nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒12‒18
eighteen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Inventive Activity, Industrial Organization and Economic Growth By Karl Shell
  2. Testing the growth effects of structural change By Jochen Hartwig
  3. Growth and Indeterminacy in Dynamic Models with Externalities By Michele Boldrin; Aldo Rustichini
  4. How does political instability affect economic growth? By Ari Aisen; Francisco J. Veiga
  5. Fixed investment, household consumption, and economic growth : a structural vector error correction model (SVECM) study of Malaysia By Abdul Karim, Zulkefly; Abdul Karim, Bakri; Ahmad, Riayati
  6. Investment, inflation and economic growth nexus By Nasir, Iqbal; Saima, Nawaz
  7. The economic ascent of technological power:South Korea By Valli Vittorio
  8. Some Speculation on Growth, Disparity and Capital Reorganisation in the Indian Economy By Sudipto Mundle
  9. Savings-led growth theories: A time series analysis for Malaysia using the bootstrapping and time-varying causality techniques By Tang, Chor Foon
  10. Deregulation, Economic Growth and Growth Acceleration By Petar Stankov
  11. The Underground Economy in a Matching Model of Endogenous Growth By Gaetano Lisi; Maurizio Pugno
  12. The Impact of Governance on Economic Growth: Further Evidence for Africa. By Bichaka Fayissa; Christian Nsiah
  13. The Contribution of Human Capital to China’s Economic Growth By John Whalley; Xiliang Zhao
  14. Productivity growth and catch up in Europe: A new perspective on total factor productivity differences By Filippetti, Andrea; Payrache, Antonio
  15. The Financial Crisis and the Measurement of Financial Sector Activity By Charles, Steindel
  16. Infrastructure development and economic growth in China By Sahoo, Pravakar; Dash, Ranjan Kumar; Nataraj, Geethanjali
  17. The Information and Communication Technology Sector in India: Performance, Growth and Key Challenges By OECD
  18. Defragmentation of Economic Growth with a Focus on Diversification: Evidence from Russian Economy By Gnidchenko, Andrey

  1. By: Karl Shell
    Date: 2010–12–09
  2. By: Jochen Hartwig (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Against the backdrop of Baumol’s model of ‘unbalanced growth’, a recent strand of literature has presented models that manage to reconcile structural change with Kaldor’s ‘stylized fact’ of the relative constancy of per-capita GDP growth. Another strand of literature goes beyond this, arguing that the expenditure shifts toward Baumol’s ‘stagnant’ sector stimulate rather than dampen long-term economic growth because of the human capital-accumulating nature of major ‘stagnant’ services (like health care and education). This paper tests the relationship between structural change and economic growth empirically by means of a Granger-causality analysis of a panel of 18 OECD countries.
    Keywords: Economic growth, structural change, human capital, Panel Granger-causality tests
    JEL: C12 C23 I10 I20 J24 O41
    Date: 2010–09
  3. By: Michele Boldrin; Aldo Rustichini
    Date: 2010–12–09
  4. By: Ari Aisen; Francisco J. Veiga
    Abstract: The purpose of this paper is to empirically determine the effects of political instability on economic growth. Using the system-GMM estimator for linear dynamic panel data models on a sample covering up to 169 countries, and 5-year periods from 1960 to 2004, we find that higher degrees of political instability are associated with lower growth rates of GDP per capita. Regarding the channels of transmission, we find that political instability adversely affects growth by lowering the rates of productivity growth and, to a smaller degree, physical and human capital accumulation. Finally, economic freedom and ethnic homogeneity are beneficial to growth, while democracy may have a small negative effect.
