nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒06‒10
fifteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Blunt Instruments: On Establishing the Causes of Economic Growth By Samuel Bazzi
  2. Two Waves of Service-Sector Growth By Barry Eichengreen; Poonam Gupta
  3. Investigando a hipótese de convergência na América Latina e no leste asiático: uma abordagem de regressão quantílica By Geovana Lorena Bertussi; Lízia de Figueiredo
  4. Indian Economic Outlook 2008-09 and 2009-10 By Rajiv Kumar; Mathew Joseph; Dony Alex; Pankaj Vashisht
  5. Dynamic Effects of Foreign Direct Investment When Credit Markets are Imperfect By Thomas Gall; Marc Schiffbauer; Julia Kubny
  6. Who Gets the Credit? And Does it Matter? Household vs Firm Lending Across Countries By Beck, T.H.L.; Büyükkarabacak, B.; Rioja, F.; Valev, N.
  7. Regional Sources of Growth Acceleration in India By Ravindra H Dholakia
  8. Origins and Resolution of Financial Crises; Lessons from the Current and Northern European Crises By Ostrup, Finn; Oxelheim, Lars; Wihlborg, Clas
  9. The Impact of the Credit Crisis on Poor Developing Countries: Growth, worker remittances, accumulation and migration By Ziesemer, Thomas
  10. Long-run economic growth: modeling exercise for emerging markets By Daniel Toro Gonzalez
  11. The Missing Middle By Anne O. Krueger
  12. Foreign Direct Investment in Times of Global Economic Crisis: Spotlight on New Europe By Filippov, Sergey; Kalotay, Kalman
  13. Structural Change and Economic Development in China and India By Saccone Donatella; Valli Vittorio
  14. Labor skills and foreign investment in a dynamic economy : estimating the knowledge-capital model for Singapore By Chellaraj, Gnanaraj; Maskus, Keith E.; Mattoo, Aaditya
  15. Capital Inflows, Household Debt and the Boom-bust Cycle in Estonia By Zuzana Brixiova; Laura Vartia; Andreas Wörgötter

  1. By: Samuel Bazzi
    Abstract: Despite intense concern that many instrumental variables used in growth regressions may be invalid, or both, top journals studies of economic growth based on problematic instruments. doing so risks pushing the entire literature closer to irrelevance. This article illustrates hidden problems with identification in recent prominently published and widely cited growth studies using their original data and urges researchers to take steps to overcome the shortcomings.
    Keywords: economic growth, capital, macroeconomy, macroeconomic policy, regression models for growth, Economics
    Date: 2009
  2. By: Barry Eichengreen (Indian Council for Research on International Economic Rela); Poonam Gupta (Indian Council for Research on International Economic Rela)
    Abstract: The positive association between the service sector share of output and per capita income is one of the best-known regularities in all of growth and development economics. Yet there is less than complete agreement on the nature of that association. Here we identify two waves of service sector growth, a first wave in countries with relatively low levels of per capita GDP and a second wave in countries with higher per capita incomes. The first wave appears to be made up primarily of traditional services, the second wave of modern (financial, communication, computer, technical, legal, advertising and business) services that are receptive to the application of information technologies and increasingly tradable across borders. In addition, there is evidence of the second wave occurring at lower income levels after 1990. But this change in the second wave is not equally evident in all economies: it is most apparent in democracies, in countries that are open to trade, and in those that are relatively close to the major global financial centers. This points to both political and economic conditions that can help countries capitalize on the opportunities afforded by an increasingly globalized post-industrial economy.
    Keywords: Services, Growth, Structural change, traditional services modern services
    JEL: O10 O11 O14
  3. By: Geovana Lorena Bertussi (UnB); Lízia de Figueiredo (Cedeplar-UFMG)
    Abstract: In this paper, we evaluate the income convergence hypothesis in Latin America and East Asia between 1960 and 2000 through the use of quantile regressions to estimate growth equations. This approach allows us to assess how the effect of policy variables on per worker income growth rate can vary over the conditional growth distribution. The results show that the income convergence process is a local phenomenon, and not a global experience along the conditional growth distribution, that is, each quantile exhibits an income growth behavior that is different from the rest.
