nep-dev New Economics Papers
on Development
Issue of 2006‒04‒08
nineteen papers chosen by
Jeong-Joon Lee
Towson University

  1. Information, Coordination, and the Industrialization of Countries By Florian Englmaier; Markus Reisinger
  2. Something out of Nothing? Neoclassical Growth and the ‘Trivial’ Steady State By Hendrik Hakenes; Andreas Irmen
  3. Democracy and Development: The Devil in the Details By Torsten Persson; Guido Tabellini
  4. Measurement Error in Education and Growth Regressions By Miguel Portela; Rob Alessie; Coenraad N. Teulings
  5. Does Financial Integration Spur Economic Growth? New Evidence from the First Era of Financial Globalization By Moritz Schularick; Thomas Steger
  6. Intertemporal Choice and Consumption Mobility By Tullio Jappelli; Luigi Pistaferri
  7. Growth and Labour Markets in Developing Countries By Satchi, Mathan; Temple, Jonathan
  8. The Geography of Output Volatility By Malik, Adeel; Temple, Jonathan
  9. Inequality and Informality By Chong, Alberto; Gradstein, Mark
  10. The Elimination of Madagascar's Vanilla Marketing Board, Ten Years On By Cadot, Olivier; de Melo, Jaime; Dutoit, Laure
  11. Endogenous Trade Policies in a Developing Economy By N.M. Hung; N.V. Quyen
  12. Welfare and Poverty Impacts of Tariff Reforms in Bangladesh: a General Equilibrium Approach By Bazlul Khondker; Mustafa Mujeri; Selim Raihan
  13. Why China is Likely to Achieve its Growth Objectives By Robert W. Fogel
  14. Development in the Indonesia-Malaysia-Singapore Growth Triangle By Toh Mun Heng
  15. Education, Economic Growth and Measured Income Inequality By Günther Rehme
  16. The poverty impact of rural roads : evidence from Bangladesh By Koolwal, Gayatri B.; Bakht, Zaid; Khandker, Shahidur R.
  17. Changes in poverty and the stability of income distribution in Argentina: evidence from the 1990s via decompositions By Florencia Lopez Boo
  18. Excludable and Non-excludable Public Inputs: Consequences for Economic Growth By Ingrid Ott; Stephen J. Turnovsky
  19. Why Equality? How Equality? By Arthur MacEwan

  1. By: Florian Englmaier; Markus Reisinger
    Abstract: The industrialization process of a country is often plagued by a failure to coordinate investment decisions. Using the Global Games approach we can solve this coordination problem and eliminate the problem of multiple equilibria. We show how appropriate information provision enhances efficiency. We discuss extensions of the model and argue that subsidies may be a property of a signalling equilibrium to overcome credibility problems in information provision. In addition we point out possible problems with overreaction to public information. Furthermore, we suggest a new focus for development policy.
    Keywords: information, coordination, industrialization, development, global games, equilibrium refinements, big push
    JEL: C72 C79 D82 F21 O12 O14
    Date: 2006
  2. By: Hendrik Hakenes; Andreas Irmen
    Abstract: A common perception about the neoclassical growth model is that an economy devoid of capital cannot evolve to strictly positive levels of output if capital is essential. We challenge this view by positing a broad class of production functions, encompassing the neoclassical production function, that—surprisingly—show that 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. When it happens, the take-off is spontaneous: there is no causality, not even randomness.
    Keywords: capital accumulation, neoclassical growth model
    JEL: N60 O11 O14 O41
    Date: 2006
  3. By: Torsten Persson; Guido Tabellini
    Abstract: Does democracy promote economic development? This paper reviews recent attempts to address this question that exploited within-country variation. It shows that the answer is largely positive, but also depends on the details of democratic reforms. First, the sequence of economic vs political reforms matters: countries liberalizing their economy before extending political rights do better. Second, different forms of democratic government lead to different economic policies, and this might explain why presidential democracy leads to faster growth than parliamentary democracy. Third, it is important to distinguish between expected and actual political reforms. Taking expectations of regime change into account helps identify a stronger growth effect of democracy.
