This paper takes a fresh look at the impact of financial development on economic growth by using recently developed generalized kernel methods that allow for heterogeneity in partial effects, nonlinearities, and endogenous regressors. Our results suggest that while the positive impact of financial development on growth has increased over time, it is also highly nonlinear with more developed nations benefiting while low-income countries do not benefit at all. This finding contributes to the ongoing policy debate as to whether low-income nations should scale up financial reforms.
Rising Income Inequality: Technology, or Trade and Financial Globalization?, with Florence Jaumotte, and Subir Lall
We examine the relationship between the rapid pace of trade and financial globalization and the rise in income inequality observed in most countries over the past two decades. Using a newly compiled panel of 51 countries over a 23 year period from 1981-2003, we report estimates that support a greater impact of technological progress than globalization on inequality. The limited overall impact of globalization reflects two offsetting tendencies: whereas trade globalization is associated with a reduction in inequality, financial globalization - and foreign direct investment in particular - is associated with an increase in inequality.
Which Reforms Work and under What Institutional Environment: Evidence from a New Dataset on Structural Reforms, with Alessandro Prati and Massimiliano Onorato
Review of Economics and Statistics, July 2013. Download PDF file.
Are structural reforms growth enhancing? Is the effectiveness of reforms constrained by a country's distance from the technology frontier or by its institutional environment? This paper takes a new and comprehensive look at these questions by employing a novel dataset that includes several kinds of real (trade, agriculture and networks) and financial (domestic finance, banking, securities, and capital account) reforms for an extensive list of developed and developing countries, going back to the early 1970s. First pass evidence based on growth breaks analysis and on panel growth regressions suggests that on average both real- and financial-sector reforms are positively associated with higher growth. However, in several occasions botched reforms resulted in growth disasters. More importantly, the positive reform-growth relationship is shown to be highly heterogeneous and to be influenced by a country's constraints on the authority of the executive power and by its distance from the technology frontier. Finally, there is some evidence that crises (defined as severe growth downturns) are associated with subsequent reform upticks.
This paper sheds light on two problems in the Penn World Table (PWT) GDP estimates. First, we show that these estimates vary substantially across different versions of the PWT despite being derived from very similar underlying data and using almost identical methodologies; that this variability is systematic; and that it is intrinsic to the methodology deployed by the PWT to estimate growth rates. Moreover, this variability matters for the cross-country growth literature. While growth studies that use low frequency data remain robust to data revisions, studies that use annual data are less robust. Second, the PWT methodology leads to GDP estimates that are not valued at purchasing power parity (PPP) prices. This is surprising because the raison d’être of the PWT is to adjust national estimates of GDP by valuing output at common international (purchasing power parity [PPP]) prices so that the resulting PPP-adjusted estimates of GDP are comparable across countries. We propose an approach to address these two problems of variability and valuation.
Investing in Public Investment: An Index of Public Investment Management Efficiency, with Era Dabla-Norris, Jim Brumby, Annette Kyobe, and Zac Mills
Pritchett (Journal of Economic Growth 2000; 5:361-384) convincingly argued that the difference between investment cost and capital value is of first-order empirical importance especially for developing countries whose public investment is the primary source of investment. This paper constructs a public investment efficiency index that captures the institutional environment underpinning public investment management across four different stages: project appraisal, selection, implementation, and evaluation. Covering 71 countries, including 40 low-income countries, the index allows for benchmarking across regions and country groups and for nuanced policy-relevant analysis and identification of specific areas where reform efforts could be prioritized. Research applications are outlined.
Recent research on growth empirics has focused on resolving model and variable uncertainty. The conventional approach has been to assume a linear growth process and then to proceed with investigating the relevant variables that determine cross-country growth. This paper questions the linearity assumption underlying the vast majority of such research and uses recently developed nonparametric techniques to handle nonlinearities as well as select relevant variables. We show that inclusion of nonlinearities is necessary for determining the empirically relevant variables and uncovering key mechanisms of the growth process. We also show how nonparametric methods can sometimes point towards the correct parametric specification. Each of these points is demonstrated by considering specific growth theories.
