nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒04‒17
24 papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Economic and Productivity Growth Decomposition: An Application to Post-reform China By Kui-Wai Li; Tung Liu
  2. On the Non-Causal Link between Volatility and Growth By Olaf Posch; Klaus Wälde
  3. Fiscal policy, employment by age, and growth in OECD economies By F. HEYLEN; R. VAN DE KERCKHOVE;
  4. Financial integration and financial development in transition economies : what happens during financial crises ? By Arjana Brezigar-Masten; Fabrizio Coricelli; Igor Masten
  5. The Global Economic Crisis and Rebalancing Growth in East Asia By Park, Yung Chul
  6. Endogenizing Growth via a Lag for Apprenticing By John Hartwick; Ngo Van Long
  7. Impacts of the triple global crisis on growth and poverty in Yemen By Breisinger, Clemens; Collion, Marie-Helen; Diao, Xinshen; Rondot, Pierre
  8. FTA and Economic Growth: A Nonparametric Approach By Jung Hur; Cheolbeom Park
  9. Technological Change, Human Capital Structure, and Multiple Growth Paths By Kim, Yong Jin; Lee, Jong-Wha
  10. Capital flows and economic growth across spectral frequencies: Evidence from Turkey By Nuri Yildirim; Huseyin Tastan
  11. The People’s Republic of China as an Engine of Growth for Developing Asia? Evidence from Vector Autoregression Models By Park, Donghyun; Shin, Kwanho
  12. What are the links between aid volatility and growth ? By Markandya, Anil; Ponczek Vladimir; Yi, Soonhwa
  13. The 2008 Financial Crisis and Taxation Policy By Thomas Hemmelgarn; Gaetan Nicodeme
  14. Entrepreneurship, Innovation and Economic Growth - past experience, current knowledge and policy implications By Braunerhjelm, Pontus
  15. Long cycles in growth: explorations using new frequency domain techniques with US data By Crowley, Patrick M
  16. Globalization and growth in the low Income African countries with the extreme bounds analysis By Rao, B. Bhaskara; Vadlamannati, Krishna Chaitanya
  17. Dynamic Scoring in a Romer-style Economy By Scrimgeour, Dean
  18. The International Financial Crisis: Eight Lessons for and from Latin America By Liliana Rojas-Suarez
  19. New structural economics : a framework for rethinking development By Lin, Justin Yifu
  20. New Technology, Human Capital and Growth in a Developing Country By Cuong Le Van; Tu-Anh Nguyen; Manh-Hung Nguyen; Thai Bao Luong
  21. The contribution of trade policy to the openness of the Dutch economy By Harold Creusen; Arjan Lejour
  22. Development strategies : integrating governance and growth By Levy, Brian; Fukuyama, Francis
  23. The Global Financial Crisis: An Update on the Effects on Bolivia By Luis Carlos Jemio; Osvaldo Nina
  24. Financial Sector Development, Economic Growth, and Poverty Reduction: A Literature Review By Zhuang, Juzhong; Gunatilake, Herath; Niimi, Yoko; Ehsan Khan, Muhammad; Jiang, Yi; Hasan, Rana; Khor, Niny; S. Lagman-Martin, Anneli; Bracey, Pamela; Huang, Biao

  1. By: Kui-Wai Li (City University of Hong Kong, Hong Kong SAR); Tung Liu (Department of Economics, Ball State University)
    Abstract: This paper examines and applies the theoretical foundation of the decomposition of economic and productivity growth to the thirty provinces in China’s post-reform economy. The four attributes of economic growth are input growth, adjusted scale effect, technical progress, and efficiency growth. A stochastic frontier model with a translog production and incorporated with human capital is used to estimate the growth attributes in China. The empirical results show that input growth is the major contributor to economic growth and human capital is inadequate even though it has a positive and significant effect on growth. Technical progress is the main contributor to productivity growth and the scale effect has become important in recent years. The impact of technical inefficiency is statistical insignificant in the sample period. The relevant policy implication for a sustainable post-reform China economy is the need to promote human capital accumulation and improvement in technical efficiency.