    Keywords: income convergence, quantile regression, panel data
    JEL: C14 C23 O47
    Date: 2009–06
  4. By: Rajiv Kumar (Indian Council for Research on International Economic Rela); Mathew Joseph (Indian Council for Research on International Economic Rela); Dony Alex (Indian Council for Research on International Economic Rela); Pankaj Vashisht
    Abstract: This paper provides an outlook for the Indian economy in the light of theextraordinary global financial crisis, that started in the US, but which has nowtransformed into the worst economic downturn since the Great Depression. TheIndian economy was slowing down even before the onset of global crisis and so thetiming of this external shock could not have been worse. The analysis undertaken forthis paper shows that the global crisis is likely to bring the Indian GDP growth ratedown considerably. This will pose a big challenge requiring urgent and sustainedpolicy attention to prevent this downturn from becoming unnecessarily prolonged.There is real downside risk that the growth rate could plummet to the pre-1980s levelsif appropriate countercyclical measures are not taken immediately and are noturgently followed by necessary structural reforms. The paper provides a short-termforecast for GDP growth based on a model of leading economic indicators. Wepresent three scenarios in the paper assuming differentiated impact of the externalcrisis. Finally the paper suggests a set of policy measures to get the Indian economyback on the path of sustained rapid and inclusive growth.
    Keywords: Forecasting, Indian economic growth, Economic outlook and conditions, Financial crises
    JEL: E17 E66
  5. By: Thomas Gall (University of Bonn); Marc Schiffbauer (Economic & Social Research Institute, Dublin, Ireland); Julia Kubny (German Development Institute, Bonn, Germany)
    Abstract: This paper argues that foreign direct investment in economies with credit market imperfections may increase their vulnerability to capital flow shocks. Due to better access to financial markets foreign firms can use different wage contracts than domestic ones. This alters the domestic wage composition and the subsequent wealth distribution. Under credit market imperfections the wealth distribution typically determines an economy’s growth potential in autarky; hence high exposure to foreign direct investment may substantially impede the capability to recover from sudden withdrawals of foreign capital. This is substantiated by empirical evidence on durations of output recovery after systemic sudden stops.
    Keywords: Credit market imperfections, foreign direct investment, growth, occupational choice, sudden stops
    JEL: F43 F23 O16
    Date: 2009–04
  6. By: Beck, T.H.L.; Büyükkarabacak, B.; Rioja, F.; Valev, N. (Tilburg University, Center for Economic Research)
    Abstract: While theory predicts different effects of household credit and enterprise credit on the economy, the empirical literature has mainly used aggregate measures of overall bank lending to the private sector. We construct a new dataset from 45 developed and developing countries, decomposing bank lending into lending to enterprises and lending to households and assess the different effects of these two components on real sector outcomes. We find that: 1) enterprise credit raises economic growth whereas household credit has no effect; 2) enterprise credit reduces income inequality whereas household credit has no effect; and 3) household credit is negatively associated with excess consumption sensitivity, while there is no relationship between enterprise credit and excess consumption sensitivity.
    Keywords: Financial Intermediation; Household Credit; Firm Credit
    JEL: D14 G21 G28
    Date: 2009
  7. By: Ravindra H Dholakia
    Abstract: Gujarat, West Bengal, Karnataka, Maharashtra, Kerala and Tamil Nadu were the major contributors to the growth acceleration in India after 1991-92. Although the Regional Disparity may increase temporarily, causality test provides support to the hypothesis about spread effects. The Regional growth targets assigned by the 11th Plan in India seem to rely on the spread effects of economic growth acceleration in the better off states to achieve its 9 percent growth target and reduce regional disparity in the long run. To strengthen spread effects, the domestic economy should be further integrated and interlinked with free flow of goods, services and factors of production.[IIMA WP no. 2009-03-06]
    Keywords: India; growth acceleration; regional growth; regional sources; regional disparity; contribution of state in growth acceleration; gross state domestic product
    Date: 2009
  8. By: Ostrup, Finn (Copenhagen Business School); Oxelheim, Lars (Research Institute of Industrial Economics (IFN)); Wihlborg, Clas (Chapman University, Orange, CA)
    Abstract: Since July 2007 the world economy has experienced a severe financial crisis originating in the U.S. housing market. The crisis has subsequently spread to the financial sectors in European and Asian economies and led to a severe worldwide recession. The existing literature on financial crises rarely distinguish between factors that create the original strain on the financial sector and factors that explain why these strains lead to system-wide contagion and a possible credit crunch. Most of the literature on financial crises refers to factors that cause an original disruption in the financial system. We argue that a financial crisis with its contagion within the system is caused by failures of legal, regulatory and political institutions. <p> One policy implication of our view is that the need for various forms of rescues of financial firms in times of crises would be reduced if appropriate institutions could be put in place Lacking appropriate institutions to avoid contagion within the financial system and a potential credit crunch, ad hoc financial crisis management is required. We draw on experiences from the financial crises in the Nordic countries at the end of the 1980s and the beginning of the 1990s. In particular, the Swedish model for crisis resolution, which has received attention during the current crisis, is discussed in order to illustrate the problems policy makers face in a financial crisis without appropriate institutions. Current European Union approaches to the crisis are discussed before turning to policy implications from an emerging market perspective in the current crisis.