    Keywords: Economic growth; Political instability; Growth accounting; Productivity
    JEL: O43 O47
    Date: 2010–10
  5. By: Abdul Karim, Zulkefly; Abdul Karim, Bakri; Ahmad, Riayati
    Abstract: This paper examines the dynamic linkages between economic growth, fixed investment, and household consumption in Malaysia by using a structural vector error correction model (SVECM) approach. The empirical results revealed that household consumption and fixed investment are only significantly influenced output growth in the short run. This finding tends to support the alternative view of growth hypothesis, namely fixed investment-led growth, and household consumption-led growth in the short run. In the long run, there is no significant effect of fixed investment and household consumption on growth. However, in the long run, there is a permanent effect of economic growth on household consumption and investment. This empirical finding signals that a demand side policy (for example, fiscal and monetary policy) by affecting the household consumption and investment is ineffective to stimulate the economic growth in the long run.
    Keywords: Economic growth; fixed investment; consumption; SVECM
    JEL: E22 C22 E00 E21
    Date: 2010–10–01
  6. By: Nasir, Iqbal; Saima, Nawaz
    Abstract: The paper has twofold objectives. Firstly, the impact of the inflation rate on economic growth with the possibility of two threshold levels for Pakistan using annual data from 1961 to 2008 is examined and secondly, nonlinear relationship between inflation and investment has been investigated. Inflation and growth models support the existence of a nonlinear relationship with two thresholds (6 percent and 11 percent). Inflation below the first threshold affects economic growth positively but insignificantly; at moderate rates of inflation, between the two threshold levels, the effect of inflation is significant and strongly negative and at high rates of inflation, above the second threshold, the marginal impact of additional inflation on economic growth diminishes but is still significantly negative. Investment is one of the possible channels through which inflation influences economic growth and the analysis indicates the nonlinear relationship between these two variables with only one threshold at 7 percent. Rate of inflation below the threshold level has positive but insignificant impact, while above the threshold it has strong negative and significant impact on the investment. Therefore, it is desirable to keep the inflation below 6 percent because it may be helpful for the achievement of robust economic growth and investment.
    Keywords: Investment; Inflation; Nonlinear; Pakistan
    JEL: E31 O4
    Date: 2010–04–21
  7. By: Valli Vittorio (University of Turin)
    Abstract: The chapter contains an analysis of the long-run trend and policies of South Korea’ s economy. The main thesis is that a combination of historical events, wise industrial policies and the great effort of families, the state and enterprises to enhance the level of human capital and of technological progress, have strongly contributed to determine the Korean economic period of fast growth. Ageing of population, financial crises, the crumbling of the fordist model of development, difficulties in stimulating a rapid productivity growth in several service sectors and other factors have reduced the rate of economic growth, which remains, however, higher than the one prevailing in most industrialized countries
    Date: 2010–10
  8. By: Sudipto Mundle
    Abstract: This paper is all about speculations on growth, disparity and Capital reorganisation in Indian Economy. [Working Paper No. 124]
    Keywords: growth, disparity, capital reorganisation, Indian, Economy
    Date: 2010
  9. By: Tang, Chor Foon
    Abstract: The purpose of this study is to empirically investigate the vindication of savings-led growth hypothesis for the Malaysian economy with the long run TYDL version of Granger causality – Toda and Yamamoto (1995) and Dolado and Lütkepohl (1996). This study used the quarterly sample from 1970:Q1 to 2008:Q4. The recursive regression procedure will also incorporate into the TYDL causality test to measure the stability of the savings-led growth hypothesis in the long run. Our empirical results support that the savings-led growth hypothesis is long run phenomenon and stable over time. Therefore, the Malaysian dataset supports the endogenous growth theory.
    Keywords: Causality; Malaysia; Recursive regression; Savings-growth; Stability
    JEL: O16 E21 C21
    Date: 2010
  10. By: Petar Stankov
    Abstract: The paper analyzes the influence of credit-, labor-, and product market deregulation policies on economic growth in more than 70 economies over a period of 30 years. It addresses both the issues of reform measurement and its endogeneity. Specifically, by combining a difference-in-difference strategy with an IV approach to the endogeneity of the reform timing, this work finds that deregulation contributed to the per capita GDP levels of the early reformers relatively more than to the ones of the late reformers. However, the paper also finds that accelerating credit market reforms leads to a large growth acceleration effect for the late reformers, which points to large dynamic welfare gains from deregulation. The latter result suggests that a large-scale credit market re-regulation in the aftermath of the Great Recession is a misguided approach to deal with the consequences of the financial crisis.