Creation and Diversion Revisited: Accounting for Model Uncertainty and Natural
Trading Partner Effects, with Theo Eicher and Christian Henn
Journal of Applied Econometrics, March 2012. Download PDF file | Data.
The effect of Preferential Trade Agreements (PTAs) on trade flows is subject to model uncertainty stemming from the diverse and even contradictory effects suggested by the theoretical PTA literature. The existing empirical literature has produced remarkably disparate results and the wide variety of empirical approaches reflects the uncertainty about the incorrect set of explanatory variables that ought to be included in the analysis. To account for the model uncertainty that surrounds the validity of the competing PTA theories, we introduce Bayesian Model Averaging (BMA) to the PTA literature. Statistical theory shows that BMA successfully incorporates model uncertainty in linear regression analysis by minimizing the mean squared error, and by generating predictive distributions with optimal predictive performance. Once model uncertainty is addressed as part of the empirical strategy, we find strong evidence of trade creation, trade diversion, and open bloc effects. Our results are robust to a range of alternative empirical specifications proposed by the recent PTA literature.
Journal of Economic Dynamics and Control, September 2011. [Lead article] Download PDF file.
This paper uses dynamic general equilibrium and computational methods, inspired by the multi-sector growth model structure in Stephen Turnovsky's previous and more recent work, to develop a theory that unifies two of the traditional explanations of structural change: sector-biased technical change and non-homothetic preferences. More specifically, we build a multisector overlapping-generations growth model with endogenous technical-change and non-homothetic preferences based on an expanding-variety setup with two different R&D technologies; one for agriculture, and another for non-agriculture. Results give additional support to the biased technical-change hypothesis as an important determinant of the structural transformation. The paper also explores where this bias might come from. Our findings suggest that production-side specific factors, such as asymmetries in cross-sector knowledge spillovers could be behind it, and therefore be important to fully explain the process of structural change.
Priors and Predictive Performance in Bayesian Model Averaging, with Application
to Growth Determinants, with Theo Eicher and Adrian Raftery
Journal of Applied Econometrics, January 2011. Download PDF file | Data.
Bayesian model averaging (BMA) has become widely accepted as a way of accounting for model uncertainty, notably in regression models for identifying the determinants of economic growth. To implement BMA the user must specify a prior distribution in two parts: a prior for the regression parameters and a prior over the model space. Here we address the issue of which default prior to use for BMA in linear regression. We compare 12 candidate parameter priors: the Unit Information Prior (UIP) corresponding to the BIC or Schwarz approximation to the integrated likelihood, a proper data-dependent prior, and 10 priors considered by Fernandez et al. (2001b). We also compare the uniform model prior to others that favor smaller models. We compare them on the basis of cross validated predictive performance on a well-known growth dataset and on two simulated examples from the literature. We found that the UIP with uniform model prior generally outperformed the other priors considered. It also identified the largest set of growth determinants.
Infection Dynamics, and Development, with Shankha
Chakraborty and Fidel Perez-Sebastian
Journal of Monetary Economics, October 2010. Download PDF file. Online Supplementary Material. Download PDF file.
The relationship between health and development at the aggregate level is a subject of ongoing debate. This paper contributes to the debate by proposing a general equilibrium theory of infectious disease transmission and rational behavior. Diseases cause premature death, labor productivity loss and lower quality of life. Higher disease prevalence lowers the average saving-investment propensity. This can be counteracted through prevention but only when disease prevalence and externality are relatively low. The model, calibrated to malaria and HIV in sub-Saharan Africa, offers two insights. First, infectious disease can plausibly generate a growth trap where income alone cannot push an economy out of underdevelopment unlike conventional traps in the literature. Second, even when countries converge to the same balanced growth path, the disease ecology significantly impairs the pace of economic development.
and Lonely Road to Prosperity: A reexamination of the sources of growth in
Africa using Bayesian Model Averaging, with Winford
Journal of Applied Econometrics, August 2008. Download PDF file | Data. Earlier longer version. Download PDF file.
