nep-gro New Economics Papers
on Economic Growth
Issue of 2015‒08‒01
eleven papers chosen by
Marc Klemp
Brown University

  1. The democratic transition By Fabrice Murtin; null null
  2. Rent Extraction, Population Growth and Economic Development: Development Despite Malthus' Theory and Precursors to the Industrial Revolution By Tisdell, Clem; Svizzero, Serge
  3. Agriculture in Developing Countries and the Role of Government: Economic Perspectives By Kanza, Patrick; Vitale, Jeffrey
  4. The Malthusian Trap and Development in Pre-Industrial Societies: A View Differing from the Standard One By Tisdell, Clem; Svizzero, Serge
  5. Agglomeration Economies and Productivity Growth: U.S. Cities, 1880-1930 By Alexander Klein; Nicholas Crafts
  6. How important is Foreign Direct Investment to Economic Growth? New Evidence from Nigeria By Owolabi-Merus, Olasunkanmi
  7. The Dynamics of Development: Entrepreneurship, Innovation, and Reallocation By Roberto Fattal Jaef; Francisco Buera
  8. Finance, growth and human development: An Islamic economic development perspective By Uddin, Md. Akhter; Masih, Mansur
  9. Causality between financial development and economic growth, and the Islamic finance imperative: A case study of Indonesia By Ismail, Mohamed Ayaz Mohamed; Masih, Mansur
  10. Financial deepening and economic growth: A System GMM Panel Analysis with application to 7 SSA countries By Alimi, R. Santos
  11. The Public R&D and Productivity Growth in Australian Broadacre Agriculture: A Cointegration and Causality Approach By Khan, Farid; Salim, Ruhul

  1. By: Fabrice Murtin (Departement d'Economie de Sciences Po); null null (Anderson School of Management)
    Abstract: Over the last two centuries, many countries experienced regime transitions toward democracy. We document this democratic transition over a long time horizon. We use historical time series of income, education and democracy levels from 1870 to 2000 to explore the economic factors associated with rising levels of democracy. We find that primary schooling, and to a weaker extent per capita income levels, are strong determinants of the quality of political institutions. We find little evidence of causality running the other way, from democracy to income or education.
    Keywords: Democracy; Modernization; Human Capital; GMM
    JEL: I25 N30 N40 O43
    Date: 2014–06
  2. By: Tisdell, Clem; Svizzero, Serge
    Abstract: Several contemporary economists claim that ‘real’ economic development only occurred following the Industrial Revolution. We contend that this is only so if a narrow view is taken of what constitutes economic development, namely increasing per capita income. Given a wider perspective, we argue that economic development occurred in hunter-gatherer societies and eventually accelerated in the second stage of the Agricultural Revolution. During this stage, a small dominant class (the elite) were able to extract rent (the economic surplus) from the mass of the population (the dominated) which they could use for development purposes. As a result of this rent extraction, the bulk of the population remained at subsistence level. Nevertheless, dissipation of the rent as a result of population increase was prevented. Consequently, the Malthusian trap could be avoided and the economic surplus could be used by the elite for development or other purposes. Whether or not economic development occurred depended on how the elite allocated the economic surplus. In the second stage of the Agricultural Revolution, the economic surplus was extracted primarily in the form of staples and the exchange of commodities was mostly directly controlled by the elite. This situation changed as states became larger in size and commodities became more diverse. In the few centuries preceding the Industrial Revolution in Europe, monarchs exerted decreasing direct control over the exchange, production and use of commodities. This was particularly noticeable in England. Also devolution of increased political power to nobles and local areas added to principal-and-agent problems. Sovereigns, instead of concentrating on the extraction of the economic surplus in the form of staples, increasingly relied on its extraction and storage in the form of treasures, precious metals and gems. Monarchs (in order to maximize their net extraction) focused on increasing the number of different markets and the extent of these but at the same time, extracted rent from them in the form of levies. Consequently, this Age of Mercantilism was marked by a substantial expansion in marketing even though this was combined with royal imposts on markets. This increase in marketing activities helped to pave the way for the Industrial Revolution by altering the balance of political power and facilitating sales of the products of the Industrial Revolution. Despite this, it seems likely that the Industrial Revolution only happened as a result of the chance occurrence of a combination of events. It was not inevitable.
