nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2013‒08‒10
ten papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Recessions, Growth and Financial Crises By Dwyer, Gerald P; Devereux, John; Baier, Scott L.; Tamura, Robert
  2. A New Interpretation of Kaldor's First Growth Law for Open Developing Countries By Penelope Pacheco-Lopez; A.P.Thirlwall
  3. Crime and Economic Growth: Evidence from India By Kumar, Surender
  4. How Important are Exports and Foreign Direct Investment for Economic Growth in the People’s Republic of China? By Yuqing Xing; Manisha Pradhananga
  5. A Time Series Analysis of Foreign Aid and Income Inequality in Pakistan By Ali, Sharafat; Ahmad, Najid
  6. Banking Crises and “Japanization†: Origins and Implications By Masahiro Kawai; Peter Morgan
  7. Causality in the Link Between Road Network Growth and Regional Development By Michael Iacono; David Levinson
  8. Asset Bubbles in an Overlapping Generations Model with Endogenous Labor Supply By Shi, Lisi; Suen, Richard M. H.
  9. "A Failure by Any Other Name: The International Bailouts of Greece" By C.J. Polychroniou
  10. Stimulating Economic Growth through Knowledge-Based Investment By Charles Hulten

  1. By: Dwyer, Gerald P; Devereux, John; Baier, Scott L.; Tamura, Robert
    Abstract: We examine the relationship of banking crises with economic growth and recessions. Our data cover 21 economies from around the world, most from 1870 to 2009 with the rest starting in 1901 or earlier. The data include capital investment and human capital formation. We have two major findings. First, there is very large heterogeneity in growth of Gross Domestic Product (GDP) and capital investment after banking crises. Most strikingly, twenty-five percent of counties experience no decrease in real GDP per capita in the year of the crisis or the following two years. Some countries see an increase in long run growth after a crisis while others see a fall, with no clear overall pattern. Second, we find clear evidence consistent with Zarnowitz’s Law. If there is a contraction in economic activity after a banking crisis, larger decreases in real GDP per capita are followed by faster subsequent growth.
    Keywords: financial crises, banking crises, recessions, Zarnowitz's Law, Zarnowitz's rule
    JEL: E32 E44 G01
    Date: 2013–05
  2. By: Penelope Pacheco-Lopez; A.P.Thirlwall
    Abstract: Kaldor’s first law of growth posits a positive causal relation between the growth of manufacturing output and the growth of GDP due to static and dynamic returns to scale in manufacturing and rising productivity outside the manufacturing sector as resources are transferred from diminishing returns activities. In an open economy, however, the Kaldor first law of growth is open to another interpretation because it is apparent across countries that there is a close association between manufacturing output growth and export growth, and between export growth and GDP growth. Results are presented for 89 developing countries over the period 1990-2011, also distinguishing between low income, lower-middle income and upper-middle income countries, and between the continents of Africa, Asia and Latin America.
    Keywords: Kaldor’s growth laws; manufacturing growth; export growth; GDP growth
    JEL: C21 E12 F43
    Date: 2013–08
  3. By: Kumar, Surender
    Abstract: This paper empirically examines the causality between crime rates and economic growth using state level data in India. A reduced form equation has been estimated using instrumental variable approach to correct for joint endogeneity between crime and economic growth. Higher crimes may reduce level of per capita income and its growth rate. Controlling intentional homicide and robbery rates in each of the states to the minimum level they observed during 1991-2011 period, the predicted annual growth in per capita income could have been higher by 1.57 and 1.2 percentage points, respectively. The average annual gain in growth rate by bringing down the homicide rate at a level of national minimum could be 0.62 percentage points. Note that the loss in growth rate is lower or negative in the states that have higher per capita income.
    Keywords: Crime, economic growth, panel data, India.
    JEL: H10 H4 K1 K14 O4 O43 O5 O53
    Date: 2013
  4. By: Yuqing Xing (Asian Development Bank Institute (ADBI)); Manisha Pradhananga
    Abstract: The global financial crisis and the recent growth slowdown in the People’s Republic of China (PRC) have led to questions about the sustainability of PRC growth. The argument is that the PRC is too dependent on external demand and that it needs to rebalance its economy toward domestic consumption. However, conventional measures of external demand—share of net exports and exports as a share of gross domestic product (GDP)—are biased and do not accurately measure the contribution of external demand to GDP growth. In this paper, we propose two measures that are simple modifications of the conventional measures. We argue that our proposed measures provide a more accurate estimate of the vulnerability of the PRC economy to external shocks, in the form of sudden drops in exports and foreign direct investment (FDI). Our estimates show that in 2001 exports and FDI accounted for 18.2% of GDP growth and by 2004 the share had risen to 49%. During 2005–07, the contribution of exports and FDI to growth remained 38%–40%. Our estimates also show that the impressive recovery of the PRC economy in the post-crisis period owed at least 53% of its growth to exports and FDI. Based on these results, we conclude that the PRC economy remains highly dependent on external demand in the form of exports and FDI, and rebalancing the economy toward domestic demand has not yet been achieved.
