nep-dev New Economics Papers
on Development
Issue of 2007‒04‒14
nineteen papers chosen by
Jeong-Joon Lee
Towson University

  1. Does Foreign Direct Investment Have Impacts on the Growth in Labor Productivity of Vietnamese Domestic Firms? By Le Thanh THUY
  2. Why Isn’t the Doha Development Agenda More Poverty Friendly? By Hertel, Thomas; Keeney, Roman; Ivanic, Maros; Winters, Alan
  3. The Origins of State Capacity: Property Rights, Taxation, and Politics By Timothy Besley; Torsten Persson
  4. Does Oil Corrupt? Evidence from a Natural Experiment in West Africa By Pedro C. Vicente
  5. Relationships among Household Saving, Public Saving, Corporate Saving and Economic Growth in India By Sinha, Dipendra; Sinha, Tapen
  6. Can International Factor Mobility lessen Wage Inequality in a Dual Economy? By Beladi, Hamid; Chaudhuri, Sarbajit; Yabuuchi, Shigemi
  7. Foreign Capital and Skilled-unskilled Wage Inequality in a Developing Economy with Non-traded Goods By Chaudhuri, Sarbajit; Yabuuchi, Shigemi
  8. Foreign Capital, Return to Education and Child labour By Dwibedi, Jayanta; Chaudhuri, Sarbajit
  9. Sources of Regional Income Disparity in Rural Vietnam: Oaxaca-Blinder Decomposition By Takahashi, Kazushi
  10. Remittances, Trade Liberalisation, and Poverty in Pakistan: The Role of Excluded Variables in Poverty Change Analysis By Rizwana Siddiqui; A. R. Kemal
  11. Myths and Realities of Long-run Development: A Look at Deeper Determinants By Lubna Hasan
  12. Demographic Dividend or Demographic Threat in Pakistan By Durr-e-Nayab
  13. Poverty-reducing or Poverty-inducing? A CGE-based Analysis of Foreign Capital Inflows in Pakistan By Rizwana Siddiqui; A. R. Kemal
  14. Bureaucracy and Pro-poor Change By Ali Cheema; Asad Sayeed
  15. A Social Accounting Matrix for Pakistan, 2001-02: Methodology and Results By Paul Dorosh; Muhammad Khan Niazi; Hina Nazli
  16. A Fresh Assessment of the Underground Economy and Tax Evasion in Pakistan: Causes, Consequences, and Linkages with the Formal Economy By M. Ali Kemal
  17. The Harris-Todaro Hypothesis By M. Ali Khan
  18. Wage Differentials, Rate of Return to Education, and Occupational Wage Share in the Labour Market of Pakistan By Asma Hyder
  19. Foreign Direct Investment and Economic Growth: The Role of Domestic Financial Sector By Muhammad Arshad Khan

  1. By: Le Thanh THUY
    Abstract: Foreign Direct Investment has been considered a very important factor in the growth of recent Vietnam's economy and so far it has drawn a lot of concerns of economic researches in Vietnam. However, studies on the impacts of Foreign Direct Investment on Vietnam's economy, especially the technological spillovers are still very scarce compared with other developing countries. This study makes an attempt to figure out the main channels and estimate the degree of Spillover effects in Vietnam using industry level data for 1995-1999 and 2000-2002 periods. The linkage between foreign investors and domestic private sectors is found to play an important role for technological spillovers from Foreign Direct Investment in Vietnam.
    Date: 2007–04
  2. By: Hertel, Thomas; Keeney, Roman; Ivanic, Maros; Winters, Alan
    Abstract: The breakdown of the WTO negotiations under the Doha Development Agenda has inspired critics to highlight the lack of effort on the part of rich countries to reform their agricultural policies. In this paper, we focus instead the poverty impacts of developing country tariff cuts - particularly those in agriculture. We argue that the Doha Development Agenda is fundamentally less poverty-friendly than it could be -- in large part due to the absence of tariff cuts on staple food products in developing countries. Such cuts would give the poor access to food at world prices, thereby reducing the cost of living at the poverty line. We also explore the contention that such tariff cuts will hurt the poor working in agriculture. Based on our analysis of the impacts of multilateral trade policy reforms on a sample of fifteen developing countries, we find there is some evidence of poverty increases in agriculture. However, such effects are minimized by ensuring that agricultural tariffs are cut in all developing countries. Overall, the poverty-reducing impact of lower food prices dominates; we conclude that the Doha Development Agenda would be more poverty friendly if it were to include deeper cuts in developing country agricultural tariffs. This contrasts sharply with calls for special products exemptions by many developing country advocates.
