nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒08‒02
thirteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. A panel Granger-causality test of endogenous vs. exogenous growth By Jochen Hartwig
  2. Capital account liberalization, financial development and industry growth: a synthetic view By Eichengreen, Barry; Gullapalli, Rachita; Panizza, Ugo
  3. Growth in the Shadow of Expropriation By Mark Aguiar; Manuel Amador
  4. Understanding Economic Growth in Indian States By NR, Bhanumurthy
  5. Lessons from the Transition Economies: Putting the Success Stories of the Postcommunist World into a Broader Perspective By Popov, Vladimir
  6. Gender Wage Inequality and Economic Growth: Is there Really a Puzzle? By Thomas Schober; Rudolf Winter-Ebmer
  7. Remittances, financing constraints and growth volatility : Do remittances dampen or magnify shocks ? By Dramane Coulibaly
  8. Contracting Institutions and Growth By Alex William Trew
  9. Larger crises, slower recoveries: the asymmetric effects of financial frictions By Guillermo L. Ordoñez
  10. Can Norway Be a Role Model for Natural Resource Abundant Countries? Keywords: cross-section models, economic development, natural resources, resource booms By Cappelen, Adne; Mjoset, Lars
  11. The growth aftermath of natural disasters By Fomby, Thomas; Ikeda, Yuki; Loayza, Norman
  12. The Finnish Developmental State and its Growth Regime By Jantti, Markus; Vartiainen, Juhana
  13. The Disinterested Government: An Interpretation of China's Economic Success in the Reform Era By Yao, Yang

  1. By: Jochen Hartwig (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: The paper proposes a new test of endogenous vs. exogenous growth theories based on the Granger-causality methodology and applies it to a panel of 20 OECD countries. The test yields divergent evidence with respect to physical and human capital. For physical capital, the test results favor Solow-type exogenous growth theory over AK-type endogenous growth models. On the other hand, the test results lend support to human capital oriented endogenous growth models – like the Uzawa-Lucas model – rather than to the human capital augmented Solow model.
    Keywords: Exogenous growth, endogenous growth, panel Granger-causality tests
    JEL: C12 C23 O41
    Date: 2009–07
  2. By: Eichengreen, Barry; Gullapalli, Rachita; Panizza, Ugo
    Abstract: This paper synthesizes previous studies analyzing the effects of capital account liberalization on industry growth while controlling for financial crises, domestic financial development and the strength of institutions. We find reasonably strong evidence that financial openness has positive effects on the growth of financially-dependent industries, although these growth-enhancing effects evaporate during financial crises. Further analysis indicates that the positive effects of capital account liberalization are limited to countries with relatively well-developed financial systems, good accounting standards, strong creditor rights and rule of law. It suggests that countries must reach a certain threshold in terms of institutional and economic development before they can expect to benefit from capital account liberalization.
    Keywords: Capital account liberalization, Financial development, External dependence
    JEL: F34 F36
    Date: 2009–06
  3. By: Mark Aguiar; Manuel Amador
    Abstract: In this paper, we propose a tractable variant of the open economy neoclassical growth model that emphasizes political economy and contracting frictions. The political economy frictions involve disagreement and political turnover, while the contracting friction is a lack of commitment regarding foreign debt and expropriation. We show that the political economy frictions induce growth dynamics in a limited-commitment environment that would otherwise move immediately to the steady state. In particular, greater political disagreement corresponds to a high tax rate on investment, which declines slowly over time, generating slow convergence to the steady state. While in the standard neoclassical growth model capital’s share in production plays an important role in determining the speed of convergence, this parameter is replaced by political disagreement in our open economy reformulation. Moreover, while political frictions shorten the horizon of the government, the government may still pursue a path of tax rates in which the first best investment is achieved in the long run, although the transition may be slow. The model rationalizes why openness has different implications for growth depending on the political environment, why institutions such as respect for property rights evolve over time, why governments in open countries that grow rapidly tend to accumulate net foreign assets rather than liabilities, and why foreign aid may not affect growth.
