atolia

  1. By: Christopher Udry (Economic Growth Center, Yale University); Santosh Anagol (Yale University)
    Abstract: We show that the real return to capital in Ghana's informal sector is high. For farmers, we find annual returns ranging from 205-350% in the new technology of pineapple cultivation, and 30-50% in well-established food crop cultivation. We also examine the relative prices of durable goods of varying durability, and estimate a lower bound to the opportunity cost of capital of 60%.
    Keywords: Capital, durable goods, credit markets
    JEL: O12 O16 D24
  2. By: Mark R. Rosenzweig (Economic Growth Center, Yale University); Junsen Zhang (Chinese University of Hong Kong)
    Abstract: In this paper we use a new data set describing households with and without twin children in China to quantify the trade-off between the quality and quantity of children using the incidence of twins that for the first time takes into account effects associated with the lower birthweight and closer-spacing of twins compared to singleton births. We show that examining the effects of twinning by birth order, net of the effects stemming from the birthweight deficit of twins, can provide upper and lower bounds on the trade-off between family size and average child quality. Our estimates indicate that, at least in one area of China, an extra child at parity one or at parity two, net of birthweight effects, significantly decreases the schooling progress, the expected college enrollment, grades in school and the assessed health of all children in the family. We also show that estimates of the effects of twinning at higher parities on the outcomes of older children in prior studies do not identify family size effects but are confounded by inter-child allocation effects because of the birthweight deficit of twins. Despite the evident significant trade-off between number of children and child quality in China, however, the findings suggest that the contribution of the one-child policy in China to the development of its human capital was modest.
    Keywords: Family size, Birthweight, Schooling, China
    JEL: J13 I12 I21
  3. By: Johnson, Andreas (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This paper discusses and models the potential of FDI inflows to affect host country economic growth. The paper argues that FDI should have a positive effect on economic growth as a result of technology spillovers and physical capital inflows. Performing both cross-section and panel data analysis on a dataset covering 90 countries during the period 1980 to 2002, the empirical part of the paper finds indications that FDI inflows enhance economic growth in developing economies but not in developed economies.
    Keywords: foreign direct investment; economic growth; developing economies; developed economies
    JEL: F21 F23 O40
    Date: 2006–03–29
  4. By: Chang-Tai Hsieh; Jonathan A. Parker
    Abstract: This paper argues that taxation of retained profits is particularly distortionary in an economy with good growth prospects and poorly developed financial markets because it primarily reduces the investment of financially constrained firms, investment that has marginal product greater than the after-tax market real interest rate. Contrarily, taxes on distributed profits or capital gains primarily reduce the investment of financially unconstrained firms. Chile experienced a banking crisis over the period from 1982 to 1986 and in 1984 reduced its tax rate on retained profits from 50 percent to 10 percent. We show that, consistent with our theory, there was a large increase in aggregate investment after the reform which was entirely funded by an increase in retained profits. Further, we show that investment grew by more in industries that depend more on external financing, according to the Rajan and Zingales (1998) measure. Finally, we present some weak evidence from comparisons of investment rates across firms for several different measures of their likelihood of being financially constrained.
    JEL: H32 E22 D92 O54 O16
    Date: 2006–03
  5. By: Daron Acemoglu; James A. Robinson
    Abstract: We construct a model of simultaneous change and persistence in institutions. The model consists of landowning elites and workers, and the key economic decision concerns the form of economic institutions regulating the transaction of labor (e.g., competitive markets versus labor repression). The main idea is that equilibrium economic institutions are a result of the exercise of de jure and de facto political power. A change in political institutions, for example a move from nondemocracy to democracy, alters the distribution of de jure political power, but the elite can intensify their investments in de facto political power, such as lobbying or the use of paramilitary forces, to partially or fully offset their loss of de jure power. In the baseline model, equilibrium changes in political institutions have no effect on the (stochastic) equilibrium distribution of economic institutions, leading to a particular form of persistence in equilibrium institutions, which we refer to as invariance. When the model is enriched to allow for limits on the exercise of de facto power by the elite in democracy or for costs of changing economic institutions, the equilibrium takes the form of a Markov regime-switching process with state dependence. Finally, when we allow for the possibility that changing political institutions is more difficult than altering economic institutions, the model leads to a pattern of captured democracy, whereby a democratic regime may survive, but choose economic institutions favoring the elite. The main ideas featuring in the model are illustrated using historical examples from the U.S. South, Latin America and Liberia.