    Date: 2007
  3. By: Timothy Besley; Torsten Persson
    Abstract: Economists generally assume the existence of sufficient institutions to sustain a market economy and tax the citizens. However, this starting point cannot easily be taken for granted in many states, neither in history nor in the developing world of today. This paper develops a framework where "policy choices", regulation of markets and tax rates, are constrained by "economic institutions", which in turn reflect past investments in legal and fiscal state capacity. We study the economic and political determinants of these investments. The analysis shows that common interest public goods, such as fighting external wars, as well as political stability and inclusive political institutions, are conducive to building state capacity. Preliminary empirical evidence based on cross-country data find a number of correlations consistent with the theory.
    JEL: D70 E60 H10 K40 O10
    Date: 2007–04
  4. By: Pedro C. Vicente
    Abstract: This paper explores an oil discovery natural experiment to assess the role of natural resources in determining corruption. We argue that an anticipated oil boom may increase corruption by boosting the value attributed by an elite to being in power when the actual oil exploration begins. We test this proposition by analyzing the impact of the oil discovery announcements that took place in 1997-99 in Sao Tome and Principe (West Africa). For this objective we conducted purposedly-designed household surveys on perceived corruption in the public services/sector. These were carried out in Sao Tome and Principe and in Cape Verde, a control West African country sharing strong cultural ties and important contemporary economic/political shocks. The unique survey instrument was retrospective and used personal histories to elicit memories from the respondents. Urban subjects, public officials, and respondents with higher reported experience with the services/issues at stake are used as internal treatment groups. Comparisons are also made with corresponding groups in Cape Verde. In addition, the regressions control for well-known `good old times` bias: this is done by using data from direct questions on optimism and from the inclusion of a `placebo` period (when no major occurrence had arisen). We conclude that a clear increase in perceived corruption has occurred in Sao Tome and Principe in recent years, ranging from 21 to 38% of the subjective scale. Consistently with our theoretical mechanism, which underlines the importance of being in power when the oil boom occurs, these effects are most robust in vote buying, education, and state jobs.
    Keywords: Corruption, Influence, Political Economy, Natural Resources, Oil, West Africa
    JEL: D73 O13 O55 P16
    Date: 2007
  5. By: Sinha, Dipendra; Sinha, Tapen
    Abstract: This paper examines the relationship between the growth rates of household saving, public saving, corporate saving and economic growth in India using multivariate Granger causality tests. The conventional wisdom suggests that the causality flows from saving to economic growth. We show that the causality goes in the opposite direction for India. Hence, higher saving is the consequence of higher economic growth and not a cause.
    Keywords: Economic growth; public saving; corporate saving; household saving
    JEL: O11 E21 O16
    Date: 2007–02–21
  6. By: Beladi, Hamid; Chaudhuri, Sarbajit; Yabuuchi, Shigemi
    Abstract: We introduce international labor mobility in a three-sector general equilibrium model with rural-urban migration. We demonstrate that under some reasonable conditions an inflow of foreign skilled labor (capital) can reduce skilled-unskilled wage inequality.
    Keywords: Skilled-unskilled wage inequality; rural-urban migration; Unemployment; International factor movements
    JEL: F21 F22
    Date: 2007–01–03
  7. By: Chaudhuri, Sarbajit; Yabuuchi, Shigemi
    Abstract: The existing theoretical literature does not take into consideration the existence of non-traded goods and the nature of capital mobility between the traded and the non-traded sectors in analyzing the consequences of liberalized investment policies on the relative wage inequality in the developing countries. The present paper purports to fill in this gap using two four-sector general equilibrium models reasonable for a developing economy. We have found that inflows of foreign capital usually improve the wage inequality when the low-skill sector is capital-intensive. But, the relative wage gap may widen if the high-skill sector is capital-intensive. When the non-traded sector produces a non-traded final commodity wage inequality worsens if the low-skill sector is capital-intensive and employs only a very small proportion of the unskilled workforce and if the primary export sector is unskilled labour-intensive. Appropriate policy recommendations for improving the wage inequality have also been made.
