nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒05‒22
seven papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Euro area fiscal policies and the crisis By Ad van Riet
  2. Fiscal adjustment and growth in Sub-Saharan Africa : overview and lessons from the current downturn By Fofack, Hippolyte
  3. Recessions and Recoveries in Asia: What Can the Past Teach Us about the Present Recession? By Gupta, Souvik; Miniane, Jacques
  4. Do Rising Top Incomes Lift All Boats? By Andrews, Dan; Jencks, Christopher; Leigh, Andrew
  5. The Great Recession of 2008-2009: Causes, Consequences and Policy Responses By Verick, Sher; Islam, Iyanatul
  6. Growth and Development Under Alternative Corruption Regimes By Keith Blackburn; Yuanyuan Wang
  7. The Governance Grenade: Mass Privatization, State Capacity and Economic Growth in Post-communist Countries By Patrick Hamm; David Stuckler; Lawrence King

  1. By: Ad van Riet (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: In mid-September 2008, a global financial crisis erupted which was followed by the most serious worldwide economic recession for decades. As in many other regions of the world, governments in the euro area stepped in with a wide range of emergency measures to stabilise the financial sector and to cushion the negative consequences for their economies. This paper examines how and to what extent these crisis-related interventions, as well as the fall-out from the recession, have had an impact on fiscal positions and endangered the longer-term sustainability of public finances in the euro area and its member countries. The paper also discusses the appropriate design of fiscal exit and consolidation strategies in the context of the Stability and Growth Pact to ensure a rapid return to sound and sustainable budget positions. Finally, it reviews some early lessons from the crisis for the future conduct of fiscal policies in the euro area. JEL Classification: E10, E62, G15, H30, H62
    Keywords: fiscal policies, financial crisis, fiscal stimulus, financial markets, sustainability, Stability and Growth Pact
    Date: 2010–04
  2. By: Fofack, Hippolyte
    Abstract: In light of the proliferation of exceptionally large fiscal stimuli to ward off the recession triggered by the 2008 global economic and financial crisis in most advanced economies, this paper revisits the fiscal adjustment and growth nexus in Sub-Saharan Africa. Using transfer functions, it quantifies expected losses in terms of aggregate output largely attributed to a systematic implementation of pro-cyclical expenditure switching and reducing policies to achieve low deficit targets throughout the decades ofadjustments. The results consistently highlight a much higher predicted aggregate output under the hypothesized counter-cyclical fiscal expansion option. This consistent outcome suggests that the output gap would have been significantly smaller in the region if countries had drawn on stop-and-go policies of fiscal expansion to sustainably raise the stock of capital investments.
    Keywords: Debt Markets,Public Sector Expenditure Policy,Fiscal Adjustment,Economic Stabilization,Economic Theory&Research
    Date: 2010–05–01
  3. By: Gupta, Souvik (Asian Development Bank Institute); Miniane, Jacques (Asian Development Bank Institute)
    Abstract: With the global economy still in recession, two important questions arise for Asia: how soon will the recession end, and how vigorous will the region's recovery be? The purpose of this paper is to look at past recessions and recoveries in Asia in order to shed light on these issues. Several important stylized facts emerge from this study: (i) recessions accompanied by financial stress—notably, stress in domestic banking sectors—have been substantially longer and deeper than the norm, suggesting that the current recession could have been even costlier and more drawn out had Asia's banks not entered the downturn in such strong shape; (ii) recoveries in Asia have been weak because they were typically driven by a single engine: exports. In contrast, other emerging economies have tended to experience more vigorous recoveries because of a stronger contribution from domestic demand, notably investment; (iii) in Asia, deep recessions have resulted in substantial declines in potential output growth, meaning that their effects are not just cyclical but permanent. A clear lesson emerges from past experience: given the expected weak recovery in the eurozone and the United States, Asia should not count on exports to rebound strongly as it did in previous upturns. Rather, a fundamental rebalancing towards domestic demand is needed if Asia wants to preserve the high growth rates that have characterized its recent past. Finally, it remains to be seen whether potential output will fully recover from pre-crisis levels in the countries most affected by the crisis.
