nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒10‒24
twelve papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. How will changes in globalization impact growth in south Asia ? By Ghani, Ejaz; Anand, Rahul
  2. A panel data analysis of the growth effects of remittances By Rao, B.Bhaskara; Hassan, Gazi
  3. Growth and the pollution convergence hypothesis: a nonparametric approach By Carlos Ordás Criado; Simone Valente; Thanasis Stengos
  4. Modernization of Agriculture and Long-Term Growth By Dennis Tao Yang; Xiaodong Zhu
  5. The pattern of growth and poverty reduction in China By Montalvo, Jose G.; Ravallion, Martin
  6. Oil Exports and the Iranian Economy By Esfahani, H.S.; Mohaddes, K.; Pesaran, M.H.
  7. The Current Economic Crisis: Causes, Cures and Consequences By Karl Aiginger
  8. Endogenous fertility, endogenous lifetime and economic growth: the role of health and child policies By Luciano Fanti and Luca Gori
  9. Iceland: The Financial and Economic Crisis By David Carey
  10. Aid and Growth: Have We Come Full Circle? By Channing Arndt; Sam Jones; Finn Tarp
  11. Implications of the growth of China and India for the other Asian giant : Russia By Ianchovichina, Elena; Ivanic, Maros; Martin, Will
  12. Inequality and the Impact of Growth on Poverty: Comparative Evidence for Sub-Saharan Africa By Augustin Kwasi Fosu

  1. By: Ghani, Ejaz; Anand, Rahul
    Abstract: The current global crisis may change globalization itself, as both developed and developing countries adjust to global imbalances that contributed to the crisis. Will these changes help or hinder economic recovery and growth in South Asia? This is the focus of this paper. The three models of globalization--trade, capital, and economic management--may not be the same in the future. Changes in globalization could change the composition of trade flows, capital flows, and economic management, which in turn, could accelerate or restrain growth. South Asia is somewhat peculiar and different from other regions in how it has globalized, although there is a lot of diversity within the region. Its trade characteristics are different. India's growth has been spearheaded by exports of modern services and less by goods exports. Modern service trade tends to be more resilient compared with goods trade. Globalization of services is still at an early stage. So, as consumers pull back in the United States, service trade is likely to be less impacted compared to goods trade. Trade also contributes to growth through knowledge spillovers, externalities, and learning. The global crisis has not reduced the stock of global knowledge. Changes in capital flows are also not likely to have a big impact on growth in South Asia, as South Asia's investments are largely driven by domestic savings. Its dependence on foreign capital is low. South Asia has attracted capital flows that are less volatile. Remittances, which are more resilient, have been the dominant form of capital inflows, exceeding foreign direct investment and other inflows.This global downturn calls for counter-cyclical economic management. But South Asia has limited room for fiscal stimulus, given high debt-to-gross domestic product ratios. Nevertheless, reduced commodity prices have created some fiscal space that can be used for growth enabling infrastructure and safety nets. As South Asia undergoes structural transformation, the region is well positioned to bounce back with global economic recovery.
    Keywords: Macroeconomic Management,Capital Flows,Globalization and Financial Integration,Economic Growth,Trade and Services
    Date: 2009–10–01
  2. By: Rao, B.Bhaskara; Hassan, Gazi
    Abstract: Many development economists believe that remittances by the migrant workers are an important source of long rum growth. Therefore, recent studies have investigated the indirect and direct effects remittances on the growth rates of the recipient countries. This paper analyses the strength of these effects with a common data set and with alternative methods of estimation. It is found that while the evidence supports the indirect effects of remittances, the direct growth effects of remittances seem to be insignificant.
    Keywords: Remittances; Growth; Panel Data; System GMM
    JEL: F22 F43
    Date: 2009–10–21
  3. By: Carlos Ordás Criado (Center for Energy Policy and Economics CEPE, Department of Managment, Technology and Economics, ETH Zurich, Switzerland); Simone Valente (Center of Economic Research CER, Department of Managment, Technology and Economics, ETH Zurich, Switzerland); Thanasis Stengos (Department of Economics, University of Guelph, Guelph, ON, Canada)
    Abstract: The pollution-convergence hypothesis is formalized in a neoclassical growth model with optimal emissions reduction: pollution growth rates are positively correlated with output growth (scale effect) but negatively correlated with emission levels (defensive effect). This dynamic law is empirically tested for two major and regulated air pollutants - nitrogen oxides (NOX) and sulfur oxides (SOX) - with a panel of 25 European countries spanning over years 1980-2005. Traditional parametric models are rejected by the data. However, more flexible regression techniques - semiparametric additive specifications and fully nonparametric regressions with discrete and continuous factors - confirm the existence of the predicted positive and defensive effects. By analyzing the spatial distributions of per capita emissions, we also show that cross-country pollution gaps have decreased over the period for both pollutants and within the Eastern as well as the Western European areas. A Markov modeling approach predicts further cross-country absolute convergence, in particular for SOX. The latter results hold in the presence of spatial non-convergence in per capita income levels within both regions.
