Macroeconomic consequences of increased productivity in less developed economies

This paper examines the impact of improvements in productivity on prices, output, the real wage rate and the balance of payments. Within the context of the model used in this paper, an improvement in productivity can take two alternative forms: (1) a cost saving for a given output and (2) an increase in production without a direct decrease in employment. The results presented are based on a simple model of a small open economy that includes some key features of less developed economies. It is shown that, in the presence of monetary and fiscal restraints, an improvement in productivity leads to increases in output, employment and the real wage and the effect on the balance of payments, in the short and the medium runs, is also positive. We find that whether or not improvement in productivity is import saving plays a crucial role in both comparative static and simulation exercises.     

Aid, Dutch disease, and manufacturing growth

We examine the effects of aid on the growth of manufacturing, using a methodology that exploits the variation within countries and across manufacturing sectors, and corrects for possible reverse causality. We find that aid inflows have systematic adverse effects on a country's competitiveness, as reflected in the lower relative growth rate of exportable industries. We provide some evidence suggesting that the channel for these effects is the real exchange rate appreciation caused by aid inflows. We conjecture that this may explain, in part, why it is hard to find robust evidence that foreign aid helps countries grow.     

Government spending and growth in second-best economies

This paper extends public spending-based growth theory along three directions: we assume a logistic trajectory for the ratio of government expenditure to aggregate income, self-limiting population change, and exogenous technological progress. By focusing on the choices of a benevolent social planner we find that, if the inverse of the intertemporal elasticity of substitution in consumption is sufficiently high, the ratio of consumption to private physical capital converges towards zero when time goes to infinity. Depending on the form of the underlying aggregate production function and on whether, for given production function, technological progress equals zero or a positive constant, our model may or may not yield an asymptotically balanced growth path (ABGP) equilibrium. When there is no exogenous technological progress, an equilibrium where population size, the ratio of government spending to aggregate income and the ratio of consumption to private physical capital are all constant does exist and the equilibrium is a saddle point. In case of positive technological progress numerical simulations show that the model still exhibits an ABGP equilibrium.     

Growth, welfare and transitional dynamics in an endogenously growing economy with abatement labor

This paper sets up a simple endogenous growth model that highlights the importance of the endogenous labor-leisure choice and the allocation between production labor and abatement labor. We show that, in contrast to the common notion (e.g. [Bovenberg, A.L., Smulders, S., 1996. Transitional impacts of environmental policy in an endogenous growth model. International Economic Review 37, 861–893] and [Bovenberg, A.L., de Mooij, R.A., 1997. Environmental tax reform and endogenous growth. Journal of Public Economics 63, 207–237]), the existence of an environmental production externality is a sufficient (but not necessary) condition for environmental policies to stimulate economic growth if the labor-leisure choice is endogenously determined. In particular, since there are complementarities between public abatement and private abatement, the public abatement expenditure will have a more powerful enhancing effect on economic growth when it is accompanied by more efficient private abatement. This result also leads to a corollary to the effect that it is easier to achieve double dividends in terms of enhancing both growth and welfare if the endogenous labor-leisure choice is taken into account.In our dynamic analysis, we show that if public abatement is substantially large, dynamic indeterminacy may occur despite the absence of a positive labor externality and interestingly, this is more likely to be the case when abatement labor plays a more significant role. Besides, the transitional effects of an increase in public abatement are also investigated.     

Terms of trade volatility,government spending cyclicality,and economic growth

This paper presents estimates of the effects that terms of trade volatility has on real gross domestic product (GDP) per capita growth. Based on 5‐year nonoverlapping panel data comprising 175 countries during 1980 to 2010, the paper finds that terms of trade volatility has significant negative effects on economic growth in countries with procyclical government spending. In countries where government spending is countercyclical, terms of trade volatility has no significant effect on growth. Conditional on the mediating role of government spending cyclicality, the GDP share of domestic credit to the private sector has no significant effect on the relationship between growth and terms of trade volatility.     

Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth

This study examines the effects of foreign direct investment (FDI) and equity foreign portfolio investment (EFPI) on economic growth using data on 80 countries from 1979 through 1998. The results largely suggest that lagged FDI and EFPI do not have direct, unmitigated positive effects on growth, but some data are consistent with the view that the effects of FDI and EFPI are contingent on the ‘absorptive capacity’ of host countries, with particular respect to financial or institutional development. Moreover, extreme bound analysis (EBA) of significant results indicates that the estimates are robust compared to other empirical studies on growth.     

