nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒11‒01
eleven papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Can Asia Sustain an Export-Led Growth Strategy in the Aftermath of the Global Crisis? An Empirical Exploration By Gonzalo Hernandez; Arslan Ramzi
  2. Growth vs level effect of population change on economic development: An inspection into human-capital-related mechanisms By Raouf Boucekkine; Blanca Martínez; Ramon Ruiz-Tamarit
  3. Sustainable growth under pollution quotas: optimal R&D, investment and replacement policies By Raouf Boucekkine; Natali Hritonenko; Yuri Yatsenko
  4. Financial sector ups and downs and the real sector : big hindrance, little help By Aizenman, Joshua; Pinto, Brian; Sushko, Vladyslav
  5. New Evidence on FDI-Led Growth: The Case of China By A. Yasemin Yalta
  6. Enrichment with growth By Klein, Michael
  7. Should Easier Access to International Credit Replace Foreign Aid? By Bandyopadhyay, Subhayu; Lahiri, Sajal; Younas, Javed
  8. High-growth cooperatives: Financial profile and key factors for competitiveness By Oriol Amat; Jordi Perramon
  9. Growth and election outcomes in a developing country By Gupta, Poonam; Panagariya, Arvind
  10. Innovation and growth with financial, and other, frictions By Jonathan Chiu; Cesaire Meh; Randall Wright
  11. Financial determinants of human development in developing countries By Simplice A., Asongu

  1. By: Gonzalo Hernandez (University of Massachusetts Amherst); Arslan Ramzi (University of Massachusetts Amherst)
    Abstract: Many developing countries have attempted to pursue the East Asian growth model in recent decades. This model is widely perceived to have been based on export-led growth. Given that developed countries are likely to grow at a slower rate and be less willing to run trade deficits in the post financial crisis world, can this growth model be sustained? Using panel data for Asian countries, this paper contributes to addressing this question by distinguishing between different kinds of export- and tradable-led growth in order to more precisely identify the nature of growth in the pre-crisis decades. We find in particular that, among our variables of interest, the proportion of a country?s manufactured exports that is destined for industrialized countries is the one most robustly associated with output growth. The results have implications for continued post-crisis growth in Asian developing countries. JEL Categories: F43, O11, O53
    Keywords: Export-led growth, tradable-led growth, global imbalances, industrialization, capital accumulation.
    Date: 2011–10
  2. By: Raouf Boucekkine (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Blanca Martínez (Fundamentos del Análisis Económico - Universidad Complutense de Madrid); Ramon Ruiz-Tamarit (Department of Economic Analysis - Universitat de València - Universitat de Valeencia)
    Abstract: We study the impact of demographic change on economic short and long-term dynamics in an enlarged Lucas-Uzawa model with intratemporal altruism. Demographics are summarized by population growth rate and initial size. In contrast to the existing literature, the long-run level effects of demographic changes, i.e. their impact on the levels of variables along the balanced growth paths, are deeply characterized in addition to the more standard growth effects. It is shown that the level effect of population growth is a priori ambiguous due to the interaction of three causation mechanisms, a standard one (dilution) and two non-standard, featuring in particular the transmission of demographic shocks into human capital accumulation. Overall, the sign of the level effect of population growth depends on preference and technology parameters, and on the initial conditions as well. In contrast, we prove that the long-run level effect of population size on per capita income is negative while its growth effect is zero. Finally, we show that the model is able to replicate complicated time relationships between economic and demographic changes. In particular, it entails a negative effect of population growth on per capita income, which dominates in the initial periods, and a positive effect which restores a positive correlation between population growth and economic performance in the long-run.