    Keywords: democracy, reform, growth, institutions, difference in difference
    JEL: E00 O10 P00
    Date: 2006
  4. By: Miguel Portela; Rob Alessie; Coenraad N. Teulings
    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 coefficient. 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: I20 O40
    Date: 2006
  5. By: Moritz Schularick; Thomas Steger
    Abstract: Does international financial integration boost economic growth? The question has been discussed controversially for a long time. As of yet, robust evidence for a positive impact is lacking (Edison et al., 2002). However, there is substantial narrative evidence from economic history that highlights the contribution European capital made to economic growth of peripheral economies before 1914. We have compiled the first comprehensive data set to test this hypothesis. The main finding is that there was indeed a significant and robust growth effect. Our theoretical explanation stresses property rights protection as a prerequisite for the standard neoclassical model to work properly.
    Keywords: international financial integration, economic growth, first era of globalization
    JEL: F15 F21 F30 N10 N20 O11 O16
    Date: 2006
  6. By: Tullio Jappelli (University of Salerno, CSEF, and CEPR); Luigi Pistaferri (Stanford University and CEPR)
    Abstract: The theory of intertemporal consumption choice makes sharp predictions about the evolution of the entire distribution of household consumption, not just about its conditional mean. In the paper, we study the empirical transition matrix of consumption using a panel drawn from the Bank of Italy Survey of Household Income and Wealth. We estimate the parameters that minimize the distance between the empirical and the theoretical transition matrix of the consumption distribution. The transition matrix generated by our estimates matches remarkably well the empirical matrix, both in the aggregate and in samples stratified by education. Our estimates strongly reject the consumption insurance model and suggest that households smooth income shocks to a lesser extent than implied by the permanent income hypothesis.
    Keywords: Consumption Dynamics, Mobility
    JEL: D52 D91 I30
    Date: 2005–04–01
  7. By: Satchi, Mathan; Temple, Jonathan
    Abstract: In middle-income countries, the informal sector often accounts for a substantial fraction of urban employment. We develop a general equilibrium model with matching frictions in the urban labour market, the possibility of self-employment in the informal sector, and scope for rural-urban migration. We investigate the effects of different types of growth on wages and the informal sector, and the extent to which labour market institutions can influence aggregate productivity. We quantify these effects by calibrating the model to data for Mexico, a country with a sizeable informal sector and significant labour market rigidities.
    Keywords: dual economies; informal sector; matching frictions; urban unemployment
    JEL: J40 O10
    Date: 2006–02
  8. By: Malik, Adeel; Temple, Jonathan
    Abstract: This paper examines the structural determinants of output volatility in developing countries, and especially the roles of geography and institutions. We investigate the volatility effects of market access, climate variability, the geographic predisposition to trade, and various measures of institutional quality. We find an especially important role for market access: remote countries are more likely to have undiversified exports and to experience greater volatility in output growth. Our results are based on Bayesian methods that allow us to address formally the problem of model uncertainty and to examine robustness across a wide range of specifications.
    Keywords: Bayesian model averaging; geography; institutions; volatility
    JEL: E30 O11
    Date: 2006–02
  9. By: Chong, Alberto; Gradstein, Mark
    Abstract: This paper presents theory and evidence on the determinants of the size of the informal sector. We propose a simple theoretical model in which it is positively related to income inequality, more so under weak institutions, and is negatively related to the economy's wealth. These predictions are then empirically validated using different proxies of the size of the informal sector, income inequality, and institutional quality. The results are shown to be robust with respect to a variety of econometric specifications. We also find that government interventions through taxes and regulations lose much of their robustness in the presence of the above factors.
    Keywords: inequality; informal sector; institutional quality; shadow economy
    JEL: D70 O15 O17
    Date: 2006–03
  10. By: Cadot, Olivier; de Melo, Jaime; Dutoit, Laure
    Abstract: Commodity prices are usually very slow to recover from adverse shocks. This is one of the reasons why it has proven so difficult either to smooth their effect or to stabilize them, and why it is sometimes argued that they should behave as if shocks were permanent. There is no reason however why countries should not find ways to protect themselves. This paper develops one practical idea on how this could be done. Our goal is not to stabilize prices, but to smooth the income of the producers. Countries, we assume, should get protection against deviation of commodity prices from a moving average of past prices. This avoids the pitfalls of past stabilization that attempted to stabilize around a single price and yet our scheme gives countries time to adjust to permanent shocks. Over a period of a 50 years time horizon, we simulate that the median cost would be worth about six months of exports.
