Institutional arrangements and public debt threshold limits

Inter-governmental Organisations, such as the IMF and OECD, advocate a medium-term reduction in deficit spending and public debt accumulation among advanced economies to satisfy conditions of fiscal sustainability. Buttressing the need for fiscal austerity, Reinhart and Rogoff claim to have identified a so-called tipping point, beyond which public debt accumulation negatively affects economic growth. While recent data seem to indicate that some Eurozone (non-sovereign) economies have reached a tipping point, for other advanced (sovereign) economies, such as the US, UK and Japan, this is not clear. The mainstream tipping point literature however does not recognise the importance of institutional arrangements for the conduct of fiscal and monetary policy. Furthermore, the literature sheds little light on the transmission mechanism between high public debt and low economic growth. This article draws on the principles of Modern Monetary Theory to discuss institutional arrangements and to justify the theoretical and empirical focus on Eurozone economies. The empirical analysis unpacks the transmission mechanism(s) to reveal that Eurozone economies have reached a public debt threshold limit with respect to long-term interest rates.     

Predicting US county economic resilience from industry input-output accounts

Resilience is defined as a system’s ability to initially resist and then recover from a shock. Here we apply this concept to examine the performance of U.S. counties during the Great Recession. The response of local economies to manmade and natural shocks is hypothesized to depend on the centrality of local industries within the economy, or how well connected they are to the other industries. We first calculate a centrality value for each industry using the national Input-Output accounts. We then ‘step down’ these values to the county level using industry employment data. We then test empirically whether local economies containing more centralized industries were more resilient, using a resilience measure that compares the local employment rebound and decline during the Great Recession. Our results suggest that measures of economic centrality adopted from the study of complex networks provide new insights when applied to the fields of regional science and spatial analysis, and economic growth more generally.     

Divisia monetary aggregates and US GDP nowcasting

ABSTRACT

This article nowcasts US quarterly real GDP growth rate with dynamic factor model (DFM) using Divisia Monetary Aggregate Index, Divisia M1, M2, M3, and exploits information from a large, unbalanced panel data. GDP nowcasting is evaluating the current quarter GDP given the available economic data up to the point when the nowcasting is conducted. GDP data is published quarterly with a substantial lag, while many monetary and financial decisions are made at a higher frequency. Therefore, nowcasting GDP has become an increasingly important task for central banks. This article uses DFM to nowcast GDP, compares the nowcasting results from DFM with the simple sum monetary aggregate M1, M2, M3, to the Model with weighted corresponding Divisia Index, then calculates the contributions of the Divisia Monetary index to US GDP nowcasting.     

Do city–county mergers in China promote local economic development?

Municipal mergers have become a worldwide phenomenon in the past few decades, primarily advanced to exploit economies of scale. While most evaluations of municipal mergers have focused on the efficiency of local public goods provision, it is rare in the literature to explore how such mergers promote economic growth in a developing country context. This research investigates the economic consequences of a policy experiment of city–county mergers (che xian she qu) in China during the period 2000–2004. Using comprehensive datasets at city, county and firm levels, we present evidence that the merger significantly increases local economic development, and the magnitude of the effect depends on local endowments related to agglomeration forces. The results are robust to a number of different model specifications. We further verify that improved transport infrastructure and urban agglomeration economies after merger are potential contributors to the positive merger effects.     

Frontiers and sustainable economic development

Exploiting new resource “frontiers,” such as agricultural land and mineral reserves, is a fundamental feature of economic development in poor economies. Yet frontier-based development is symptomatic of a pattern of economy-wide resource exploitation in developing economies that: (a) generates little additional economic rents, and (b) what rents are generated are not being reinvested in other sectors. Such development is inherently unsustainable. The following paper explains this phenomenon, and provides evidence that long-run expansion of agricultural land and oil and natural gas proved reserves across poor economies is associated with lower levels of real income per capita. The paper proposes a frontier expansion hypothesis to explain why the structural economic dependence of these economies on frontier land expansion and resource exploitation is not conducive to sustained long-run growth. The key to sustainable economic development in poor economies will be improving the economic integration between frontier and other sectors of the economy, targeting policies to improved resource management in frontier areas and overcoming problems of corruption and rent-seeking in resource sectors.      

