nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2013‒07‒05
eleven papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Corruption and Economic Growth: The Transmission Channels By Dridi, Mohamed
  2. The growth crisis of Germany: A blueprint of the developed economies By Berthold, Norbert; Gründler, Klaus
  3. Real Exchange Rate and Economic Growth: new empirical evidence By Fabrício Missio; Frederico Jayme Jr; Gustavo Britto; José Luis Oreiro
  4. Financial Fragility and the Distribution of Firm Growth Rates By Giulio Bottazzi; Angelo Secchi
  5. What Affects the Main Engine of Growth in the European Economy? Industrial Interconnectedness and Differences in Performance of Business Services Across the EU25 By Maciej Sobolewski; Grzegorz Poniatowski
  6. Sovereign debt markets in turbulent times: Creditor discrimination and crowding-out effects By Fernando Broner; Aitor Erce; Alberto Martin; Jaume Ventura
  7. Intergenerational Transfer, Human Capital and Long-term Growth in China under the One Child Policy By Xi Zhu; John Whalley; Xiliang Zhao
  8. Stress-testing Africa's recent growth and poverty performance By Devarajan, Shantayanan; Go, Delfin S.; Maliszewska, Maryla; Osorio-Rodarte, Israel; Timmer, Hans
  9. The impact of investment in education on economic development: Spain in comparative perspective (1860-2000) By Enriqueta Camps
  10. The impact of economic shocks in the rest of the world on South Africa: Evidence from a global VAR By Annari de Waal; Renee van Eyden
  11. Economic Rise and Decline in Indonesia – As Seen from Space By Olivia, Susan; Gibson, John

  1. By: Dridi, Mohamed
    Abstract: The relationship between corruption and economic growth has been the focus of numerous studies. However, no consensus seems to exist on the mechanisms via which corruption should reduce growth. The aim of this paper is to identify the transmission channels through which corruption is likely to affect economic growth. Unlike most previous analysis in this area that used the decomposition method [Mo (2001), Pellegrini and Gerlagh (2004) and, Pellegrini (2011)], we employ a Channel Methodology [developed by Tavares and Wacziarg (2001) and applied by Wacziarg (2001) and, more recently, by Lorentzen, McMillan and Wacziarg (2008)]. This methodology based on a system of simultaneous equations to evaluate the effects of corruption on various determinants of economic growth, will allow us to show how corruption affects growth via each possible channel. Our results suggest that the negative effect of corruption on economic growth is mainly transmitted by its impact on human capital and political instability.
    Keywords: Corruption, Economic Growth, Simultaneous Equations
    JEL: C30 D73 O40
    Date: 2013–06
  2. By: Berthold, Norbert; Gründler, Klaus
    Abstract: Germany has experienced tremendous growth rates in the aftermath of World War II. Since the early 1970s, growth rates declined and settled down at a more or less constant rate of 2 percent per year, only to experience a renewed negative trend around the early 2000s. We investigate the evolution of the German growth rate and particularly aim to explain the last decline. Endogenous growth theory suggest that long-run growth is mainly driven by human capital and technological progress. Our 3SLS estimations in a panel of 187 countries between 1965 and 2010 support this hypothesis. As it turns out, human capital accumulation in Germany severely lags behind the average level of the developed countries. As this may explain the moderate position of Germany in the group of the 25 richest countries, the developed countries in turn experience a period of below-average growth rates. Regardless the financial crisis from the late 2000s, growth reveals a downward trend since the turn of the millennium in nearly each of the developed economies. We argue that this decline must be traced back to a general lack of radically new ideas in the world economy. The explanation of the German growth crisis may thus be considered a blueprint of the situation in the developed economies. --
    Keywords: Economic Growth,Endogenous Theory,Germany,Technical Change
    JEL: O40 O33
    Date: 2013
  3. By: Fabrício Missio (UFMT); Frederico Jayme Jr (Cedeplar-UFMG); Gustavo Britto (Cedeplar-UFMG); José Luis Oreiro (UNB)
    Abstract: The goal of this paper is to empirically analyse the relationship between the real exchange rate and the growth rate of output. Firstly, we calculate an index of real exchange rate undervaluation, following the relevant literature. Then, using unbalanced (balanced) panel data techniques, we estimate the effect of this index on the rate of output growth for a sample of 103 (63) countries over the 1978-2007 period. Afterwards, we investigate the existence of a nonlinear relationship (quadratic) between these variables, as well as the possibility of there being different patterns for different groups of countries. We employ various tests and econometric methods, including the technique of quantile regressions, to ensure the robustness of the results. The conclusions indicate that maintaining a competitive level for the real exchange rate has positive effects on the growth rate, especially for developing countries in Latin America. Moreover, this effect tends to be nonlinear, i.e., it is positive for moderate levels of undervaluation.