    Keywords: technical progress, technical efficiency, economies of scale, human capital, China economy
    JEL: C2 D24 O4 O53
    Date: 2009–09
  2. By: Olaf Posch (School of Economics amd Management, Ahrhus University, Denmark); Klaus Wälde (Chair in Macroeconomics, Johannes Gutenberg-Universität Mainz, Germany)
    Abstract: A model highlighting the endogeneity of both volatility and growth is presented. Volatility and growth are therefore correlated but there is no causal link from volatility to growth. This joint endogeneity is illustrated by working out the eects through which economies with dierent tax levels dier both in their volatility and growth. Using a continuous-time dynamic stochastic general equilibrium (DSGE) model with plausible parametric restrictions, we obtain closed-form measures of macro volatility based on cyclical components and output growth rates. Given our results, empirical volatility-growth analysis should include controls in the conditional variance equation. Otherwise an omitted variable bias is likely.
    Keywords: Tax effects, Volatility measures, Poisson uncertainty, Endogenous cycles and growth, Continuous-time DSGE models
    JEL: E32 E62 H3 C65
    Date: 2010–03–08
    Abstract: We build and parameterize a general equilibrium OLG model for an open economy to study hours of work in three age groups, education of the young, and aggregate per capita growth. The composition of fiscal policy plays a crucial role. The government sets tax rates on labor, capital and consumption. It allocates its revenue to productive expenditures (mainly for education), consumption and ‘non‐employment’ benefits. Labor taxes and benefits may differ across age groups. We find that our model’s predictions match the facts remarkably well for all key variables in many OECD countries. We then use the model to investigate the effects of various fiscal policy shocks on employment by age and growth, as well as on welfare of current and future generations. We identify ‘non‐employment’ benefits and labor taxes as the main policy variables affecting employment. Productive government expenditures are the most effective with respect to long‐run output and growth. Long‐run output and growth may benefit also from labor tax cuts targeted at older workers. Considering welfare effects, however, these policy measures may not be the ones preferred most by current generations.
    Keywords: employment by age, endogenous growth, fiscal policy, overlapping generations
    JEL: E62 J22 O41
    Date: 2009–12
  4. By: Arjana Brezigar-Masten (Institute of Macroeconomic Analysis and Development - IMAD); Fabrizio Coricelli (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, CEPR - Centre for Economic Policy Research); Igor Masten (University of Ljubljana - Faculty of Economics)
    Abstract: This papers provides an empirical analysis of the role of financial development and financial integration in the growth dynamics of transition countries. We focus on the role of financial integration in determining the impact of financial development on growth, distinguishing "normal times" from periods of financial crises. In addition to confirming the significant positive effect on growth exerted by financial development and financial integration, our estimates show that a higher degree of financial openness tends to reduce the contractionary effect of financial crises, by cushioning the effect on the domestic supply of credit. Consequently, the high reliance on international capital flows by transition countries does not necessarily increase their financial fragility. This implies that financial protectionism is a self-defeating policy, at least for transition countries.
    Keywords: Transition economies, financial integration, financial crises, economic growth, threshold effects.
    Date: 2010–02
  5. By: Park, Yung Chul (Asian Development Bank Institute)
    Abstract: Asia has staged an impressive turnaround in 2009, but it is unclear whether the recovery can be self sustaining even if the United States and Europe fail to pull themselves out of the current recession. This policy brief discusses the impact of the global financial crisis on emerging Asia and seeks to articulate the rationale behind the policy changes and reform necessary to return East Asia to the path of pre-crisis growth.
    Keywords: financial crisis growth asia; emerging asia economic recovery; rebalancing growth east asia
    JEL: F00
    Date: 2009–12–15
  6. By: John Hartwick (Queen's University); Ngo Van Long (McGill University)
    Abstract: We take up a growth model with both skilled and unskilled labor, and a steady migration of some unskilled workers, who undertake apprenticing, to the skilled group of workers. Apprenticing involves a period of observing and thus labor output foregone. The time-out for observing represents a cost to the economy and this results in the rate of balanced growth being endogenous. We examine the balanced growth path and report on the stability of our dynamic system.