    Keywords: economic development, economic surplus, Malthus, pre-industrial economics, rent extraction., Community/Rural/Urban Development, Institutional and Behavioral Economics, Research and Development/Tech Change/Emerging Technologies, N00, O1,
    Date: 2015–05–08
  3. By: Kanza, Patrick; Vitale, Jeffrey
    Abstract: Agriculture in Developing countries and the Role of Government: From an Economic Perspective Agriculture has been a critical driver of well-being for centuries, ensuring food security and catalyzing productivity needed for economic prosperity (Robin, 2011). According to the International Food Policy Research Institute, sixty-five percent of African relies on agriculture as a primary source of livelihood, where small-scale famers are responsible for ninety percent of agricultural production (IFPRI, 2009). Across the African continent, there has been a renewed commitment from governments, non-governmental organizations and the private sector to move agriculture from a development challenge to a business opportunity. As a result, countries such as Nigeria are moving to once again become a net exporter rather than importer of agricultural commodities (Robin, 2011). However, despite these developments, many smallholder farmers, who form the backbone of Africa’s agriculture sector, remain trapped in poverty (Robin, 2011). Indeed, African spending on agriculture represented 6 to 7 per cent of the total national budget for 1980-05, while in Asia the corresponding number was 6-15 per cent (IFPRI, 2009). The objective of this research is to determine the manner in which government assistance to African farmers varies taking into account factors such as rural population share, real GDP per capita, arable land share etc. The data for this research will be based on a new World Bank dataset of indicators of distortions to domestic price of agriculture and non-agriculture commodities drawn from a sample of 40 countries of which 20 are from Sub-Saharan Africa, 12 from Asian developing and 8 from Latin American developing countries. Those indicators compiled by Anderson and Valenzuela (2008) contain the nominal rates of assistance to agricultural tradables relative to non-agricultural tradables and the nominal rates of assistance to agricultural importables and agricultural exportables (Bates and Block, 2009). In addition, another indicator “cash-food bias index” shows how producers of cash crops are treated relative to producers of food crops will also be incorporated. We will examine how factors such as rural population share, real GDP per capita, arable land share, natural resource endowment, and geographical location affect the assistance farmers receive from government. We are hypothesizing that rural population share will have a negative impact on the level of assistance farmers receive. Indeed, Bates and Block (2009) argue that government policies toward agriculture will tend to be detrimental to farmers the greater “the rural dwellers share of population” depending upon the nature of the party system. When taking into account geographical location, we argue that farmers living in coastal countries will experience less support from government compared to those living in landlocked countries. In fact, Ndulu et al. (2007) conclude that landlocked countries are more likely to show least bias against agriculture trade than coastal states which tend to display the greatest bias. The evidence of natural resource endowment on government agricultural policies has been mixed. Bourguignon and Verdier (2000) suggest that governments of resource rich countries will tend to exhibit less support for agriculture since the existence of natural resources may prevent redistribution of political power towards the middle classes and thus prevent adoption of growth-promoting policies; and Isham et al (2003) to add that resource wealth worsens quality of institution because it allows governments to avoid accountability and resist modernization. However, Bates and Block (2009) contend that governments of resource rich countries have a tendency to enact policies that favor producers of both food and cash crops. They argue that Governments of resource rich countries specifically in Africa have tended to protect food crops, raising the level of domestic prices above those prevailing in world markets, while taxing cash crops (Bates and Block, 2009). When using arable land share as a proxy for the overall importance of agriculture, Bates and Block (2009) find that it is positively related to policy orientation of governments towards agriculture. This study takes a new approach by providing a cross-regional analysis of government level of assistance to farmers in Asian and Latin American developing countries, which will enable us to compare government support for agriculture in the three regions while focusing primarily on Africa. For this purpose three regressions will be used for each region. In the first regression government level of assistance to farmers will be measured by the