    Keywords: Real Exchange Rate, Nonlinearity and Growth.
    JEL: F43 O19 E12
    Date: 2013–06
  4. By: Giulio Bottazzi; Angelo Secchi
    Abstract: Analyzing a comprehensive database of limited liability manufacturing firms this paper investigates the relation between a firm's financial situation and its conditional expected growth rate. Specifically, using quantile regressions, we obtain a quantitative characterization of this relation for different quantiles of the growth rates distribution. We find that simple location-shift models, as for instance the OLS, provide a poor and potentially misleading representation of the growth-finance relation. Indeed, the vast majority of the explanatory variables considered are associated with modifications in the support of the growth rates distribution (scale-effect), even when the relation of the same variables with the expected growth is negligible. Moreover, we show that financial conditions impact differently on the growth dynamics of young and old firms. Finally, our investigations reveal that the results obtained with quantile regressions appear robust with respect to possible mispecifications of the empirical model.
    Keywords: Firm growth, Quantile regression, Financial constraints, Firm size dis- tribution, Credit risk ratings
    Date: 2013–06–24
  5. By: Maciej Sobolewski; Grzegorz Poniatowski
    Abstract: The main purpose of this study is to determine what are the main factors which stand behind the diversity in performance of business services measured by their contribution to growth in the EU Member States. We show that in addition to typical growth factors which enhance labor productivity, also the extent of interconnectedness of business services with upstream industries is important to explain service-based economic growth. Our analysis yields two interesting results. Firstly, we show that patterns of industrial interconnectedness of business services are considerably diversified across the EU Member States indicating large differences in the integration of services as supplier with other sectors on a country level. Secondly we show that the diversified growth performance of business services across the EU25 countries can be explained by differences in labor productivity and differences in forward linkages. Our results indicate the fundamental role of business services as the main engine of growth in the European economy. This service-based growth is channeled mainly through increases in labor productivity and forward interconnectedness of services with downstream industries. On the policy making level our results indicate that investment in human and intangible capital are crucial for the service-dominated economy as they not only enhance economic growth inside knowledge intensive services but also facilitate transmission of growth impulses to downstream industries by increasing diffusion and integration of services as suppliers of high value added inputs to the economy.
    Keywords: Industrial Linkages,Business Services, Growth, Multipliers, Input-Output
    JEL: D57 L52 R15
    Date: 2013–06
  6. By: Fernando Broner; Aitor Erce; Alberto Martin; Jaume Ventura
    Abstract: In 2007, countries in the Euro periphery were enjoying stable growth, low deficits, and low spreads. Then the financial crisis erupted and pushed them into deep recessions, raising their deficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and, surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocated from the private to the public sectors, reducing investment and deepening the recessions even further. To account for these facts, we propose a simple model of sovereign risk in which debt can be traded in secondary markets. The model has two key ingredients: creditor discrimination and crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereign debt offers a higher expected return to domestic creditors than to foreign ones. This provides incentives for domestic purchases of debt. Crowding-out effects arise because private borrowing is limited by financial frictions. This implies that domestic debt purchases displace productive investment. The model shows that these purchases reduce growth and welfare, and may lead to self-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countries in the Eurozone, and how they may be addressed by policies at the European level.
    Keywords: sovereign debt, rollover crises, secondary markets, economic growth.
    JEL: F32 F34 F36 F41 F43 F44 G15
    Date: 2013–06
  7. By: Xi Zhu; John Whalley; Xiliang Zhao
    Abstract: We argue that the demographic changes caused by the one child policy (OCP) may not harm China's long-term growth. This attributes to the higher human capital induced by the intergenerational transfer arrangement under China’s poor-functioning formal social security system. Parents raise their children and depend on them for support when they reach an advanced age. The decrease in the number of children prompted by the OCP resulted in parents investing more in their children’s educations to ensure retirement consumption. In addition, decreased childcare costs strengthen educational investment through an income effect. Using a calibrated model, a benchmark with the OCP is compared to three counterfactual experiments without the OCP. The output under the OCP is expected to be about 4 percent higher than it would be without the OCP in 2025 under moderate estimates. The output gain comes from a greatly increased educational investment driven by fewer children (11.4 years of schooling rather than 8.1). Our model sheds new light on the prospects of China's long-term growth by emphasizing the OCP's growth enhancing role through human capital formation under the intergenerational transfer arrangement.
