nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2009‒12‒11
nine papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Schooling, Cognitive Skills, and the Latin American Growth Puzzle By Hanushek, Eric A.; Woessmann, Ludger
  2. Dynamic Ethnic Fractionalization and Economic Growth in the Transition Economies from 1989 to 2007 By Campos, Nauro F.; Saleh, Ahmad; Kuzeyev, Vitaliy S.
  3. The Impact of Local Decentralization on Economic Growth: Evidence from U.S. Counties By Hammond, George W.; Tosun, Mehmet S.
  4. On the Feasibility of Perpetual Growth in a Decentralized Economy Subject to Environmental Constraints By Jean-Francois FAGNART; Marc GERMAIN
  5. The relationship between health and growth:when Lucas meets Nelson-Phelps By Philippe Aghion; Peter Howitt; Fabrice Murtin
  6. Do Better Schools Lead to More Growth? Cognitive Skills, Economic Outcomes, and Causation By Hanushek, Eric A.; Woessmann, Ludger
  7. Job Creation in Spain: Productivity Growth, Labour Market Reforms or both? By Javier Andrés Domingo; José Emilio Boscá; Rafael Domenech Vilariño; Javier Ferri
  8. Does Human Capital Protect Workers against Exogenous Shocks? South Africa in the 2008-2009 Crisis By Leung, Ron; Stampini, Marco; Vencatachellum, Désiré
  9. Does Public Investment Enhance Labor Productivity Growth in Argentina? A Cointegration Analysis By Ramirez, Miguel D.

  1. By: Hanushek, Eric A. (Stanford University); Woessmann, Ludger (Ifo Institute for Economic Research)
    Abstract: Economic development in Latin America has trailed most other world regions over the past four decades despite its relatively high initial development and school attainment levels. This puzzle can be resolved by considering the actual learning as expressed in tests of cognitive skills, on which Latin American countries consistently perform at the bottom. In growth models estimated across world regions, these low levels of cognitive skills can account for the poor growth performance of Latin America. Given the limitations of worldwide tests in discriminating performance at low levels, we also introduce measures from two regional tests designed to measure performance for all Latin American countries with internationally comparable income data. Our growth analysis using these data confirms the significant effects of cognitive skills on intra-regional variations. Splicing the new regional tests into the worldwide tests, we also confirm this effect in extended worldwide regressions, although it appears somewhat smaller in the regional Latin American data than in the worldwide data.
    Keywords: human capital, economic growth, cognitive skills, Latin America
    JEL: H4 I2 O4 N16
    Date: 2009–11
  2. By: Campos, Nauro F. (Brunel University); Saleh, Ahmad (Brunel University); Kuzeyev, Vitaliy S. (affiliation not available)
    Abstract: In their survey of the literature on ethnic fractionalization and economic performance, Alesina and La Ferrara (JEL 2005) identify two main directions for future research. One is to improve the measurement of diversity and the other to treat diversity as an endogenous variable. This paper tries to address these two issues: it investigates the effects of ethnic fractionalization on economic growth across countries using unique time-varying measures. We first replicate the finding of a weak effect of exogenous diversity on growth and then we show that accounting for how diversity changes over time and treating it as an endogenous variable makes a difference. Once diversity is instrumented (with lagged diversity and latitude), it shows a significant negative impact on economic growth which is robust to different specifications, polarization measures, econometric estimators, as well as to the use of an index of ethnic-religious-linguistic fractionalization.
    Keywords: ethnic diversity, fractionalization, polarization, growth
    JEL: O11 Z12 O55 H1
    Date: 2009–11
  3. By: Hammond, George W. (West Virginia University); Tosun, Mehmet S. (University of Nevada, Reno)
    Abstract: We analyze the impact of fiscal decentralization on U.S. county population, employment, and real income growth. Our findings suggest that government organization matters for local economic growth, but that the impacts vary by government unit and by economic indicator. We find that single-purpose governments per square mile have a positive impact on metropolitan population and employment growth, but no significant impact on nonmetropolitan counties. In contrast, the fragmentation of general-purpose governments per capita has a negative impact on employment and population growth in nonmetropolitan counties. Our results suggest that local government decentralization matters differently for metropolitan and nonmetropolitan counties.
    Keywords: fiscal decentralization, metropolitan, nonmetropolitan, population, employment, income, spatial econometrics
    JEL: E62 H7 R11
    Date: 2009–11
  4. By: Jean-Francois FAGNART (CEREC, Facultes universitaires Saint-Louis, Brussels and Department of Economics, Universite catholique de Louvain, Louvain- la-Neuve.); Marc GERMAIN (EQUIPPE, Universite de Lille 3 and Department of Economics, Universite catholique de Louvain, Louvain-la-Neuve)
    Abstract: We propose an endogenous growth model of a decentralized economy subject to environmental constraints. In a basic version, we consider an economy where final production requires some material input and where research activities allow simultaneously productive firms to reduce the dependency of their production process on this input and to improve the quality of their output. We adopt a material balance approach and, in spite of the optimistic assumption that the material input is perfectly recyclable (and thus never exhausted), we show that material output growth is always a transitory phenomenon. When it exists, a balanced growth path is necessarily characterized by constant values of the material variables, long term economic growth taking exclusively the form of perpetual improvements in the quality of consumption goods. The material esource constraint is not solely a long term issue since it is also shown to affect the whole transitory dynamics of the (material) growth process. Renewable energy is introduced in an extension of our basic model. This extension does not affect qualitatively the features of a feasible balanced growth path but make its conditions of existence more restrictive.