    Keywords: skilled and unskilled labor, apprenticing, balanced growth, endogenous growth
    JEL: J00
    Date: 2010–04
  7. By: Breisinger, Clemens; Collion, Marie-Helen; Diao, Xinshen; Rondot, Pierre
    Abstract: Yemen is an oil-exporting and food-importing country on the Arabian Peninsula with persistently high levels of poverty. The impacts of the food, fuel, and financial global crises are likely to further complicate preexisting conditions of internal conflicts, decreasing oil revenues, and governance failure. The latest official growth numbers date back to precrisis levels; new estimates are subject to much debate; and the current state of poverty in Yemen remains unclear. In this paper, a consistent economic framework is presented to help close this information gap and to better understand growth and poverty dynamics during crises. Results show that economic growth in Yemen accelerated during the food and fuel crises in 2008 because oil-driven growth dominated the negative growth impacts of the food crisis. However, this oil-driven growth has not been pro-poor; in fact, poverty in both rural and urban areas rises sharply in 2008. The financial crisis in 2009 impacts Yemen mainly through the drop in oil prices and a reduction in remittances and thereby sharply slows growth, including agricultural growth. This growth decline hits households hard and compounds the poverty effects of the food crisis. Model results indicate that poverty has increased to 42.8 percent in 2009, an increase of 8 percentage points from 2005–2006, when it was 34.8 percent. Poverty continues to be much higher in rural areas, where almost half of all people lived in poverty in 2009, compared with 29.9 percent in urban areas. These estimates can be considered conservative because we do not account for conflicts and natural disasters that recently hit the country.
    Keywords: Conflict, Development strategies, global economic crises, Growth, Poverty,
    Date: 2010
  8. By: Jung Hur (Sogang University); Cheolbeom Park (Korea University)
    Abstract: This paper assesses whether a bilateral FTA exerts a positive growth effect of the economies of the two countries engaging in the FTA. It employs a nonparametric matching approach, which is more faithful to questions posed by trade theories, imposes no specific functional froms on the relation, and can be applied to a broad range of data structures. Unlike the results from earlier linear regression model approaches, we find an insignificant effect of the FTA on total economic growth. In particular, we demonstrate that an FTA exerts no significant growth effects in the one-to-10-year period after its launch. Furthermore, we detect an upward trend in the gap between the growth rates of per capita real GDP within a bilateral FTA. This implies uneven FTA effects across within an FTA, which may explain, in part, the insignificant effects of the FTA on the total economic growth.
    Keywords: Free trade agreement, Growth, Matching, Treatment effect
    JEL: F13 O24 C14 C21
    Date: 2010
  9. By: Kim, Yong Jin (Ajou University); Lee, Jong-Wha (Asian Development Bank)
    Abstract: This paper presents a theoretical model to analyze the effects of technology change on growth rates of income and human capital in the uncertain environments of technology. The uncertainty comes from two sources; the possibility of a technology advance and the characteristics of new technologies. We set up an overlapping generations model in which young agents invest in both width and depth of human capital in order to adopt new technologies. The model develops explicitly the micro-mechanism of the role of human capital in adopting new technologies as well as that of the process of human capital production in uncertain environments. In our model, a higher level for width of human capital relative to the level of depth leads one country to a higher growth path. We also show that an economy can have different growth paths depending on the initial structure of human capital and the uncertainty about the nature of new technologies. In particular, new technologies with more uncertain characteristics may adversely affect human capital accumulation and income growth, leading the economy to a low growth trap.
    Keywords: education; endogenous growth; human capital; technology adoption
    JEL: J24 O33
    Date: 2009–03
  10. By: Nuri Yildirim (Yildiz Technical University); Huseyin Tastan (Yildiz Technical University)
    Abstract: In this paper we study the interactions and feedbacks between three categories of net capital flows and growth in the Turkish economy for the 1992:01-2009:01 period using frequency domain techniques. Our main spectral analysis tool is a new version of the causality test of Geweke (1982) and Hosoya (1991) in the frequency domain developed by Breitung and Candelon (2006). Besides, we make use of other tools of spectrum analysis such as cospectrum, squared coherence, phase and gain spectrums to decompose total covariance between capital flows and growth across main frequency bands and capture lead/lag interactions between them. Some of our empirical findings are as follows: Variance decompositions over frequency bands reveal that variations in individual capital flow categories are concentrated over high (seasonal) frequencies. We found no feedback from short-term and long-term ‘other’ investments to growth in these frequencies. However, there are highly significant feedbacks from growth to short-term and long-term capital inflows over business cycle and seasonal frequencies. Spectral variance decompositions reveal that, in general, percentage of variation in capital flows due to economic growth is much higher than the percentage of variation in growth due to capital flows.
