nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒06‒26
fifteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Catastrophic Natural Disasters and Economic Growth By Eduardo Cavallo; Sebastian Galiani; Ilan Noy; Juan Pantano
  3. Financial Development and Economic Growth in Latin America: Schumpeter is Right! By Manoel Bittencourt
  4. "Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different, by Reinhart and Rogoff" By Yeva Nersisyan; L. Randall Wray
  5. Social conflict, growth and factor shares By Tsoukis, Chrsitopher; Tournemaine, Frederic
  6. Dependency Ratio and the Economic Growth Puzzle in Sub-Saharan Africa. By Bichaka Fayissa; Paulos Gutema
  7. Migration, Skill Composition and Growth By Young-Bae Kim; Paul levine; Emanuela Lotti
  8. Pro-Poor Growth, Poverty and Inequality in Rural Vietnam By Woojin Kang; Katsushi Imai
  9. The illusive quest: do international capital controls contribute to currency stability? By Reuven Glick; Michael Hutchison
  10. Post-Manichean Economics: Foreign Investment, State Capacity and Economic Development in Transition Economies By Patrick Hamm; Lawrence King
  11. Technology diffusion and postwar growth By Diego Comin; Bart Hobijn
  13. REGIONAL PRO-POOR GROWTH AND CONVERGENCE IN TUNISIA By Ghazi Boulila; Chaker Gabsi; Mohamed Trabelsi
  14. How Should Macroeconomic Policy Respond to Foreign Financial Crises? By Anthony J Makin
  15. Agricultural Productivity Growth, Efficiency Change and Technical Progress in Latin America and the Caribbean By Carlos Ludena

  1. By: Eduardo Cavallo; Sebastian Galiani; Ilan Noy; Juan Pantano
    Abstract: This paper examines the short and long-run average causal impact of catastrophic natural disasters on economic growth by combining information from comparative case studies. The counterfactual of the cases studied is assessed by constructing synthetic control groups, taking advantage of the fact that the timing of large sudden natural disasters is an exogenous event. It is found that only extremely large disasters have a negative effect on output, both in the short and long run. However, this result appears in two events where radical political revolutions followed the natural disasters. Once these political changes are controlled for, even extremely large disasters do not display any significant effect on economic growth. It is also found that smaller, but still very large natural disasters, have no discernible effect on output.
    Keywords: Natural Disasters, Political Change, Economic Growth and Causal Effects
    JEL: O40 O47
    Date: 2010–06
  2. By: M. Hakan Berument (Department of Economics, Bilkent University); N. Nergiz Dincer; Zafer Mustafaoglu
    Abstract: This paper examines the relationship between growth and growth volatility for a small open economy with high growth volatility: Turkey. Quarterly data for the period from 1987Q1 to 2007Q3 suggests that growth volatility reduces growth and that this result is robust under different specifications. This paper contributes to the literature by focusing on how growth volatility affects a set of variables that are crucial for growth. Empirical evidence from Turkey suggests that higher growth volatility reduces total factor productivity, investment, and the foreign currency value of local currency (depreciation). Moreover, employment increases, however the evidence for this is not statistically significant.
    Date: 2010–06
  3. By: Manoel Bittencourt (Department of Economics, University of Pretoria)
    Abstract: In this paper we investigate the role of financial development, or more widespread access to finance, in generating economic growth in four Latin American countries between 1980 and 2007. The results, based on the relatively novel panel time-series analysis, confirm the Schumpeterian prediction which suggests that finance authorises the entrepreneur to invest in productive activities, and therefore to promote economic growth. Furthermore, given the characteristics of the sample of countries chosen, we also highlight the importance of macroeconomic stability, and all the institutional framework that it encompasses, as a necessary condition for financial development, and consequently for growth and prosperity in the region.
    Keywords: Finance, Growth, Latin America
    JEL: E31 N16 O11 O54
    Date: 2010–06
  4. By: Yeva Nersisyan; L. Randall Wray
    Abstract: The worst global downturn since the Great Depression has caused ballooning budget deficits in most nations, as tax revenues collapse and governments bail out financial institutions and attempt countercyclical fiscal policy. With notable exceptions, most economists accept the desirability of expansion of deficits over the short term but fear possible long-term effects. There are a number of theoretical arguments that lead to the conclusion that higher government debt ratios might depress growth. There are other arguments related to more immediate effects of debt on inflation and national solvency. Research conducted by Carmen Reinhart and Kenneth Rogoff is frequently cited to demonstrate the negative impacts of public debt on economic growth and financial stability. In this paper we critically examine their work. We distinguish between a nation that operates with its own floating exchange rate and nonconvertible (sovereign) currency, and a nation that does not. We argue that Reinhart and Rogoff’s results are not relevant to the case of the United States.