    Keywords: asian economic recession recovery; past recessions future recovery
    JEL: E32 E65
    Date: 2009–09–02
  4. By: Andrews, Dan (OECD); Jencks, Christopher (Harvard Kennedy School); Leigh, Andrew (Australian National University)
    Abstract: Pooling data for 1905 to 2000, we find no systematic relationship between top income shares and economic growth in a panel of 12 developed nations observed for between 22 and 85 years. After 1960, however, a one percentage point rise in the top decile's income share is associated with a statistically significant 0.12 point rise in GDP growth during the following year. This relationship is not driven by changes in either educational attainment or top tax rates. If the increase in inequality is permanent, the increase in growth appears to be permanent. However, our estimates imply that it would take 13 years for the cumulative positive effect of faster growth on the mean income of the bottom nine deciles to offset the negative effect of reducing their share of total income.
    Keywords: inequality, growth, income distribution, national income
    JEL: D31 N10 O57
    Date: 2010–04
  5. By: Verick, Sher (ILO International Labour Organization); Islam, Iyanatul (Griffith University)
    Abstract: Starting in mid-2007, the global financial crisis quickly metamorphosed from the bursting of the housing bubble in the US to the worst recession the world has witnessed for over six decades. Through an in-depth review of the crisis in terms of the causes, consequences and policy responses, this paper identifies four key messages. Firstly, contrary to widely-held perceptions during the boom years before the crisis, the paper underscores that the global economy was by no means as stable as suggested, while at the same time the majority of the world’s poor had benefited insufficiently from stronger economic growth. Secondly, there were complex and interlinked factors behind the emergence of the crisis in 2007, namely loose monetary policy, global imbalances, misperception of risk and lax financial regulation. Thirdly, beyond the aggregate picture of economic collapse and rising unemployment, this paper stresses that the impact of the crisis is rather diverse, reflecting differences in initial conditions, transmission channels and vulnerabilities of economies, along with the role of government policy in mitigating the downturn. Fourthly, while the recovery phase has commenced, a number of risks remain that could derail improvements in economies and hinder efforts to ensure that the recovery is accompanied by job creation. These risks pertain in particular to the challenges of dealing with public debt and continuing global imbalances.
    Keywords: global financial crisis, unemployment, macroeconomic policy, labour market policy
    JEL: E24 E60 J08 J60
    Date: 2010–05
  6. By: Keith Blackburn; Yuanyuan Wang
    Abstract: Empirical observation suggests that not all countries of the world have suffered as a result of widespread corruption. Whilst many countries have undoubtedly been damaged considerably, others appear to have coped well - in some cases, very well - with the problem. The analysis that follows seeks to provide an explanation for this puzzle. It does so by differentiating alternative types of corruption regime according to the way that corruption is practised. Speci?cally, we distinguish between organised and disorganised, collusive and non collusive corruption. This gives four possible scenarios, the implications of which are compared and contrasted to provide a ranking of regimes in terms of their impact on growth. We ?nd that the least (most) damaging regime is one in which corruption is both organised and collusive (disorganised and non-collusive), as broadly characterises the situation in China and its fast-growing neighbours (many African countries).
    Date: 2010
  7. By: Patrick Hamm; David Stuckler; Lawrence King
    Abstract: Why did the transitions from state socialism to capitalism result in improved growth in some countries but significant economic declines in others? Three main arguments have been advanced: (1) the most successful countries rapidly implemented privatization, liberalization, and stabilization policies; (2) failures were unrelated to economic policies but occurred because of a poor institutional environment; and (3) the policies were counterproductive because they damaged the state. We present a state-centered theory which argues that the more radical the privatization program, the worse the subsequent performance. We agree with the second account, that institutions matter, but demonstrate that it was radical privatization itself which was a major determinant of institutional weakness. In addition, our account holds that privatization was in fact a crucial determinant of institutional failure, operating primarily through the creation of a massive shock to state revenues. We perform cross-national regressions for a sample of 30 countries between 1990 and 2000, and find that mass privatization programs negatively impacted economic growth, state capacity and property rights protection. These findings are corroborated with data from a random sample of 4,000 firms from 26 post-communist countries. We show that in countries which implemented sizable mass-privatized programs, privatized firms were substantially less likely to engage in successful industrial restructuring but considerably more likely to engage in barter and have tax arrears than their state owned counterparts.
    Date: 2010

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