    Keywords: Financial Crisis; Institutional Failure; Insolvency Procedures; Contagion; Systemic Effects; Macroeconomic Shock; Financial Crisis Management; Swedish Model
    JEL: D53 E44 E58 F32 F42 G15 G18 G21 G28
    Date: 2009–05–20
  9. By: Ziesemer, Thomas (UNU-MERIT, Department of Economics, Maastricht University)
    Abstract: The credit crisis of OECD countries has a negative impact on the growth of the world economy according to a simple error correction model. This causes negative growth effects in poor developing countries. The reduced growth has a direct or indirect impact on the convergence issue, aid, remittances, labour force growth, investment and savings, net foreign debt, migration, tax revenues, public expenditure on education and literacy. We estimate dynamic equations of all these variables using dynamic panel data methods for a panel of countries with per capita income below $1200 (2000). The estimated equations are then integrated to a dynamic system of fourteen equations for fourteen variables that allows for highly non-linear baseline simulations for these open economies. Then we analyze the effects of shocks as predicted by the international organizations for the OECD and world growth for 2008 and 2009. Whereas growth rates return to the baseline scenario very quickly, the GDP per capita returns to its baseline level in OECD countries and the world economy after some years but in poor developing countries it remains below the baseline scenario for more than 200 years. This long run blow to convergence leads to more remittances and emigration, a lower labour force growth, higher shares of GDP for saving, tax revenues, public expenditure on education and investment, and higher literacy. However, all these stabilizing forces through remittances and emigration cannot compensate the losses in levels of growth. Short and medium run effects are driven by a return to baseline for OECD and world GDP growth rates by the end of 2010, but for levels only 10 to 30 years later. Therefore we first get 15 to 20 years of fewer remittances, tax revenues, savings, public expenditure on education, literacy, and investment, more emigration and lower labour force growth.
    Keywords: crisis, migration, remittances, accumulation, growth
    JEL: F22 F24 O15 J61
    Date: 2009
  10. By: Daniel Toro Gonzalez
    Abstract: This document is intended to show some results about the predictions over the long run economic growth of some emerging markets. Following Lucas (2009) we successfully replicate the estimation about Thailand, South Korea, Indonesia and Hong Kong, and we also use the model to predict the per capita GDP in some Latin American countries like Chile, Colombia and Mexico taking United States as the leading economy. We show that there are significant differences in the catch up process between the Asian economies and the Latin American Economies. In Latin America, the convergence process will take more than twice the time needed by the Asian economies to catch up the most advanced economies.
    Date: 2009–06–03
  11. By: Anne O. Krueger (Indian Council for Research on International Economic Rela)
    Abstract: Though recent economic growth in India has increased productivity and living standards significantly, the need for more growth and more reform remains. Rapid growth of unskilled labor-intensive manufacturing combined with growth of productivity in agriculture is necessary to enable a more inclusive growth that raises living standards in rural areas and in non-agricultural employment of relatively unskilled labor. India's comparative advantage in services does not preclude the need for a rapid-manufacturing growth phase of development due to the service sector's low contribution to output and its demand for educated and skilled, as opposed to unskilled, workers. The failure of manufacturing output and employment to grow more rapidly can be attributed to (1) regulations governing enterprises in the private sector and (2) regulations covering conditions of employment of labor. Reducing the barriers to entry of unskilled labor into manufacturing and relaxing some of the most restrictive labor laws would increase prospects for even faster growth than current high rates.
    Keywords: purchasing power, China, India, economic growth, tertiary sector, capital stock
    JEL: F4 F41 F43
  12. By: Filippov, Sergey (UNU-MERIT); Kalotay, Kalman (UNCTAD)
    Abstract: This paper examines the potential impact of the economic crisis, which started in 2008, on the dynamics global foreign direct investment, especially in the new member states of the European Union. The global economic crisis that hit the world in 2008 has forced scholars and policy makers alike to rethink their approaches to the global economy, in particular to financial markets (including stock exchanges and portfolio investment). It can be hypothesised that the crisis has been particularly devastating because it has resulted from the coincidence of three factors: a cyclical downturn in the world economy; a structural change that hit certain industries which used to be star performers in the global economy (especially the automotive industry); and the collapse of the previous model of the financial industry based on excesses. This paper asks how this crisis affects foreign direct investment flows, with special attention being paid to the question of which locations are set to lose the least and which ones are set to lose the most. In this respect, particular attention is paid to the activities of subsidiaries of multinational enterprises. These subsidiaries can follow different scenarios as a response to the global economic turmoil, including a reorganization of their production systems, and a reduction or closure of activities that are deemed to be less necessary for the continuation of activities. Finally, the paper examines the policy implications of the crisis. It challenges the view that rising economic nationalism (in the form of protecting one location against locations in other countries) would be the right answer to the problems created by corporate restructurings.