Heterogeneous ideas production and endogenous growth: an empirical investigation

Abstract .  We examine the dynamics of ideas production and knowledge-productivity relationship in a panel of 19 OECD countries. A new data set of triadic patents is used. We rigorously address the issues of cross-country heterogeneity and endogeneity. Domestic and foreign ideas stocks exert positive but heterogeneous effects on ideas production. We find evidence of duplicate R&D but little support for endogenous growth. Countries with low domestic ideas bases could considerably improve productivity through ideas accumulation; however, this effect is modest for countries with sizeable ideas bases. An implication is that country-specific R&D policy appears potentially more effective than the one-size-fits-all approach.     

Temporary shocks and offshoring: The role of external economies and firm heterogeneity

We construct a model of offshoring with externalities and firm heterogeneity. Due to the presence of externalities, temporary shocks like the Y2K problem can have permanent effects, i.e., they can permanently raise the extent of offshoring in an industry. Also, the initial advantage of a country as a potential host for outsourcing activities can create a lock in effect, whereby late movers have a comparative disadvantage. Furthermore, the existence of firm heterogeneity along with externalities can help explain the dynamic process of offshoring, where the most productive firms offshore first and the others follow later. Finally, we work out some unexpected welfare implications which show that net industry profits can be lower in an outsourcing equilibrium than in a regime of no outsourcing. Consumer welfare rises, and under fairly plausible conditions this effect can offset the negative impact on profits.     

Labour unions and multi‐product firms in closed and open economies

Abstract This paper sets up a general oligopolistic equilibrium model with multi‐product firms and union wage setting. In this model, we conduct two policy experiments. First, we show that deunionization induces a general decline in firm scale and scope, the respective reduction being more pronounced in non‐unionized industries. Second, we study the consequences of trade liberalization, and show that access to foreign markets lowers firm scope in all industries as well as the scope differential between unionized and non‐unionized firms. Adjustments in firm scale turn out to be less clear‐cut and, inter alia, depend on the degree of product differentiation.     

Financial flows and economic growth in developing countries

This paper assesses the impact of financial flows and their composition on the real exchange rate and on economic growth for a sample of low- and middle-income countries over the period of 1980–2012. Financial flows can directly support economic growth by relaxing constraints on domestic resources, but can also indirectly weaken growth through appreciation of the real exchange rate. We use the generalized method of moments (GMM) for dynamic panel. Results show that net financial flows affect economic growth both directly and indirectly: (i) a one percent increase in total financial flows appreciates the real exchange rate by 0.5 percent; (ii) the real exchange rate appreciation effect of remittances is twice the effect of aid and ten times greater than the effect of Foreign Direct Investments; (iii) financial flows stimulate economic growth regardless of the development level. An increase of $10 per capita financial flows leads to a gain of 0.08 points of annual growth. This gain amounts to 0.15 when we control for the negative impact of the real exchange rate. Instability of market-oriented flows, such as FDI and portfolio investments, exacerbates instability of the economic growth rate.     

The composition of foreign direct investment and protection of intellectual property rights: Evidence from transition economies

While existing literature examined the impact of intellectual property protection on the volume of foreign direct investment (FDI), little is known about its effect on the composition of FDI inflows. This paper addresses this question empirically using a unique firm-level data set from Eastern Europe and the former Soviet Union. It finds that weak protection deters foreign investors in technology-intensive sectors that rely heavily on intellectual property rights. Moreover, the results indicate that a weak intellectual property regime encourages investors to undertake projects focusing on distribution rather than local production.     

Competition policy in the transitional economies

Conclusion It is very encouraging to note how much progress has been made with competition policy, especially in the four Visegrad countries. One might add that the developments were not merely in the legal front; in both Poland and Hungary the competition offices have forceful and impressive heads who have used their considerable discretion to shape anti-monopoly practice in their respective countries. The weakness of Bulgaria and Romania on this front is a reflection of the more general problems in implementing market-based reforms, and in establishing true independence between the economic and the political sphere.Nonetheless, our discussion indicates several cases where further developments could be made. The legislative structures in the reforming economies perhaps place excessive faith on quantitive indicators of dominance, and in many countries the independence of the competition offices from the political system is insufficient. The reliance on EU-type legislative structures perhaps also leads to insufficientper se prohibitions.     

Imports and growth in China

In this paper, we analyze the role played by imports and investment on labor productivity and output in China from 1964 to 2004. In doing so, our analysis focuses on the role of technological progress incorporated into the Chinese economy through capital accumulation and imports, which could be a cause of significant technology transfer from abroad that facilitated industrialization and rapid growth in China. However, as we know that there could be other factors influencing economic development, we have also considered the role played by domestic innovation activities, competitiveness and foreign economic conditions. We focus on examining the short- and long-run effects of the considered variables as well as the direction of their causality. In addition, we investigate the role played by the exchange rate on growth and discuss some policy implications of this effect on the current debate on the appreciation of the Yuan. The empirical results provide evidence that both imports and investment encourage output and labor productivity in the long run, but neither investment causes imports nor imports cause investment. Moreover, we found that during the period considered the real exchange rate influenced output, but not productivity. These findings provide interesting insights on the future Chinese economic policy.     

