nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒02‒20
eleven papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Threshold Effect and Financial Intermediation in Economic Development By Augier, Laurent; Soedarmono, Wahyoe
  2. Population, Innovation, Competition and Growth with and without Human Capital Investment By Alberto Bucci
  3. On the interaction between public investment and private capital in economic growth By Alberto Bucci; Chiara Del Bo
  4. Factor Employment, Sources and Sustainability of Output Growth: Analysis of Indian Manufacturing By Arvind Virmani; Danish A. Hashim
  5. The role of institutions in cross-section income and panel data growth models: a deeper investigation on the weakness and proliferation of instruments By Aderbal Damasceno; Ronald MacDonald; Flávio Vieira
  6. Further Comments on The Impact of the Asian Miracle on the Theory of Economic Growth By Robert W. Fogel
  7. Does the Structure of Banking Markets Affect Economic Growth? Evidence from U.S. State Banking Markets By Kris James Mitchener; David C. Wheelock
  8. The end of subsistence farming: Growth dynamics and investments in human and environmental capital in rural Ethiopia By Erreygers G.; Ferede T.
  9. Is there any relationship between Environmental Quality Index, Human Development Index and Economic Growth? Evidences from Indian States By Mukherjee, Sacchidananda; Chakraborty, Debashis
  10. Policies to Promote Growth and Economic Efficiency in Mexico By Arias, Javier; Azuara, Oliver; Bernal, Pedro; Heckman, James J.; Villarreal, Cajeme
  11. Export Diversification and Economic Growth in Malaysia By Arip, Mohammad Affendy; Yee, Lau Sim; Abdul Karim, Bakri

  1. By: Augier, Laurent; Soedarmono, Wahyoe
    Abstract: This paper analyzes the theoretical finance-growth nexus. Using the Neoclassical growth framework, we raise a new issue where our finance-growth nexus has multiple stationary states with threshold effect. Threshold effect prevents the economy to reach long-run steady state equilibrium of capital and hence financial economists in developing countries should be aware of such an impediment. We show that the development of banking sector should be more supported than financial market, since banking sector is better than financial market in order to reduce threshold effect and ensure the existence and uniqueness of a higher long-run steady state equilibrium of capital stock.
    Keywords: Threshold Effect; Financial Intermediation; Economic Growth; Developing Countries
    JEL: O16 C61 C62
    Date: 2010–02–05
  2. By: Alberto Bucci (University of Milan)
    Abstract: This paper analyzes how population and product market competition may interact with each other in affecting the pace of productivity growth. We find that the impact of a change in population (size/growth) and in the degree of market concentration on economic growth varies depending on the structure of the underlying model economy and, more precisely, depending on the presence of purposeful human (versus physical) capital investment, the type of input used in the uncompetitive sector, the form of households' intertemporal utility and whether product market competition (measured by the elasticity of substitution between differentiated intermediates) is disentangled or not from the input-shares in total income. We also find that only a fully endogenous growth model with purposeful human capital investment at the individual level and a continuum of degrees of inter-generational altruism is simultaneously able to predict an ambiguous link between population and economic growth rates and to display no strong scale effects in economic growth, while keeping the property that positive economic growth is feasible even without any population change. The paper also examines the conditions under which population (size/growth) and product market competition/monopoly power can be complementary factors in economic growth.
    Keywords: Population (size and growth); Endogenous and Semi-endogenous Economic Growth; Human and Physical Capital Investment; Innovation; Scale Effects; Competition,
    Date: 2009–11–26
  3. By: Alberto Bucci (University of Milan); Chiara Del Bo (University of Milan)
    Abstract: This paper examines two possible sources of interaction between private and public capital in an endogenous growth model with productive public investment, which is used as an input both in the production of final output and in the production of new public capital. On the one hand ,public investment and private capital are complementary with each other in the production of goods. On the other, they can be either complementary or substitutes in the production of new productive public capital .In our model private and public capital are two reproducible productive inputs interacting with each other in goods production and in productive public capital investment. The share of public capital devoted to output production can be exogenous or endogenous, and we consider a Cobb-Douglas and a more general CES aggregate production function. Our main results are that, when the share of public capital devoted to output production is exogenous along the balanced growth path equilibrium the common growth rate is a negative function of this share and a positive function of the degree of complementarity between the two forms of capital in infrastructure capital investment. When the sectoral allocation of productive public capital is endogenous, the main determinant of the economy's long run growth rate is, along with the model's preferences parameters, the public capital's share in GDP. Unlike existing literature (notably, Barro 1990), we find that the relationship linking the economy's growth rate and the public capital's share in GDP is U-shaped, rather than monotonically decreasing.
