nep-dev New Economics Papers
on Development
Issue of 2008‒06‒13
eighteen papers chosen by
Jeong-Joon Lee
Towson University

  1. Why Are Market Economies Politically Stable? A Theory of Capitalist Cohesion By Dalgaard, C.; Olsson, O.
  2. The devil is in the shadow Do institutions affect income and productivity or only official income and official productivity? By Dreher, A.; Méon, P.; Schneider, F.
  3. Institutional Traps and Economic Growth By Gradstein, M.
  4. Religion and Human Capital in Ghana By Blunch, N.
  5. The Economic Impact of AIDS in Sub-Saharan Africa By Azomahou, Theophile
  6. Competition, Human Capital and Income Inequality with Limited Commitment By Ramon Marimon; Vincenzo Quadrini
  7. How should donors give foreign aid? Project aid versus budget support By Izabela Jelovac; Frieda Vandeninden
  8. Second-Best Institutions By Dani Rodrik
  9. Firm-Size Distribution and Cross-Country Income Differences By Laura Alfaro; Andrew Charlton; Fabio Kanczuk
  10. Much Ado About Nothing: American Jobs and the Rise of Service Outsourcing to China and India By Runjuan Liu; Daniel Trefler
  11. Estimating the Productivity Selection and Technology Spillover Effects of Imports By Ram C. Acharya; Wolfgang Keller
  12. Remittances and Subjective Welfare in a Mixed-Motives Model: Evidence from Fiji By Richard P.C. Brown; Eliana V. Jimenez
  13. Foreign Direct Investment and Structural Reforms: Evidence from Eastern Europe and Latin America By Nauro Campos; Yuko Kinoshita
  14. Determinants Of Barries To Quality Of Direct Foreign Investments – Evidences From South & East Asian Economies By Juan Piñeiro Chousa,; Krishna Chaitanya,; Bitzenis P. Aristidis; Artur Tamazian
  16. Leakage of Public Resources in the Health Sector: An Empirical Investigation of Chad By Bernard Gauthier; Waly Wane
  17. Civil conflict and displacement Village‐level determinants of forced migration in Aceh By Mathias Czaika; Krisztina Kis-Katos
  18. Refugee movements and aid responsiveness By Mathias Czaika; Amy Mayer

  1. By: Dalgaard, C.; Olsson, O.
    Abstract: The present paper documents that political stability is positively associated with the extent of domestic trade. In explaining this regularity, we provide a model where political cohesion is linked to the emergence of a fully functioning market economy. Without market exchange, the welfare of inherently selfish individuals will be mutually independent. As a result, political negotiations, echoing the preferences of the citizens of society, will be dog-eat-dog in nature. Whoever has greater bargaining power will be willing to make decisions that enhance the productivity of his supporters at the expense of other groups in society. If the gains from specialization become sufficiently large, however, a market economy will emerge. From being essentially non-cooperative under self-sufficiency, the political decision making process becomes cooperative in the market economy, as the welfare of individuals will be mutually interdependent due to the exchange of good.
    Keywords: Political cohesion, Economic growth
    JEL: P16 O41
    Date: 2007–10
  2. By: Dreher, A.; Méon, P.; Schneider, F.
    Abstract: This paper assesses the relationship between institutions, output, and productivity, when official output is corrected for the size of the shadow economy. Our results confirm the usual positive impact of institutional quality on official output and total factor productivity, and its negative impact on the size of the underground economy. However, once output is corrected for the shadow economy, the relationship between institutions and output becomes weaker. The impact of institutions on total (“corrected”) factor productivity even becomes insignificant. Differences in corrected output must then be attributed to differences in factor endowments. These results survive several tests for robustness.
    Keywords: Shadow economy, income, aggregate productivity, development accounting.
    JEL: O11 O17 O47 O5
    Date: 2007–11
  3. By: Gradstein, M.
    Abstract: This paper's point of departure is that low-quality institutions, concentration of political power, and underdevelopment are persistent over time. Its analytical model views an equal distribution of political power as a commitment device to enhance institutional quality thereby promoting growth. The politically powerful coalition contemplates relinquishing of its power, weighing this advantageous consequence against the limit on own appropriative ability that it entails. The possibility of two developmental paths is exhibited: with concentration of political and economic power, low-quality institutions, and slow growth; and a more equal distribution of political and economic resources, high-quality institutions, and faster growth.
    Keywords: Institutional quality, inequality, political bias, growth.