    Keywords: deregulation; economic growth; origins of institutional change;
    JEL: N43 K20
    Date: 2010–10
  11. By: Gaetano Lisi (University of Cassino); Maurizio Pugno (University of Cassino)
    Abstract: A matching model will explain both unemployment and economic growth by considering the underground sector. Three problems can thus be simultaneously accounted for: (i) the persistence of underground economy, (ii) the ambiguous relationships between underground employment and unemployment, and (iii) between growth and unemployment. The key assumptions adopted are that entrepreneurial ability is heterogeneous across individuals; skill accumulation determines productivity growth in the regular sector and a positive externality on the underground sector; job-seekers choose whether or not to invest in education and skill depending on the expected wages in the two sectors. The conclusions are that the least able entrepreneurs set up underground firms, employ unskilled labour, and do not contribute to growth. Underground employment alleviates unemployment only if the monitoring rate is sufficiently low. Policies for entrepreneurship and monitoring would help both economic growth and employment.
    Keywords: entrepreneurship, underground economy, shadow economy, unemployment, human capital, endogenous growth, search and matching models
    JEL: E26 J23 J24 J63 J64 L26 O40
    Date: 2010–12–12
  12. By: Bichaka Fayissa; Christian Nsiah
    Abstract: Sub-Sahara African countries have had a checkered past when it comes to good governance and good institutions. Increasingly, economists and policy makers are recognizing the importance of good governance and institutions for economic growth and development. The New Partnership for Africa’s Development (NEPAD) which was initiated by the African Heads of State and endorsed by the G8 countries including the European Union, Japan, and China in October 2001 has four main goals: eradicating poverty, promoting sustainable growth and development, integrating Africa into the world economy, and accelerating the empowerment of women. The NEPAD objectives are based on the underlying principles of a commitment to good governance, democracy, human rights and conflict resolution, and the recognition that the maintenance of these standards is fundamental to the creation of an environment conducive to investment and long-term economic growth. The objective of this paper is to investigate the role of governance in explaining the sub-optimal economic growth performance of African economies while controlling for the conventional sources of growth. Our results suggest that good governance or lack thereof contributes to the gaps in income per capita between richer and poorer African countries. Furthermore, our results indicate that the role of governance on economic growth depends on the type and the level of income growth of countries under consideration.
    Keywords: Workers’ Remittances, Economic Growth, Panel Data, Arellano-Bond, Quantile Regression, Sub-Saharan Africa
    JEL: E21 F21 G22 J61 O16
    Date: 2010–12
  13. By: John Whalley; Xiliang Zhao
    Abstract: This paper develops a human capital measure in the sense of Schultz (1960) and then reevaluates the contribution of human capital to China’s economic growth. The results indicate that human capital plays a much more important role in China’s economic growth than available literature suggests, 38.1% of economic growth over 1978-2008, and even higher for 1999-2008. In addition, because human capital formation accelerated following the major educational expansion increases after 1999 (college enrollment in China increased nearly fivefold between 1997 and 2007) while growth rates of GDP are little changed over the period after 1999, total factor productivity increases fall if human capital is used in growth accounting as we suggest. TFP, by our calculations, contributes 16.92% of growth between 1978 and 2008, but this contribution is -7.03% between 1999 and 2008. Negative TFP growth along with the high contribution of physical and human capital to economic growth seem to suggest that there have been decreased in the efficiency of inputs usage in China or worsened misallocation of physical and human capital in recent years. These results underscore the importance of efficient use of human capital, as well as the volume of human capital creation, in China’s growth strategy.