    Keywords: Capital flows, causality in frequency domain, Geweke’s measure of feedback, Turkey
    JEL: C32 F21 F32 F43
    Date: 2009
  11. By: Park, Donghyun (Asian Development Bank); Shin, Kwanho (Korea University)
    Abstract: Developing Asia has traditionally relied on exports to the United States (US) and other industrialized countries for demand and growth. As a result, the collapse of exports to the US and other industrialized countries during the global financial and economic crisis has sharply curtailed gross domestic product (GDP) growth across the region. The emergence of the People’s Republic of China (PRC) as a globally influential economic force is fueling hopes that it can supplement the US as an additional source of demand and growth. The central objective of this paper is to use vector autoregression (VAR) models to empirically investigate whether exports to the PRC have a significant and positive effect on the GDP of nine developing Asian countries. The study’s results from a three-variable VAR model indicate that PRC’s imports have a significant positive effect on the GDP of regional countries. However, the study’s results from a four-variable VAR model indicate that the PRC’s apparently positive impact reflects the US’ demand for Asian goods, rather than independent demand from the PRC. Therefore, overall, the study’s evidence suggests that the PRC is not yet an engine of growth for the rest of the region.
    Keywords: China; Asia; trade; engine; recovery; growth; VAR
    JEL: F10 F14 F43
    Date: 2009–10
  12. By: Markandya, Anil; Ponczek Vladimir; Yi, Soonhwa
    Abstract: This paper adds to aid volatility literature in three ways: First it tests the validity of the aid volatility and growth relationship from various aspects: across different time horizons, by sources of aid, and by aid volatility interactions with country characteristics. Second, it investigates the relationship by the level of aid absorption and spending. Third, when examining the relationship between International Development Association aid volatility and growth, it isolates International Development Association aid volatility due to the recipient country's performance from that due to other sources. The findings suggest that, in the long run, on average, aid volatility is negatively correlated with real economic growth. But the relationship is not even. It is stronger for Sub-Saharan African countries than for other regions and it is not present in middle-income countries or countries with strong institutions. For economies where aid is fully absorbed, aid volatility matters for long-run growth; economies with full aid spending also bear a negative impact of aid volatility on long-run growth. Where aid is not fully absorbed, or where it is not fully spent, the aid volatility relationship is not significant. Looking at International Development Association aid separately, the volatility arising from the recipient country's International Development Association performance does not have a causal relationship with growth. In policy terms, the results suggest that low- income countries with weak institutions, especially in Sub-Saharan Africa, could benefit from reduced aid volatility or from being better prepared for the volatility that is there.
    Keywords: Economic Conditions and Volatility,Development Economics&Aid Effectiveness,Emerging Markets,Gender and Health,Achieving Shared Growth
    Date: 2010–02–01
  13. By: Thomas Hemmelgarn (European Commission); Gaetan Nicodeme (European Commission)
    Abstract: The 2008 financial crisis is the worst economic crisis since the Great Depression of 1929. It has been characterised by a housing bubble in a context of rapid credit expansion, high risk-taking and exacerbated financial leverage, ending into deleveraging and credit crunch when the bubble burst. This paper discusses the interactions between tax policy and the financial crisis. In particular, it reviews the existing evidence on the links between taxes and many characteristics of the crisis. Finally, it examines some possible future tax options to prevent such crises.
    Keywords: Taxation, financial crisis, banking crisis, fiscal incentives
    JEL: E62 F21 F30 G10 H20 H30 H50 H60
    Date: 2010–01
  14. By: Braunerhjelm, Pontus (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: Considerable advances, even breakthroughs, have been made during the last decades in our understanding of the relationship between knowledge and growth on one hand, and entrepreneurship and growth on the other. Similarly, more profound insights have also been gained as to how entrepreneurship, innovation and knowledge are interrelated. Yet, a comprehensive understanding is still lacking concerning the interface of all of those variables: knowledge, innovation, entrepreneurship and growth. The link between the micro-economic origin of growth and the macro-economic outcome is still too rudimentary modeled to grasp the full width of these complex and intersecting forces. The main objective of this paper is hence to shed light on recent advances in our understanding of the forces that underpin the creation of knowledge, its diffusion and commercialization through innovation, and the role of the entrepreneur in the growth process. The policy implications of recent research findings conclude this survey. Particularly important policy implications refer to the design of regulation influencing knowledge production, ownership, entry barriers, labor mobility and (inefficient) financial markets. They all have implication for the efficient diffusion of knowledge through entry. Knowledge creation has to be matched by incentives that induce mechanisms to convert knowledge into societal and useful needs.
