Global Economics and Development Long-Run: Centuries Medium Run: Decades – Human Development...
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Global Economics and Development Long-Run: Centuries Medium Run: Decades – Human Development Index/Inequality Adjusted HDI Purchasing Power Parity Income
Global Economics and Development Long-Run: Centuries Medium
Run: Decades Human Development Index/Inequality Adjusted HDI
Purchasing Power Parity Income Per Capita Health Education Short
Run: Shocks Fluctuations ECON 403 Topics in Macroeconomics Fall
2013TR 1 2:15 pm
Slide 2
Why Nations Fail Exorbitant Privilege Elusive Quest for Growth
Talvi/Lombardi: New International Monetary Architecture Reinhart:
Debt and Crisis McMafia: Global Crime Antholis: China/India
Federalism Gaddy: Virtual Economy Bear Trap Kimenyi: Educational
Reform Can It Scale? Crisis: Is This Time Different? Soviet
Extraction: Ukrainian Famine Graham: Measuring Happiness
Endowments Institutions - Endowments Inequality, cause and
effect: Political power Economic power Reinforce status quo?
Promote progress? Why nations fail: Geography hypothesis/Culture
hypothesis/Ignorance hypothesis Prescriptions: Authoritarian
growth/Modernization Theory/Washington Consensus Acemoglu and
Robinson: Institutions hypothesis Extractive Institutions Vicious
Circles Economic institutions Insecure property rights
Slavery/Plantation system Encomienda Mita/Repartimiento Reversal of
fortune Monopoly: La Serrata Dual economy Crony capitalism
Marketing boards Political institutions Absolutism
Infighting/Failed state Ethnic fractionalization Iron Law of
Oligarchy Elites: Libro dOro Indirect rule Patronage networks
Apartheid/Jim Crow
Slide 5
Inclusive Institutions Virtuous Circles Why Nations Fail:
Institutions Hypothesis Economic institutions Enforced property
rights Patent protection Rule of law Open Markets Commenda
Political institutions Pluralism Constraint on executive Secret
ballot/Wide suffrage Free media: Muckrakers Creative Destruction
(pursuit of transient rents) Theory of Development Institutional
Drift Critical Juncture Contingency Preconditions Centralized State
Constraint on executive Pluralistic coalition Critical junctures we
have known Neolithic Revolution Fall of Rome Black Plague Atlantic
Trade Glorious Revolution Industrial Revolution French Revolution
Colonialism The Great War Energy Crisis
Slide 6
The Medium-Run Cumulative Causation: Stuck in a Trap Lack of
social infrastructure Low payoff to skill Little skill acquisition
Lack of social infrastructure Lack of skills/lack of means to
employ knowledge Primary production Primitive techniques Stagnation
Poverty Trap
Slide 7
Cumulative Causation Escaping the Trap: The Elusive Quest for
Growth Build social infrastructure Subsidize targeted
industries/Tax consumption Coordinate...industrial complex
development...assure critical mass Foster Great expectations
Self-fulfilling optimism Exploit Technology LEAPS Creation without
destruction...when theres nothing to destroy Take Advantage of
Demography Age and vested interest Immigration: the future of the
West Harness Creation without Destruction...Pursue Increasing
Returns Complementary inventions and technologies Railroads and the
steam engine/The internet and PCs Increasing Returns
Slide 8
Development (per capita income): What Matters? Sala-i-Martin: 2
million regressions testing 59 suspects Rule of law, accumulation,
initial education, openness help War, political instability,
primary goods specialization hurt Government stance, price
distortion, ethnic fractionalization dont matter Easterly and
Levine Africas Growth Tragedy: Ethno linguistic fractionalization
Tropics, Germs, Crops Institutions: protection of property rights
index Endowmentsgeography: Settler mortality, latitude, landlocked,
crops, minerals Policies: Openness to trade, overvaluation,
inflation Other variables: Ethnic fractionalization, religion,
legal origin FINDINGS: Endowments Institutions Economic Development
Engerman & Sokoloff/Acemoglu, Johnson and Robinson get the ring
What about policies? Once per capita income is explained by
institutions, policy variables individually and together are
insignificant CONCLUDE: Policies may affect growth over a decade,
as found by other studies Bad policies are symptoms of bad
institutions INSTITUTIONS MATTER FOR LONG-RUN DEVELOPMENT
Slide 9
Development, One Schoolhouse at a Time Kimenyi: Can Contract
Teacher Results be Scaled Up? In randomized experiment implemented
by NGOs, low-paid contract teachers performed better than higher
paid civil service teachers in Western Kenya. But can the result be
scaled up, i.e., when implemented on large-scale by government
agencies? Another randomized experiment performed: half the
contract teachers worked for NGOs, half for government agencies.