    Keywords: Air pollution, convergence, economic growth, mixed nonparametric regressions, distribution dynamics
    JEL: C14 C23 Q53
    Date: 2009–09
  4. By: Dennis Tao Yang; Xiaodong Zhu
    Abstract: This paper develops a two-sector model that illuminates the role played by agricultural modernization in the transition from stagnation to growth. When agriculture relies on traditional technology, industrial development reduces the relative price of industrial products, but has a limited effect on per capita income because most labor has to remain in farming. Growth is not sustainable until this relative price drops below a certain threshold, thus inducing farmers to adopt modern technology that employs industry-supplied inputs. Once agricultural modernization begins, per capita income emerges from stasis and accelerates toward modern growth. Our calibrated model is largely consistent with the set of historical data we have compiled on the English economy, accounting well for the growth experience of England encompassing the Industrial Revolution.
    Keywords: long-term growth, transition mechanisms, relative price, agricultural modernization, structural transformation, the Industrial Revolution, England.
    JEL: O41 O33 N13
    Date: 2009–10–13
  5. By: Montalvo, Jose G.; Ravallion, Martin
    Abstract: China has seen a huge reduction in the incidence of extreme poverty since the economic reforms that started in the late 1970s. Yet, the growth process has been highly uneven across sectors and regions. The paper tests whether the pattern of China´s growth mattered to poverty reduction using a new provincial panel data set constructed for this purpose. The econometric tests support the view that the primary sector (mainly agriculture) has been the main driving force in poverty reduction over the period since 1980. It was the sectoral unevenness in the growth process, rather than its geographic unevenness, that handicapped poverty reduction. Yes, China has had great success in reducing poverty through economic growth, but this happened despite the unevenness in its sectoral pattern of growth. The idea of a trade-off between these sectors in terms of overall progress against poverty in China turns out to be a moot point, given how little evidence there is of any poverty impact of non-primary sector growth, controlling for primary-sector growth. While the non-primary sectors were key drivers of aggregate growth, it was the primary sector that did the heavy lifting against poverty.
    Keywords: Rural Poverty Reduction,Achieving Shared Growth,Regional Economic Development,Subnational Economic Development
    Date: 2009–10–01
  6. By: Esfahani, H.S.; Mohaddes, K.; Pesaran, M.H.
    Abstract: This paper develops a long run growth model for a major oil exporting economy and derives conditions under which oil revenues are likely to have a lasting impact. This approach contrasts with the standard literature on the "Dutch disease" and the "re- source curse", which primarily focus on short run implications of a temporary resource discovery. Under certain regularity conditions and assuming a Cobb Douglas production function, it is shown that (log) oil exports enter the long run output equation with a coeficient equal to the share of capital. The long run theory is tested using a new quarterly data set on the Iranain economy over the period 1979Q1-2006Q4. Building an error correction specification in real output, real money balances, inflation, real exchange rate, oil exports, and foreign real output, the paper finds clear evidence for two long run relations: an output equation as predicted by the theory and a standard real money demand equation with inflation acting as a proxy for the (missing) market interest rate. Real output in the long run is shaped by oil exports through their impact on capital accumulation, and the foreign output as the main channel of technological transfer. The results also show a significant negative long run association between inflation and real GDP, which is suggestive of economic ineficiencies. Once the effects of oil exports are taken into account, the estimates support output growth convergence between Iran and the rest of the world. We also find that the Iranian economy adjusts quite quickly to the shocks in foreign output and oil exports, which could be partly due to the relatively underdeveloped nature of Iran's financial markets.
