The dual economy in long-run development

A salient feature of developing economies is the coexistence of a modern commercial sector alongside a traditional subsistence sector—the dual economy. The apparent differences in productivity between sectors imply substantial losses in aggregate productivity. Existing theories of the dual economy rely on exogenous price distortions, and cannot explain why or if these distortions evolve over the course of development. This paper provides a model of the dual economy in which the productivity differences arise endogenously because of a non-separability between the value of market and non-market time in the traditional sector. Incorporating endogenous fertility, the model then demonstrates how a dual economy will originate, persist, and eventually disappear within a unified growth framework. An implication is that traditional sector productivity growth will exacerbate the inefficiencies of a dual economy and produce slower overall growth than will modern sector productivity improvements.     

The emergence of convergent price clusters in China

This paper reports new evidence on the existence of both large and small price divergent clusters for China's energy markets, 2000–2009. The largest convergent price clusters suggest that the coal and gasoline markets are well integrated, however, small convergent price clusters suggest that electricity and diesel markets are proving harder to integrate. The paper argues that the traditional approach to price convergence analysis should be applied with caution, especially in a transitional economy such as China where questions to be asked should relate to the ‘degree of market‐orientation’ and not simply whether it is a market‐based economy or not.     

稳态通货膨胀下经济增长率的估计

本文从产品市场价格变动出发,解释了经济增长影响通货膨胀的原因,并讨论了稳定通货膨胀的经济增长率的概念。同时,利用季度数据从实证的角度分析了过去1 4年中国经济增长与通货膨胀之间的变动情况,估计出2 0世纪90年代以来中国“稳定通货膨胀的经济增长率”(SIRG ,SteadyInflationRateofEconomicGrowth)大致维持在9.8%左右     

Preference shocks from aggregation: time series data evidence

Abstract.  We investigate the impact of preference shocks on the aggregate dynamics of the U.S. economy in the context of a neoclassical growth model derived from aggregation. The aggregation result we use is as follows: if markets are complete and if agents have identical preferences of the addilog type, then the heterogeneous‐agent economy where agents are subject to idiosyncratic productivity shocks behaves as if there was a representative consumer who faces shocks to preferences and technology. We estimate the parameters in the aggregation‐based model from the aggregate time‐series data and compute the numerical solution. We find that the preference shocks play an important role in the aggregate labour‐market fluctuations. JEL classification: C73, D90, E21     

CONTRACEPTION AND DEVELOPMENT: A UNIFIED GROWTH THEORY

This study investigates the interaction of the use of modern contraceptives, fertility, education, and long‐run growth. It develops an economic model that takes into account that sexual intercourse is utility enhancing and that birth control by modern contraceptives is more efficient but more costly than traditional methods. The study shows how a traditional economy, in which modern contraceptives are not used, gradually converges toward a high growth regime, in which modern contraceptives are used. Lower prices or higher efficacy of contraceptives are conducive to an earlier onset of the fertility transition and a quicker takeoff to modern growth.     

On the growth and welfare effects of monopolistic distortions

The most fundamental proposition about growth and competition is that there is a tradeoff between static welfare and long-term growth. This paper reconsiders this basic proposition in an expanding variety endogenous growth model with competitive markets for “old” innovative products and for a traditional good. We shed light on some implications of monopolistic distortions which tend to be ignored by standard models. First, no growth may be better than some growth, since modest positive growth potentially requires sizeable static welfare losses. Second, the economy may converge to a steady state with zero growth, even though a locally saddle-point stable steady state with positive growth exists if the initial share of “cheap” competitive markets is sufficiently high, as this implies a relatively low demand for “expensive” innovative goods. Third, such a “no-growth trap” may happen in a world economy made up of several countries engaged in free trade with each other. The policy implications are that growth-enhancing policies may be misguided and that quick deregulation as well as quick trade liberalization can lead to stagnation in the long term.      

Post-socialist financial fragility: the case of Albania

The 1997 collapse of the Albanian economy caused by the collapseof economy-wide Ponzi schemes contrasts sharply to its successstatus as a post-Socialist transition country in the years 1992-1996.In this paper, an attempt is made to explain this 'AlbanianParadox'. The specific Albanian conditions for the growth ofPonzi schemes are identified. Theoretically, the Albanian Paradoxcan be interpreted as one version of the 'Financial InstabilityHypothesis' suggested by Minsky. Investigation of the underlyingfactors that render financial markets fragile suggest that theAlbanian case is extreme but not unique in the region. It isemphasised that sustainable growth is predicted on the qualityof government, on proper financial-sector regulation, on actualmicroeconomic restructuring and on the development of marketinstitutions through which adequate market information is disseminated.     