This paper takes a fresh look into Africa's growth experience by using the Bayesian Model Averaging (BMA) methodology. BMA enables us to consider a large number of potential explanatory variables and sort out which of these variable can effectively explain Africa's growth experience. Posterior coefficient estimates reveal that key engines of growth in Africa are substantially different from those in the rest of the world. More precisely, it is shown that mining, primary exports and initial primary education exerted differential effect on African growth. These results are examined in relation to the existing literature.
to use interaction terms in BMA: Reply to Crespo’s
comment on Masanjala and Papageorgiou (2008)
Journal of Applied Econometrics, October 2011. Download .
Jesus Crespo Cuaresma (forthcoming) shows that the results in Masanjala and Papageorgiou (Rough and lonely road to prosperity: a reexamination of the sources of growth in Africa using Bayesian model averaging, Journal of Applied Econometrics 2008; 23(5): 671-682) are sensitive to an alternative prior model structure in considering interaction terms. As a side-issue, the algorithm for averaging over models is also challenged. In this reply I show that the prior used in Masanjala and Papageorgiou is as sensible as the prior suggested by Crespo. What we learn from Crespo’s comment and this reply is that further effort should be dedicated to the study of parameter heterogeneity in the framework of BMA methods.
The two-level CES aggregate production function - that nests a CES into another CES function - has recently been used extensively in theoretical and empirical applications of macroeconomics. We examine the theoretical properties of this production technology and establish existence and stability conditions of steady states under the Solow and Diamond growth models. It is shown that in the Solow model the sufficient condition for a steady state is fulfilled for a wide range of substitution parameter values. This is in sharp contrast with the two-factor Solow model, where only an elasticity of substitution equal to one is sufficient to guarantee the existence of a steady state. In the Diamond model, multiple equilibria can occur when the aggregate elasticity of substitution is lower than the capital share. Moreover, it is shown that for high initial levels of capital and factor substitutability, the effect of a further increase in a substitution parameter on the steady state depends on capital-skill complementarity.
In the literature studying aggregate economies the aggregate elasticity of substitution (AES) between capital and labor is often treated as a constant or "deep" parameter. This view contrasts with the conjecture put forward by Arrow et al. (1961) that AES evolves over time and changes with the process of economic development. This paper evaluates this conjecture in a simple dynamic multi-sector growth model, in which AES is endogenously determined. Our findings support the conjecture, and in particular demonstrate that AES tends to be positively related to the state of economic development, a result consistent with recent empirical findings.
Does medical technology originating in countries close to the technology frontier have a significant impact on health outcomes in countries distant from this frontier? This paper considers a framework where lagging countries may benefit from medical technology (a result of research and development by countries close to the frontier) that is embodied in medical imports or diffuses in the form of ideas. Using a novel dataset from a cross-section of 73 technology-importing countries, we show that medical technology diffusion is an important contributor to improved health status, as measured by life expectancy and mortality rates.
This paper compares transitional dynamics in two alternative R&D non-scale growth models, one with endogenous human capital and the other without. We show that focusing on the asymptotic speed of convergence to discriminate between the two models' performance can be misleading. Our analysis suggests that a careful study of the entire adjustment paths predicted by alternative growth models starting far away from the balanced growth path is required in order to successfully discriminate among them.
in a Non-Scale R&D Growth Model with Human Capital: Explaining the Japanese
and South Korean Development Experiences, with Fidel Perez-Sebastian
Journal of Economic Dynamics and Control, June 2006. [Lead article] Download PDF file.
This paper constructs an R&D non-scale growth model that includes endogenous human capital. The goal is to take the model's implications to the data once the complementarity between technology and human capital, commonly found in the empirical literature, is taken into account. Our model suggests that cross-sector labor movements induced by the complementarity between human capital and technology can be a key factor in replicating and explaining development experiences such as those of Japan and South Korea. In particular it is shown that the the adjustment paths of output growth, investment rates, interest rates, and labor shares implied by the proposed model are consistent with empirical evidence.
in Capital-Skill Complementarity, with Viera Chmelarova
Journal of Economic Growth, March 2005. Download PDF file.