    Keywords: Skilled labour; unskilled labour; wage inequality; foreign capital inflows; non-traded goods; intersectoral capital mobility; labour market imperfection
    JEL: F21
    Date: 2007–03–16
  8. By: Dwibedi, Jayanta; Chaudhuri, Sarbajit
    Abstract: This paper attempts to identify the different channels through which economic reforms can affect the incidence of child labour in a developing economy. Using a three-sector general equilibrium model it shows that inflows of foreign capital can lower the problem of child labour by raising the return to education and reducing the earning opportunities of children. It demonstrates how foreign capital produces favourable effect on the incidence of child labour although it affects wage inequality adversely.
    Keywords: Child labour; general equilibrium; foreign capital; return to education; wage inequality.
    JEL: F21
    Date: 2007–03–04
  9. By: Takahashi, Kazushi
    Abstract: This paper investigates determinants of regional income disparity in rural Vietnam, with special emphasis placed on the roles of human capital and land. We apply a decomposition method, suggested by Oaxaca and Blinder. We found that returns to assets rather than endowments, especially those of human capital, are one of the leading factors to account for income differences across regions. We also found that substantial improvements of returns to human capital in the Red River delta region are a driving force to catch up with Mekong River delta region. Unexpectedly, differences in land endowment do not strongly correlate with regional income disparity because better access to land in a region was partially offset by lower returns.
    Keywords: Income inequality, Human capital, Land, Vietnam, Income distribution, Human resources
    JEL: D31 I32 O12
    Date: 2007–03
  10. By: Rizwana Siddiqui (Pakistan Institute of Development Economics, Islamabad); A. R. Kemal (Pakistan Institute of Development Economics, Islamabad)
    Abstract: This study attempts to assess the impact of two shocks-trade liberlisation and a decline in remittances from abroad-on poverty in Pakistan using a CGE framework. It is found that tariff reducation in the absesnce of a decline in remittances reduces poverty, as measured by the head count, poverty gap, and severity ratios (FGT indicators) in both the rural and urban areas of Pakistan. In terms of welfare, all households appear to gain. The results show that the gain in welfare is larger for urban households than for rural households. We conclude from this that trade liberalisation reduces the gap between urban and ruralhouseholds. In a second set of experiments, it was found that trade liberlisation in the presence of a decline in remittances reduced welfare in urban households but rural households still show an increase over the base year. According to all FGT indicators, poverty increases in urban households but not in rural households. the combined shock is more harmful to households in the urban areas than for households in the rural areas. However, this welfare gain and reduction in poverty level in rural households in less than the welfare gain and poverty reduction in the presence of trade liberlisation only. Aggregate statistics show that the negative impact of remittance decline dominates the positive impact of trade liberlisation in urban areas. On the other hand, in the case of rural areas, the posve impact of trade liberlisation dominates the negative impact of a decline in remittances. It shows that teh decline in remittance inflows is a major contributory factor in explaining the increase in poverty in pakistan.
    Keywords: Trade, Remittances, Poverty, Pakistan
    JEL: F10 F16 I32 J61
    Date: 2006
  11. By: Lubna Hasan (Pakistan Institute of Development Economics, Islamabad)
    Abstract: It has long been realised that factor accumulation and technological development are only proximate causes of economic development, and focus has now shifted to investigating the ‘deeper determinants’ of economic growth. Two such forces are highlighted in literature: institutions and geography. However, it remains controversial as to which of these two is the more important. The “Institutions school” assigns primal importance to institutions, whereas the “Geography school” considers geographical factors as the primary determinant of economic performance of countries. This paper reviews the debate surrounding these “deeper determinants” of economic performance. It reviews the work of these two schools of thought and their interpretation of the long-run development. The paper then examines the evidence provided by the respective schools in favour of their hypotheses. It concludes in favour of the Institutions hypothesis as the Geography school does not provide a consistent story of long-run development
    Keywords: Institutions, Geography, Long-run Development, Deeper Determinants of Growth
    JEL: O10 O43 N00 P51 R11
    Date: 2006
  12. By: Durr-e-Nayab (Pakistan Institute of Development Economics, Islamabad)