    JEL: H2 N10 N40 P16
    Date: 2006–03
  6. By: K.K.Tang (MRG - School of Economics, The University of Queensland); Jie Zhang (MRG - School of Economics, The University of Queensland)
    Abstract: This paper studies investment in health and education in a life-cycle model. Health investment enhances survival to old age by improving health from its endowed level. The model predicts two distinctive phases of development. When income is low enough, the economy has no health investment and little savings, leading to slow growth. When income grows, health investment will become positive and the saving rate will rise, leading to higher life expectancy and faster growth. A health subsidy can move the economy from the first phase to the next. Subsidies on health and education investments can improve welfare.
  7. By: Mukesh Ralhan (Department of Economics, University of Victoria)
    Abstract: There are two basic approaches to identifying the determinants of capital flows, viz. the traditional and the portfolio (or modern) approach. Although most econometric models have by now forsaken the traditional capital flow equations in favour of modelling financial linkages via arbitrage type interest rate parity relations, the importance of fundamentals in explaining particular capital flow developments cannot be denied (International Monetary Fund, 1992). This paper identifies the determinants of capital flows using the conventional approach, and is based on a cross-sectional study of eight countries, viz. Australia, India, Indonesia, Argentina, Brazil, Chile, Columbia and Mexico. Non-linear Seemingly Unrelated Regression estimation has been used to allow for cross-country effects in the error structure.
    Keywords: Capital Flows, Seemingly Unrelated Regressions (SUR) Model
    JEL: C3 F21
    Date: 2006–03–22
  8. By: Yamano, Takashi; Ayalew, Daniel; Deininger, Klaus
    Abstract: Mixed evidence on the impact of formal title in much of Africa is often used to question the relevance of dealing with land policy issues in this continent. The authors use data from Uganda to assess the impact of a disaggregated set of rights on investment, productivity, and land values, and to test the hypothesis that individuals ' lack of knowledge of the new law reduces their tenure security. Results point toward strong and positive effects of greater tenure security and transferability. Use of exogenous knowledge of its provisions as a proxy for the value of the land law suggests that this piece of legislation had major economic benefits that remain to be fully realized.
    Keywords: Municipal Housing and Land,Real Estate Development,Agricultural Knowledge & Information Systems,Rural Land Policies for Poverty Reduction,Land Use and Policies
    Date: 2006–03–01
  9. By: Schady, Norbert
    Abstract: There is considerable evidence that young children in many developing countries suffer from profound deficits in nutrition, health, fine and gross motor skills, cognitive development, and socio-emotional development. Early childhood development (ECD) outcomes are important markers of the welfare of children. In addition, the deleterious effects of poor outcomes in early childhood can be long-lasting, affecting school attainment, employment, wages, criminality, and measures of social integration of adults. This paper considers the theoretical case to be made for investments in early childhood, selectively reviews the literature on the impact of ECD programs in the United States, discusses the evidence from Latin America and the Caribbean, and makes suggestions for future research. The focus is on the relation between outcomes in early childhood and measures of household s ocioeconomic status, child health, and parenting practices, as well as on the impact of specific policies and programs. The knowledge base on early childhood outcomes is still thin in Latin America and the Caribbean. There are therefore very high returns to comparative descriptive analysis in the region, as well as to careful evaluations of the impact of various programs.