This paper uses a novel dataset to test the capital-skill complementarity hypothesis in a cross-section of countries. It is shown that for the full sample there exists evidence in favor of the hypothesis. When we arbitrarily split the full sample into OECD and non-OECD countries, we find no evidence in favor of the hypothesis for the OECD subsample, but strong evidence for the non-OECD subsample. When we use Hansen's (2000) endogenous threshold methodology we find that initial literacy rates and initial per capita output are threshold variables that can cluster countries into three distinct regimes that obey different statistical models. In particular, the regime with moderate initial per capita income but low initial education exhibits substantially higher capital-skill complementarity than the regime with low income and low education and the regime with high education. This cross-country nonlinearity in capital-skill complementarity is consistent with the time-series nonlinearity found by Goldin and Katz (1998) using U.S. manufacturing data, and promotes the view that the phenomenon maybe a transitory one.
This paper studies the transition dynamics predictions of an R&D-based growth model, and evaluates their performance in explaining income disparities across nations. We find that the fraction of the observed cross-country income variation explained by the transitional dynamics of the model is as large as the one accounted by existing steady-state level regressions. Our results suggest that the traditional view of a world in which nations move along their distinct balanced-growth paths is as likely as the one in which countries move along adjustment paths toward a common (very long-run) steady state.
This paper examines whether nonlinearities in the aggregate production function can explain parameter heterogeneity in the Solow (1956) growth regressions. Nonlinearities in the production technology are introduced by replacing the commonly used Cobb-Douglas (CD) aggregated production specification with the more general Constant-Elasticity-of-Substitution (CES) specification. We first justify our choice of production function by showing that cross-country level regressions favor the CES over the CD technology. Then, by using the endogenous threshold methodology of Hansen (2000) we show that the Solow model with CES technology is consistent with the existence of multiple regimes.
Since Griliches (1969), researchers have been intrigued by the idea that physical capital and skilled labor are relatively more complementary than physical capital and unskilled labor. In this paper we consider the cross-country evidence for capital-skill complementarity using a time-series, cross-section panel of 73 developed and less developed countries over a 25 year period. We focus on three empirical issues. First, what is the best specification of the aggregate production technology to address the capital-skill complementarity hypothesis. Second, how should we measure skilled labor? Finally, is there any cross-country evidence in support of the capital-skill complementarity hypothesis? Our main finding is that we find some support for the capital-skill complementarity hypothesis in our macro panel dataset.
It is often asserted that the more substitutable capital and labor are in the aggregate production the more rapidly an economy grows. Recently this has been formally confirmed within the Solow model by Klump and de La Gradville (2000). This paper demonstrates that there exists no such monotonic relationship between factor substitutability and growth in the Diamond overlapping-generations model. In particular, we prove that, if capital and labor are relatively substitutable, a country with a greater elasticity of substitution exhibits lower per capital output and growth in transit and in steady state.
Many models of exogenous and endogenous growth assume that aggregate output is generated by a Cobb-Douglas specification for the aggregate production function with labor, physical capital, and sometimes human capital as inputs. In this paper we question the empirical relevance of the Cobb-Douglas specification. We consider new World Bank data on GDP, the labor supply, the stock of physical capital and educational attainment per worker for a panel of 82 countries over a 28 year period from 1960-87. These data are used to estimate a general CES production function specification for which the Cobb-Douglas specification is a special case. We find that for the entire 82 country-28 year panel we can reject a Cobb-Douglas specification for the aggregate production function. When we divide our sample of 82 countries up into several subsamples based on initial per capita income levels we find that we can continue to reject a Cobb-Douglas specification. In particular, we find that physical capital and human capital adjusted labor are more substitutable in the richest group of countries and less substitutable in the poorest group of countries than would be implied by a Cobb-Douglas specification. We discuss the implications of our findings for the debate concerning convergence in income levels across countries as well as for the plausibility of long-run endogenous growth due to the specification of the production technology.
We investigate country heterogeneity in cross-country growth regressions. In contrast to the previous literature that focuses on low-income countries, this study also highlights growth determinants in high-income (OECD) countries. We introduce Iterative Bayesian Model Averaging (IBMA) to address not only potential parameter heterogeneity, but also the model uncertainty inherent in growth regressions. IBMA is essential to our estimation because the simultaneous consideration of model uncertainty and parameter heterogeneity in standard growth regressions increases the number of candidate regressors beyond the processing capacity of ordinary BMA algorithms. Our analysis generates three results that strongly support different dimensions of parameter heterogeneity. First, while a large number of regressors can be identified as growth determinants in Non-OECD countries, the same regressors are irrelevant for OECD countries. Second, Non-OECD countries and the global sample feature only a handful of common growth determinants. Third, and most devastatingly, the long list of variables included in popular cross-country datasets does not contain regressors that begin to satisfactorily characterize the basic growth determinants in OECD countries.
