Aid, shocks, and growth

Analysis of the relationship between aid and growth by Burnside and Dollar found that the better a country's policies, the more effective aid is in raising growth in that country. But this result has been criticized for being sensitive to choice of sample and for neglecting shocks. The authors incorporate export price shocks into the analysis of aid's effect on growth. They construct export price indices using the approach pioneered by Deaton and Miller. They locate shocks by differencing the indices, removing predictable elements from the stationary process, and normalizing the residuals. Extreme negative shocks are the bottom 2.5 percent tail of this distribution. Introducing these extremeshocks into the Burnside-Dollar regression, the authors find that they are highly significant: unsurprisingly, extreme negative shocks reduce growth. Once these shocks are included, the Burnside-Dollar results become robust to choice of sample. Moreover, the adverse effects of negative shocks on growth can be mitigated through offsetting increases in aid. Indeed, targeting aid to countries experiencing negative shocks appears to be even more important for aid effectiveness than targeting aid to countries with good policies. But the authors show that, overall, donors have not used aid for this purpose.Development Economics&Aid Effectiveness,Gender and Development,Markets and Market Access,Environmental Economics&Policies,School Health,Environmental Economics&Policies,Development Economics&Aid Effectiveness,Inequality,School Health,Markets and Market Access

The optimal income tax when poverty is a public"bad"

The author considers poverty as an aggregate negative externality that affects people in different ways, depending on their aversion to poverty. If society is on average averse to poverty, then the optimal income tax schedule displays negative marginal tax rates, at least for less skilled individuals. Negative marginal tax rates play the role of a Pigouvian earnings subsidy, fostering the supply of poor individuals to provide labor. The result of no distortion at the endpoints, which is therefore violated, can be restored once the focus is shifted from individual to social distortions.Environmental Economics&Policies,Economic Theory&Research,Health Economics&Finance,Achieving Shared Growth,Safety Nets and Transfers

THE SUSTAINABLE GROWTH PARADIGM'S APPLICATION TO U.S. FARM BUSINESSES

The sustainable growth paradigm is used to analyze aggregate output decisions across U.S. agricultural productions regions. Results show that the farm sector has adapted to positive or negative sustainable growth challenges (SGC) and that, from an equilibrium point of view, SGC countercyclical measures indicate a usual tendency towards balanced growth.Production Economics,

Corruption and economic growth in Lebanon

This paper seeks to examine the impact of corruption on economic growth in Lebanon. Using a neoclassical model, we hypothesise that corruption reduces the country's standard of living as measured by real per capita GDP. We show that corruption deters growth indirectly through reducing the factor input productivity in a Cobb-Douglas production function. We provide empirical evidence suggesting that corruption increases inefficiencies in government expenditure and reduces investment and human capital productivity, leading to a negative impact on output. The implications of the analysis are explored.corruption, economic growth, investment, human capital, government expenditure, foreign aid, Institutional and Behavioral Economics, Labor and Human Capital, Public Economics,

Getting connected : competition and diffusion in African mobile telecommunications markets

The author studies the determinants of the diffusion of mobile telecommunications in Africa in a fixed effects model. He uses data from 1987-2000 on 41 African countries that have adopted cellular telecommunications technologies. He finds that competition is the driving force behind the mobile telecommunications explosion in Africa. Duopoly and triopoly markets grow significantly faster than monopoly markets, although growth does not appear to differ between the first two markets. Evidence of preemptive behavior is found in competitive sequential entries into the market, but the major effect of competition on diffusion occurs after the actual year of entry. The introduction of digital technology has a positive and significant effect on the diffusion of mobile phones. The presence of an incumbent-owned cellular operator has a negative effect on the diffusion of mobiles, suggesting an abuse of a dominant position by the incumbent fixed-line operator. However, privatization of the incumbent fixed-line cellular operator accelerates mobile growth and mitigates that negative effect.Trade Finance and Investment,Economic Theory&Research,Environmental Economics&Policies,ICT Policy and Strategies,Health Economics&Finance,Economic Theory&Research,ICT Policy and Strategies,Environmental Economics&Policies,Governance Indicators,Health Economics&Finance

The relative richness of the poor? natural resources, human capital, and economic growth