    Keywords: Educational Sciences,Primary Education,Early Childhood Development,Street Children,Youth and Governance
    Date: 2006–03–01
  10. By: Cunningham, Wendy; Kristensen, Nicolai
    Abstract: Despite the existence of minimum wage legislation in most Latin American countries, there is little empirical evidence demonstrating its impact on the distribution of wages. In this study the authors analyze cross-country data for 19 Latin American and Caribbean (LAC) countries to gain an understanding of if and how minimum wages affect wage distributions in LAC countries. Although there is no single minimum wage institution in the LAC region, the authors find regional trends. Minimum wages affect the wage distribution in both the formal and, especially, the informal sector, both at the minimum wage and at multiples of the minimum. The minimum does not uniformly benefit low-wage workers: in countries where the minimum wage is relatively low compared to mean wages, the minimum wage affects the more disadvantaged segments of the labor force, namely informal sector workers, women, young and older workers, and the low skilled, but in countries where the minimum wage is relatively high compared to the wage distribution, it primarily affects wages of the high skilled. This indicates that the minimum does not generally lift the wages of all, but instead, it offers a wage into which employers can " lock in " wages that are already near that level. Thus, minimum wage legislation is more far-reaching than originally thought, affecting both the uncovered informal sector and those earning above the minimum. In addition, the relative level of the minimum wage i s important for determining whose wages are affected.
    Keywords: Labor Markets,Income,Wages, Compensation & Benefits,Corporate Social Responsibility,Child Labor
    Date: 2006–03–01
  11. By: van de Walle, Dominique; Ravallion, Martin
    Abstract: In the wake of reforms to establish a free market in land-use rights, Vietnam is experiencing a pronounced rise in rural landlessness. To some observers this is a harmless by-product of a more efficient economy, while to others it signals the return of the pre-socialist class-structure, with the rural landless at the bottom of the economic ladder. The authors ' theoretical model suggests that removing restrictions on land markets will increase landlessness among the poor, but that there will be both gainers and losers, with uncertain impacts on aggregate poverty. Empirically, they find that landlessness is less likely for the poor and that the observed rise in landlessness is poverty reducing on balance. However, there are marked regional differences, notably between the north and the south.
    Keywords: Land Use and Policies,Rural Land Policies for Poverty Reduction,Rural Poverty Reduction,Rural Development Knowledge & Information Systems,Climate Change
    Date: 2006–04–01
  12. By: Lederman, Daniel; Klinger, Bailey
    Abstract: Recent research highlights the relationship between economic development and productive diversification, which may be hindered by market failures. After identifying stages of diversification in disaggregated export data, the authors develop a metric for the flows of export " discoveries, " or inside-the-frontier innovations in developing countries. They then explore the empirical relationship between economic development and (1) inside-the-frontier-innovation as reflected by the introduction of new export products, (2) export diversification measured by an index of export-revenue concentration, and (3) on-the-frontier innovation as reflected in patents. The data suggest , unsurprisingly, that inside-the-frontier innovation is more common among poor countries than among industrial economies. Overall export diversification increases at low levels of development but declines with development after a high-income point, whereas patenting activity rises exponentially with development. The data also suggest that the relationship between the frequency of export discoveries and economic development is not due to changes in the industrial composition of exports. The authors use a simple model of innovation and imitation to test the hypothesis that the threat of imitation inhibits the discovery of new exports. Econometric evidence suggests that the frequency of export discoveries across countries rises with the returns of export activities (proxied by exogenous export growth during the sample period), but the magnitude of this effect increases with barriers to entry. The count-data estimations deal with unobserved international heterogeneity, and the results are robust to various changes in the specification of the empirical model. This finding supports the hypothesis that market failures inhibit inside-the-frontier innovation.
    Keywords: Economic Theory & Research,Markets and Market Access,Water Resources Assessment,Pro-Poor Growth and Inequality,Airports and Air Services
    Date: 2006–04–01
  13. By: Manoj Atolia (Department of Economics, Florida State University)
    Abstract: The paper uses a currency substitution model to explain the stylized macroeconomic facts associated with productivity-enhancing reforms in countries of Africa. The model, when calibrated to Ghana and Uganda results in current account deficit and private capital inflows as well as changes in real interest rate, real exchange rate, and inflation comparable to those in data. Thus, currency substitution is important to understand macroeconomic dynamics in countries of Africa as many of them are currently undertaking such reforms. The paper also implements a new technique to solve for global nonlinear saddlepath for perfect foresight models with two state variables. The technique combines reverse shooting with the bisection method in two dimensions to systematically shoot for the trajectory in the state space that corresponds to the desired saddlepath.
    Keywords: Africa, Currency Substitution, Real Interest Rates, Capital Inflows, Nonlinear dynamics
    JEL: C63 F32 F41 O55
    Date: 2003–10

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