This paper discusses the relationship between economic development and one aspect of property rights, a statute of limitations defining time limits on ownership claims. The analysis centers on property rights in land. This paper argues that the available development opportunities shape the time limits on ownership claims that maximize property values, which in turn creates an inherent underlying tension among the owners of different types of property in the economy. An implication for positive analysis is that economic growth and successful development create demands for changing this dimension of property rights. Other characteristics of the economy like the efficiency of the legal system, the quality of the public sector bureaucracy, and corruption, also affect the value-maximizing time limitations for different types of property. This paper discusses implications of these relationships for developing countries and for property redevelopment in declining central cities in the US.
The growth literature has not yet established how data on education should be introduced in theories involving human capital. Early work used enrolment rates as a proxy of human capital whereas more recently it has utilized measures of average education al attainment taking advantage of new data sets. This paper examines alternative specifications of human capital that may match up with the existing data on education. First, we present a standard neoclassical two-sector growth model that adopts a human capital specification proposed in recent papers. In this model the fraction of individual's time endowment in school is viewed as an investment rate. We show that the optimally chosen educational attainment predicted by the calibrated model is very high and does not correspond to the data. Next, we consider two extensions of the basic model: (a) allow for different elasticities of substitution between skilled and unskilled labor, (b) introduce work experience. We find that neither of the two extensions are able to generate plausible predictions. Finally, we propose an alternative specification of human capital based on a law of motion of educational attainment that successfully matches up with the data.
This paper reports findings of an experiment motivated by a dynamic labor market model that considers the problem faced by an employer in making hiring decisions of workers of different types. The question examined here is how quickly do employers learn about workers ability through observing the their performance in the workplace. If prior opinions are weak, the employer will quickly update any group-based stereotypes with information from the workplace. Our experimental findings are twofold: first subjects (employers) learn fast and second priors are hard to establish.
Between the Effects of Primary and Post-Primary Education on Economic Growth
Review of Development Economics, November 2003. Download PDF file.
This paper follows Benhabib and Spiegel (1994) in examining the effect of human capital accumulation on economic growth. The paper is innovative in two ways. First, it takes the R&D-based models more seriously. This delivers more structural specifications in which human capital affects growth as an input of final output and as a catalyst of technological innovation and imitation. Second, due to data availability it is possible to disaggregate human capital and assign different roles to primary and post-primary education. Regression estimates obtained from these alternative specifications suggest that the relative contribution of human capital to technology adoption and final output production vary by country wealth. More importantly, regression estimates suggest that primary education contributes mainly to production of final output, whereas post-primary education contributes mainly to adoption and innovation of technology.
in a Non-Scale R&D Growth Model
Economics Letters, September 2003. [Lead article] Download PDF file.
Motivated by recent empirical evidence this paper extends a non-scale R&D growth model to allow for technological imitation in addition to innovation. It is shown that a simple modification of the standard R&D equation results in a more general model that can explain not only the growth process of developed countries that mostly innovate, but also the growth process of developing countries that mostly imitate.
Adoption, Human Capital and Growth Theory
Review of Development Economics, October 2002. Download PDF file.
This paper explores a model in which growth is determined by a combination of human capital and technology adoption. At the heart of the model is the notion of "contiguous knowledge" - the idea that knowledge spreads out a certain distance. Because of this property of knowledge, a developing country can adopt existing technology only when it is sufficiently close to the technological frontier. The nature of the model is optimistic in that technology gaps present an opportunity for developing countries that are relatively close to the frontier to achieve rapid growth through technology adoption. Unlike the neoclassical growth model however, the predictions of the model are rather pessimistic for countries that are far away from the frontier making them unable to take advantage of imitation. As a result, the model is able to account both for rapid growth episodes as well as economic stagnation.