    Keywords: Human Capital; Population Growth; Population Size; Endogenous Growth; Level Effect; Growth Effect
    Date: 2011–10–17
  3. By: Raouf Boucekkine (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Natali Hritonenko (Prairie View - A&M University); Yuri Yatsenko (Houston Baptist University - Houston Baptist University)
    Abstract: We consider an optimal growth model of an economy facing an exogenous pollution quota. In the absence of an international market of pollution permits, the economy has three instruments to reach sustainable growth: R&D to develop cleaner technologies, investment in new clean capital goods, and scrapping of the old dirty capital. The R&D technology depends negatively on a complexity component and positively on investment in this sector at constant elasticity. First, we characterize possible balanced growth paths for different parameterizations of the R&D technology. It is shown that countries with an under-performing R&D sector would need an increasing pollution quota over time to ensure balanced growth while countries with a highly efficient R&D sector would supply part of their assigned pollution permits in an international market without harming their long-term growth. Second, we study transitional dynamics to balanced growth. We prove that regardless of how large the regulation quota is, the transition dynamics leads to the balanced growth with binding quota in a finite time. In particular, we discover two optimal transition regimes: an intensive growth (sustained investment in new capital and R&D with scrapping the oldest capital goods), and an extensive growth (sustained investment in new capital and R&D without scrapping the oldest capital).
    Keywords: Sustainable growth; vintage capital; endogenous growth; R&D; pollution quotas
    Date: 2011–10–17
  4. By: Aizenman, Joshua; Pinto, Brian; Sushko, Vladyslav
    Abstract: This paper examines how financial expansion and contraction cycles affect the broader economy through their impact on eight real economic sectors in a panel of 28 countries over 1960-2005, paying particular attention to large, or sharp, contractions and magnifying and mitigating factors. Overall, the construction sector is the most responsive to financial sector growth, with a number of others -- such as government, public utilities, and transportation -- also exhibiting significant sensitivity to lagged financial sector growth. Sharp fluctuations in the financial sector have asymmetric effects, with the majority of real sectors adversely affected by contractions but not helped by expansions. The adverse effects of financial contractions are transmitted almost exclusively by the financial openness channel with foreign reserves mitigating these effects with a sizeable (10 to 15 times greater) impact during sharp financial contractions. Both effects are magnified during particularly large financial contractions (with coefficients on interaction terms two to three times greater than when all contractions are considered). Consequent upon a financial contraction, the most severe real sector contractions occur in countries with high financial openness; relative predominance of construction, manufacturing, and wholesale and retail sectors; and low international reserves. Finally, the analysis finds that abrupt financial contractions are more likely to follow periods of accelerated growth, indicative of"up by the stairs, down by the elevator dynamics."
    Keywords: Economic Theory&Research,Achieving Shared Growth,Emerging Markets,Currencies and Exchange Rates,Debt Markets
    Date: 2011–10–01
  5. By: A. Yasemin Yalta
    Date: 2011–10
  6. By: Klein, Michael
    Abstract: This essay first sets out the"business model"problems entailed by corruption and their effects as well as implications for economic growth. Key issues are the need for secrecy and co-operation with partners in crime. Dealing with these leads to behavior which is ostensibly bizarre and undermines economic efficiency, but is in fact a rational way of managing corrupt practices. However, different economic policies can be pursued that are compatible with corruption. Some are more pro-growth than others. Pro-growth corrupt policies hold the promise of enriching the corrupt elite more in absolute terms even though the share of national wealth diverted may be smaller. The most effective pro-growth polices that help enrich an elite resemble fairly orthodox economic policy prescriptions. Eventually the abolition of corruption holds the greatest promise to enhance growth and with it the wealth of elites. The expectation of such growth may explain why more and more political elites pursue"sound"economic policy and may embrace anti-corruption efforts, while securing legal ways of enrichment for themselves. Country examples illustrate policy approaches with different combinations of enrichment and growth properties.
    Keywords: Public Sector Corruption&Anticorruption Measures,Access to Finance,Labor Policies,Technology Industry,Debt Markets
    Date: 2011–10–01
  7. By: Bandyopadhyay, Subhayu (Federal Reserve Bank of St. Louis); Lahiri, Sajal (Southern Illinois University Carbondale); Younas, Javed (American University of Sharjah)
    Abstract: We examine the interaction between foreign aid and binding borrowing constraint for a recipient country. We also analyze how these two instruments affect economic growth via non-linear relationships. First of all, we develop a two-country, two-period trade-theoretic model to develop testable hypotheses and then we use dynamic panel analysis to test those hypotheses empirically. Our main findings are that: (i) better access to international credit for a recipient country reduces the amount of foreign aid it receives, and (ii) there is a critical level of international financial transfer, and the marginal effect of foreign aid is larger than that of loans if and only if the transfer (loans or foreign aid) is below this critical level.