    Keywords: Entrepreneurs; knowledge; innovation; growth; policy
    JEL: O31
    Date: 2010–04–10
  15. By: Crowley, Patrick M (College of Business, Texas A&M University)
    Abstract: In his celebrated 1966 Econometrica article, Granger first hypothesized that there is a ‘typical’ spectral shape for an economic variable. This ‘typical’ shape implies decreasing levels of energy as frequency increases, which in turn implies an extremely long cycle in economic fluctuations and particulary in growth. Spectral analysis is however based on certain assumptions particulary in that render these basic frequency domain techniques inappropriate for analysing non-stationary economic data. In this paper three recent frequency domain methods for extracting cycles from non-stationary data are used with US real GNP data to analyse fluctuations in economic growth. The findings, among others, are that these more recent frequency domain techniques do not provide evidence to support the ‘typical’ spectral shape and nor an extremely long growth cycle á la Granger.
    Keywords: business cycles; growth cycles; frequency domain; spectral analysis; long cycles; Granger; wavelet analysis; Hilbert-Huang Transform (HHT); empirical mode decomposition (EMD); non-stationarity
    JEL: C13 C14 O47
    Date: 2010–02–21
  16. By: Rao, B. Bhaskara; Vadlamannati, Krishna Chaitanya
    Abstract: The relationship between globalization and economic growth, especially in the poorer developing countries, is controversial. Many previous studies have used single globalization indicators such as the ratio of exports plus imports to GDP. This paper uses a comprehensive measure of a globalization of Dreher (2006), which is based on measures of globalization of the economic, social and political sectors. Panel data estimates with data of 21 low income African countries show a small but significant positive permanent growth effects. The sensitivity of this growth effect is examined with the extreme bounds analysis (EBA). Contrary to the findings by Levine and Renelt (1992) that cross country growth relationships are fragile, the effects of globalization and some other determinants of the long run growth rate are found to be robust by EBA.
    Keywords: Globalization; Economic growth; Solow model; Africa and Extreme bounds analysis.
    JEL: N01
    Date: 2010–04–07
  17. By: Scrimgeour, Dean (Department of Economics, Colgate University)
    Abstract: This paper explores the dynamic behavior of a Romer-style endogenous growth model, analyzing how changes in tax rates affect government revenue in the short run and the long run. I show that in this environment lowering taxes on financial income is unlikely to stimulate tax revenue in the long run and has modest effects on the tax base, contrary to some other studies of the dynamic response of revenue to tax rates. Calibrations of the model that suggest Laffer curve effects can be substantial require implausibly low values for the elasticity of substitution between varieties of intermediate goods. For more plausible parameter values, I find that around 20% of a tax cut would be self-financing due to an expansion in the tax base.
    Keywords: dynamic scoring, endogenous growth
    JEL: O3 H3
    Date: 2010–02–06
  18. By: Liliana Rojas-Suarez
    Abstract: The international financial crisis of 2008–09 exposed the strengths and weaknesses of the current paradigm of development in Latin America, a paradigm based on liberalized capital accounts and significantly improved macroeconomic conditions. This paper presents lessons derived from the crisis, not only for the region itself, but also for other developing countries that might seek economic growth in the context of greater integration to the international capital markets. Some of the lessons are not new but have been reinforced by the crisis, such as Latin America’s imperative need for export diversification (not only in products but in partners). Other lessons break with longstanding myths about the region, such as its inability to undertake counter-cyclical policies—at least on the monetary side. Yet other lessons reflect new developments in the current growth paradigm, such as a renewed assessment of (1) the relative roles of foreign and domestic banks in shielding the financial system against external shocks and (2) the desirability of adopting blanket international financial regulations that do not account for a country’s degree of development. Taken together, the lessons in this paper bring a new sense of optimism for growth in Latin America.
