Entrepreneurship prompts institutional change in developing economies

The Review of Austrian Economics - Entrepreneurship plays a pivotal role for institutional change and economic development in transition and developing economies. Formal and informal institutions...     

Choosing sides in the trilemma: international financial cycles and structural change in developing economies

ABSTRACT

This paper analyzes the impact of international financial cycles on structural change in developing economies. It is argued that the impact of these cycles depends on the specific combination of macroeconomic and industrial policies adopted by the developing economy. The cases of Brazil and Argentina are contrasted with those of Korea and China. In the Asian economies, macroeconomic policy has been a complementary tool along with industrial policy to foster the diversification of production and capabilities. Inversely, in the case of the Latin American countries, long periods of real exchange rate (RER) appreciation, combined with the weaknesses (or absence) of industrial policies, contributed to the loss of capabilities and lagging behind.     

Policy guidelines for providing telecommunication access in developing economies

Economic literature and historical experience indicate a causal relationship between telecommunications and a country's development. This article, using structural microeconomic theory, outlines policies that will contribute to optimal accessibility and penetration of new telecommunication technology. Deregulation, privatization, licensing, and interconnection are discussed. Grass roots organizations and the urban/suburban “universal access” problem are included in a section on the digital divide.     

Optimal monetary policy regime for oil producing developing economies: Implications for post-war Iraq

This paper theoretically investigates optimal monetary policy regime for oil producing developing countries. We analyze credibility and reputation of the Central Bank and macroeconomic dynamics under alternative monetary policy regimes. We construct a detailed and realistic model that can be used to analyze macroecomic structure and expectation dynamics of an oil producing open economy. We take into account the asymmetric information between the public and the central bank and theoretically investigate how this asymmetric information impacts the real economy and the credibility of the central bank. The simulation results indicate that central bank achieves higher credibility and lower inflation under dollarization and higher output levels under currency board regime. The model constructed in this paper has many policy implications for oil producing open economies. Using the implications of the model, we make monetary policy regime recommendations for post-war Iraq.     

A re-examination of the demand for money in small developing economies

This paper re-examines the money-demand function in three small open economies of Asia: Korea, Pakistan and Singapore. In addition to using the relatively new procedure of error-correction modelling, the roles of variables such as (a) the expected change in the exchange rate, (b) foregin interest rates, and (c) foreign exchange risks on money demand are examined. In testing the importance of these variables in the money-demand function, special attention is paid to testing the assumptions of the classical linear regression model. The sample period for each country spans from 1973:1 through 1990:1. The empirical results suggest that the error-correction specification performs very well. In addition to the traditional variables, the results suggest that at least some measure of foreign monetary developments appear to have some significant effect on money-demand behaviour in these small developing economies.     

Macroeconomic effects of international remittances: The case of developing economies

Over the past few decades international workers' remittances have significantly contributed to the foreign exchange reserves of the developing countries. While these household level remittance flows have often been associated with poverty alleviation, positive welfare gains and even as an alternate source of development finance, a detailed study of the effects of these flows on a remittance-dependent small developing economy, however shows counterintuitive results. The paper applies the Dutch Disease theory to explain the effects of remittances on the economy and introduces a micro–macro framework to establish channels of transmission of remittances through the economy. The paper shows that international remittances, by altering the household budget constraint, have a direct impact on the micro level household decision making, primarily with respect to the consumption and labor supply decisions. These when aggregated give rise to significant adjustments in the macro level production functions and consumption behaviors, leading to a decline in the output, particularly of the trading sector and an adverse impact on the external sector of the economy.     

Macroeconomic stabilization in developing economies: Are optimal policies procyclical?

Many empirical studies provide evidence that macroeconomic policies as well as capital flows exhibit procyclical characteristics in developing economies. In particular Kaminsky et al. [2004. When it rains, it pours: Procyclical capital flows and macroeconomic policies. NBER Macroeconomics Annual, MIT Press] demonstrate that a large group of middle-income countries run contractionary policies and experience capital flight during times of recession. This paper investigates the role of international financial markets in explaining these macroeconomic policy and capital flow characteristics. An optimal fiscal and monetary policy problem is formulated and solved for a small-open economy that faces a country-specific interest rate spread in international financial markets. It is found that, in the presence of the country spread, optimal fiscal and monetary policies as well as capital flows are procyclical under a reasonable parametrization. Optimal policies and capital flows turn countercyclical in the absence of the country spread. This pattern is robust to a range of alternative model specifications.     