relative rate of assistance which captures the relative support given to agriculture versus non-agricultural tradables, and it is found as follows: (Anderson et al. 2008, Bates and Block 2009) RRA=(1+〖NRA〗_(〖ag〗^t ))/(1+〖NRA〗_(〖nonag〗^t ) )-1, where 〖NRA〗_(〖ag〗^t ) is the nominal rate of assistance to agricultural tradables, and 〖NRA〗_(〖nonag〗^t ) is the nominal rate of assistance to non-agricultural tradables. The second regression will have the trade bias index as a measure of government level of assistance to farmers, it determines the relative assistance of government to exportables versus importable. It is found as follows: (Anderson et al. 2008, Bates and Block 2009) TBI=(1+〖NRAag〗_x)/(1+〖NRAag〗_m )-1, where 〖NRAag〗_x is the nominal rate of assistance to agricultural exportables and 〖NRAag〗_m is the nominal rate of assistance to agricultural importable. The third regression seeks to determine whether producers of cash crops compared to producers of food crops benefit the most from government policies. We use the “cash-food bias index as a measure of government level of assistance to farmers. It can be found as follows: (Anderson et al. 2008, Bates and Block 2009) CFBI=(1+NRAcashcrops)/(1+NRAfoodcrops)-1, where NRAcashcrops refers to the nominal rate of assistance to cash crops and NRAfoodcrops is the nominal rate of assistance to food crops. Our generic model is: y_it=α+δ_1 Resource rich+δ_2 Landlocked +δ_3 Rural population share+δ_4 (Resource rich*Rural population share)_it+X_it β+U_i+ε_it , where y_it is our dependent variable depicting government level of assistance to farmers for country i in year t through the policy indicators defined above, Resource rich is a dummy variable for resource rich-countries, Landlocked is a dummy variable for landlocked contries, Rural population share is the share of a country’s population living in rural areas, X stands for the control variables such as real GDP per capita, arable land share in country i in year t, V_i the random disturbance that captures unobserved time invariant country-specific effects, and ε_it is the error term associated with country i in year t.The parameters of our models will be estimated using the fixed effects and random effects models following Greene (2010). The fixed effect is specified as: y_it=X_it^' β+α_i+ε_it , where α_i=Z_i^' α, embodies all the observable effects and specifies an estimable conditional mean. It implies that Z_i is unobserved, but correlated withX_it. The random effects model is specified as: y_it=X_it^' β+α+U_i+ε_it , where U_i is a group-specific random element, similar to ε_it except that for each group, there is but a single draw that enters the regression identically in each period. Then, following Hausman (1978) we will perform the Hausman’s specification test. Using these outcomes as the background of their decision making process policy makers in developing countries particularly in Africa may advocate for a transformation of the agriculture sector with an emphasis on improving farmers’ wellbeing. If for instance, it is provided that farmers are worse off in regions with a high rate of rural population share, policy makers may consider taking actions that encourage farm modernization or the use of productive inputs in agriculture. References Anderson, K., and E. Valenzuela (2008), Estimates of Distortions to Agricultural Incentives, 1955 to 2007, core database at Anderson, K., M. Kurzweil, W. Martin, D. Sandri and E. Valenzuela (2008), “Measuring Distortions to Agricultural Incentives, Revisited”, World Trade Review 7(4):1-30. Bates, R., S. Block (2010), “Political Institutions and Agricultural Trade Interventions in Africa”, American Journal of Agricultural Economics 93, 317-323. Bourguignon, F., and T. Verdier (2000a), “Oligarchy, Democracy, Inequality, and Growth”, Journal of Development Economics 62: 285-313. Diao, X., P. Hazell, D. Resnick, and J. Thurlow (2007), “The Role of Agriculture in Development: Implications for Sub-Saharan Africa”, Research Report 153, Washington DC: IFPRI. Greene, W.H. (2012), Econometric Analysis, Upper Saddle River, NJ: Prentice Hall, seventh edition, 2012. Hausman, J.A. (1978), “Specification Tests in Econometrics”, Econometrica 46(6):1251-1271. International Food Policy Research Institute (2009), Media briefing on GM Crops for African Farmers, May 19, 2019, Washington DC: IFPRI. Retrieved from lopment Isham, J., L. Pritchett, M. Woolock, and G. Bushy (2003), “The Varieties of the Resource Experience: How Natural Resource Export Structures Affect the Political Economy of Economic Growth”, World Bank, Washington DC. Ndulu, B., P. Collier, R. Bates and S. O’Connell (2007), The Political Economy of Economic Growth in Africa, 1960-2000, 2 volumes, Cambridge: Cambridge University Press. Robin, J. (2011), “Bringing Finance and Innovation to Advance a Green Revolution in Africa”, This is Africa published by the Financial Times Limited, London, United Kingdom. World Bank (2007), World Development Indicators 2007, Washington DC: World Bank.
