nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒06‒18
eight papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Demographic change, growth and agglomeration By Theresa Grafeneder-Weissteiner
  2. The growth report and new structural economics By Lin, Justin Yifu; Monga, Celestin
  3. High skills, high growth: is tourism an exception? By A.DiLiberto
  4. The Realities and Relevance of Japan’s Great Recession: Neither Ran nor Rashomon By Adam S. Posen
  6. North-South Trade-Related Technology Diffusion: Virtuous Growth Cycles in Latin America By Schiff, Maurice; Wang, Yanling
  7. Instability and crisis in financial complex systems By Sau Lino
  8. Surviving the Global Financial Crisis: Foreign Direct Investment and Establishment Performance By Laura Alfaro; Maggie Chen

  1. By: Theresa Grafeneder-Weissteiner (Department of Economics, Vienna University of Economics & B.A.)
    Abstract: This article presents a framework within which the effects of demographic change on both agglomeration and growth of economic activities can be analyzed. I introduce an overlapping generation structure into a New Economic Geography model with endogenous growth due to learning spillovers and focus on the effects of demographic structures on long-run equilibrium outcomes and stability properties. First, life-time uncertainty is shown to decrease long-run economic growth perspectives. In doing so, it also mitigates the pro-growth effects of agglomeration resulting from the localized nature of learning externalities. Second, the turnover of generations acts as a dispersion force whose anti-agglomerative effects are, however, dampened by the growth-linked circular causality being present as long as interregional knowledge spillovers are not perfect. Finally, lifetime uncertainty also reduces the possibility that agglomeration is the result of a self-fulfilling prophecy.
    JEL: F43 O33 J10 R11
    Date: 2010–06
  2. By: Lin, Justin Yifu; Monga, Celestin
    Abstract: Despite its heavy human, financial, and economic cost, the recent global recession provides a unique opportunity to reflect on the knowledge from several decades of growth research, draw policy lessons from the experience of successful countries, and explore new approaches going forward. In an increasingly globalized world where fighting poverty is not only a moral responsibility but also a strategy for confronting some of the major problems (diseases, malnutrition, insecurity and violence) that ignore boundaries and contribute to global insecurity, thinking about new ways of generating and sustaining growth is a crucial task for economists. This paper reassesses the evolution of knowledge on growth and suggests a new structural approach to the analysis. It offers a brief, critical review of lessons learned from growth research and examines the remaining challenges -- especially from the policy standpoint. It highlights how the 2008 Growth Commission Report identifies the stylized facts associated with sustained and inclusive growth. And it explains how the new structural economics provides a consistent framework for understanding the key findings of the Report.
    Keywords: Economic Theory&Research,Achieving Shared Growth,Economic Growth,Political Economy,Inequality
    Date: 2010–06–01
  3. By: A.DiLiberto
    Abstract: Despite the emphasis placed by growth models on technological progress, recent empirical evidence shows that tourism, a low-skill/low-tech sector and one of the fastest growing industries in the world, may offer a beneficial specialization strategy for growth. This paper focuses on a balanced panel of 72 countries (1980-2005) and confirms that the tourism sector indicator is always positive and significant in growth regressions. Moreover, results also imply that increased education contribute to growth and that the role of the tourism sector is significantly larger in countries with higher aggregate levels of human capital. Our main results are robust to the inclusion of additional variables and the use of alternative estimators in the regression analysis. Overall, this study confirms that the expansion of a low-tech sector such as tourism may be a valuable strategy for development. But it also suggests that an increase in human capital endowments is always beneficial, even when the development strategy focuses on the expansion of a (successful) unskilled sector.