    Keywords: foreign direct investment, credit crunch, foreign subsidiaries, Europe
    JEL: F01 F23 O30
    Date: 2009
  13. By: Saccone Donatella (University of Turin); Valli Vittorio (University of Turin)
    Abstract: The comparison of the periods of rapid economic growth in China since 1978 and India since 1992 markedly show different patterns of development and structural change. However, both countries experienced some of the advantages of “relative economic backwardness” and some aspects of the “fordist model of growth”. China had an anticipated and deeper structural change, spurred mainly by economic reforms and the growth of the internal market in the 1980s and since the mid-1990s by a very rapid penetration of its industrial products in the world market. However, a substantial part of its exports in medium and high tech sectors are due to joint- ventures with foreign multinationals. India had a more balanced structural change and a slower insertion in the world market, although some sectors, such as software, steel, automotive and pharmaceuticals are recently increasing their share in the world markets.
    Date: 2009–07
  14. By: Chellaraj, Gnanaraj; Maskus, Keith E.; Mattoo, Aaditya
    Abstract: Singapore is an interesting example of how the pattern of foreign investment changes with economic development. The authors analyze inbound and outbound investment between Singapore and a sample of industrialized and developing countries over the period 1984-2003. They find that Singapore’s two-way investment with industrialized nations has shifted into skill-seeking activities over the period, while Singapore’s investments in developing countries have increased sharply and become concentrated in labor-seeking activities. Singapore’s increasing skill abundance relative to all countries in the sample accounted for 41 percent of average inbound stocks during the period, that is, US$18 billion annually; the corresponding figure for outbound stocks was 40 percent, that is, US$5.51 billion annually.
    Keywords: Debt Markets,Non Bank Financial Institutions,Investment and Investment Climate,Economic Theory&Research,
    Date: 2009–06–01
  15. By: Zuzana Brixiova; Laura Vartia; Andreas Wörgötter
    Abstract: From 2000 to 2007, Estonia was one of the fastest growing emerging market economies. A housing boom, fuelled by capital inflows and credit, resulted in skyrocketing house prices and an over-expanded construction sector. However, the currency board limited the Bank of Estonia’s ability to curb credit growth, while the fiscal policy framework amplified the cycle through pro-cyclical spending increases and tax cuts. As credit was mostly financed by cross-border loans from foreign banks, the risks of disruptions to credit flows and financial contagion have increased. Some have already materialised through tightened lending standards and capital outflows. Estonia is now in a severe recession. To restore high and sustainable growth, the country will need to rebalance its resources from non-tradables towards exports. Regaining external competitiveness will be challenging, however, given the fixed exchange rate and recent devaluations in partner countries. Flexibility of the economy will thus be crucial. Over the medium term, policymakers could also strengthen incentives for a better functioning of the housing finance market and gradually remove the pro-cyclical bias of fiscal policy.<P>Entrée de capitaux, endettement des ménages et alternance expansion-contraction en Estonie<BR>Entre 2000 et 2007, l’Estonie a été l’une des économies de marché émergentes qui ont connu la plus forte croissance. Une rapide progression de l’investissement privé, surtout dans l’immobilier résidentiel, a été alimentée par les entrées de capitaux et par le crédit. En conséquence, les prix immobiliers se sont envolés et le secteur de la construction s’est surdéveloppé. Le système de caisse d’émission a toutefois limité les possibilités d’action qui s’offraient à la Banque d’Estonie pour freiner la croissance rapide du crédit. Parce que le crédit était essentiellement financé par les prêts transnationaux que consentaient les banques mères étrangères, les risques d’arrêt brutal et de contagion financière se sont aggravés. Certains de ces risques se sont déjà concrétisés par un durcissement des conditions de prêt et par des sorties de capitaux. L’Estonie est maintenant en proie à une sévère récession. Son PIB réel s’est contracté de 3.6 % en 2008 et de 9.7 % au quatrième trimestre par rapport à la même période de 2007. Pour en revenir à une croissance forte et durable, l’Estonie devra rééquilibrer ses ressources en favorisant l’exportation par rapport au secteur non exportateur (en particulier la construction et l’immobilier). Mais il sera difficile de rétablir la compétitivité extérieure sachant que le taux de change est fixe et que plusieurs pays partenaires ont récemment dévalué. La flexibilité de l’économie sera cruciale. A moyen terme, il faudrait aussi renforcer l’incitation à un meilleur fonctionnement du marché du financement du logement.
    Keywords: capital inflows, credit, crédit, household debt, endettement des ménages, boom-bust cycle, cycle expansion-contraction, Estonia, Estonie, entrées de capitaux
    JEL: C2 E3 E62
    Date: 2009–05–27

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