    Keywords: economic growth; development; finance; Latin America
    Date: 2010–01
  19. By: Lin, Justin Yifu
    Abstract: As strategies for achieving sustainable growth in developing countries are re-examined in light of the financial crisis, it is critical to take into account structural change and its corollary, industrial upgrading. Economic literature has devoted a great deal of attention to the analysis of technological innovation, but not enough to these equally important issues. The new structural economics outlined in this paper suggests a framework to complement previous approaches in the search for sustainable growth strategies. It takes the following into consideration: First, an economy's structure of factor endowments evolves from one stage of development to another. Therefore, the optimal industrial structure of a given economy will be different at different stages of development. Each industrial structure requires corresponding infrastructure (both"hard"and"soft") to facilitate its operations and transactions. Second, each stage of economic development is a point along the continuum from a low-income agrarian economy to a high-income industrialized economy, not a dichotomy of two economic development stages ("poor"versus"rich"or"developing"versus"industrialized"). Industrial upgrading and infrastructure improvement targets in developing countries should not necessarily draw from those that exist in high-income countries. Third, at each given stage of development, the market is the basic mechanism for effective resource allocation. However, economic development as a dynamic process requires industrial upgrading and corresponding improvements in"hard"and"soft"infrastructure at each stage. Such upgrading entails large externalities to firms'transaction costs and returns to capital investment. Thus, in addition to an effective market mechanism, the government should play an active role in facilitating industrial upgrading and infrastructure improvements.
    Keywords: Economic Theory&Research,Debt Markets,Banks&Banking Reform,Emerging Markets,Achieving Shared Growth
    Date: 2010–02–01
  20. By: Cuong Le Van (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, University of Exeter Business School - University of Exeter Business School); Tu-Anh Nguyen (Central Insitute of Economic Management - Central Insitute of Economic Management); Manh-Hung Nguyen (LERNA - INRA); Thai Bao Luong (National Economics University - National Economics University)
    Abstract: In a developing country with three sectors: consumption goods, new tech- nology, and education, the productivity of the consumption goods depends on a new technology and skilled labor used to produce this new technol- ogy. There can be three stages of economic growth. In the …rst stage the country concentrates on the production of consumption goods; in the second the country must import both physical capital and new technology capital to produce consumption goods and new technology; in the third the country must import capital and invest in the training and education of high skilled labor.
    Keywords: Optimal growth model; New technology capital; Human Capital; Developing country.
    Date: 2010
  21. By: Harold Creusen; Arjan Lejour
    Abstract: The last four decades, Dutch exports and imports grew annually about 7.5%, while re-exports rocketed in the last two decades. Using a gravity approach this paper finds that the increase in trade is largely caused by income developments. Trade policy, consisting of reductions in import tariffs and other trade barriers and the creation of the EU internal market, also has a significant impact on trade growth, although much smaller. Without any liberalisation of trade policy since 1970 the ratio of trade (excluding re-exports) to GDP would have been about 8%- points lower. By estimating the trade enhancing-effect of trade policy on GDP we conclude that trade policy has contributed 6% to 8% to the growth of national income in Netherlands since the 1970s. Foreign Direct Investments (FDI) experienced a massive but erratic growth, mostly in the last two decades. Income developments could explain half of that growth; deregulations of national capital markets explain only a small part of FDI growth.
    Keywords: trade policy; openness and income; gravity equation; FDI
    JEL: F15 F4
    Date: 2009–11
  22. By: Levy, Brian; Fukuyama, Francis
    Abstract: A frontier challenge for development strategy is to move beyond prescribing optimal economic policies, and instead – taking a broad view of the interactions between economic, political and social constraints and dynamics -- to identify entry points capable of breaking a low-growth logjam, and initiating a virtuous spiral of cumulative change. The paper lays out four distinctive sequences via which the different dimensions might interact and evolve over time, and provides country-specific illustrations of each. Each sequence is defined by the principal focus of its initial step: 1) State capacity building provides a platform for accelerated growth via improved public sector performance and enhanced credibility for investors; strengthened political institutions and civil society come onto the agenda only over the longer term; 2) Transformational governance has as its entry point the reshaping of a country’s political institutions. Accelerated growth could follow, insofar as institutional changes enhance accountability, and reduce the potential for arbitrary discretionary action -- and thereby shift expectations in a positive direction; 3) For'just enough governance', the initial focus is on growth itself, with the aim of addressing specific capacity and institutional constraints as and when they become binding -- not seeking to anticipate and address in advance all possible institutional constraints; 4) Bottom-up development engages civil society as an entry point for seeking stronger state capacity, lower corruption, better public services, improvements in political institutions more broadly -- and a subsequent unlocking of constraints on growth. The sequences should not be viewed as a technocratic toolkit from which a putative reformer is free to choose. Recognizing that choice is constrained by history, the paper concludes by suggesting an approach for exploring what might the scope for identifying practical ways forward in specific country settings.