    Keywords: Economic Growth; Complementarity; Productive Public Investment; Private Capital,
    Date: 2009–11–03
  4. By: Arvind Virmani; Danish A. Hashim
    Abstract: The manufacturing sector in India is crucial for two main reasons: It has significant potential to provide modern employment to a growing labour force, especially that of less skilled type and second by its own healthy growth, stimulate and provide a foundation for, organic growth in other sectors of the economy. On both these counts, however, the manufacturing sector has so far not performed to its potential. In an attempt to identify the factors responsible for this phenomenon, the present study examines in detail the main determinants of factor employment, their shares, and output growth. The framework used is a CES production function estimated using ASI time-series data for the organised manufacturing industry spanning a period from 1973/74 to 2001/02. The study also dwells on the subject of sustainability of high growth in output on the back of raising capital labour ratio. [Working Paper No.3 /2009-DEA].
    Keywords: industry, sustainability, labour-surplus, CES, production function, manufcturing sector, India, development policy, Asian countries, total factor productivity (TFP), output growth, employment, India, labour force, economy, capital labour ratio,
    Date: 2010
  5. By: Aderbal Damasceno; Ronald MacDonald; Flávio Vieira
    Abstract: This paper investigates the role of institutions in determining per capita income levels and growth. It contributes to the empirical literature by using different variables as proxies for institutions and by developing a deeper analysis of the issues arising from the use of weak and too many instruments in per capita income and growth regressions. The cross-section estimation suggests that institutions seem to matter, regardless if they are the only explanatory variable or are combined with geographical and integration variables, although most models suffer from the issue of weak instruments. The results from the growth models provides some interesting results: there is mixed evidence on the role of institutions and such evidence is more likely to be associated with law and order and investment profile; government spending is an important policy variable; collapsing the number of instruments results in fewer significant coefficients for institutions.
    Keywords: Institutions; Income Levels and Growth: Cross-Section and Panel Data Analysis: Weak Instruments and Instrument Proliferation
    JEL: C33 O47 O43
    Date: 2010–01
  6. By: Robert W. Fogel
    Abstract: This paper addresses three issues related to the relative rates of growth in the United States, the European Union, and China during the four decades between 2000 and 2040. The first concerns the source of the factors which make it likely that China will continue to grow at a high rate for another generation. The paper argues that this growth will be the result of both favorable economic and political conditions. The second concerns the source of declining GDP growth in the original fifteen nations of the European Union. For these countries, the underlying cause is due in large measure to low fertility rates and an increase in the dependency ratio. The third issue is the projection of long-term U.S. growth in GDP at a rate of 3.7 percent per annum.
    JEL: F47 O53
    Date: 2010–02
  7. By: Kris James Mitchener; David C. Wheelock
    Abstract: This paper examines the relationship between the structure of banking markets and economic growth using a new dataset on manufacturing industry-level growth rates and banking market concentration for U.S. states during 1899-1929—a period when the manufacturing sector was expanding rapidly and restrictive branching laws segmented the U.S. banking system geographically. Unlike studies of modern developing and developed countries, we find that banking market concentration had a positive impact on manufacturing sector growth in the early twentieth century, with little variation across industries with different degrees of dependence on external financing or access to capital. However, because regulations affecting bank entry varied considerably across U.S. states and the industrial organization of the U.S. banking system differs markedly from those of other countries, we also examine the impact of other aspects of banking market structure and policy on growth. We continue to find that banking market concentration boosted industrial growth. In addition, we find evidence that a greater prevalence of branch banking and more banks per capita increased the growth of industries that rely relatively heavily on external financing or have greater access to external funding sources, while deposit insurance depressed growth in the manufacturing sector. Regulations on bank entry and other banking market characteristics thus appear to exert an independent influence on manufacturing growth in geographically fragmented banking markets.