Technical change and market structure

This paper investigates the ceteris-paribus effects of labor reducing technical progress on industry-wide employment under different market regimes. We distinguish between a contestable market, a monopoly, and a market with bounded supplier power. Under a constant wage rate, employment will not decrease only if the elasticity of demand on a contestable market exceeds one. The same thing holds for markets with bounded supplier power. Under a monopoly, price elasticity must even be more than three. Ceteris paribus we thus have to expect a higher probability of employment reduction under a monopoly than under other market regimes. Raising wages proportional to productivity leads to an employment reduction on stagnating markets with supplier power. Here a raise in wages without layoffs is only possible if the growth in demand is at least as high as the growth in productivity.The author is indebted to Alfred E. Ott, Sabine Böckem, Rolf Wiegert and Ulf Schiller for valuable comments. Of course, I take responsibility for all remaining errors.     

The evolution of debt and equity markets in economic development

Summary. As noted by Gurley and Shaw, there is a typical pattern of economic development in which the evolution of the financial system is an essential aspect of the growth process. We focus on one component of this evolution: the increasing importance of equity markets as an economy grows. We develop a growth model where capital accumulation is financed externally through a combination of debt and equity. We illustrate why equity market activity might grow – often very rapidly – as an economy develops. We also illustrate why access to equity markets may not be needed in the early stages of economic development. Received: December 30, 1997; revised version: May 26, 1998     

THE FOUNDATION OF MARKET QUALITY ECONOMICS*

This study is based on my observation that high quality markets are indispensable for the healthy growth of a modern economy. Many problems surrounding markets are attributable to the lack of high quality markets. An industrial revolution creates extremely vibrant but unhealthy markets. This study introduces a concept of fairness in dealing and pricing (competitive fairness), which differs from efficiency, and defines market quality as a measure for the efficiency of allocation and the fairness of dealing and pricing. This study shows that competitive fairness is achieved by several market mechanisms that I constructed in my previous work.     

Endogenous Fertility, Income Distribution, and Growth

This article analyzes the interaction between growth and fertility via income distribution in a model in which fertility decisions are motivated by old-age support. It provides an explanation of the demographic transition of an economy from a stage of increasing fertility and low growth to a stage of low fertility, high human capital investments, and high growth.     

Financial Markets and Stochastic Growth

The authors study the effect of financial markets on the investment of a two-good two-country economy with stochastic production in a dynamic framework. Each country produces and invests only one good and, therefore, makes decisions as a central planner in an optimal growth model. Trade between consumers of both countries, however, takes place on competitive (spot or financial) markets. The authors compare the investment–consumption decisions of both "market" models with the benchmark case of an integrated world-equilibrium. In the log-linear case, it is possible to uniquely characterize the state-dependent preferences of consumers that lead to dynamically efficient investment decisions. It is shown that the investment decisions in both "market" models are, in general, inefficient compared with the efficient, or integrated world economy, case.     

Aggregate demand shocks and economic growth

The traditional view of growth and fluctuations implies that aggregate demand shocks result in only transitory departures from trend or “normal” output, which is determined exclusively by aggregate supply factors. Using a simple dynamic framework for a less-developed economy, a series of models is developed to show that aggregate demand can have a permanent effect on economic growth. It is shown that even if the economy converges to some “normal” path, this path itself may be altered by large demand shocks, due to increasing returns and hysteresis effects in labor markets and balance of payments constraints. It is also shown that the economy may not converge to its “normal” path, in which case fiscal and monetary policy will have long-term effects on output and growth.     

MARKET TRANSACTION COSTS IN INDUSTRIALIZATION AND DEMOGRAPHIC TRANSITION*

Abstract. This paper presents a unified theory of growth involving human capital accumulation, labour specialization, market expansion and falling fertility rates. The model suggests that these processes, often analysed separately, are intimately linked. The accumulation of specialized human capital increases the gains to labour specialization, leading agents to increase their participation in markets and reduce time spent at home. This raises the opportunity cost of child raising, lowering fertility rates. The model suggests a central role for market transaction costs in determining the timing and rate of fertility declines linked to rising income.     