    JEL: O0 O10 O4 O47
    Date: 2010–12
  14. By: Filippetti, Andrea; Payrache, Antonio
    Abstract: This paper investigates the relative contribution of capital deepening and total factor productivity (TFP) as drivers of labour productivity growth and catch up in Europe. Proxies for technological capabilities (technology gap) are introduced which allow to explain differences in TFP. Using a conditional Malmquist nonparametric approach, we find that capital deepening and TFP respectively account for around 53% and 47% of labour productivity growth respectively. Further, change in technological capabilities explains 71% of change in TFP, making a substantial contribution to catch up. Different patterns arise between industrialized and catching-up countries. Our results support the scope for innovation policy, technology diffusion and education policy to explain growth and convergence in labour productivity across Europe.
    Keywords: labour productivity growth; technological capabilities; EU policies; Malmquist TFP
    JEL: O47 E23 O33
    Date: 2010–12–07
  15. By: Charles, Steindel
    Abstract: The widespread expectation, forcefully posed by Reinhart and Rogoff (2009), that growth in the U.S. and the rest of the industrialized world will be subpar for a prolonged period following the financial crisis, raises issues for the measurement of the financial sector’s activity. According to the U.S. NIPA, finance and insurance accounts for roughly 8 percent of GDP, much of which consists of routine processing of transactions and maintenance of accounts. As noted in Steindel (2009), by normal growth accounting reasoning, even a marked contraction in the sector’s activity would not seem likely to be capable by itself to have a major prolonged negative impact on growth. One possible alternate way to account for the activity of the sector, building on the work of Corrado, Hulten, and Sichel (2005, 2009), is that the very high levels of employee compensation in finance partly reflect investments in market knowledge, a form of intangible capital. The increased growth in such market knowledge in the years leading up to the crisis may have helped to support growth in the economy outside of finance, while its diminution in the current environment (if not offset by increased growth of comparable knowledge elsewhere) could work to hold down growth. Altering the treatment of finance in the accounts in this fashion helps to bridge, if not fully close, the gap between the absolute size of the sector as gauged in the standard way and its generally acknowledged large and persistent effect on aggregate activity.
    Keywords: Financial activity; multifactor productivity; growth contribution; compensation; potential growth
    JEL: O47 E01 G20
    Date: 2010–11–13
  16. By: Sahoo, Pravakar; Dash, Ranjan Kumar; Nataraj, Geethanjali
    Abstract: China is the fastest growing country in the world for last few decades and one of the defining features of China's growth has been investment-led growth. China's sustained high economic growth and increased competitiveness in manufacturing has been underpinned by a massive development of physical infrastructure. In this context, we investigate the role of infrastructure in promoting economic growth in China for the period 1975 to 2007. Overall, the results reveal that infrastructure stock, labour force, public and private investments have played an important role in economic growth in China. More importantly, we find that Infrastructure development in China has significant positive contribution to growth than both private and public investment. Further, there is unidirectional causality from infrastructure development to output growth justifying China's high spending on infrastructure development since the early nineties. The experience from China suggests that it is necessary to design an economic policy that improves the physical infrastructure as well as human capital formation for sustainable economic growth in developing countries.
    Keywords: China, Infrastructure, Economic development, Investments, China, Investment, L9 - Industry Studies: Transportation and Utilities, H4 - Publicly provided goods, O1 - Economic development
    JEL: H54 L90 O10
    Date: 2010–10
  17. By: OECD
    Abstract: apid growth in globally competitive Indian information technology services has helped to transform the Indian economy.
    Date: 2010–06–30
  18. By: Gnidchenko, Andrey
    Abstract: In this paper, we develop a comprehensive analysis of diversification issues for Russian economy. Assessing diversification for nine different variables, we show that choice of a variable affects the result much, and that, unlike a popular opinion, equiproportional economic diversity measures are still useful in economic analysis. Developing a simple defragmentation of economic growth, we account for labor productivity and labor availability separately, and show that these components depend on different factors.
    Keywords: Diversification, economic growth, regions, Russia
    JEL: O18 O49 R15 R12 R11
    Date: 2010–12

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