This paper employs the data-sorting method developed by Hansen (2000) which allows the data to endogenously select regimes using different variables. It is shown that openness, as measured by the trade share to GDP, is a threshold variable that can cluster middle-income countries into two distinct regimes that obey different statistical models. Our result suggests that openness may not be as crucial in the growth process of low and high-income countries but it is instrumental in identifying middle-income countries into high and low-growth groups.
as a Threshold Variable for Multiple Regimes: Reply
Economics Letters, June 2006. Download PDF file.
Huang and Chang's comment pointing to an error in Papageorgiou [Papageorgiou, C., 2002. Trade as a Threshold Variable for Multiple Regimes, Economics Letters 77, 85-91] is gratefully acknowledged but more recent work (using a new methodological advancement in threshold estimation) is suggestive of the result claimed in the earlier paper.
Education Inequality among Women and Infant Mortality: A cross-country empirical investigation, with Petia Stoytcheva in Progress in Economic Research, Nova Science Publishers, New York, NY. January 2012. Download PDF file.
We construct a cross-country dataset on female human capital inequality. Unlike the existing literature that primarily focuses on the average years of women's education, we use this dataset to examine the relationship between female human capital inequality and infant mortality. We show that higher education inequality among women, measured by the Gini coefficient, leads to substantially higher infant mortality. This finding is robust to various alternative specifications and subsamples considered. We also consider whether this channel is important in explaining growth. Growth regressions show favorable but weak evidence that education inequality among women is associated with growth via its effect on infant mortality. Our main results have implications related to the policy question on the optimal allocation of educational subsidies. Most importantly, if infant mortality reduction is a priority for policy makers, then educating the least educated women first seems to be an effective (and also simple) policy recommendation.
Tanzania: Growth Acceleration and Increased Public Spending with Macroeconomic Stability, with David Robinson and Matthew Gaertner in Yes Africa Can: Success Stories from a Dynamic Continent, World Bank, Washington DC. July 2011. Download PDF file.
Tanzania has seen unprecedented sustained growth acceleration since 1996. Several major (real and financial) reforms played a pivotal role in the take-off. Maintaining macroeconomic stability was a critical component in sustaining growth. Navigating the post–1996 period has involved the development of new policy instruments, as the nature of the economy changed and legacy constraints were eased. Is another 15 years of uninterrupted growth likely? Untapped growth potential clearly remains, and the policy space that has been developed over the past decade or so can provide needed support.
Globalization and Inequality, with Florence Jaumotte, Subir Lall and Petia Topalova, in World Economic Outlook, Washington DC. October 2007. Download PDF file.
This chapter examines the relationship between the rapid pace of trade and financial globalization and the rise in income inequality observed in most countries over the past two decades. The analysis finds that technological progress has had a greater impact than globalization on inequality within countries. The limited overall impact of globalization reflects two offsetting tendencies: whereas trade globalization is associated with a reduction in inequality, financial globalization and foreign direct investment in particular is associated with an increase in inequality. It should be emphasized that these findings are subject to a number of caveats related to data limitations, and it is particularly difficult to disentangle the effects of technology and financial globalization since they both work through processes that raise the demand for skilled workers. The chapter concludes that policies aimed at reducing barriers to trade and broadening access to education and credit can allow the benefits of globalization to be shared more equally.
Variable Elasticity of Substitution and Economic Growth: Theory and Evidence, with Theodore Palivos and Giannis Karagiannis in New Trends in Macroeconomics, C. Diebolt and C. Kyrtsou, Eds., Springer Verlag, New York, February 2005. Download PDF file.
We construct a one-sector growth model where the technology is described by a Variable Elasticity of Substitution (VES) production function. This framework allows the elasticity of factor substitution to interact with the level of economic development. First, we show that the model can exhibit unbounded endogenous growth despite the absence of exogenous technical change and the presence of non-reproducible factors. Second, we provide some empirical estimates of the elasticity of substitution, using a panel of 82 countries over a 28-year period, which admit the possibilities of a VES aggregate production function with an elasticity of substitution that is greater than one and consequently of unbounded endogenous growth.
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