The Influence of Capital Controls on Long Run Growth: Where and How Much?

The recent financial crisis in East Asia generated a revival of interest in the merits of financial openness. The ensuing debate on the benefits of openness has focused more on short and medium run issues than on the long run effects. Within the empirical literature on economic growth, little or no attention has been paid to the effects of financial openness. Contrary to the orthodox position, the few results that exist suggest that capital controls have no effect on economic growth. This paper argues that this conclusion emerges from a failure to account for underlying differences across countries with similar degrees of capital controls. I show that the degree of ethnic and linguistic heterogeneity in a country plays a significant role in explaining the effects of controls on economic growth. For countries with relatively higher degrees of ethnic heterogeneity, the effects are particularly adverse whereas for countries with high degrees of homogeneity, capital controls actually have a net positive effect on economic growth. On balance, more developing countries suffered due to controls than not. Within the sample of 57 non OECD countries that did implement controls for the period 1975-95, as many as 39 saw a reduction in their growth rates. This result is robust to a number of variables commonly used in the economic growth regressions.Economic Growth, Capital Controls, Ethno-Linguistic Fractionalization

The Rise in Returns to Education and the Decline in Household Savings

This paper explores the consequences of rising returns to human capital investment on the personal savings rate. Over the past two decades, the return to college education has increased relative to high school education leading economists to argue the presence of 'skill biased technological progress'. The literature explaining household savings has also burgeoned considerably, motivated by its declining rate in the US over the past couple of decades. Stylized facts suggest a negative relationship between returns to education and savings rates across most of the past century and also a negative relationship between education spending and savings rates across OECD countries. In this paper, we present a model where a declining savings rate emerges as an outcome of an exogenously driven increase in the return to education. The link between the two is attributed to optimizing behavior of altruistic households. The results of our model are robust to the inclusion of life cycle savings and unintentional bequests. Some of the interesting results of our model are (i) a rise in the return to education raises education spending ratio by less than what it reduces the aggregate savings rate (ii) for some parameter values it actually reduces both the education spending rate and the aggregate savings rate and finally, (iii) it also raises the return to capital due to physical capital-human capital complementarity.Skill Biased Technological Change, Savings, Education, Economic Growth

Can Skill Biased Technological Progress Have a Role in the Decline of the Savings Rate?

This paper explores the consequences of skill biased technological progress on the savings rates. The literature, both theoretical and empirical, on the causes and consequences of skill biased technological progress in the past few years has burgeoned considerably. So has the literature on declining household savings, motivated by the American experience over the past couple of decades. I present a general equilibrium model where declining savings rates emerges as an outcome of exogenously driven skill biased technological progress. The link between the two is attributed to optimizing behavior of altruistic households. In an overlapping generations model, parents are assumed to derive utility from both spending on their children's education and making monetary transfers (or bequests). I show that increases in the growth rate of skill biased technological change causes a shift in allocations away from bequests in favor of education- leading to a decline in domestic capital accumulation. The analysis is extended to incorporate life cycle savings both under certainty and uncertainty regarding the timing of death.Technological Change, Savings, overlapping Generations,Human Capital, Growth

Productivity Growth in Goods and Services across US States: What can We Learn from Factor Prices?

This paper exploits the dual accounting technique to uncover multi-factor productivity growth patterns for goods and services across US states from 1980 to 2007. Due to changes in sectoral classifications, the period is divided into two parts, 1980-1997 and 1998-2007. Over both periods, states exhibit a wide range of productivity growth rates with the goods sector showing much larger variations. The variations are larger for the second time period with some states recording productivity growth as high as almost nine percent annually while other states showing declines at more than two percent. Underlying the wide variation in productivity growth are variations in both wage growth and real user cost growth. Since 1998, the real user cost declines at almost two per cent annually. Incorporating human capital into the analysis makes wage growth and, hence, productivity growth lower in both sectors, and on average negative in the second period. Scaling up the analysis to the national level, we also find that there are large differences between the growth rates of primal based measures of marginal product of capital and our calculations of real user cost growth. This can only be partially explained by the anomalous behavior of particular industries such as mining and real estate services, and to some degree due to the declining relative price of investment goods.

Why is Maharashtra’s average income five times that of Bihar?

Income gaps among Indian states are large, persistent and increasing over time. Differences in technology and efficiency in production processes have been found to be the primary explanation for income gaps across countries. Does the same apply to Indian states? This column attempts to answer this question, with a particular focus on Bihar – the state with the lowest average income in the country

Early Starts, Reversals and Catchup in The Process of Economic Development

Early states like China, India, Italy and Greece have been experiencing more rapid economic growth in recent decades than have later-comers to agriculture and statehood like New Guinea, the Congo, and Uruguay. We show that more rapid growth by early starters has been the norm in economic history, and that the “reversal of fortune” associated with European overseas expansion from about 1500 to 1960 was an exception. We demonstrate that the colonial era reversal was in the process of being reversed in recent decades, and that this second reversal is in line with longer-term trends dating back to the first agricultural revolution.economic growth, economic development, economic history

Dual Economies and International Total Factor Productivity Differences

This paper shows that a significant part of measured total factor productivity (TFP) differences across countries is attributable not to technological factors that affect the entire economy neutrally, but rather, to variations in the structural composition of economies. In particular, the allocation of scarce inputs between agriculture and non-agriculture is important. We provide a framework which maps the composition of the economy to measured aggregate TFP. A decomposition analysis suggests that as much as 85 percent of the international variation in TFP can be attributed to the composition of output. Estimation exercises indicate that recent findings of the conduciveness of good institutions, and, to some extent trade, on levels of TFP, may be thus explained.