Market Power in Laboratory Emission Permit Markets

Many proposals suggesting the use of markets tocontrol pollution assume markets will becompetitive. When markets do not exhibitcompetitive characteristics, however, shouldthey still be expected to result in efficiencyimprovement relative to traditional approaches? This paper employs experimental economicmethods to examine the effect of marketstructure on the use of marketable emissionspermits. Results indicate that in a market withone dominant firm and a number of fringe firms,strategic manipulation occurs repeatedly in thelaboratory as predicted by market power models,undermining the allocative and dynamicefficiency benefits such markets offer. Whenfirms compete in a downstream product marketdominated by the same single firm, marketefficiency can actually be reduced with theimplementation of permit markets. Final marketefficiencies reflect initial endowments and areinfluenced by competitive conditions elsewherein the economy, indicating that policy-makersshould carefully consider whether markets areappropriate in such circumstances.     

Pension,possible phaseout,and endogenous fertility in general equilibrium

The rich literature on Pay-As-You-Go (PAYG)-type pensions provides a notion that when pension return is dominated by the market return, generally it is impossible to phase pension out without hurting any generation. We show that PAYG pensions can indeed be phased out in a much richer framework where fertility is endogenous and general equilibrium effects are present. Interestingly, the factor that helps us to phase the pension out in a Pareto way is hidden in the structure of PAYG pension itself. Individualistic agents fail to recognize the benefits of their fertility decision on these programs and, therefore, end up in an allocation that is strictly dominated by the allocations that internalize this externality. Exploiting this positive externality, competitive economy can improve its allocations and can reach the planner's steady-state in finite time where each generation secures as much utility as in the competitive equilibrium. Clearly, it is possible to transition in a Pareto way to an economy either with no pension or with pensions whose return is not dominated by market return.     

经济改革与经济学转型

我国的经济改革是在传统计划体制背景下启动的,也是在一定的改革意识引领下发生的,但在传统政治经济学框架内形成的改革理论具有一定的局限性。改革开放以来,经济学者运用现代经济学方法对中国经济进行分析,获得了有价值的成果。但是,我国经济学理论的转型还没有完成。为了深化市场经济的改革,如何科学地认识市场经济,怎样在经济学理论研究中体现现代精神,都需要在范式转型的前提下继续进行探索。     

Fertility,Intra‐Generational Redistribution,and Social Security Sustainability

Incorporating heterogeneity in preference to having children into an overlapping generations model of a small open economy, we examine the effects of changes in the size of pay‐as‐you‐go (PAYG) social security on fertility choices of individuals and population growth of the economy. It is shown that PAYG social security will raise population growth by increasing the number of individuals who have children and the number of children parents have if the system involves redistribution between retirees with different contributions, whereas, if it has no redistribution, PAYG social security does not affect the fertility decisions of individuals.     

The Nature of Institutional Change in Transition

Contemporary empirical evidence of transition in Central and East European countries proves the importance of institutional change, as was claimed by advocates of this field of transition. The article assesses institutional change in the first phases of transition from the perspective of competing strategies: rapid changes versus gradualism. After pointing to some inconsistencies in this debate, the article discusses the possibility and prospects for development of a market for institutions in European transition countries. The main criterion which is used is the requirement for the rule of law as one of the foundations of a market economy. It concludes that undeveloped endogenous factors of institutional change still do not enable development of markets for institutions. Reluctance of national governments to act according to a long-run perspective is at present to a certain extent compensated by the presence of external factors of institutional change.     

Cyclical Dynamics of the Turkish Economy and the Stock Market

Abstract

We analyze the cyclical dynamics of the Turkish economy and the stock market as well as their interactions. We use hidden Markov models that are robust to parameter instability arising from major shifts in economic policy, which have been typically observed in the Turkish economy. These models provide estimates of turning points for the growth, business, and stock market cycles. We identify three states of growth cycles and two states of business cycles in Turkey characterized by different mean estimates. We find that the economy went through five recessions since 1987. Crises are characterized by sharp drops in economic activity and are preceded by slowdowns. These crises are typically followed by strong recoveries during which the economy grows above its long-run average rate. We show that the Turkish stock market goes through three regimes having distinct risk-return dynamics. Bear markets associated with negative returns precede every recession with an average lead time of three quarters, suggesting that the stock market may be a useful forward-looking indicator of the Turkish economy.