    Keywords: Economic development; Tourism; Human capital
    JEL: I21 O15
    Date: 2010
  4. By: Adam S. Posen (Peterson Institute for International Economics)
    Abstract: Japan’s Great Recession was the result of a series of macroeconomic and financial policy mistakes. Thus, it was largely avoidable once the initial shock from the bubble bursting had passed. The aberration in Japan’s recession was not the behaviour of growth, which is best seen as a series of recoveries aborted by policy errors. Rather, the surprise was the persistent steadiness of limited deflation, even after recovery took place. This is a more fundamental challenge to our basic macroeconomic understanding than is commonly recognized. The UK and US economies are at low risk of having recurrent recessions through macroeconomic policy mistakes—but deflation itself cannot be ruled out. The United Kingdom worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had. Also, Japan did not face poor prospects for external demand and the need to reallocate productive resources across export sectors during its Great Recession. Many economies do now face this challenge simultaneously, which may limit the pace of, and their share in, the global recovery.
    Keywords: Japan, deflation, fiscal stimulus, quantitative easing
    JEL: E31 E62 E63 O53
    Date: 2010–06
  5. By: Jacques Kibambe (Department of Economics, University of Pretoria); Arnold Zellner (Booth School of Business, University of Chicago)
    Abstract: Using a disaggregated Marshallian Macroeconomic Model (MMM-DA), this paper investigates how the adoption of a set of 'free market reforms' may affect the economic growth rate of South Africa. Accounting for possible side effects mainly on the budget deficit, our findings suggest that the institution of the proposed policy reforms would yield a substantial growth in the aggregate annual real GDP. The resulting GDP growth rate could range from 5.3 percent to 9.8 percent depending on which variant of the reform policies is implemented.
    Keywords: Marshallian Macroeconometric Model, Disaggregation, Transfer functions
    JEL: E27
    Date: 2010–06
  6. By: Schiff, Maurice (World Bank); Wang, Yanling (Carleton University)
    Abstract: This paper examines the impact on TFP in Latin America and the Caribbean (LAC) and in other developing countries (DEV) of trade-related foreign R&D (NRD), education and governance. The measures of NRD are constructed based on industry-specific R&D in the North, North-South trade patterns, and input-output relations in the South. The main findings are: i) education and governance have a much larger direct effect on TFP in LAC than in DEV, while the opposite holds for the North's R&D; and ii) education and governance have an additional impact on TFP in R&D-intensive industries through their interaction with NRD in LAC but not in DEV. These interaction effects imply that increasing the level of any of the three policy variables – education, governance or openness – result in virtuous growth cycles. These are smallest under an increase in trade, education or governance, are stronger under an increase in two of these three policy variables, and are strongest under an increase in all three variables.
    Keywords: trade, technology diffusion, growth, Latin America
    JEL: F15 O19 O33
    Date: 2010–05
  7. By: Sau Lino (University of Turin)
    Date: 2010–01
  8. By: Laura Alfaro (Harvard Business School, Business, Government and the International Economy Unit); Maggie Chen (George Washington University)
    Abstract: We examine in this paper the differential response of establishments to the global financial crisis, with particular emphasis on the role of foreign direct investment (FDI) in determining micro economic performance. Using a new worldwide dataset that reports the activities of more than 12 million establishments before and after 2008, we investigate how multinationals around the world responded to the crisis relative to local firms. We explore three distinct channels through which FDI affects establishment performance, (i) production linkages, (ii) financial linkages, and (iii) multinational networks. Our analysis shows that while multinational owned establishments performed, on average, better than their local competitors, there is considerable heterogeneity in the role of FDI. First, multinationals located in countries that experienced sharper declines in aggregate output, demand, and credit conditions displayed a greater advantage over local firms. Multinationals headquartered in countries with a greater incidence of the crisis, in contrast, fared less satisfactorily abroad. Second, multinationals that engaged in activities with vertical production linkages or stronger financial constraints exhibited particularly better responses compared to local firms. Finally, being part of a larger multinational network also led to superior economic performance.
    Keywords: global financial crisis, establishment response, foreign direct investment, production linkage, financial linkage, network
    JEL: F2 F1
    Date: 2010–06

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