    JEL: E44 G21 G38 N11 N12 N21 N22 O16 O47
    Date: 2010–01
  8. By: Erreygers G.; Ferede T.
    Abstract: In settings characterized by weak human capital and agricultural land degradation, investments in human capital formation and land conservation can be key candidates for triggering sustained economic growth. In this study, based on insights from growth literature and models of economic transformation, we develop a framework to examine the dynamic interactions between income, human and natural capital in rural Ethiopia. In addition, the trade-offs and complementarities of economic and environmental policies in terms of their impact on growth, investments in human capital formation and land conservation are assessed. The study underscores the centrality of interconnectedness and reciprocal influences between growth and investments in human and natural capital in understanding the long-run implications of policy reforms. Development interventions that are crucial for achieving broad-based and sustainable improvements in household income, human and natural capital are identified, which have wider implications for settings sharing similar socioeconomic characteristics.
    Date: 2009–09
  9. By: Mukherjee, Sacchidananda; Chakraborty, Debashis
    Abstract: Economic growth does not necessarily ensure environmental sustainability for a country. The relationship between the two is far more complicated for developing countries like India, given the dependence of a large section of the population on natural resources. Under this backdrop, the current study attempts to analyze the relationships among Environmental Quality (EQ), Human Development (HD) and Economic Growth (EG) for 14 major Indian States during post liberalisation period (1991-2004). Further, for understanding the changes in EQ with the advancement of economic liberalisation, the analysis is carried out by dividing the sample period into two: Period A (1990–1996) and Period B (1997–2004). For both the sub-periods, 63 environmental indicators have been clustered under eight broad environmental groups and an overall index of EQ has been constructed using the HDI methodology. The EQ ranks of the States exhibit variation over time, implying that environment has both spatial and temporal dimensions. Ranking of the States across different environmental criteria (groups) show that different States possess different strengths and weaknesses in managing various aspects of EQ. The HDI rankings of the States for the two periods are constructed by the HDI technique following the National Human Development Report 2001 methodology. We attempt to test for the Environmental Kuznets Curve hypothesis through multivariate OLS regression models, which indicate presence of non-linear relationship between several individual environmental groups and per capita net state domestic product. The relationship between EQ and economic growth however does not become clear from the current study. The regression results involving individual environmental groups and HDI score indicate a slanting N-shaped relationship. The paper concludes that individual States should adopt environmental management practices based on their local (at the most disaggregated level) environmental information. Moreover, since environmental sustainability and human well-being are complementary to each other, individual States should attempt to translate the economic growth to human well-being.
    Keywords: Environmental Quality Index (EQI); Human Development Index (HDI); Economic Liberalisation; Economic Growth; India.
    JEL: Q50 E21 K32 Q23 C43 I20 I0 O10 O15 Q24 O13 Q01 Q25 O40 I32 Q56 Q0 Q53 I10
    Date: 2009–09
  10. By: Arias, Javier (University of Chicago); Azuara, Oliver (University of Chicago); Bernal, Pedro (University of Chicago); Heckman, James J. (University of Chicago); Villarreal, Cajeme (University of Chicago)
    Abstract: This paper discusses the problems facing the Mexican economy. It operates under a heavy burden of monopoly and regulation. We focus on two issues that should receive more attention in discussions of Mexican policy. (1) The family is under stress in Mexico and this retards the growth of skills of workforce. (2) The informal sector is large, mostly due to the heavy burden of monopoly and regulation. We find little evidence that the introduction of social protection programs for workers outside the formal sector have promoted the growth of the informal sector.
    Keywords: Mexico, family policy, informality, regulation
    JEL: J13 L51 O17
    Date: 2010–02
  11. By: Arip, Mohammad Affendy; Yee, Lau Sim; Abdul Karim, Bakri
    Abstract: This paper examines the relationship between export diversification and economic growth in Malaysia. We use annual data from 1980-2007 and time-series techniques of cointegration and Granger causality tests to examine the long-run relationship and dynamic interactions among the variables. The results show the presence of a unique cointegrating vector among the four variables. Consistent with previous studies, we found that export diversification plays significant roles to economic growth in Malaysia. This finding suggests that, in order to sustain future economic growth under the static effect of multilateral and regional trade liberalization, Malaysia should diversify its export commodities and develop greater social and economic cooperation with the rest of the world. As an export-oriented economy, in the long run, export diversification strategy could help stabilizing Malaysia’s export earnings.
    Keywords: export diversification; economic growth; revealed comparative advantage
    JEL: F10 C30
    Date: 2010–02–09

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