    Abstract: Population growth and size have remained the focus of debate for centuries but the recent demographic transition in developing countries has made social scientists take note of the changing age structure of the population as well. As a result of declining population growth and consequent changes in age structure, the proportion of working-age population is increasing in most developing countries, with an associated decline in the dependent age population, offering a window of opportunity to these countries that is referred to as the “demographic dividend”. Pakistan is also going through the demographic transition, and is experiencing a once-in-a-lifetime demographic dividend as the working-age population bulges and the dependency ratio declines. This paper looks into the demographic dividend available to Pakistan and its implications for the country, mainly through three mechanisms: labour supply, savings, and human capital. For economic benefits to materialise, there is a need for policies dealing with education, public health, and those that promote labour market flexibility and provide incentives for investment and savings. On the contrary, if appropriate policies are not formulated, the demographic dividend might in fact be a cost, leading to unemployment and an unbearable strain on education, health, and old age security
    Keywords: Demographic dividend, age-structure, demographic transition, Pakistan
    JEL: J11
    Date: 2006
  13. By: Rizwana Siddiqui (Pakistan Institute of Development Economics, Islamabad); A. R. Kemal (Pakistan Institute of Development Economics, Islamabad)
    Abstract: Foreign capital inflows (FKI) help an economy by financing the imbalance between income and expenditure. However, their impact on poverty in the recipient economy is a controversial issue. In this study, we examine the impact on poverty in two different scenarios (1) labour is homogeneous (2) labour is heterogeneous. The Computable General Equilibrium model for Pakistan is used to conduct simulations in order to assess the impact of an increase in foreign capital on poverty both in the presence and in the absence of trade liberalisation. Several interesting results emerge from the study. First, FKI tends to reduce poverty in the presence as well as in the absence of trade liberalisation when labour is homogeneous. However, poverty reduction appears to be larger in the presence of trade liberalisation. Second, when labour is differentiated according to qualification and is assumed to be sector-specific, in the absence of trade liberalisation a higher proportion of benefits of FKI accrue to skilled labour and poverty increases by all measures for both urban and rural households. In the presence of trade liberalisation, FKI benefits unskilled labour more, and poverty is decreased irrespective of the choice of poverty indicators
    Keywords: Capital inflow, Poverty, Pakistan
    JEL: F F3 F32
    Date: 2006
  14. By: Ali Cheema (Lahore University of Management Sciences, Lahore); Asad Sayeed (Collective for Social Science Research, Karachi)
    Abstract: This paper takes a political economy perspective in analysing the nature and causes on the decline in bureaucratic conduct. Section 1 lays out the details of this structure. Based on a logical model which places the bureaucracy within the larger context of the objective function of the state, the nature of the political process, the degree of centralisation and fragmentation of the bureaucratic structure and processes for monitoring and accountability of the bureaucracy, this model provides the basis for subsequent analysis. Section 2 provides a historical overview with regard to changes in the bureaucratic and political structure and the impact it had on the above mentioned balance between bureaucratic conduct and political compulsions. Section 3 then analyses the consequences on service delivery that this systematic weakening of the bureaucratic structure has had. Section 4 then critically assesses some of the recent attempts at bureaucratic reform in the light of the framework developed in Section 1. The conclusion then summarises the paper and draws implications for pro-poor change of the structure and conduct of the bureaucratic structure in Pakistan
    Keywords: Poverty, Poor, Bureaucracy
    JEL: I38
    Date: 2006
  15. By: Paul Dorosh (The World Bank, Washington, D. C.); Muhammad Khan Niazi (Innovative Development Strategies, Islamabad); Hina Nazli (Innovative Development Strategies, Islamabad)
    Abstract: This paper describes the structure and construction of a social accounting matrix (SAM) for Pakistan for 2001-02. A SAM is an internally consistent extended set of national accounts that disaggregates value-added in each production activity into payments to various factors (e.g., land, labour, capital), and disaggregates household incomes and expenditures according to various household types. Because this Pakistan SAM is designed for analysis of the links between growth and rural poverty, agricultural activities, agricultural factors of production, and rural household accounts are more disaggregated than are those for urban activities and households. Rural household groups in the SAM are split according to three regions (Punjab, Sindh, and Other Pakistan) to capture the large differences in the structure of agricultural production and incomes across Pakistan. On average, household incomes in the SAM are 2.1 times greater than household expenditures in the HIES Survey, reflecting the apparent substantial under-reporting of expenditures (particularly on services) and informal sector incomes in the HIES and other household surveys. Agricultural factor incomes as calculated in the SAM account for only 23 percent of total factor incomes in Pakistan, but 60 percent of total factor incomes for agricultural households. 91 percent of agricultural incomes derive from land, water, own-farm labour, or livestock; earnings of hired labour and (nonlivestock) agricultural capital account for only 9 percent of agricultural incomes. Incomes of large- and medium-farm rural households, calculated using land area cultivated, data from the Agricultural Census, and other data, are significantly higher than indicated in household surveys
