nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒01‒30
seven papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Corruption, taxation and economic growth: theory and evidence By Gbewopo Attila
  2. Financial Reforms, Growth and Regional Disparity in Post-reform China By Zhicheng Liang
  3. A Neoclassical Growth Model with Public Spending By Oliviero Carboni; G. Medda
  4. Economic growth and and FDI in ASIA: A panel data approach By Tiwari, Aviral; Mutascu, Mihai
  5. Finance and Growth in Africa: The Broken Link By Panicos O. Demetriades; Gregory A. James
  6. Government Size and Growth: A Survey and Interpretation of the Evidence By Bergh, Andreas; Henrekson, Magnus
  7. Could the Stability and Growth Pact Be Substituted by the Financial Markets? By Terezie Výprachtická

  1. By: Gbewopo Attila (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: In this paper, we analyze the interaction between corruption, taxation and economic growth. Our contributions are twofold. Theoretically, in an endogenous growth model, we introduce corruption in two different ways: corruption in the public expenditure and corruption in the public revenue. We show two opposing effects. Under certain conditions, corruption can affect growth rate positively but it can also exert a negative effect via fiscal revenue. Not only does it tend to make the tax rate, which maximizes the long run growth rate sub-optimal, but it can also create distortions that can lead to excessive tax rates harmful to growth. The empirical analyses are based on non parametric estimates as well as econometric investigations. Our results support the assumption of a non linear relationship between public resources and growth. Interactions between public resources and institutional variables evidence the following the results: (i) the more countries are corrupt the stronger the negative effects of taxation on the growth (ii) Once the negative effects of corruption are accounted
    Keywords: corruption;taxation;growth;developing countries
    Date: 2011–01–17
  2. By: Zhicheng Liang (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: In this paper, by employing the Generalized Method of Moment (GMM) techniques and Chinese provincial level data from 1991 to 2003, we empirically investigate the relationship between finance and growth in post-reform China. We find that financial development significantly promotes economic growth in coastal regions but not in inland regions; the weak finance-growth nexus in inland provinces has exacerbated China's regional disparity.
    Keywords: Financial Development;income disparity;Chinese Economy
    Date: 2011–01–18
  3. By: Oliviero Carboni; G. Medda
    Abstract: This paper analyses the effect of public expenditures in the context of a modified Solow model of capital accumulation with optimising agents. The model identifies optimal government size and optimal composition of public expenditures which maximize the rate of growth in the dynamics to the steady state and maximize the long run level of per capita income. Different allocations of public resources lead to different growth rates in the transitional dynamics depending on their elasticity. However effects from fiscal policy are only temporary and disappear in the steady state. Finally we argue that neglecting the non- linear nature of the relationship between government spending and growth may lead empirical studies to biased results.
    Keywords: neoclassical and augmented growth models; fiscal policy; public spending composition.
    JEL: E13 E62 H20 H50 O40
    Date: 2010
  4. By: Tiwari, Aviral; Mutascu, Mihai
    Abstract: This study is an attempt to examine the impact of foreign direct investment on economic growth in Asian countries. We did our analysis in the panel framework during 1986 to 2008. We also examined the nonlinearities associated with foreign direct investment and exports in the economic growth process of Asian countries under consideration. We find that both foreign direct investment and exports enhance growth process. In addition, labour and capital also play an important role in the growth of Asian countries. Further, nonlinearity effects show that export-led growth is a better option of growth enhancing in Asian developing countries compared with foreign direct investment-led growth.
    Keywords: Growth; FDI; Connection; Effects; Panel analysis
    JEL: C23 F21 F43
    Date: 2010–12–13
  5. By: Panicos O. Demetriades; Gregory A. James
    Abstract: Utilizing the latest panel cointegration methods we provide new empirical evidence from 18 countries that suggests that the link between finance and growth in Sub-Saharan Africa is ‘broken’. Specifically, our findings suggest that banking system development in this region follows economic growth. They also indicate that there is no link between bank credit and economic growth.
    Keywords: Panel cointegration; cross-sectional dependence; African financial under-development; African credit markets
    JEL: G21 O16
    Date: 2011–01
  6. By: Bergh, Andreas (Research Institute of Industrial Economics (IFN)); Henrekson, Magnus (Research Institute of Industrial Economics (IFN))
    Abstract: The literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings. This conflict is largely explained by variations in definitions and the countries studied. An alternative approach—of limiting the focus to studies of the relationship in rich countries, measuring government size as total taxes or total expenditure relative to GDP and relying on panel data estimations with variation over time—reveals a more consistent picture. The most recent studies find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate. We discuss efforts to make sense of this correlation, and note several pitfalls involved in giving it a causal interpretation. Against this background, we discuss two explanations of why several countries with high taxes seem able to enjoy above average growth: (i) that countries with higher social trust levels are able to develop larger government sectors without harming the economy, and (ii) that countries with large governments compensate for high taxes and spending by implementing market-friendly policies in other areas. Both explanations are supported by current research.
    Keywords: Government size; Government expenditure; Economic growth; Economic freedom; Globalization; Taxation; Cross-country regressions
    JEL: E62 H11 H20 O23 O43
    Date: 2011–01–03
  7. By: Terezie Výprachtická (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper analyzes the role of labor market institutions in explaining developments of shadow economies in European countries. We use several alternative measures of the shadow sector, and we examine effects of labor institutions on shadow sector in two specific regions: new and old European Union member countries, as their respective shadow sectors exhibited a different development in the last decade. In the discussions of the need for fiscal rules and their usefulness in a monetary union researchers have not agreed on whether the financial markets have a sufficiently disciplining effect on the governments, which would mean that the fiscal rules are not necessary. This paper investigates whether the European Union’s main fiscal rule, the Stability and Growth Pact, could be substituted by the financial markets, taking into account also the effects of the latest financial and economic crisis. Our findings suggest that there is certain interaction between the financial markets and the governments’ decisions on the fiscal policies and that this reaction has become stronger after the beginning of the crisis. However, the institutional setup and market conditions in the European Union are such that this interaction is biased and thus we conclude that the Union needs to have fiscal rules.
    Keywords: European Economic and Monetary Union, Stability and Growth Pact, Financial markets, Fiscal rules
    JEL: C23 E44 E62 H62 H74 H87
    Date: 2010–12

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