Government hired somewhat more qualified contract teachers
Government hires more likely related to someone in system cronyism
Other things equal, only NGO contract teachers performed better
than civil service teachers Payroll delays significantly affected
performance/Paymt by govt more delayed Kimenyi concludes: Dont
leave education reform to government Alternative conclusion: Clean
up the payroll system and public education will do fine Equal
fractions of NGO and govt teachers did well enough to be hired full
time
Slide 10
Gaddy: Russia, Before and After Soviet growth under extractive
institutions The Easy Part: Move resources from low productivity
agriculture to higher productivity manufacturing The Hard Part:
Spur innovation/Creative Destruction Perverse quotas and prices The
Post-Soviet Virtual Economy Loss-making manufacturing ought to shut
down Unemployment/Social discontent Siberian industries and cities
ought to be downsized Extreme cold/high transport costs
uneconomical settlement Primary producers/fictitious prices
maintain the status quo Oligarchs keep export earnings Putin
maintains power: A protection racket Required subsidy grows with
time Unsustainable Bear Trap
Slide 11
Antholis: China and India The Political Realities China and
India are not monolithic states Regions and provinces matter India:
35 states/China: 22 provinces + Taiwan Local issues Beijing and New
Delhi cant easily lead Migration Land acquisition for industry and
urbanization Infrastructure provision Fiscal federalism: Center
bail-out of sub-national entities China: GDP Monotheism/Fragmented
Authoritarianism Central Ministry Provincial Government Matrix
Global Coast vs. Protectionist Interior Special Enterprise
Zones/Environmental sustainability issue India: Secessionist
Threat/Ethnic Conflicts/Caste Conflicts Regional parties critical
for Congress or BJP coalitions Advanced States: Benefit from
high-tech diaspora Backward States: Cronyism Legacy of socialist
subsidies: Unreliable power/shoddy infrastructure
Slide 12
The Short-Run in a Floating Age Managed float: intervention $
reserves $ privilege Currency misalignments Currency crises Latin
Americas Lost Decade Tequila/East Asia Global demand for $s Capital
inflows to US US International Debt Threat of Bank Run The US
Housing Bubble (Developed) World in a Slump Dysfunctional US
Finance/Dysfunctional US Politics Dawn of a new international
monetary architecture?
Slide 13
Slide 14
The Euro: An Alternative to the $? Why a ? Euro economics:
Transactions costs/CAP/German Discipline Euro politics: Integration
Peace/Tie Germany to West Europe Eurozone Imbalance Early 2000s:
German wage discipline German competitiveness Current account
surplus Capital inflows to peripheral countries Financial
bubbles/Housing bubbles/Fiscal bubbles
Iceland/Cyprus/Ireland/Spain/UK/Greece/Italy/Portugal Iceland: When
fishermen become investment bankers Crash Brit and Dutch Screwed
Cyprus: Oligarch/Mafiya Laundry Crash Russians Screwed
Slide 15
Talvi: New Economic Geography Latin American and other emerging
economies not dragged down by the crisis Chinese expansion
commodity boom Latin American countries with relatively high net
commodity exports advantaged by rising commodity prices Advanced
country deleveraging capital inflows to emerging economies growth
of emerging economies
Slide 16
Carmen Reinharts Remarks: Carmen bemoans debt Emerging
economies had reduced debt Deleveraging followed 1997-98 crises
Advanced countries (and Emerging Europe) entered crisis with high
Public + Private Debt Deleveraging has been and will continue to be
prolonged ~ Decade Downward pressure on demand, output, &
employment Massive monetary easing lightens debt burden Stemmed
debt deflation spiral But private saving eaten up by public
borrowing Vulnerabilities for emerging economies Build up of
domestic debt Brazil: private debt and non-federal government debt
Reinhart: For a banking crisis, dont need external debt, just debt
China slowdown commodity price collapse
Slide 17
This Time Aint Different Reinhart and Rogoff Excessive debt
accumulation, whether it be by the government, banks, corporations,
or consumers, often poses greater systemic risks than it seems
during a boom. Such large-scale debt buildups pose risks because
they make an economy vulnerable to crises of confidence,
particularly when debt is short term and needs to be constantly
refinanced. Highly leveraged economies can seem to be merrily
rolling along for an extended period, when bang! - confidence
collapses, lenders disappear, and a crisis hits. Eight centuries of
experience suggests this time is not different.
Slide 18
U.S. Debt History
Slide 19
This Time Aint Different (but its not another Depression, ECON
403) Consequences of banking crises Real GDP down Unemployment up
Government revenue down Government bailout of banks Government
debt/GDP U P But 90% is not a ratio to be particularly feared
Austerity sucks...and doesnt spur recovery A recession is no time
to cut spending Prolonged slump Deleveraging Zero lower bound
Monetary policy weakened Fiscal policy would work, given the
chance: STIMULUS NOW