    JEL: D31 D72 O10 O11
    Date: 2007
  4. By: Blunch, N.
    Abstract: This paper examines the religion-human capital link, examining a recent household survey for Ghana. Insights from the recent anthropological literature leads to a prediction of Islam being associated with lower human capital levels than Christianity, since Islam, perhaps surprisingly, may be clustered together with Traditional/Animist religion within the group of orally based religions for the case of Ghana. While previous studies typically have only considered the main religions, thereby not allowing for heterogeneous associations in the links at the sub-group level, and also have not allowed religious affiliation to be endogenously determined, these possibilities are explored here, as well. I find a strong association between individual religious affiliation and human capital as measured by years of schooling, with Christians as a group being more literate and having completed more years of schooling than Muslims and Animists / Traditionalists, thus confirming the predictions from the conceptual framework. At the same time, there is a great deal of heterogeneity in the strength of this relationship within different types of Christianity. The instrumental variables estimation strategy proves to be preferable to OLS, while at the same yielding higher associations in the religion-human capital relations ship. In turn, this indicates that previous studies, which have typically used OLS, may have systematically underestimated the strength of the religion-human capital link. Directions for future research are also presented.
    Keywords: Religion, human capital, literacy and numeracy, Ghana.
    JEL: J24 Z12
    Date: 2007–12
  5. By: Azomahou, Theophile (UNU-MERIT)
    Abstract: In this paper, a simple general equilibrium model à la Solow is developed to capture the impact of AIDS on economic growth. To this end, a benchmark model due to Cuddington and Hancock (1994) is extended in various directions. In particular, the sharply declining life expectancy patterns are clearly re°ected in the enlarged model through a generic Ben-Porath mechanism. AIDS-related health expenditures are incorporated as well. Using up-do-date optimal forecasting methods, the model applied to South Africa shows that while a relatively short term assessment might not reveal any dramatic AIDS growth e®ect, the medium/long run impact can be truly devastating. In particular, the heavy trends in mortality and life expectancy currently induced by AIDS are shown to be potentially at least twice more detrimen-tal for per capita economic growth in the period 2020-2030 compared to 2000-2010.
    Keywords: Epidemics, Life Expectancy, Economic Growth, AIDS
    JEL: C61 C62 O41
    Date: 2008
  6. By: Ramon Marimon; Vincenzo Quadrini
    Abstract: We develop a dynamic general equilibrium model with two-sided limited commitment to study how barriers to competition, such as restrictions to business start-up, affect the incentive to accumulate human capital. We show that a lack of contract enforceability amplifies the effect of barriers to competition on human capital accumulation. High barriers reduce the incentive to accumulate human capital by lowering the outside value of ‘skilled workers’, while low barriers can result in over-accumulation of human capital. This over-accumulation can be socially optimal if there are positive knowledge spillovers. A calibration exercise shows that this mechanism can account for significant cross-country income inequality.
    Keywords: Limited commitment, limited enforcement, human capital accumulation, income inequality, innovation, barriers to competition.
    JEL: D99 E20 J24 O15 O34 O43
    Date: 2008
  7. By: Izabela Jelovac (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France); Frieda Vandeninden (MGSoG, Universiteit Maastricht)
    Abstract: We develop a theoretical model to compare the two major foreign aid modalities: project aid and budget support. These two modalities have a different impact on the production of ‘developmental goods’. Firstly, conditionality can be associated with budget support, but only a subset of the developmental expenses – the observable ones – can be subject to conditionality. Secondly, when using project aid, the donors control the overall allocation of the aid resources. However, we consider that, because of limited harmonisation and coordination, project aid can be associated with a cost of imperfect fit. We develop a unified framework to compare these two modalities where we allow the simultaneous utilisation of both instruments. We show that all the aid should be given via budget support, no matter whether conditionality is used or not. Furthermore, we show that the optimal use of conditionality depends on the recipient’s developmental preferences, the productivity of the inputs and the level of aid compared to the recipient’s budget: when these parameters are relatively high, conditionality should be enforced. Otherwise, the optimal aid allocation is such that all the aid is given through unconditional budget support. We conclude that conditionality does not always improve the aid effectiveness.
    Keywords: conditionality, foreign aid, optimal contract
    JEL: D82 F35 O19
    Date: 2008
  8. By: Dani Rodrik
    Abstract: The focus of policy reform in developing countries has moved from getting prices right to getting institutions right, and accordingly countries are increasingly being advised to move towards "best-practice" institutions. This paper argues that appropriate institutions for developing countries are instead "second-best" institutions -- those that take into account context-specific market and government failures that cannot be removed in short order. Such institutions will often diverge greatly from best practice. The argument is illustrated using examples from four areas: contract enforcement, entrepreneurship, trade openness, and macroeconomic stability.