    Keywords: Government Debt; Government Deficit; Sovereign Default; Reinhart and Rogoff; Economic Growth; Inflation; Modern Money
    JEL: E60 E61 E62 E64 E69 E31 E32 O40
    Date: 2010–06
  5. By: Tsoukis, Chrsitopher; Tournemaine, Frederic
    Abstract: Standard growth theory is based on atomistic agents with no strategic interactions among them. In contrast, we model growth as resulting from a one-off, strategic game between workers and owners of capital (capitalists) on factor shares, in an otherwise standard AK growth model. The resulting distribution of income between factors further determines the marginal revenue product of capital and the rate of growth. We analyse the properties of four equilibria: competitive, Stackelberg equilibrium, a hybrid non-cooperative regime, and cooperative (Nash) solution. We show that our model provides a potentially richer view of the growth process than comparable models, and endogenises a key aspect of the social contract.
    Keywords: social conflict; factor shares; growth; catching up with the Joneses
    JEL: O41 E25 E22
    Date: 2010–06–18
  6. By: Bichaka Fayissa; Paulos Gutema
    Abstract: Conventional growth theories in the literature explain the poor economic performance of African economies by stressing the inadequacy of savings, human capital, and poor institutional quality. However, the key question is how to enhance savings for the accumulation of both physical and human capital in order to spur growth. A common thread that runs through the existing models is that the dependency ratio, not only remains constant over time, but has no long-run negative impact on economic growth. By relaxing this rigid assumption, this paper constructs a growth estimating equation which accommodates this demographic factor. The analytic results from the modified model suggest that economies with high dependency ratio face their stable equilibrium at lower levels of their income per capita. Moreover, econometric results from analysis of panel data drawn from Sub-Saharan Africa economies suggest that the growth puzzle can be well explained in terms of the demographic factors, especially the level and dynamics of dependency ratio of the region.
    Keywords: Sub-Saharan Africa, growth model, dependency ratio, steady state, panel data, fixed-effects model, random-effects model
    JEL: R11 N3 F43
    Date: 2010–06
  7. By: Young-Bae Kim (University of Surrey); Paul levine (University of Surrey); Emanuela Lotti (University of Southamton and University of Surrey)
    Abstract: The UK, with its relatively liberal immigration policies following recent enlarge- ments, has been one of the main recipients of migrants from new EU member states. This paper poses the questions: what is the effect of immigration on a receiving econ- omy such as the UK? Is the effect beneficial or adverse for growth? Does emigration have brain drain effects on sending economies? How differently would skilled (or un- skilled) migration affect both receiving and sending economies? What factors would contribute to immigration/emigration benefits/costs and economic growth driven by migration? Who are the winners and losers in both the sending and host regions? We utilize an endogenous growth two-bloc model with labour mobility of different skill compositions to address these questions. We show that migration, in general, is beneficial to the receiving country and increases the world growth rate. With remit- tances, the sending country in aggregate can also benefit. The only exception is in the case of unskilled migration, which can actually have a detrimental impact on the world growth rate. This possibility however seems to be unlikely by our examination of migration trends. Winners are migrants, and the skill group in the region that sees its relative size decrease.
    Keywords: Migration, Labour mobility, Skill composition, Economic growth
    JEL: F22 F43 J24 J61 O41
    Date: 2010–06
  8. By: Woojin Kang; Katsushi Imai
    Date: 2010
  9. By: Reuven Glick; Michael Hutchison
    Abstract: We investigate the effectiveness of capital controls in insulating economies from currency crises, focusing in particular on both direct and indirect effects of capital controls and how these relationships may have changed over time in response to global financial liberalization and the greater mobility of international capital. We predict the likelihood of currency crises using standard macroeconomic variables and a probit equation estimation methodology with random effects. We employ a comprehensive panel data set comprised of 69 emerging market and developing economies over 1975–2004. Both standard and duration-adjusted measures of capital control intensity (allowing controls to "depreciate" over time) suggest that capital controls have not effectively insulated economies from currency crises at any time during our sample period. Maintaining real GDP growth and limiting real overvaluation are critical factors preventing currency crises, not capital controls. However, the presence of capital controls greatly increases the sensitivity of currency crises to changes in real GDP growth and real exchange rate overvaluation, making countries more vulnerable to changes in fundamentals. Our model suggests that emerging markets weathered the 2007-08 crisis relatively well because of strong output growth and exchange rate flexibility that limited overvaluation of their currencies.