A model with endogenously determined cycles, discounting and growth

Summary. This article reexamines the role of consumption in growth and emphasises the external effects of aggregate consumption, viewed as consumption standards, as an additional impediment in the growth process. These external effects raise the productivity of the individuals and are positively related to their valuation of the future. Conditions are established under which this results in a marginal value of wealth that is an increasing function of consumption. This brings new types of multiple steady states, local indeterminacies and cyclical motions. Imposing extra homogeneity restrictions, balanced growth solutions with endogenous impatience emerge. The possibility of multiple convergent paths is univocally related to endogenous discount effects. A comparison with a benchmark planning economy indicates an excessive value for the rate of time preference and emphasises its insufficient adaptation to future utility in a stationary setting. Discrepancies along the transition path that rest on endogenous impatience versus fixed discount appear in a non-stationary environment when the competitive balanced growth solution is indeterminate. Received: May 5, 1996; revised version: May 19, 1997     

The Indian growth miracle and endogenous growth

Using over half a century of R&D data for India, this paper tests whether the second-generation endogenous growth theories are consistent with India's growth experience. Furthermore, the paper examines the extent to which growth in India can be explained by R&D activity, international R&D spillovers, catch-up to the technology frontier and policy reforms. The empirical results show that the growth in India over the past five decades has been driven by research intensity following the predictions of Schumpeterian growth theory.     

An experimental investigation of wage taxation and unemployment in closed and open economies

We investigate experimentally the economic effects of wage taxation to finance unemployment benefits for a closed economy and an international economy. The main findings are the following. (i) There is clear evidence of a vicious circle in the dynamic interaction between the wage tax and unemployment. (ii) Employment is boosted by budget deficits but subsequent tax rate adjustments to balance the budget lead to employment levels substantially lower than theoretically predicted. (iii) A sales risk for producers due to price uncertainty on output markets appears to cause a downward pressure on factor employment. For labor the wage tax exacerbates this adverse effect.     

Inflation,growth and exchange rate regimes in small open economies

Summary. This paper compares the merits of alternative exchange rate regimes in small open economies where financial intermediaries perform a real allocative function, there are multiple reserve requirements, and credit market frictions may or may not cause credit rationing. Under floating exchange rates, raising domestic inflation can increase production if credit is rationed. However, there exist inflation thresholds: increasing inflation beyond the threshold level will reduce domestic output. Endogenously arising volatility may be observed independently of the exchange rate regime. Private information - with high rates of domestic inflation - increases the scope for indeterminacy and economic fluctuations.Received: 26 March 2002, Revised: 29 October 2002JEL Classification Numbers: E32, E44, F33.P.L. Hernandez-Verme: I would like to thank Leonardo Auernheimer, Valerie Bencivenga, Dean Corbae, Scott Freeman, Todd Keister, Beatrix Paal, and Maxwell Stinchcombe for very helpful comments and suggestions. Very special thanks are due to Bruce D. Smith. The paper also benefited from the discussions in the seminars in CIDE, the Federal Reserve Bank of Atlanta, the Federal Reserve Bank of Kansas City, Indiana University, ITAM, Purdue University, the Second Annual Missouri Economics Conference, Texas A&M, the University of Missouri and the University of Texas at Austin.     

Multiple equilibria, coordination, and transitional growth

We study a small open economy with two sectors and two factors of production. In one of the sectors, external economies of scale are generated through the industry-level capital input. This leads to a divergence between private and social production possibility frontiers as well as to multiple equilibria. The equilibrium selection problem that arises is solved by agents who follow a simple trial-and-error learning rule. The growth path of the economy as agents learn lies below the production possibility frontier and may display cyclical transitional dynamics. We also show that coordination problems which may prevent the economy from attaining the “good” equilibrium may be alleviated by the temporary use of policy instruments that shape the allocation of resources.     

Phases of economic development and the transitional dynamics of an innovation-education growth model

This paper extends earlier analysis of the transitional dynamics of a growth model in which both human capital and innovation drive income expansion. Funke and Strulik [2000. On endogenous growth with physical capital, human capital and product variety. European Economic Review 44, 491-515] suggest that the typical advanced economy follows three development phases, characterized in a temporal order by physical capital accumulation, human capital formation, and innovation, and that the transitional dynamics of the model reproduce such a sequencing. I argue that other sequences of the phases of development are possible and show that the model can generate a trajectory in which innovation precedes human capital formation. This trajectory accords with the observation that the rise in formal education followed with a considerable lag the process of industrialization. U.S. income and educational time series data are used to corroborate the innovation-education trajectory.