    Keywords: Growth models, long run relations, Iranian economy, oil price and foreign output shocks, and error correcting relations
    JEL: C32 C53 E17 F43 F47 Q32
    Date: 2009–10–15
  7. By: Karl Aiginger (WIFO)
    Abstract: The financial crisis has brought about an economic recession which is more severe and widespread than any decline in production in the past 50 years. In the USA and Europe the decline in production over the entire economy was however much less than during the Great Depression of the 1930ies. Only in manufacturing has the decline in some quarters of 2008-09 been similarly sharp. This time, however, the economic policy makers reacted differently. The high income levels at the start of the crisis and the social systems in place were able to cushion the fall. The roots of the crisis are not only to be found in the financial sector but also in macroeconomic imbalances, in regulation failures and insufficient policy coordination. Previous experience shows that the length of the crisis will be different for the financial markets, for the housing sector, for production and for employment, and that recovery could be slow, bumpy and fragile. Different approaches of economic policy are being systematically compared and we already discuss how the crisis can actually be turned into an opportunity. One even dares to suggest that some of the elements of the European Model (long-term orientation, stakeholder model) could serve as an example to the world, even if the crisis management in Europe is not without fault, and despite the fact that in the USA and China economic policy is reacting more decisively. It is necessary to coordinate European policy more closely internally as well as with those of the USA and of the dynamic economies of neighbouring countries and Asia in order to avoid further crises, and proactively to tackle worldwide problems such as climate change, and raw materials and food shortages.
    Date: 2009–08–24
  8. By: Luciano Fanti and Luca Gori
    Abstract: In this paper we link endogenous fertility, endogenous longevity, economic growth and public policies – represented by public health investments and child policies – in a basic overlapping generations model. We found that there even exist four equilibria, and thus low and high development regimes, which may be, however, determined by government policies, and concluded that when fertility is endogenous, increasing public health is always beneficial allowing economies to escape from poverty and, hence, to prosper. The same conclusion holds for the child tax policy. In particular, the latter result may be in accord with, for instance, the tremendous development experienced by China where a restrictive one child per family policy forced by the government planned and restricted the size of Chinese families, probably allowing some geographic areas within China to escape from poverty.
    Keywords: Child policy; Endogenous fertility; Health; Life expectancy; OLG model.
    JEL: I1 J13 O4
    Date: 2009–10–15
  9. By: David Carey
    Abstract: The global financial and economic crisis has struck Iceland with extreme force. Iceland’s three main banks, accounting for almost all of the banking system, failed in October 2008. They were unable to resist the deterioration in global financial markets following the failure of Lehman Brothers. The banks had pursued risky expansion strategies – notably borrowing in foreign capital markets to finance the aggressive international expansion of Icelandic investment companies – that made them vulnerable to the deterioration in global financial markets. They had also grown to be too big for the government to rescue. When access to foreign capital eventually closed, the banks failed. Non-financial firms and households were also vulnerable to the deterioration in global financial conditions, having taken on a lot of debt in recent years based on inflated collateral values. In some cases, the debt was foreign-currency denominated, without matching foreign-currency assets or revenues. In the wake of the banking crisis, the government obtained an IMF Stand-By Arrangement to provide favourable access to foreign capital markets and creditability for the recovery programme. Even so, the recession is likely to be deeper in Iceland than in most other OECD countries owing to the seriousness of the banking crisis and the weakness of private sector balance sheets. Reforms are needed to strengthen prudential regulation and supervision. This Working Paper relates to the 2009 Economic Survey of Iceland.<P>Islande : La crise économique et financière<BR>La crise économique et financière mondiale a frappé l’Islande avec une violence extrême. Les trois principales banques du pays, qui représentaient pratiquement l’ensemble du système bancaire, ont fait faillite en octobre 2008. Elles n’ont pas réussi à résister à la détérioration des marchés de capitaux mondiaux dans le sillage de la faillite de Lehman Brothers. Les banques avaient suivi des stratégies de développement risquées – empruntant notamment sur des marchés financiers étrangers pour soutenir une expansion internationale dynamique des sociétés d’investissement islandaises – ce qui les a rendues vulnérables à la détérioration des marchés de capitaux mondiaux. Elles avaient également atteint une taille trop importante pour que le gouvernement puisse venir à leur rescousse. Lorsque l’accès aux capitaux étrangers a été finalement fermé, les banques ont fait faillite. Les entreprises non financières et les ménages – qui s’étaient massivement endettés ces dernières années profitant de la forte valorisation de leurs garanties – étaient aussi vulnérables à la détérioration de la situation financière mondiale. Dans certains cas, la dette était libellée en devises sans que les emprunteurs n’aient d’actifs ou de revenus dans ces devises susceptibles de compenser le risque de change. À la suite de la crise du système bancaire, les pouvoirs publics ont conclu un accord de confirmation avec le FMI pour assurer des conditions d’accès favorables aux marchés de capitaux étrangers et soutenir la crédibilité du programme de redressement économique. Malgré cela, il est probable que la récession sera plus profonde en Islande que dans la plupart des autres pays de l’OCDE en raison de la gravité de la crise bancaire et de la faiblesse des bilans des entreprises et des patrimoines des ménages dans le secteur privé. Des réformes sont nécessaires pour renforcer la réglementation et la surveillance prudentielle.