Expansive agendas and weak instruments: governance related conditionalities of international financial institutions

China’s more than ten thousand economic zones, while similar in some respects to those found elsewhere, exhibit various unique features. In most developing economies, zones are the responsibility of the central administration and are designed to promote exports or foreign investment. In contrast, the Chinese zones are built and run by local governments and need not involve foreign investment or exports. We argue that the Chinese zone policy is best understood as part of a drive for economic reform, and that its unique features serve to defuse potential resistance from local cadres, whose interests are not served by reform.     

From goulash communism to goulash populism: the unwanted legacy of Hungarian reform socialism

The systemic change of 1989/1990 is usually identified as the critical juncture in the modern economic history of post-communist economies. While the change itself was indeed a remarkable moment in time, a branching point from which a multitude of new paths originated in most of the countries in Central and Eastern Europe, this was only partially true in the case of Hungary. If a critical juncture is sought for Hungary, it is more likely to be 1968, the year the New Economic Mechanism was launched. By applying the conceptual framework of historical institutionalism, the article argues that what made Hungary unique during the communist era and what rendered its position as a (one-time) frontrunner proved to be a serious constraint after the systemic change. The legacy of a pre-born welfare state, the constant need for compensating potential losers of any economic reform, along with short-sighted decision-making, have together generated specific path dependencies in the Hungarian trajectory of economic development.     

Explaining local manufacturing growth in Chile: the advantages of sectoral diversity

This article investigates whether the agglomeration of economic activity in regional clusters affects long-run manufacturing Total Factor Productivity (TFP) growth in an emerging market context. We explore a large firm-level panel dataset for Chile during a period characterized by high growth rates and rising regional income inequality (1992–2004). Our findings are clear-cut. Locations with greater concentration of a particular sector have not experienced faster TFP growth during this period. Rather, local sector diversity was associated with higher long-run TFP growth. However, there is no evidence that the diversity effect was driven by the local interaction with a set of suppliers and/or clients. We interpret this as evidence that agglomeration economies are driven by other factors such as the sharing of access to specialized inputs not provided solely by a single sector, e.g. skills or financing.     

Monopoly capital and capitalist inefficiency

This paper examines the arguments and assertions of Baran’s and Sweezy’s Monopoly Capital: An Essay on the American Economic and Social Order (1966) by assessing the degree of economic efficiency or inefficiency in how surplus value and economic surplus were created by 16 major capitalist economies during the 2000s using data envelopment analysis (DEA). After assigning a score to the degree of economic efficiency/inefficiency for each country, one can then assess which factors influence the degree of efficiency/inefficiency. This paper finds empirical support for many of the arguments put forth by the authors, Baran and Sweezy, as well as others regarding the inefficiency of the use of some forms of economic activity to help absorb economic surplus and to create surplus value.     

COMPETITION OR COOPERATION IN URBAN SERVICE DELIVERY?

ABSTRACT: Inter‐municipal cooperation is now as common among US local governments as for profit privatization. This article uses data from a national survey in 2007 to explore the benefits of cooperation – economies of scale, service coordination across the metropolitan region and greater community control. While privatization reforms have focused on harnessing the benefits of a competitive market, cooperation may be the new frontier where economies of scale and efficiency gains can be achieved with governments working together in a new form of collaborative service delivery.     