Development of domestic markets and poverty reduction for poor developing economies

Constructing a model of structural change with household production, this paper finds two equilibrium paths: one path leads to a low-income steady state and the other to a high-income steady state. This paper shows that as long as the relative marginal productivity of manufactured goods in household production is high enough, a poor country may transform from a home-producing economy to a firm-producing one and eventually reaches a high standard of living. Is it empirically acceptable for us to claim that when a country starts with poorer pro-market infrastructures and institutions, she will be less likely to escape from poverty later on? This paper provides an empirical evidence of positive relationship between pro-market infrastructures and poverty reduction for poor developing countries.     

Modelling economies subject to structural change: The case of Germany

Abstract structural change is traditionally central to the analysis of economic developments in East Europe and the former Soviet Union, but is also applicable in the case of Germany following reunification. Conventional econometric analysis rests largely on a search for structural stability and the belief that the future will be similar to the past. But this is not a tenable assumption in the face of the degree of change which we have observed in these economies. In this paper we continue a line of argument that econometric modelling can still be a useful tool but that it must take explicit account of the form of change which has taken place. The underlying philosophy is that the very near future will be similar to the very recent past, but we must understand the changes in the past to say anything useful about the future. We will explore the implications of this approach for what is perhaps the most drastic structural change which has so far been observed, the unification of Germany.     

International debt shifting and multinational firms in developing economies

We present empirical evidence suggesting that the effect of the host country corporate tax rate on the debt ratio of multinational affiliates in developing economies is positive and larger than the same effect for affiliates in developed economies.     

Trade,structure and linkages in developing and regional economies

This short note addresses some issues raised in a recent paper in this Journal by Bulmer-Thomas (1978) in connection with the relationship between structure and growth. Some comparisons are drawn between the experiences from developing countries and regional economies within the developed world.     

Determinants of the adjusted net saving rate in developing economies

The adjusted net saving rate, initially known as the genuine saving rate, was first published by the World Bank in the late 1990s as a more comprehensive measure of national saving and one more indicative of sustainable development. The adjusted net saving rate incorporated not just physical capital depreciation, but natural capital depletion and environmental damage, as well as including some human capital formation. In this paper, using a cross‐section of developing economies for 2001–2006, determinants of the adjusted net saving rate are estimated. For comparison, the same determinants for the gross national saving rate are estimated. Also, a basic Solow growth model is extended to incorporate natural resources and to justify a more comprehensive measure of savings, such as the adjusted net saving rate, for modeling economic growth. The two measures of savings are then compared as determinants in estimations of economic growth. Understanding the determinants of the adjusted net saving rate is useful for policies to promote sustainable development.     

The welfare implications of exchange rate choices in developing agricultural economies

This paper analyzes the appropriate choice of an exchange rate regime in agricultural commodity-exporting economies. In an estimated open economy model that incorporates key structural characteristics of agricultural commodity exporters including dual labor markets and imperfect asset markets, the benefits of exchange rate flexibility are shown to depend on the extent of labor and product market development. With developed markets, flexible exchange rates are preferred as they allow for greater relative price fluctuations, which amplify the transmission mechanism of labor re-allocation upon commodity price volatility. When labor and product markets are not well-developed, however, international relative price adjustments exacerbate currency and factor misalignments. A nominal exchange rate peg, by mitigating relative wage and price fluctuations, increases welfare relative to a float. Given the current low level of labor and product market development across most agricultural commodity exporters, the study provides a novel rationale as to why exchange rate targeting is implemented in many developing agricultural economies.     