    Keywords: People’s Republic of China, PRC, external demand, GDP growth, export growth
    JEL: F43 E01
    Date: 2013–07
  5. By: Ali, Sharafat; Ahmad, Najid
    Abstract: Pakistan economy is one of those economies that has received a huge amount of foreign aid. Foreign aid has been considered to help capital-deficient economies to fulfill the desired levels of finances to generate growth, increase employment and income, and furthermore, it helps to alleviate poverty levels in the recipient economies. Present study focuses on the analysis of impact of foreign aid on income inequality in Pakistan. Since time series data is used for the analysis so the ADF and Phillip-Perron unit root test are applied to find out each of the time series to be stationary at its first difference. Johansen contegration test and vector error correction models are employed to examine the long run and short run impacts of growth, foreign aid, foreign direct investment, and labor force participation rate on income inequality, respectively. The cointegration test results confirm negative impact of economic growth on income inequality whereas foreign aid, foreign direct investment and labor force participation rate are concluded to have inequality increasing impacts. The results are statistically significant.
    Keywords: foreign aid, growth rate, foreign direct investment, labor force, stationarity, cointegration, causality
    JEL: C22 E1 F35 O15
    Date: 2013–07–31
  6. By: Masahiro Kawai (Asian Development Bank Institute (ADBI)); Peter Morgan
    Abstract: Japan’s “two lost decades†perhaps represent an extreme example of a weak recovery from a financial crisis, and are now referred to as “Japanization.†More recently, widespread stagnation in advanced economies in the wake of the global financial crisis led to fears that Japanization might spread to other countries. This study examines the dimensions of Japanization—including low trend growth, debt deleveraging, deflation, and massive increases in government debt—and analyzes their possible causes—including inadequate macroeconomic policy responses, delayed banking sector restructuring, inadequate corporate investment, loss of industrial competitiveness, a slowdown in total factor productivity (TFP) growth due to excessive regulation and economic rigidities, and an aging society. The study compares Japan’s experience with three other groups that experienced banking crises in the 1990s—developed economies; emerging Asian economies and Latin American economies. Japan’s experience is found to parallel most closely that of other Asian economies that experienced unusually high growth rates of gross domestic product (GDP) and credit before their crises. The study also develops an econometric model of long-term growth rates that uses measures of net investment, the share of the aged in the population, and occurrence of banking crises in addition to traditional explanatory variables. It finds that very low rates of consumer price index (CPI) inflation (or deflation) and net investment, the lack of openness to foreign direct investment, and an aged population explain much of Japan’s slowdown.
    Keywords: Japan, lost decades, Japanization, global financial crisis, macroeconomic policy responses, banking crisis
    JEL: E20 E31 E51 F31 G01
    Date: 2013–07
  7. By: Michael Iacono; David Levinson (Nexus (Networks, Economics, and Urban Systems) Research Group, Department of Civil Engineering, University of Minnesota)
    Abstract: This paper investigates the relationship between the growth of road networks and regional development. We test for mutual causality between the growth of road networks (which are divided functionally into local roads and highways) and changes in county-level population and employment. We employ a panel data set containing observations of road mileage by type for all Minnesota counties over the period 1988 to 2007 to fit a model describing changes in road networks, population and employment. Results indicate that causality runs in both directions between population and local road networks, while no evidence of causality in either direction is found for networks and local employment. We interpret the findings as evidence of a weakening influence of road networks (and transportation more generally) on location, and suggest methods for refining the empirical approach described herein.
    Keywords: network expansion, economic evaluation, regional growth, rural development, economic development
    JEL: O18 R42 R48
    Date: 2013
  8. By: Shi, Lisi; Suen, Richard M. H.
    Abstract: This paper examines the effects of asset bubbles in an overlapping generations model with endogenous labor supply. We derive a set of conditions under which asset bubbles will lead to an expansion in steady-state capital, investment, employment and output. We also provide a specific numerical example to illustrate these results.
    Keywords: Asset Bubbles, Overlapping Generations, Endogenous Labor.
    JEL: E22 E44
    Date: 2013–08–04
  9. By: C.J. Polychroniou
    Abstract: Research Associate and Policy Fellow C. J. Polychroniou argues that a political solution based on a new economic vision is needed to bring an end to the Greek crisis. Polychroniou observes that what began as a financial crisis has been transformed into a full-fledged economic and social crisis by the neoliberal policies of the International Monetary Fund and the European Union (EU). Instead of growth, these policies have destroyed Greece's economy, divided the eurozone states, and hobbled a fragile global recovery. The past six years have seen Greece's descent into economic and social ruin. Exiting the current crisis, for Greece and countries throughout the eurozone, requires more than an end to austerity. Broadly, EU institutions must be radically restructured around the principles of sustainable, equitable growth. Specifically, Greece needs a comprehensive development plan, with massive public spending and investment.
    Date: 2013–07
  10. By: Charles Hulten
    Abstract: Recent studies have shown that knowledge-based capital (KBC) is an important source of economic growth in many of the world’s advanced economies (much more so than R&D alone) and is positively correlated with real GDP per capita in a cross-section of these economies. This literature is still in its infancy and there is, as yet, no systematic discussion of KBC policy. This paper makes an attempt to fill this gap.<P>Stimuler la croissance économique par l'investissement intellectuel<BR>Des études récentes révèlent que le capital intellectuel constitue une source importante de croissance économique (bien plus que la R-D) dans de nombreuses économies avancées du monde et qu’en général il y affiche une corrélation positive avec le PIB réel par habitant. Les travaux dans ce domaine n’en étant qu’à leurs débuts, l’action à mener à l’égard du capital intellectuel ne fait pas encore l’objet d’une réflexion systématique. La présente étude tâche d’y remédier.
    Date: 2013–05–22

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