THE SIZE OF FISCAL MULTIPLIERS AND THE STANCE OF MONETARY POLICY IN DEVELOPING ECONOMIES

Implementing fiscal programs during monetary policy expansions seems to improve significantly their economic stimulus. We find this result by estimating the effect of government consumption shocks on gross domestic product (GDP) using a panel of 23 developing economies. Our goal is to better understand the reasons for the low fiscal multipliers found in the literature by performing estimations for alternative exchange rate regimes, business‐cycle phases, and monetary policy stances. In addition, we perform counterfactual simulations to analyze the possible gains from fiscal‐monetary policy coordination. Our results also show lower multipliers in developing economies with flexible regimes, especially during economic slowdowns. (JEL E62, E63, F32)     

ECONOMIES OF SCALE AND SCOPE: THE CASE OF SPECIALTY HOSPITALS

The recent growth of physician‐owned hospitals specializing in orthopedic and surgical specialty services in the United States has generated considerable controversy, yet there is little understanding of the economic logic of organizing hospital services around these single specialties. This article takes a multiple output hospital cost function approach to an empirical investigation of whether single specialty hospitals (SSHs) exhibit economies of scale and economies of scope as keys to new insights into that logic. We applied generalized estimating equation techniques to a sample of 80 SSHs and 883 general hospital competitors over the 1998–2008 period. Results indicated large underlying scale differences across the organizational types. Simulation analysis revealed the potential for exploitation of economies of scope gained from shifting output from SSHs to general hospitals. (JEL I18, L23)     

Basel III and perceived resilience of banks in the BRICS economies

This study investigates how the additional capital and liquidity requirements of Basel III would increase the resilience of banks. In particular, using panel data from 2007 to 2014, we examine the resilience of banks in the BRICS economies. Our results suggest that a 10% increase in capital adequacy ratio (CAR), Tier 1 capital ratio (TRA), and leverage ratio (LEV), the resilience (as measured by Z-Score of banks) increases by about 2.18, 0.89 and 1.31%, respectively. Similarly, for a 100% increase in liquidity coverage ratio (LCR), the resilience of banks increases by 0.51%, 1.10% and 1.19%, respectively, in the models associated with CAR, TRA, and LEV. Hence, our findings suggest that the CAR is robust to increase the resilience of banks. Our study also reveals that the LCR and LEV are the most effective to increase the resilience of banks if implemented simultaneously. We also find that the stage of economic development does not matter in formulating policies for the BRICS economies, and finally, we provide empirical evidence that economy-wide risk, such as a financial crisis, does not affect the resilience of banks and it influences the resilience of banks in the BRICS economies in the same way before and after the crisis.     

Local monopsony and free riders

In an industry with upstream economies of scale in the distribution of differentiated products to retailers which have monopoly power within separate local market areas, the retailers have an incentive to exert monopsony power due to the divergence between average and marginal costs in the distribution of those inputs. The retailers increase their ability to exert monopsony power by forming coalitions (that is, chains) across local markets. Sufficiently large retail chains may force input price below the seller's average cost, thus ‘free riding’ on the level of product variety supported by other retailers. Vertical integration, cartels, or other cooperative behavior, however, can be means to control the level of product variety, and may increase both industry profits and economic welfare. Policy applications to the cable television, motion picture, and pharmaceutical industries are discussed.     

Capital markets and capital allocation: Implications for economies in transition*

Recent work showing that a sounder financial system is associated with faster economic growth has important implications for transition economies. Stock prices in developed economies move in highly firm‐specific ways that convey information about changes in firms’ marginal value of investment. This information facilitates the rapid flow of capital to its highest value uses. In contrast, stock prices in low‐income countries tend to move up and down en masse, and thus are of scant use for microeconomic capital allocation. Some transition economy markets are coming to resemble those of developed economies, others those of low‐income countries. Stock return asynchronicity is highly correlated with the strength of private property rights in general and public shareholders’ rights in particular. Other recent work suggests that small entrenched elites in low‐income countries preserve their sweeping control over the corporate sectors of their economies by using political influence to undermine the financial system and deprive entrants of capital. The lack of cross‐sectional independence in some transition economies’ stock returns may be a warning of such economic entrenchment. Sound property rights, solid shareholder rights, stock market transparency, and capital account openness appear to check this, and thus contribute to efficient capital allocation and economic growth.     