    JEL: F21 F43 O23 P16 P45
    Date: 2009–07
  4. By: NR, Bhanumurthy
    Abstract: The present study tries to understand the trends and determinants of economic growth in Indian states. For this, it considers two important determinants such as infrastructure and financial development. With the help of panel time series models, the study concludes that although both the variables are highly correlated with economic growth, it is the social sector development that is having higher impact on the economic growth. In terms of the role of financial sector, the results show that although it is necessary to have development in terms of increase in number of bank branches, it is the extent of bank business that is more important in the growth process.
    Keywords: Growth; Infrastructure; Financial Development; Panel Time Series; India
    JEL: H54 N20 O16 F43
    Date: 2009–05–15
  5. By: Popov, Vladimir
    Abstract: Why many transition economies succeeded by pursuing policies that are so different from the radical economic liberalization (shock therapy) that is normally credited for the economic success of central European countries? First, optimal policies are context dependent, they are specific for each stage of development and what worked in Slovenia cannot be expected to work in Mongolia. Second, even for countries at the same level of development, reforms needed to stimulate growth are different; they depend on the previous history and on the path chosen. The reduction of government expenditure as a share of GDP did not undermine significantly the institutional capacity of the state in China, but in Russia and other CIS states it turned out to be ruinous. It is the growth diagnostics that should reveal the missing ingredient for economic growth. Finally, and most important, introducing this .missing ingredient. should not result in the destruction of other preconditions for growth. The art of the policymaker is to create markets without causing the government failure, as happened in many CIS countries.
    Keywords: transition, growth diagnostics, path dependence
    Date: 2009
  6. By: Thomas Schober; Rudolf Winter-Ebmer
    Abstract: Seguino (2000) shows that gender wage discrimination in export-oriented semi-industrialized countries might be fostering investment and growth in general. While the original analysis does not have internationally comparable wage discrimination data, we replicate the analysis using data from a meta-study on gender wage discrimination and do not find any evidence that more discrimination might further economic growth – on the contrary: if anything the impact of gender inequality is negative for growth. Standing up for more gender equality – also in terms of wages – is good for equity considerations and at least not negative for growth.
    Date: 2009–07
  7. By: Dramane Coulibaly (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: This paper studies empirically the link between remittances and growth volatility by examining the impact of remittances on the propagation of real and monetary shocks. This study is conducted by employing dynamic panel generalized method of moment (GMM) technique for a sample of 63 countries over the 1980-2004 period. The volatility of terms of trade and inflation is used to proxy for real and monetary volatility, respectively. The results show that the impact of remittances on the propagation of shocks depends on the nature of shock. Precisely, the results show that remittances dampen the effect of terms of trade volatility, but, magnify the effect of inflation volatility. The results also suggest that the dampening effect of remittances on propagation of terms of trade volatility is greater in country with high level of financial development.
    Keywords: Remittances, financing constraints, volatility.
    Date: 2009–03
  8. By: Alex William Trew
    Abstract: We follow Acemoglu and Johnson (2005) in disentangling the effects of contracting and property rights institutions on average growth rates over the period 1985--2004 in addition to the log level of per capita income in 1995. On the basis of 2SLS results, we find a robust, positive link between the quality of some contracting institutions and the rate of economic growth and a robust, negative link between contracting institutions and the level of output. We interpret these conflicting results as evidence for a trade-off in the effect of contracting institutions on growth and income levels. We look to rationalize this apparent trade-off in terms of a framework where transactions costs are endogenous to investments made in contracting technologies.
    Keywords: Economic growth, institutions.
    JEL: O11 O40 O43
    Date: 2009–07
  9. By: Guillermo L. Ordoñez
    Abstract: It is well known that movements in lending rates are asymmetric; they rise quickly and sharply, but fall slowly and gradually. Not known is the fact that the asymmetry is stronger the less developed a country's financial system is. This new fact is here documented and explained in a model with an endogenous flow of information about economic conditions. The stronger asymmetry in less developed countries stems from their greater financial system frictions, such as monitoring and bankruptcy costs, which first magnify jumps of lending rates and then delay their recoveries by restricting the generation of information after the crisis. A quantitative exploration of the model shows the data are consistent with this explanation.