    Keywords: material balance, endogenous growth, recycling
    JEL: E1 Q0 Q56
    Date: 2009–10–30
  5. By: Philippe Aghion (Harvard University); Peter Howitt (Brown University); Fabrice Murtin (OECD)
    Date: 2009–11
  6. By: Hanushek, Eric A. (Stanford University); Woessmann, Ludger (Ifo Institute for Economic Research)
    Abstract: We investigate whether a causal interpretation of the robust association between cognitive skills and economic growth is appropriate and whether cross-country evidence supports a case for the economic benefits of effective school policy. We develop a new common metric that allows tracking student achievement across countries, over time, and along the within-country distribution. Extensive sensitivity analyses of cross-country growth regressions generate remarkably stable results across specifications, time periods, and country samples. In addressing causality, we find, first, significant growth effects of cognitive skills when instrumented by institutional features of school systems. Second, home-country cognitive-skill levels strongly affect the earnings of immigrants on the U.S. labor market in a difference-in-differences model that compares home-educated to U.S.-educated immigrants from the same country of origin. Third, countries that improved their cognitive skills over time experienced relative increases in their growth paths. From a policy perspective, the shares of basic literates and high performers have independent significant effects on growth, and the estimates suggest that the high-performer effect is larger in poorer countries.
    Keywords: human capital, economic growth, cognitive skills
    JEL: H4 I2 J3 J61 O1 O4
    Date: 2009–11
  7. By: Javier Andrés Domingo (University of Valencia, Spain); José Emilio Boscá (University of Valencia, Spain); Rafael Domenech Vilariño (University of Valencia, Spain); Javier Ferri (University of Valencia, Spain)
    Abstract: The benefits implied by changing the growth model are at the heart of the heated political and economic debate in Spain. Increases in productivity and the reallocation of employment towards more innovative sectors are defended as the panacea for most of the ills afflicting the Spanish economy. In this paper we use a DSGE model with price rigidities, and labour market search frictions a la Mortensen-Pissarides, to assess the effects of the change in the growth model on unemployment. In so doing, we assume that the vigorous demand shock which has been mostly responsible for recent economic growth in Spain will be successfully substituted by a productivity shock as the main driver of Spain‘s economic growth in the future. So we assume that we actually succeed in the so called "change in the growth model". We show that whatever the benefits that this change might bring to the Spanish economy, the time span needed to bring the unemployment rate down to the European average actually increases. We then analyze the impact of several reforms in the labour market and evaluate their interaction with the new growth model. We conclude that changes in the economic structure do not make labour reforms any less necessary, but rather the opposite if we want to shorten employment recovery significantly.
    Keywords: artistic creation, superstars, private copy, piracy, levies
    JEL: L10 L82
    Date: 2009–11
  8. By: Leung, Ron (African Development Bank); Stampini, Marco (African Development Bank); Vencatachellum, Désiré (African Development Bank)
    Abstract: The financial and economic crisis of 2008 and 2009 has taken its toll on the South African economy. The economy contracted for the first time since 1998, and entered recession during the fourth quarter of 2008. The GDP contraction was soon transmitted to the labor market. Between the second quarters of 2008 and 2009, employment fell by 3.8 percent. However, not all individuals were hit with the same intensity. Using labor force survey data unique in the African context, we find that human capital provided a buffer against the shock. After controlling for observable characteristics, education and experience showed the potential to entirely offset the effect of the recession on the likelihood of employment. This has important policy implications, as it strengthens the case for strategic investments in human capital, and helps identifying the unskilled as those with the highest need for social safety net interventions during the recession.
    Keywords: labor markets, South Africa, financial crisis, human capital, business cycle, emerging economies
    JEL: J2 E3
    Date: 2009–12
  9. By: Ramirez, Miguel D. (Trinity College, Hartford)
    Abstract: This paper addresses the important question of whether public investment spending on economic infrastructure enhances economic growth and labor productivity in Argentina. Following the lead of the endogenous growth literature, it presents a simple modified production function that explicitly includes the positive or negative externality effects generated by public investment. Using cointegration analysis, the paper estimates a dynamic labor productivity function for the 1960-2005 period that incorporates the impact of public and private investment spending and the labor force (rather than the rate of population growth). The results suggest that (lagged) increases in public investment spending on economic infrastructure--as opposed to overall public investment spending--have a positive and significant effect on the rate of labor productivity growth. In addition, the model is estimated for a shorter period (1970-2005) to capture the impact of foreign direct investment. The estimates suggest that foreign direct investment spending has a lagged positive and significant impact on labor productivity growth, while increases in the labor force have a negative effect. Thus, the findings call into question the politically expedient policy in many Latin American countries, including Argentina during the 1990s, of disproportionately reducing public capital expenditures to meet reductions in the fiscal deficit as a proportion of GDP.
    JEL: C22 O10 O40 O50
    Date: 2009–01

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