    Keywords: Madagascar; marketing board; poverty; vanilla
    JEL: F14 O11 O12
    Date: 2006–03
  11. By: N.M. Hung; N.V. Quyen
    Abstract: Consider a small developing economy with a manufacturing sector opened to international trade, and an agricultural sector having limited, not to say any, access to world markets. We modify the Grossman and Helpman's influence-driven model of trade policy formation to allow for an endogenously determined wage rate in a three-sector economy where the manufacturing sector can lobby policy makers for favorable policies. Beside protectionist policies, namely an import tariff or an export subsidy, we show that the owners of the specific factor in agriculture - a non-lobby group - have to bear a consumption tax imposed on their products. This would further strengthen the trade protectionist measure, and imply possibly undesirable general equilibrium repercussions: there will be a reallocation of labor to the manufacturing sector which enjoys an output expansion, an output contraction in the agricultural sector, and a lower workers' "real" income.
    JEL: F13
    Date: 2006
  12. By: Bazlul Khondker; Mustafa Mujeri; Selim Raihan
    Abstract: This paper examined welfare and poverty impacts of trade liberalization in Bangladesh. By using a computable general equilibrium model based on a social accounting matrix, an empirical investigation of the transmission channels linking trade liberalisation to the rest of the economy was carried out by conducting three simulations. In the first two simulations full tariff removal was accompanied by respective increase in production tax rates and income tax rate to ensure revenue neutrality. Third simulation resembles the actual tariff reforms undertaken in the country. This entailed the decline in both the spread and effective average duty rates, thereby reducing the mean rates and variance. The patterns of welfare losses are progressive for rural households but regressive for urban households in the first two simulations. In the third simulation, a clear regressive pattern is observed amont the urban households but it is ambiguous for the rural households. Rural poverty declined due to tariff-income tax reforms and tariff rationalization but worsened in the case of tariff-production tax reforms. Except for the second simulation, the urban poverty headcount, gap and severity all worsen in other two simulations. This confirms that the benefits of tariff rationalization accrue more to the urban rich households compared to their poored counterparts.
    Keywords: Trade liberalization, Poverty, Bangladesh, Computable General Equilibrium (CGE) Model
    JEL: D33 D58 E27 F13 F14 I32 O15
    Date: 2006
  13. By: Robert W. Fogel
    Abstract: In 2002, the Chinese Communist Party announced a goal of quadrupling per capita income by the year 2020. Starting at income levels of the year 2000, this would require a growth rate of 7.2 percent per annum in per capita income or close to 8.0 percent in GDP. Such unresolved and emerging problems as growing income disparities, increasing pollution, pressures on infrastructure, the inefficiency of state owned enterprises, and political instability are often cited as reasons to doubt the attainability of the CCP’s goal. However, China’s progress in addressing fundamental constraints that might limit rapid economic growth augurs well for the success of its economic goals. Although there are disagreements about economic policy among top leaders, the continued transformation into a market economy and the promotion of increasing local autonomy in economic matters are not in doubt. In education, China has substantially increased the percentage of its workforce receiving a college education, and continuing growth in this investment in human capital could account for a large portion of the desired growth rate. In addition, the value of improvements in the quality of economic output unmeasured by GDP, such as advances in the quality of health care and education, could raise reported growth rates by as much as 60 percent. Finally, the government’s increasing sensitivity to public opinion and issues of inequality and corruption, combined with improving living conditions, have resulted in a level of popular confidence in the government that makes political instability unlikely.
    JEL: O0
    Date: 2006–03
  14. By: Toh Mun Heng (Department of Business Policy, Faculty of Business Administration, National University of Singapore, Singapore)
    Abstract: In this article, we explore whether regional economic cooperation in the form of growth triangle, made popular during the late 1980s, can continue to be relevant in the face of more formal arrangements as in free trade agreements (FTAs) and other bilateral ‘closer economic partnerships’ (CEPs) initiatives in the recent years. In particular, the discussion is focussed on the Indonesia-Malaysia-Singapore growth triangle (IMS-GT) which is the pioneering arrangement in Southeast Asia. IMS-GT continues to be a successful mode of cooperation among the three countries and will remain a key and subtle framework for regional economic collaboration amidst the plethora of initiatives relating to FTAs and CEPs. This paper put forth a thesis that GT is part of a spectrum of regional cooperation efforts with convergence interest to be in synchrony with the global value chain. As long as the formation and implementation of GT contribute to the creation of value, it can co-exist with more formal arrangements like the FTAs and CEPs.
