New Economics Papers
on Central and South America
Issue of 2008‒11‒11
four papers chosen by

  1. Financial Development and the Distribution of Income in Latin America and the Caribbean By Canavire Bacarreza, Gustavo Javier; Rioja, Felix
  2. The War on Illegal Drug Production and Trafficking: An Economic Evaluation of Plan Colombia. By Daniel Mejía; Pascual Restrepo
  3. Public Investment in Developing Countries: A Blessing or a Curse? By Eduardo A. Cavallo; Christian Daude
  4. The Experimental Approach to Development Economics By Abhijit V. Banerjee; Esther Duflo

  1. By: Canavire Bacarreza, Gustavo Javier (Georgia State University); Rioja, Felix (Georgia State University)
    Abstract: One of the central concerns in Latin America and the Caribbean (LAC) has been the reduction of poverty and inequality so prevalent in the continent. Using large world samples, the literature has found that financial development increases economic growth, increases the income of the poor, and reduces inequality. This paper studies the effects of financial development on the whole distribution of income in LAC. We find that the income of the poorest quintile has not been affected by expansion in the financial system. However, we do find that financial development has had a disproportionate positive effect on the incomes of the second, third and fourth quintiles. We also find some evidence for the Greenwood-Jovanovic (1991) hypothesis that this positive effect only begins after a country crosses a certain economic development threshold.
    Keywords: distribution of income, financial development, inequality
    JEL: O11 O16 G00
    Date: 2008–10
  2. By: Daniel Mejía; Pascual Restrepo
    Abstract: This paper provides a thorough economic evaluation of the anti-drug policies implemented in Colombia between 2000 and 2006 under the so-called Plan Colombia. The paper develops a game theory model of the war against illegal drugs in producer countries. We explicitly model illegal drug markets, which allows us to account for the feedback effects between policies and market outcomes that are potentially important when evaluating large scale policy interventions such as Plan Colombia. We use available data for the war on cocaine production and trafficking as well as outcomes from the cocaine markets to calibrate the parameters of the model. Using the results from the calibration we estimate important measures of the costs, effectiveness, and efficiency of the war on drugs in Colombia. Finally we carry out simulations in order to assess the impact of increases in the U.S. budget allocated to Plan Colombia, and find that a three-fold increase in the U.S. budget allocated to the war on drugs in Colombia would decrease the amount of cocaine that succesfully reaches consumer countries by about 17%.
    Date: 2008–10–02
  3. By: Eduardo A. Cavallo; Christian Daude
    Abstract: This paper analyzes the impact of public investment on private investment in panel of 116 developing countries between 1980 and 2006 using dynamic panel data techniques, finding a strong and robust crowding-out effect that seems to be the norm rather than the exception, both across regions and over time. It is also found that this effect is dampened (or even reversed) in countries with better institutions and that are more open to international trade and financial flows. These results are consistent with the hypothesis that, while public infrastructure may be complementary to private capital in the aggregate production function, there are distortions associated with the public investment process that might render a crowding out of private investment in the course of building public capital stocks. These distortions, in turn, are more prevalent in countries with worse institutions or that lack trade and financial openness.
    Date: 2008–10
  4. By: Abhijit V. Banerjee; Esther Duflo
    Abstract: Randomized experiments have become a popular tool in development economics research, and have been the subject of a number of criticisms. This paper reviews the recent literature, and discusses the strengths and limitations of this approach in theory and in practice. We argue that the main virtue of randomized experiments is that, due to the close collaboration between researchers and implementers, they allow the estimation of parameters that it would not otherwise be possible to evaluate. We discuss the concerns that have been raised regarding experiments, and generally conclude that while they are real, they are often not specific to experiments. We conclude by discussing the relationship between theory and experiments.
    JEL: O1
    Date: 2008–11

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.