    Keywords: National accounts, Social accounting matrix
    JEL: E01
    Date: 2006
  16. By: M. Ali Kemal (Pakistan Institute of Development Economics, Islamabad)
    Abstract: Rise in the underground economy creates problems for the policy-makers to formulate economic policies, especially the monetary and fiscal policies. It is found that if there was no tax evasion, budgets balance might have been zero and positive for some years and we would not have needed to borrow as much as we had borrowed. It is concluded that the impact of the underground economy is significant to the movements of the formal economy, but the impact of formal economy is insignificant in explaining the movements in the underground economy. In the long run, underground economy and official economy are positively associated. It is estimated that the underground economy ranges between Rs 2.91 trillion and Rs 3.34 trillion (54.6 percent of GDP to 62.8 percent of GDP respectively) in 2005 and tax evasion ranges between Rs 302 billion and Rs 347 billion (5.7 percent of GDP to 6.5 percent of GDP respectively) in 2005. Underground economy and tax evasion were increasing very rapidly in the early 1980s but the rate of increase accelerated in the 1990s. It declined in 1999, but reverted to an increasing trend until 2003. It declined again in 2004 and 2005
    Keywords: Underground Economy, Tax Evasion
    JEL: E26 H26
    Date: 2007
  17. By: M. Ali Khan (The Johns Hopkins University, Baltimore, USA)
    Abstract: The Harris-Todaro hypothesis replaces the equality of wages by the equality of ‘expected’ wages as the basic equilibrium condition in a segmented but homogeneous labour market, and in so doing it generates an equilibrium level of urban unemployment when a mechanism for the determination of urban wages is specified. This article reviews work in which the Harris-Todaro hypothesis is embedded in canonical models of trade theory in order to investigate a variety of issues in development economics. These include the desirability (or the lack thereof) of foreign investment, the complications of an informal sector, and the presence of clearly identifiable ethnic groups
    Keywords: Harris-Todaro, Wages, Labour Economics, Labour Market, Rural to Urban Migration
    JEL: D00
    Date: 2007
  18. By: Asma Hyder (Pakistan Institute of Development Economics, Islamabad)
    Abstract: This paper examines the magnitude of public/private wage differentials in Pakistan using data drawn from the 2001-02 Labour Force Survey. Pakistan Labour Force Survey is a nationwide survey containing micro data from all over the country containing demographic and employment information. As in many other countries, public sector workers in Pakistan tend to have higher average pay and educational levels as compared to their private sector counterparts. First, this paper presents the inter-sectoral earning equations for the three main sectors of the economy, i.e., public, private, and state-owned enterprises. These results are further decomposed into “treatment” and “endowment effect”. To examine the role of human capital in wage gap, the rate of return to different levels of schooling is calculated. These rates of return to education may be important for policy formulation. The relative earning share is also worked out to look into the distribution of wages across the occupational categories. The earning equations are estimated with and without correction for selectivity, which is also the main objective of the study, i.e., to find out if any non-random selection is taking place within these three sectors of employment
    Keywords: Wage Differentials, Rate of Return to Education, Public Sector Labour Markets
    JEL: J32 J45 J24
    Date: 2007
  19. By: Muhammad Arshad Khan (Pakistan Institute of Development Economics, Islamabad)
    Abstract: Recent theoretical and empirical literature suggests that foreign direct investment (FDI) exerted positive impact on economic growth through the process of technological diffusion. The literature also suggests that the development of the domestic financial system of the host country is an important pre-condition for FDI to have a positive impact on economic growth. A welldeveloped domestic financial sector enhances efficient allocation of financial resources and improves the absorptive capacity of a country with respect to FDI inflows. Particularly, a more developed financial system positively contributes to the process of technological diffusion associated with foreign direct investment. In this study, we examine the link between FDI, domestic financial sector, and economic growth for Pakistan over the period 1972–2005. Empirical analysis is based on the bound testing approach of cointegration advanced by Pesaran, et al. (2001). The results suggest that FDI inflows exerted positive impact on economic growth in the short-run and the long-run if the domestic financial system has achieved a certain minimum-level development. The results further suggest that better domestic financial conditions not only attract foreign companies to invest in Pakistan, but also allow maximising the benefits of foreign investment
    Keywords: Foreign Direct Investment, Financial Sector Development, Economic Growth, Technology Spillovers
    JEL: F21 F36 F43 O16
    Date: 2007

This nep-dev issue is ©2007 by Jeong-Joon Lee. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.