    JEL: J13 O11 O53
    Date: 2013–06
  8. By: Devarajan, Shantayanan; Go, Delfin S.; Maliszewska, Maryla; Osorio-Rodarte, Israel; Timmer, Hans
    Abstract: After an impressive acceleration in growth and poverty reduction since the mid-1990s, many African countries continue to register robust growth in the aftermath of the global financial crisis. Will this growth persist, given the tepid recovery in developed countries, numerous weather shocks, and civil conflicts in Africa? This paper"stress tests"African economies. The findings indicate that Africa's long-term growth is fairly impervious to a prolonged recession in high-income countries. Growth is, however, much more sensitive to a disruption of capital flows to the region, and to internal shocks, such as civil conflict and drought, even if the latter follow historical patterns. The broad policy implication is that with proper domestic production conditions African countries can sustain robust long-term growth. Because of the economic dominance of the agriculture sector and the share of food in household budgets, countries will need to increase the resilience of agriculture and protect it from unfavorable climate change impacts, such as drought. As in the past, civil conflicts and violence will pose by far the greatest threat to Africa's performance.
    Keywords: Economic Theory&Research,Emerging Markets,Rural Poverty Reduction,Achieving Shared Growth,Climate Change Economics
    Date: 2013–06–01
  9. By: Enriqueta Camps
    Abstract: Throughout the 19th century and until the mid-20th century, in terms of long-term investment in human capital and, above all, in education, Spain lagged far behind the international standards and, more specifically, the levels attained by its neighbours in Europe. In 1900, only 55% of the population could read; in 1950, the figure was 93%. This no doubt contributed to a pattern of slower economic growth in which the physical strength required for agricultural work, measured here through height, had a larger impact than education on economic growth. It was not until the 1970s, with the arrival of democracy, that the Spanish education system was modernized and the influence of education on economic growth increased.
    Keywords: employment structure, human capital, educational offer, economic growth.
    JEL: I2 I1 J3 J8 N3
    Date: 2013–06
  10. By: Annari de Waal (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria)
    Abstract: The significant change in South Africa’s trade patterns over the past two decades should affect the impact of shocks in the rest of the world on the country, since South Africa is a small open economy. We investigate the effect with the use of a global vector autoregression (GVAR) model from 1979Q2 to 2009Q4. To account for changes in international trade linkages, we assemble the country-specific foreign variables with time-varying trade-weighted data. We show that the long-term impact of a shock to Chinese GDP on South African GDP is 330% stronger in 2009 than in 1995, due to the substantial increase in South Africa’s trade with China since the mid-1990s. By 2005, a United States (US) GDP shock only has a quarter of the long-term impact on South African GDP compared to 1995, as trade with the US declined noticeably. By 2009, the impact of a US GDP shock on South African GDP is insignificant. The results indicate why the recent global crisis did not affect South Africa as much as it affected developed economies. It also stresses the increased risk, to the South African economy and economies in the rest of the world, should China experience slower GDP growth.
    Keywords: South Africa, developing economies, trade linkages, global macroeconomic modelling, global vector autoregression (GVAR)
    JEL: C32 E32 F43 O55
    Date: 2013–06
  11. By: Olivia, Susan; Gibson, John
    Abstract: Satellite-detected luminosity is sometimes used to proxy for economic activity although only recently within the mainstream economics literature (Henderson et al., 2012). If this method works it holds great promise for developing countries with weak statistical systems that face difficulties in consistently measuring long-term economic change. Regardless of how chaotic are statistical efforts on the ground, viewed from space it may be possible to detect economic change, with high frequency and for small areas. But doubts remain about how much trust can be put in night lights data as a proxy for economic growth since previous validation attempts just compare with other error-ridden measures (Henderson et al., 2012; Chen and Nordhaus, 2011; Kulkarni et al., 2011). This paper uses gold standard data on electrification and economic growth for 5000 sub-districts in Indonesia from 1992 to 2008 to evaluate the reliability of night-light based measures of local economic change. Our results also contribute to debate in the literature about the severity of the shock to Indonesia from the Asian Financial Crisis of 1997 and the subsequent rate of rebound in economic activity.
    Keywords: Economic Growth, Luminosity, Measurement Error, Indonesia, Agricultural and Food Policy, Financial Economics, International Relations/Trade, Production Economics, Research Methods/ Statistical Methods, O47, C52, E31,
    Date: 2013

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