    Keywords: foreign aid, foreign loans, borrowing constraint, economic growth, fungibility, public input
    JEL: F34 F35 O11 O16
    Date: 2011–10
  8. By: Oriol Amat; Jordi Perramon
    Abstract: Given the current economic environment, high-growth companies are particularly relevant for their contribution to employment generation and wealth. This paper discusses the results of a survey that was conducted in order to gain a deeper understanding of high-growth cooperatives through analyzing their financial profiles and then identifying key contributing factors to their growth. To do this, we compared this particular sample with other cooperatives and other high-growth mercantile companies. The results show the main drivers related to high-growth companies success. They are the competitive advantages based on the surveyed group, modern management techniques, quality and productivity, innovation and internationalization. Additionally, we have observed some financial strengths and weaknesses. In this sense, they are under capitalized companies with an unbalanced growth.
    Keywords: Worker cooperatives, service cooperatives, high-growth cooperatives, competitiveness factors, financial information, management tools.
    JEL: M10 M14 M40 P13
    Date: 2011–10
  9. By: Gupta, Poonam; Panagariya, Arvind
    Abstract: With the exception Brander and Drazen (2008), who use a comprehensive cross-country database consisting of both developed and developing countries, the hypothesis that rapid growth helps incumbents win elections has been tested exclusively for the developed countries (e.g., Ray Fair 1978). But since sustained rapid growth offers the prospect of pulling vast numbers of the voters out of poverty within a generation, such an effect is far more likely to be present in the developing rather than developed countries. In this paper, we offer the first test of the hypothesis on a large developing and poor country, India, which has seen its economy grow 8 to 9 percent recently. We first generalize the Fair model to allow for multiple candidates instead for just two and then test it using cross-state data. We find quantitatively large and statistically robust effect of growth on the prospects of the candidates of the state incumbent parties to win elections. Specifically, we use the data on 422 candidates in the 2009 parliamentary elections and show that the candidates of incumbent parties in high-growth states have much better prospects of victory than those in low-growth states.
    Keywords: India; elections; growth; incumbents
    JEL: D72
    Date: 2011–10
  10. By: Jonathan Chiu; Cesaire Meh; Randall Wright
    Abstract: The generation and implementation of ideas, or knowledge, is crucial for economic performance. We study this process in a model of endogenous growth with frictions. Productivity increases with knowledge, which advances via innovation, and with the exchange of ideas from those who generate them to those best able to implement them (technology transfer). But frictions in this market, including search, bargaining, and commitment problems, impede exchange and thus slow growth. We characterize optimal policies to subsidize research and trade in ideas, given both knowledge and search externalities. We discuss the roles of liquidity and financial institutions, and show two ways in which intermediation can enhance efficiency and innovation. First, intermediation allows us to finance more transactions with fewer assets. Second, it ameliorates certain bargaining problems, by allowing entrepreneurs to undo otherwise sunk investments in liquidity. We also discuss some evidence, suggesting that technology transfer is a significant source of innovation and showing how it is affected by credit considerations.
    Date: 2011
  11. By: Simplice A., Asongu
    Abstract: Hitherto financial drivers of human development have been unexplored by the UNDP. This paper assesses determinants of human development from financial dynamics of depth, efficiency, size and activity on data from 38 developing countries. While the importance of financial activity, size and depth (in decreasing order) is significant for inequality adjusted human development, financial allocation efficiency significantly undermines welfare. As a policy implication results do not support financial allocation efficiency as a driver of human development.
    Keywords: Banking; human development; developing countries; instrumental variables
    JEL: O10 I00 E00 G20
    Date: 2011–10–19

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