    Keywords: Agricultural and Food Policy, International Development,
    Date: 2015–06–26
  4. By: Tisdell, Clem; Svizzero, Serge
    Abstract: Presents a simple economic theory explaining how some agriculturally based preindustrial societies (for example, in the Neolithic period) developed despite most of their population being subject to Malthusian dynamics. Their development depended on a dominant class (limited in size) extracting the economic surplus which could be used (among other things) to accumulate capital and advance knowledge and thereby, add to this surplus. Cities facilitated this process. Extraction of the surplus prevented increased population from dissipating it and curtailing development. Several early extractive and non-inclusive societies were long lasting. This is at odds with the theories of some contemporary development economists.
    Keywords: Institutional economics, Malthusian trap, Neolithic development, population dynamics, social inequality and development, Research and Development/Tech Change/Emerging Technologies, O1, P4, N00,
    Date: 2015–01–29
  5. By: Alexander Klein; Nicholas Crafts
    Abstract: WWe investigate the role of industrial structure in labor productivity growth in U.S. cities between 1880 and 1930 using a new dataset constructed from the Census of Manufactures. We find that increases in specialization were associated with faster productivity growth but that diversity only had positive effects on productivity performance in large cities. We interpret our results as providing strong support for the importance of Marshallian externalities. Industrial specialization increased considerably in U.S. cities in the early 20th century, probably as a result of improved transportation, and we estimate that this resulted in significant gains in labor productivity.
    Keywords: agglomeration economies; Jacobian externalities; manufacturing productivity; Marshallian externalities; industrial structure
    JEL: N91 N92 R32
    Date: 2015–06
  6. By: Owolabi-Merus, Olasunkanmi
    Abstract: This study investigates the impact that Foreign Direct Investment (FDI) has on economic growth in Nigeria through the use of annual secondary data from 1981 to 2013 collected from the World Bank’s Africa Development Indicators. The econometric methodologies used in this research are Ordinary Least Squares (OLS), ADF unit root and the Granger Causality tests. The OLS results shows that FDI positively contributes to economic growth in Nigeria, but not statistically significant at the 5% level of significance. However, Gross Fixed Capital Formation (GFCF) is found to have a positive and statistically significant contribution to Nigeria’s economic growth. The unit root test shows that the variables are stationary and the Granger Causality test connotes a unidirectionary causation running from FDI to GDP but not vice-versa. But no mutual correlation is found between GFCF and GDP. This study recommends that policymakers in Nigeria should focus on instigating strategies geared towards increasing capital formation (GFCF) in order to present an attractive platform that will stimulate and encourage FDI inflow which will in whole, facilitate the increase and sustenance of economic growth in the country.
    Keywords: Economic Growth, FDI inflows, GDP, Gross Fixed Capital Formation, Nigeria.
    JEL: E0 E2 E22
    Date: 2015–01
  7. By: Roberto Fattal Jaef (The World Bank); Francisco Buera (Federal Reserve Bank of Chicago)
    Abstract: Development dynamics are characterized by sustained improvements in TFP, protracted increases in investment rates, and a broad transformation in the struc- ture of production. Low income countries are characterized by small average firm size, slow firm growth over the life-cycle, and significant dispersion of marginal products. In this paper we present a quantitative theory that jointly matches the behavior of firms in under-developed economies and key properties of develop- ment paths. We work with a model that features endogenous innovation decisions by entrepreneurs, reallocation of factors due to idiosyncratic productivity shocks, and selection in and out of entrepreneurship. We construct a low-TFP stationary equilibrium with dispersion in marginal products that is driven by idiosyncratic distortions. We then trigger development through a reform that liberalizes the economy from all frictions. Our quantitative theory can account well for cross- sectional and life-cycle patterns in distorted economies, and can generate develop- ment paths with rising TFP and investment dynamics, consistent with the data. Ignoring either endogenous innovation or selection in and out of entrepreneurship would lead to counter-factual transition paths, similar to those of the standard neoclassical growth model.