    JEL: O1
    Date: 2008–06
  9. By: Laura Alfaro; Andrew Charlton; Fabio Kanczuk
    Abstract: We investigate, using firm level data for 79 developed and developing countries, whether differences in the allocation of resources across heterogeneous plants are a significant determinant of cross-country differences in income per worker. For this purpose, we use a standard version of the neoclassical growth model augmented to incorporate monopolistic competition among heterogeneous firms. For our preferred calibration, the model explains 58% of the log variance of income per worker. This figure should be compared to the 42% success rate of the usual model.
    JEL: O1
    Date: 2008–06
  10. By: Runjuan Liu; Daniel Trefler
    Abstract: We examine the impact on U.S. labor markets of offshore outsourcing in services to China and India. We also consider the reverse flow or 'inshoring' which is the sale of services produced in the United States to unaffiliated buyers in China and India. Using March-to-March matched CPS data for 1996-2006 we examine the impacts on (1) occupation and industry switching, (2) weeks spent unemployed as a share of weeks in the labor force, and (3) earnings. We precisely estimate small positive effects of inshoring and smaller negative effects of offshore outsourcing. The net effect is positive. To illustrate how small the effects are, suppose that over the next nine years all of inshoring and offshore outsourcing grew at rates experienced during 1996-2005 in business, professional and technical services i.e., in segments where China and India have been particularly strong. Then workers in occupations that are exposed to inshoring and offshore outsourcing (1) would switch 4-digit occupations 2 percent less often, (2) would spend 0.1 percent less time unemployed, and (3) would earn 1.5 percent more. These are not annual changes – they are changes over nine years – and are thus best described as small positive effects.
    JEL: F16
    Date: 2008–06
  11. By: Ram C. Acharya; Wolfgang Keller
    Abstract: In the wake of falling trade costs, two central consequences in the importing economy are, first, that stronger competition through increased imports can lead to market share reallocations among domestic firms with different productivity levels (selection). Second, the increase in imports might improve domestic technologies through learning externalities (spillovers). Each of these channels may have a major impact on aggregate productivity. This paper presents comparative evidence from a sample of OECD countries. We find that the average long run effect of an increase in imports on domestic productivity is close to zero. If the scope for technological learning is limited, the selection effect dominates and imports lead to lower productivity. If, however, imports are relatively technology-intensive, imports also generate learning that can on net raise domestic productivity. Moreover, there is somewhat less selection when the typical domestic firm is large. The results support models in which trade triggers both substantial selection and technological learning.
    JEL: F1 F2 O3 O33
    Date: 2008–06
  12. By: Richard P.C. Brown; Eliana V. Jimenez (School of Economics, The University of Queensland)
    Abstract: To analyze migrants’ remittance motivations we extend the mixed-motives model of private transfers developed by Cox et al (2004), incorporating subjectively-assessed recipient welfare. We test the model with customized survey data from Fiji, finding evidence supportive of altruism for households below a subjective threshold level, indicating that international migrants’ remittances provide important social protection coverage to households where formal social protection systems are lacking.Unlike previous studies, we also find a positive, exchange-motivated relationship for those above the threshold. The conventional linear model applied to the same sample uncovers neither relationship. We conclude that either crowding-out or crowding-in of remittances can occur when recipients’ welfare improves, depending on the household’s pre-transfer welfare level. The net effects of recipients’ welfare improvements on remittances, and the effects of remittances on poverty alleviation and income distribution, are consequently more complex and ambiguous than previous studies suggest.
    Date: 2008
  13. By: Nauro Campos; Yuko Kinoshita
    Abstract: This paper investigates the role of structural reforms – privatization, financial reform and trade liberalization– as determinants of FDI inflows based on newly constructed dataset on structural reforms for 19 Latin American and 25 Eastern European countries between 1989 and 2004. Our main finding is a strong empirical relationship from reforms to FDI, in particular, from financial liberalization and privatization. These results are robust to different measures of reforms, split samples, and potential endogeneity and omitted variables biases.
    Keywords: privatization, financial reform, trade liberalization, foreign direct investment, Latin America, transition economies
    JEL: H11 F21 O16
    Date: 2008–01–01
  14. By: Juan Piñeiro Chousa,; Krishna Chaitanya,; Bitzenis P. Aristidis; Artur Tamazian
    Abstract: The objective of this paper is to examine whether FDI inflows in South & East Asian economies posses any barriers which are deterring to attract FDI of their actual potential? If so, what are those various set of barriers? These questions are addressed in this study using cross section time series data for 17 South and East Asian economies from 1996 to 2005.