Analysing Potential Effects of Preferential Liberalisation in Some Asian Emerging Economies

This paper examines the ex-ante effects of possible trade liberalisation of some Asian emerging economies through forming a regional economic bloc called BIMSTEC by adopting SMART and GTAP models. Based on estimated export supply elasticity, the results of SMART simulation reveal that the highest net trade effect takes place for India, the biggest economy in the bloc, followed by Bangladesh for tariff elimination. The two countries also derive substantial welfare gains. The proportionate revenue loss is remarkably higher for smaller countries such as Nepal, Myanmar and Bangladesh. GTAP simulation suggests that Bangladesh incurs a net welfare loss by joining the FTA. The overall intra-bloc export is likely to increase. These results imply that there is a need for designing proper compensation mechanism and technical support for the smaller economies to offset the possible adverse effects.     

From economic stagnation to systemic fragility?

Advanced economies are in a rut of slow growth. Growth in emerging economies has also slowed. Explanations are meager and policies have not worked or have made problems worse. The Trump administration of hard-line billionaires will likely exacerbate problems. Jack Rasmus’s book Systemic Fragility in the Global Economy offers a penetrating analysis of economic stagnation in advanced economies by providing a sustained and systemic focus on the role of finance, an analysis that probes further than mainstream economic analysis. Rasmus has made a signal contribution to contemporary economics and provided a vitally important X-ray of the political economy of stagnation.     

The Role of Natural Resources in Economic Development

Economists now recognize that, along with physical and human capital, environmental resources should be viewed as important economic assets, which can be called natural capital. Three recent debates have emerged over the role of natural capital in economic development. First, as many ecological services are unique, does the environment have an “essential” role in sustaining human welfare, and if so, are special “compensation rules” required to ensure that future welfare is not worsened by natural capital depletion today? Second, the environmental Kuznets curve (EKC) hypothesis has fostered empirical estimations of an “inverted U” shaped relationship between a variety of indicators of environmental pollution or resource depletion and the level of per capita income. Does the existence of such EKC relationships suggest that environmental degradation will eventually decline with growth? Finally, recent economic theories and empirical evidence have questioned whether lower income economies that are endowed with abundant natural resources develop more rapidly than economies that are relatively resource poor. Is it possible that resource abundant economies are not reinvesting the rents generated from natural resource exploitation into productive assets, or that resource booms actually divert economic resources from more productive and innovative sectors?     

Money Talks: Moral Economies of Earning a Living in Neoliberal East Africa

Neoliberal restructuring has targeted not just the economy, but also polity, society and culture, in the name of creating capitalist market societies. The societal repercussions of neoliberal policy and reform in terms of moral economy remain understudied. This article seeks to address this gap by analysing moral economy characteristics and dynamics in neoliberalised communities, as perceived by traders in Uganda and sex workers in Kenya. The interview data reveal perceived drivers that contributed to a significant moral dominance of money, self-interest, short-termism, opportunism and pragmatism. Equally notable are a perceived (i) close interaction between political–economic and moral–economic dynamics, and (ii) significant impact of the political–economic structure on moral agency. Respondents primarily referred to material factors usually closely linked to neoliberal reform, as key drivers of local moral economies. We thus speak of a neoliberalisation of moral economies, itself part of the wider process of embedding and locking-in market society structures in the two countries. An improved political economy of moral economy can help keep track of this phenomenon.     

Optimal versus adequate level of international reserves: evidence for Turkey

The determination of international reserve balance for emerging economies is part of the efforts to strengthen the immunity of these economies to crises. However, there is still evidence on crises even for the countries with large foreign reserves. It has usually been experienced that the countries with greatest need for reserves economize more than others on their holdings since they might underestimate the cost of crisis. In this study, the official international reserves of Turkey are tested against optimality and adequacy. During 1988–2002, the actual reserves fell short of both the optimal and the adequate levels. They are only optimal when the expected cumulative contraction is about 5.2% of real GDP under crisis. However, early evidence from emerging economies and Turkey show that crises hit more heavily. Hence, it is found that the current financial structure in Turkey such as the absence of capital controls and a highly dollarized banking system necessitates more foreign reserves for preventing any future economic and/or financial shocks.