Are natural resources a blessing or a curse? The authors present a model in which natural resources have a positive effect on the level of income and a negative effect on its growth rate. The positive and permanent effect on income implies a welfare gain. There is a growth effect stemming from a composition effect. However, the authors show that this effect can be offset by having a large level of human capital. They test their model using panel data for the period 1970-90. They extend the usual specifications for economic growth regressions by incorporating an interaction term between human capital and natural resources, showing that high levels of human capital may outweigh the negative effects of the natural resource abundance on growth. The authors also review the historical experience of Scandinavian countries, which in contrast to Latin America, another region well-endowed with natural resources, shows how it is possible to grow fast based on natural resources.Capital Markets and Capital Flows,Economic Theory&Research,Decentralization,Environmental Economics&Policies,Banks&Banking Reform,Economic Theory&Research,Environmental Economics&Policies,Economic Growth,Inequality,Governance Indicators

Is the psychology of high profits favorable to industrial renewal? Experimental evidence for the theory of transformation pressure and Schumpeterian economics

The theory of transformation pressure sheds light on the importance of negative driving forces for economic growth and the countercyclical movement in innovations and productivity growth. The theory suggests that firms have a status-quo bias in periods of increasing profits leading to lower productivity growth. Firm agents are governed by changes in current profits through historical relativism, the peak-end rule and overconfidence. They will first abandon a status-quo bias after an actual decline in profits though both under- and overreaction is possible. On the other hand Schumpeterian economics stress that firm renewal is speeded up during recoveries, e.g. by psychological reasons. The two contradicting hypotheses were tested by a role play where a group of university students in economics completed a questionnaire acting as managers for an established company. The students had the opportunity to choose between different growth strategies and define the underlying psychological mechanism. The questionnaire also provided room for rational considerations. The role play confirmed the theory of transformation pressure more than Schumpeterian economics but primarily that the students expected that they would have reacted rationally as managers.Transformation pressure; Schumpeterian economics; peak-end rule; historical relativism; productivity growth; overconfidence; bounded rationality; the business cycle; heuristic decision rules; role play

A Retail Sales / Sales Tax Paradox

Small communities experiencing slow to negative growth sometimes increase their local sales tax rate in order to maintain or expand public services. A cross-sectional, time series model is used to investigate possible unintended consequences. Negative elasticities are found for tax rates above the norm, resulting in reduced retail trade.community development, sales tax, Community/Rural/Urban Development, Public Economics, Q00, R51,

The causes of government and the consequences for growth and well-being

Using a large cross-country data set, the authors examine the factors that cause governments to grow, and analyze how the size of government affects growth, whether measured as income growth or other measures of well-being, such as infant mortality and life expectancy. They find no robust link between government size and per capita income. The factors they find to be important in explaining government size are relative prices, the age-dependency ratio, how long a country has been independent, relative political freedom, and openness in trade. Their results also partially support the view that governments use consumption to buffer external risk, especially in low-income countries. As for how government size affects growth, they find a robust and significant negative relationship between growth and government size, as measured by consumption. Policy distortions, predictably, also have a negative effect on growth. But the positive effects of well-functioning institutions and high quality in government bureaucracies can offset the negative influence of large government size alone. Finally, they find that social-sector spending can exert a positive influence by reducing infant mortality and raising life expectancy. Better income distribution, higher per capita income, higher per capita income growth, and more political freedom have the same positive effect on those two measures of well-being.Environmental Economics&Policies,Economic Theory&Research,National Governance,Payment Systems&Infrastructure,Knowledge Economy,Knowledge Economy,Environmental Economics&Policies,National Governance,Economic Theory&Research,Inequality

Negative externalities as the engine of growth in an evolutionary context

We present a simple growth model which has two original features: the strategic context considered, which is an evolutionary game, and the growth mechanism described, in which growth is caused by negative externalities. The emphasis in this growth mechanism is evidently different from that placed on positive externalities by current endogenous growth models. In this model welfare depends on three goods: leisure, a free environmental renewable resource, and a non-storable output. The environmental resource is subject to negative externalities, that is, it is deteriorated by the production of the output. Faced with a forced reduction of the resource, agents may react by increasing the labor supply in order to produce and consume substitutes for the diminishing resource, i. e. they can raise their defensive expenditures. The increase in production and consumption that follows, i.e. growth, generates a further deterioration of the environmental resource, thus giving rise to a self-feeding growth process. The conditions under which multiple equlibria and Pareto-worsening growth dynamics arise, are analysed. Beside showing the logical possibility that negative externalities are the engine of growth, we suggest that the case analysed may be of practical relevance, i.e., that negative externalities may play an important role in many episodes of growth. This role is widely recognized by social sciences other than economics. We suggest that the model may be interpreted as a push development model and that it may also contribute to explain some aspects of growth in advanced countries