    Keywords: FDI Inflows, Barriers, South & East Asia
    JEL: F21 O53
    Date: 2008–02–01
  15. By: Krishna Chaitanya Vadlamannati
    Abstract: The basic objective of this paper is to examine the effect of military spending on income inequality in four major South Asian economies. In the process, we also control for other possible key determinants of income inequality subject to data availability. Using panel regression fixed effects analysis for the study period 1975 to 2005, we find from our estimates that there is a positive effect of military expenditure on income inequality.
    Keywords: Defense Spending; Income Inequality & South Asia
    JEL: H I O
    Date: 2008–02–01
  16. By: Bernard Gauthier; Waly Wane (-)
    Abstract: In the public sector in developing countries, leakage of public resources could prove detrimental to users and affect the well-being of the population. In this paper, we empirically examine the importance of leakage of government resources in the health sector in Chad and its effects on medication mark-up. We make use of data collected in Chad as part of a Health Facilities Survey organized by the World Bank in 2004. The survey covers 281 primary health care centers and hospitals and contains information on the provision of medical material, financial resources and medication allocated by the Ministry of Health (MoH) to the regional administration and primary health centers. While the regional administration is officially allocated 60% of the MoH’s non-wage recurrent expenditures, the share of the resources that actually reach the regions is estimated to be 18%. The health centers, which are the frontline providers and the entry point for the population, receive less than 1% of the MoH’s non-wage recurrent expenditures. Accounting for the endogeneity of the level of competition among health centers, we observe that leakage of government resources has a significant and negative impact on the mark-up health centers charge patients on drugs sales. Furthermore, it is estimated that had public resources earmarked for frontline providers reached them in their entirety, the number of patients seeking primary health care in Chad would have more than doubled.
    Keywords: Corruption, public expenditure, primary health care
    JEL: H51 K49
    Date: 2008–02–01
  17. By: Mathias Czaika; Krisztina Kis-Katos (Department of International Economic Policy, University of Freiburg)
    Abstract: The purpose of this paper is to identify the determinants of displacement behavior based on various push and pull factors at the village level. The study concentrates on changes in village population during three years of civil conflict (1999-2002) in Aceh, Indonesia. The empirical analysis is based on a unique dataset from two census rounds of the Indonesian Village Potential Census (PODES). It uses data on around 5200 Acehnese villages and relates village level population change to conflict variables, geographic patterns and traditional socio-economic determinants of migration. By applying quantile regressions, the push (outflow) factors and the pull (inflow) determinants of migration can also be distinguished. We identify the following factors as the main determinants of the Aceh migration pattern in this period: First, conflict clashes induced large rearrangements of the population between villages in highly affected districts, as well as strong village emigration from the geographically remote regions in Central Aceh towards the less conflict-affected coastal industrial areas. Besides conflict factors, an (ongoing) rural-urban migration process, driven by socio-economic factors has taken place during the conflict period. Second, there is also evidence that security considerations, such as the presence of police in a village or neighborhood, were either emigration-reducing or immigration-inducing. Third, although the presence of ethnic-Javanese has not been a primary cause of conflict incidence, their intimidation by the rebel movement has led to a significant outflow, primarily from conflict-affected villages in Central Aceh. These results reveal that, beside a conflict-induced fear of violence, population movements in Aceh have also been an outcome of traditional migration determinants.
    Date: 2008–04
  18. By: Mathias Czaika; Amy Mayer (Department of International Economic Policy, University of Freiburg)
    Abstract: This article analyses the impact of refugee migration movements on the long-term and short-term aid allocation decisions of bilateral donors. We distinguish between different types of forced migrants: internally displaced persons (IDPs) that stay in their country of origin, cross-border refugees that flee to neighboring countries, and asylum seekers in Western donor states. For the period 1992 to 2003, empirical evidence on 18 donor and 148 recipient countries suggests that short-term emergency aid is given to all types of refugee situations, but is predominantly directed towards the countries of origin. For the allocation of long-term development aid, donor states focus even more on the sending-countries of forced migrants; in general, they increase aid volumes only for the home countries of refugees, not for the hosting countries. This preference for the countries of origin is even stronger when these are sendingcountries of asylum seekers to the Western aid-giving states.
    Keywords: Bilateral aid allocation, refugee movements
    Date: 2008–04

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