    Keywords: Financial crises ; Capital market ; Emerging markets ; Econometric models ; Panel analysis
    Date: 2010
  10. By: Patrick Hamm; Lawrence King
    Abstract: This paper evaluates the role of foreign direct investment (FDI) in the transition from socialism to capitalism. Fixed-effects panel regressions indicate that FDI and domestic investment have an equal effect on growth in the first year of investment, but over time FDI is associated with greater growth than domestic investment. However, this positive impact of FDI turns out to be contingent upon the presence of a relatively well-functioning state in the host economy; in the absence of such a state, the net effect of FDI on economic development may be negative. All findings are robust in light of instrumental variable estimation, which is used to account for potential endogeneity problems.
    Date: 2010
  11. By: Diego Comin; Bart Hobijn
    Abstract: In the aftermath of WorldWar II, the world's economies exhibited very different rates of economic recovery. We provide evidence that those countries that caught up the most with the U.S. in the postwar period are those that also saw an acceleration in the speed of adoption of new technologies. This acceleration is correlated with the incidence of U.S. economic aid and technical assistance in the same period. We interpret this as supportive of the interpretation that technology transfers from the U.S. to Western European countries and Japan were an important factor in driving growth in these recipient countries during the postwar decades.
    Keywords: Technology - Economic aspects
    Date: 2010
  12. By: Olivier Parent (Olivier Parent: University of Cincinnati); Abdallah Zouache
    Abstract: This paper examines Africa’s and Middle East’s growth performance for the period 1990- 2005. It employs a Bayesian Model Averaging method that constructs estimates as a weighted average of Spatial Autoregressive estimates for every possible combination of included variables. One of the results of the paper is that the inclusion of spatial dependencies has a direct impact on the determinants of growth in Africa and Middle-East. Indeed, the methodology used in the paper offers an interesting response to the institution/geography debate on the explanation of growth and development. In particular, our methodology allows a selection of the institutional variables that count to explain low development since the geographical variables are partially integrated in the spatial dependence effect.
    Date: 2009–06
  13. By: Ghazi Boulila (Faculte des Sciences Economiques et de Gestion de Tunis, Universite de Tunis - El Manar); Chaker Gabsi; Mohamed Trabelsi (Institut des Hautes Etudes Commerciales de Carthage (IHEC))
    Abstract: This paper studies the evolution of total and regional poverty in Tunisia using the Growth Incidence Curve (GIC) approach based on individual consumption and education level from the household consumption surveys and other official publications during the period 1990-1995. Three main results are found, first, growth is pro-poor in Tunisia and poor households benefit from growth in the whole country as well as many different governorates. Second, the different social incidence curves (SGICs) using education as a social indicator confirms the fact that growth is generally pro-poor. This result means that education and human capital accumulation are important factors in decreasing poverty especially in rural areas. Third, the empirical analysis tends to confirm the existence of conditional and unconditional convergence in terms of poverty between regions, where poor governorates tend to grow more rapidly (with a high pro-poor growth) and to catch up with rich ones.
    Date: 2009–10
  14. By: Anthony J Makin
    Keywords: global financial crisis, national income, exchange rate, monetary policy, fiscal stimulus
    JEL: F31 F33 F41
  15. By: Carlos Ludena
    Abstract: This paper analyzes total factor productivity growth in agriculture in Latin America and the Caribbean between 1961 and 2007 employing the Malmquist Index, a non-parametric methodology that uses data envelopment analysis (DEA) methods. The results show that among developing regions, Latin America and the Caribbean shows the highest agricultural productivity growth. The highest growth within the region has occurred in the last two decades, especially due to improvements in efficiency and the introduction of new technologies. Within the region, land-abundant countries consistently outperform land-constrained countries. Within agriculture, crops and non-ruminant sectors have displayed the strongest growth between 1961 and 2001, and ruminant production performed the worst. Additional analysis of the cases of Brazil and Cuba illustrates potential effects of policies and external shocks on agricultural productivity; policies that do not discriminate against agricultural sectors and that remove price and production distortions may help improve productivity growth.
    Keywords: Total factor productivity, Agriculture, Crops, Livestock, Latin America and the Caribbean, Malmquist Index
    JEL: O13 O47 O54
    Date: 2010–05

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