  15. By: Günther Rehme (Darmstadt University of Technology, Department of Economics)
    Abstract: In this paper education simultaneously affects growth and income inequality. More education does not necessarily decrease inequality when the latter is assessed by the Lorenz dominance criterion. Increases in education first increase and then decrease growth as well as income inequality, when measured by the Gini coefficient. There is no clear functional relationship between growth and measured income inequality. The model identifies regimes of this relationship which depend crucially on the production and schooling technology. Conventional growth regressions with human capital and inequality as regressors may miss the richness of the underlying nonlinearities, but viewed as approximations may still provide important information on the nonlinear relationship between growth and education.
    Keywords: Education, Growth, Inequality, Policy
    JEL: O4 I2 D31 H2
    Date: 2006–03
  16. By: Koolwal, Gayatri B.; Bakht, Zaid; Khandker, Shahidur R.
    Abstract: The rationale for public investment in rural roads is that households can better exploit agricultural and nonagricultural opportunities to use labor and capital more efficiently. But significant knowledge gaps remain as to how opportunities provided by roads actually filter back into household outcomes and their distributional consequences. This paper examines the impacts of rural road projects using household-level panel data from Bangladesh. Rural road investments are found to reduce poverty significantly through higher agricultural production, higher wages, lower input and transportation costs, and higher output prices. Rural roads also lead to higher girls ' and boys ' schooling. Road investments are pro-poor, meaning the gains are proportionately higher for the poor than for the non-poor.
    Keywords: Transport Economics Policy & Planning,Rural Roads & Transport,Economic Theory & Research,Rural Transport,Rural Poverty Reduction
    Date: 2006–04–01
  17. By: Florencia Lopez Boo (Department of Economics, University of Oxford)
    Abstract: From 1992 to 2001, despite its rapid economic growth during the early 1990s, Argentina experienced a period characterized by increasing income inequality and poverty. An axiomatically modified Datt-Ravallion decomposition, that separates changes in poverty rates into mean and inequality components, will illustrate how each of them has contributed to those changes. Contrary to the claims of much of the recent cross-country literature, income inequality does not appear stable in Argentina. Previous results are extended in two key ways. First, the empirical density function is used to calculate the inequality component, without assuming a particular functional form for the Lorenz curve. Second, both components are recomputed without the vaguely defined Datt-Ravallion residual, which improves interpretability.
    Keywords: decomposition of changes in poverty, poverty measures, inequality and growth.
    JEL: C16 D63 I30 I31 I32 O54
    Date: 2006
  18. By: Ingrid Ott (Institute of Economics, University of Lüneburg); Stephen J. Turnovsky (Department of Economics, University of Washington)
    Abstract: Many public goods are characterized by rivalry and/or excludability. This paper introduces both non-excludable and excludable public inputs into a simple endogenous growth model. We derive the equilibrium growth rate and design the optimal tax and user-cost structure. Our results emphasize the role of congestion in determining this optimal financing structure and the consequences this has in turn for the government’s budget. The latter consists of fee and tax revenues that are used to finance the entire public production input and that may or may not suffice to finance the entire public input, depending upon the degree of congestion. We extend the model to allow for monopoly pricing of the user fee by the government. Most of the analysis is conducted for general production functions consistent with endogenous growth, although the case of CES technology is also considered.
    Keywords: Excludable and Non-excludable Public Goods, Congestion, Growth
    JEL: H21 H40 O40
    Date: 2005–06
  19. By: Arthur MacEwan
    Abstract: Much of the discussion of economic development in low and middle income countries and of poverty reduction has either ignored the issue of income distribution or has tended to view income distribution only in terms of its impact on economic growth. In this paper I argue that such an approach is misguided.
    Keywords: development, distribution, poverty
    JEL: D31 I32 O15 O20

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