    Keywords: Governance Indicators,National Governance,Parliamentary Government,Public Sector Corruption&Anticorruption Measures,Political Economy
    Date: 2010–01–01
  23. By: Luis Carlos Jemio (Institute for Advanced Development Studies); Osvaldo Nina (Institute for Advanced Development Studies)
    Abstract: The global financial crisis (GFC) has had a negative effect on the Bolivian economy. The outbreak of the GFC has caused a drop in export commodity prices such as mining and hydrocarbons, and a reduction in remittances. Bolivia however, was in a relatively good position to deal with the negative effects of the GFC. The country has experienced in recent years an important commodity price boom, which significantly increased external revenues, public and private incomes and consumption levels. Although the GFC has had a mild effect on the Bolivian economy so far, there are important structural factors that could put at risk the long term sustainability of policies and of the macroeconomic equilibriums. Among these factors are: i) a low investment rates, which could risk growth prospects and employment creation; ii) a large dependency of Bolivia fiscal sector on the hydrocarbon rent, which makes the long term sustainability of macroeconomic policies and of the current economic situation questionable; iii) the lack of a favourable investment climate required to increase growth and employment, which depends among other factors of the rule of law, property rights, judicial security, clearer and more stable rules of the game, macroeconomic stability, etc. iv) lack of a clearer strategy in relation to the country external insertion is also necessary. Access to larger markets, with higher incomes and purchasing power, is necessary to promote sustainable growth and employment creation, and to reduce the vulnerability of the Bolivian economy to shocks. Trade agreements with the USA, European Union and other regions of the world are necessary to promote investment, growth and employment creation.
    Keywords: Financial crisis, Bolivia
  24. By: Zhuang, Juzhong (Asian Development Bank); Gunatilake, Herath (Asian Development Bank); Niimi, Yoko (Asian Development Bank); Ehsan Khan, Muhammad (Asian Development Bank); Jiang, Yi (Asian Development Bank); Hasan, Rana (Asian Development Bank); Khor, Niny (Asian Development Bank); S. Lagman-Martin, Anneli (Asian Development Bank); Bracey, Pamela (Asian Development Bank); Huang, Biao (Asian Development Bank)
    Abstract: This paper reviews the theoretical and empirical literature on the role of financial sector development, with a view to deepening understanding of the rationale of development assistance to the financial sector of developing countries. The review leads to the following broad conclusions: (i) there are convincing arguments that financial sector development plays a vital role in facilitating economic growth and poverty reduction, and these arguments are supported by overwhelming empirical evidence from both cross-country and countryspecific studies; (ii) there are however disagreements over how financial sector development should be sequenced in developing countries, particularly the relative importance of domestic banks and capital markets and, in developing the banking sector, the relative importance of large and small banks; (iii) while broadening the access to finance by microenterprises, small and medium-sized enterprises (SMEs), and vulnerable groups is recognized as critically important for poverty reduction, it is also widely believed that microfinance and SME credit programs need to be well designed and targeted to be effective. In particular, these programs need to be accompanied by other support services such as provision of training and capacity building, assistance in accessing markets and technologies, and addressing other market failures; and (iv) financial sector development and innovation will bring risks, and it is therefore essential to maintain sound macroeconomic management, put in place effective regulatory and supervisory mechanisms, and carry out structural reforms in developing the financial sector. The paper argues that these conclusions provide a strong justification for development assistance to target financial sector development as a priority area, and that, like any public sector intervention, such assistance should be designed to address market and nonmarket failures. The paper also highlights several areas where more research is urgently needed, in particular, how to sequence financial sector development, how to balance the need for financial innovation and that for economic and financial stability, and how to make microfinance and SME credit programs work better to reduce poverty.
    Date: 2009–10

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