    Date: 2015
  8. By: Uddin, Md. Akhter; Masih, Mansur
    Abstract: In a growing body of literature, importance of financial sector development and growth on human development has been emphasized but so far little empirical evidence to support this. Islam is a progrowth religion but the concept of development in Islam is multidimensional, understanding the relationship between finance, growth and human development would help us better explain and develop a sustainable pro-Islamic economic growth model, which would help eradicate mass poverty, income inequality and develop human capital in the Muslim world. This study aims to investigate how finance and growth affect human development in Malaysia from Islamic economic development perspective by using standard time series technique, ARDL. The study finds that there is a long term relationship between finance, growth and human development. Human development is found significantly correlated with the growth in the long run. It can be argued that financial development supports growth and growth ultimately promotes human development in the long run, also, macroeconomic stability is found significant for sustainable economic growth in Malaysia. However, oil price is found not correlated with growth in the long run for the Malaysian economy.
    Keywords: economic growth, financial development, human development, ARDL
    JEL: C22 C58 E44
    Date: 2015–06–25
  9. By: Ismail, Mohamed Ayaz Mohamed; Masih, Mansur
    Abstract: Indonesia has been rapidly showing signs of advanced economic development. The country’s central bank is of the view that with the unbanked accounting for more than half of the population, the potential for growth in the world’s biggest Muslim population is immense. This article makes an attempt to test the possible directions of causality between financial development and economic growth, with Indonesia as a case study. It also discusses the results in the context of the development of Islamic finance in Indonesia. The study is conducted by applying the Autoregressive Distributed Lag model (ARDL) analysis (also known as the Bounds testing procedure) proposed by Pesaran et al. (2001). This article is believed to be one of the first to extend the finance-growth nexus discussion to include the development of Islamic finance. The study finds a unique cointegrating relationship among GDP per capita, gross fixed capital formation, annual population growth rate, and domestic credit to private sector. These findings have clear policy implications in that a policy of development and growth of the financial sector will help enhance economic growth, and will provide the necessary base from which Indonesia can significantly enhance its Islamic finance industry.
    Keywords: Financial Development, Economic Growth, Islamic Finance, ARDL Approach, Indonesia
    JEL: C22 C58 E44
    Date: 2015–07–18
  10. By: Alimi, R. Santos
    Abstract: The relationship between financial development and economic growth has been a key study in economics field for a long time. This paper examines the link between financial development and economic growth in 7 Sub-Saharan African countries - Nigeria, South Africa, Lesotho, Malawi, Sierra Leone, Botswana and Kenya, over the period of 1981-2013. The study applied both static and dynamic panel data approach, to investigate the relation between financial development and economic growth. The results show that financial development has not led to economic growth in the panel of the selected countries when domestic credit provided by the banking sector is used as a proxy for financial development. The results thus lend support for the independent hypothesis postulates that financial development and economic growth are causally independent. Our study also considered foreign direct investment and interest rate as determinant of growth, but only interest rate suggested positive effect on economic growth. The implication of the results is that there is ardent need to develop the financial sector in order to stimulate real growth in the economies of these countries. Development of microfinance institutions as a complement to the conventional commercial banks will play a great role mobilising savings and providing ease access to fund, thus engendering growth process in the Sub-Saharan Africa.
    Keywords: Economic Growth; Financial Development; Generalized Method of Moments; Panel Data.
    JEL: G2 G21 O47
    Date: 2015–07
  11. By: Khan, Farid; Salim, Ruhul
    Abstract: This study investigates the nexus between research and development expenditure and productivity growth in Australian broadacre agriculture using country-level time-series data for the period 1953 to 2009. Using standard time-series econometrics data are analysed to examine the dynamic relationships between research and development expenditure (R&D) and total factor productivity (TFP) growth. Findings here provide econometric evidence of a co-integrating relationship between R&D and productivity growth, and a unidirectional causality emergent from R&D to TFP growth. Moreover, employing variance decomposition and impulse response function the dynamic properties of the model are explored beyond the sample periods. Findings suggest that R&D can be readily linked to the variation in productivity growth beyond the sample periods. Further, forecasting result suggests a significant out-of-sample relationship exists between the public R&D and productivity in broadacre agriculture. We used a novel method MIRR which is conceptually superior than the conventional IRR to obtain a credible estimate of returns on public research investment. We found MIRR of 10.06% per year for the reinvestment rate of 3% per year. Therefore, results establishing long run relationship between productivity and R&D in Australian agriculture shed light on the future policies in R&D investments in Australia.
    Keywords: Public Research & Development (R&D), Productivity, Australian Broadacre Agriculture, Cointegration, Internal Rates of Return, Productivity Analysis, Research and Development/Tech Change/Emerging Technologies,
    Date: 2015–02

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