    Keywords: Financial crises ; Developing countries
    Date: 2009
  10. By: Cappelen, Adne; Mjoset, Lars
    Abstract: During the 1950-70s Norway had relatively low GDP per capita compared to the OECD average and even more so compared to Denmark and Sweden. During the 1970s there was a significant catch-up in incomes and from the early 1990s a .take-off. in relative income. Norway is currently ranked among the countries with the highest GDP per capita in the world and is at the top according to UNDP.s human development indicator. We argue that this development is related to the growth of the Norwegian petroleum sector, although many studies of economic growth conclude that countries abundant in natural resources are not blessed but cursed by gifts of nature. How has Norway avoided so many of the possible problems that follow in the wake of a natural resource-based development? Nowadays the standard answer to this question is .good institutions. and .clever policies.. In this paper we detail the institutions and policies that may explain the peculiar development success of Norway. There are lessons here that can contribute to policy learning, but only on the provision that the specificities of the .learning. country are understood.
    Date: 2009
  11. By: Fomby, Thomas; Ikeda, Yuki; Loayza, Norman
    Abstract: This paper provides a description of the macroeconomic aftermath of natural disasters. It traces the yearly response of gross domestic product growth - both aggregated and disaggregated into its agricultural and non-agricultural components - to four types of natural disasters - droughts, floods, earthquakes, and storms. The paper uses a methodological approach based on pooling the experiences of various countries over time. It consists of vector auto-regressions in the presence of endogenous variables and exogenous shocks (VARX), applied to a panel of cross-country and time-series data. The analysis finds heterogeneous effects on a variety of dimensions. First, the effects of natural disasters are stronger, for better or worse, on developing than on rich countries. Second, while the impact of some natural disasters can be beneficial when they are of moderate intensity, severe disasters never have positive effects. Third, not all natural disasters are alike in terms of the growth response they induce, and, perhaps surprisingly, some can entail benefits regarding economic growth. Thus, droughts have a negative effect on both agricultural and non-agricultural growth. In contrast, floods tend to have a positive effect on economic growth in both major sectors. Earthquakes have a negative effect on agricultural growth but a positive one on non-agricultural growth. Storms tend to have a negative effect on gross domestic product growth but the effect is short-lived and small. Future research should concentrate on exploring the mechanisms behind these heterogeneous impacts.
    Keywords: Natural Disasters,Disaster Management,Hazard Risk Management,Achieving Shared Growth,Economic Conditions and Volatility
    Date: 2009–07–01
  12. By: Jantti, Markus; Vartiainen, Juhana
    Abstract: This paper reviews Finland.s growth strategy in the postwar decades. Finland was able to initiate an impressive mobilization of resources during this period, reflected mostly in a high rate of capital accumulation for manufacturing industries. This was achieved by an unorthodox combination of dirigiste means and a basic commitment to upholding the market economy. The state acted as a net saver, and credit was rationed to productive investment outlays. This policy package may have been boosted by the country.s precarious international position during the cold war, so that an economic failure would have been very risky indeed. We argue also that incomes policies and welfare reforms were important in sustaining the necessary political compromise that underpinned the Finnish development state.
    Keywords: economic growth, incomes policy, income distribution, labour unions, structural transformation, social contacts, developmental state
    Date: 2009
  13. By: Yao, Yang
    Abstract: In the last 30 years, China has achieved high economic growth and successfully transformed its economy from a planned economy to a market-based system. The country, to a large extent, has attained success through the recommendations proposed by standard economic theory. However, the role of political economy has been omitted from the literature: how did China adopt the right economic policies and the appropriate road to reform? This paper attempts to answer this question. The central assumption of the paper is that China achieved success because the Chinese government has been a disinterested party, i.e., a government that does not favour any particular sections of the population and prioritizes the long-term welfare of the whole society. In this paper, we first define and analyse the concept of disinterested governments, and then proceed to provide several examples to demonstrate that China has been characterized by a disinterested government. Based on a theoretical model, we also discuss the reasons of the
    Keywords: Disinterested governments, the China miracle, econimic reform
    Date: 2009

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