Capital specificity,imperfect labor mobility and growth in developing economies

Labor markets in developing economies may be afflicted by a multiplicity of interacting distortions. We consider a general equilibrium model of an economy distorted by both sector-specific sticky wages and imperfect mobility of labor. In this framework, we contrast the implications of capital accumulation in the short and long run. We show that, in contrast to both the case in the absence of a sector-specific sticky wage and the case in the absence of imperfect labor mobility, the short and long-run effects of growth on the economic system converge as the degree of labor mobility is limited.     

A development model of developing economies with capital and knowledge accumulation

This study suggests a model of economic development which treats knowledge accumulation as an endogenous variable. It examines possible dynamic processes in an economic system which accumulates knowledge from developed nations. We describe the dynamics of the system by the interactions of three variables—economic conditions, level of knowledge, and openness. The introduction of openness as an important endogenous variable is due to the fact that the development model considered here is primarily concerned with the economic dynamics of the People's Republic of China. We are especially interested in nonlinear phenomena such as catastrophes and limit cycles. We show that small shifts in political policies may result in great social structural changes.The author is very grateful to two anonymous referees for important comments and to an anonymous referee for linguistic help.     

Trade adjustment policies and income distribution in three archetype developing economies

This paper explores quantitatively the macroeconomic and distributional impacts on non-oil producing, semi-industrial developing countries of external shocks originating in the world economy —in particular, rising costs of imports and shrinking export markets. The empirical analysis is done with a computable general equilibrium (CGE) model. The effects of the same external shock are modelled for three different archetype economies: a primary exporter, a manufacturing exporter, and a closed economy. Three different policy-adjustment regimes are considered: devaluation, premium rationing of imports (import licenses), and premium rationing in an environment with a fixed real wage for unskilled labor. By making simple assumptions about the way socioeconomic groups operate to influence decision-making, the paper also examines how the struggle between the gainers and losers is likely to affect the policy regime to be chosen.     

External liabilities,domestic institutions and banking crises in developing economies

We investigate the impact of foreign equity and debt on the occurrence of banking crises in 61 lower income and middle income economies during the 1984 to 2010 period. We also focus on the effects of domestic institutions on banking crises and whether they mitigate or exacerbate the impact of the external liabilities. We find that FDI liabilities lower the probability of a crisis, while debt liabilities increase their incidence. However, institutions that lower financial or political risk partially offset the impact of debt liabilities, as does government stability. A decrease in investment risk directly reduces the incidence of banking crises.     

Technology adoption in autocratic economies: The role of fiscal capacity

What determines technology in autocratic regimes? In this paper, I assume that a rent-extracting regime can adopt technology from the global technology frontier, tax-paying citizens can oust the regime, and technology can decrease the ousting cost. I show that a lack of fiscal capacity can increase technology by preventing the ousting constraint from binding. Consistent with this prediction, tax collections and total factor productivity are negatively related in autocratic regimes. Extensions show that natural resources can divorce fiscal revenues from technology, which can encourage technology blocking. However, if technology adoption is socially costly, autocratic regimes can adopt too much technology.     

Inter-factor Substitution,economies of scale and technical change: Evidence from Canadian industries

This paper explores the causes of inter-temporal variations in factor intensities and total factor productivity (TFP) in Canadian industries. For this purpose, we estimated translog cost function at the sector level allowing for non-homotheticity and non-neutral technical progress. Our empirical results suggest that about 15 to 20 per cent of the post-1973 slowdown in TFP is due to the inter-industry shifts in factor inputs. The remaining productivity slowdown could be attributed to the world wide slowdown in aggregate demand (lower capacity utilization rates) and the substantial increase in the relative price of energy and raw materials.     

Removing foreign direct investment's exchange rate risk in developing economies: the case for a foreign exchange custodian board

This paper proposes a system design (foreign exchange custodian board) that may stimulate foreign direct investment (FDI) in developing economies through the removal of foreign investors' exchange rate risk in investment outlay. For any expected distribution of exchange rate on any interval around the starting exchange rate, there exists a non-negative custodian service charge that both the developing economy and foreign investors can benefit from the proposed system. When the increase in domestic factors' value added caused by FDI is sufficiently large, the developing economy will benefit even in the absence of any custodian service charge.