    Keywords: currency crisis, Islande, Iceland, financial crisis, crise financière, deleveraging, réduction de l’effet de levier, banking crisis, crise bancaire, IMF stand-by arrangement, accord de confirmation avec le FMI, envolée du cours des actions induite par le crédit, position d’investissements internationaux, crise monétaire, sociétés d’investissement, surveillance et réglementation prudentielle, micro-prudential supervision, surveillance micro-prudentielle, macro-prudential supervision, surveillance macro-prudentielle, credit-induced asset price boom, foreign exchange exposure, investment companies, international investment position, prudential supervision and regulation
    JEL: E44 G21 G24 G28 R21
    Date: 2009–10–09
  10. By: Channing Arndt (Department of Economics, University of Copenhagen); Sam Jones (Department of Economics, University of Copenhagen); Finn Tarp (Department of Economics, University of Copenhagen)
    Abstract: The micro-macro paradox has been revived. Despite broadly positive evaluations at the micro and meso-levels, recent literature has turned decidedly pessimistic with respect to the ability of foreign aid to foster economic growth. Policy implications, such as the complete cessation of aid to Africa, are being drawn on the basis of fragile evidence. This paper first assesses the aid-growth literature with a focus on recent contributions. The aid-growth literature is then framed, for the first time, in terms of the Rubin Causal Model, applied at the macroeconomic level. Our results show that aid has a positive and statistically significant causal effect on growth over the long run with point estimates at levels suggested by growth theory. We conclude that aid remains an important tool for enhancing the development prospects of poor nations.
    Keywords: foreign aid; growth; aid effectiveness; causal effects
    JEL: O1 O4 F35 C21
    Date: 2009–10
  11. By: Ianchovichina, Elena; Ivanic, Maros; Martin, Will
    Abstract: Continuing rapid growth of China and India can be expected to raise incomes in Russia, but also to put adjustment pressure on Russian firms. The impacts of the rapid growth of China and India on the Russian economy are explored by examining a baseline projection using a global general equilibrium model, and then assessing the implications of higher-than-expected growth in China and India. The authors find that a major source of benefits to Russia is likely to be terms-of-trade improvements associated with higher energy prices - a quite different channel of effect from that for many developing countries that benefit primarily through expanded opportunities to trade directly with these emerging giants. Taking into account the likely improvements in the quality and variety of exports from China and India, the gains to Russia increase substantially. The expansion of the energy sector and the contraction of manufacturing and services are a sign of a Dutch disease effect that will increase the importance of policies to encourage adaptation to the changing world environment.
    Keywords: Economic Theory&Research,Emerging Markets,Markets and Market Access,Trade Policy,Free Trade
    Date: 2009–10–01
  12. By: Augustin Kwasi Fosu
    Abstract: This study explores the extent to which inequality affects the impact of income growth on the rates of poverty changes in sub-Saharan Africa (SSA) compared to non-SSA, based on a global sample of 1977-2004 unbalanced panel data. For both regions and all three measures of poverty – headcount, gap and squared gap – the paper finds the impact of GDP growth on poverty reduction to be a decreasing function of initial inequality. The impacts are similar in direction for SSA and non-SSA, so that within both regions there are considerable disparities in the responsiveness of poverty to income growth, depending on inequality. Nevertheless, income-growth elasticity is substantially less for SSA, implying relatively low poverty-reduction sensitivity to growth compared with the rest of the developing world. Furthermore, the paper uncovers a considerable variation in the predicted values of income-growth elasticity across a large number of SSA countries. This implies there is a need to understand country-specific inequality attributes for poverty-reduction strategies to be effective.
    Date: 2009

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