which reforms work and under what institutional environment evidence from a new data set on structural reforms abstract 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 data set 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 on several occasions botched reforms resulted in growth disasters more important 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 fro

income inequality capitalism and ethno linguistic fractionalization we examine the relationship between capitalism and income inequality for a large sample of countries using an adjusted economic freedom index as proxy for capitalism our results suggest that there is no robust relationship between economic freedom and gini coefficients based on gross income subsequently we analyze the relationship between income redistribution and ethno linguistic fractionalization we find that the impact of ethno linguistic fractionalization on income redistribution is conditional on the level of economic freedom countries that have a high degree of fractionalization redistribute income less while capitalist countries that have a low degree of fractionalization redistribute income more

the political dynamics of economic growth summary we argue that an understanding of the political drivers of economic growth needs an explanation of the political dynamics around the transition from one growth phase to another and that the political drivers of early stage growth accelerations are different from that of growth maintenance informal institutions are likely to play a role in growth acceleration while formal institutions of credible commitment the provisioning of public goods and the overcoming of co ordination failures will be more important in growth maintenance we present empirical evidence drawn from country case studies and cross country econometric analysis that provides support to our theoretical propositions

environmental taxation inequality and engel s law the double dividend of redistribution empirical evidence shows that low income households spend a high share of their income on pollution intensive goods this fuels the concern that an environmental tax reform could be regressive we employ a framework which accounts for the distributional effect of environmental taxes and the recycling of the revenues on both households and firms to quantify changes in the optimal tax structure and the equity impacts of an environmental tax reform we characterize when an optimal environmental tax reform does not increase inequality even if the tax system before the reform is optimal from a non environmental point of view if the tax system before the reform is calibrated to stylized data and is thus non optimal we find that there is a large scope for inequality reduction even if the government is restricted in its recycling options

government impartiality and sustained growth in sub saharan africa many studies suggest that one of the main reasons for africa s dismal growth performance over most of the 20th century is its degree of ethnic fragmentation yet there is still insufficient knowledge about whether ethnic diversity necessarily entails large economic costs or whether the implications of diversity depend inter alia on the government s approach toward the ethnic question we note that economic growth tends to increase average incomes but it also affects the income distribution then if growth is accompanied by growing economic inequality the perception of the impartiality of the government toward different ethnic groups is likely to be important for whether growth can be sustained or whether sparks of growth will evaporate because of rising political divisions and internal conflicts in this paper we study whether the degree of ethnic impartiality in the government s policies is related to the emergence of sustained growth in sub saharan africa irrespective of the actual content of the policies we measure perceptions about the impartiality of the government with survey data from the afrobarometer covering 20 countries starting in the late 1990 s our main definition of sustained growth is when there is a gdp per capita growth rate of at least 2 for at least five consecutive years our empirical results suggest that countries whose governments are perceived as impartial are more likely to experience sustained growth we conclude that in order to ensure economic development it is not only important to choose the right policies but also to implement these policies in a fair manner

what makes growth sustained abstract we identify structural breaks in economic growth in 140 countries and use these to define growth spells periods of high growth preceded by an upbreak and ending either with a downbreak or with the end of the sample growth spells tend to be shorter in african and latin american countries than elsewhere we find evidence that growth duration is positively related to the degree of equality of the income distribution democratic institutions export orientation with higher propensities to export manufactures greater openness to fdi and avoidance of exchange rate overvaluation favorable for duration and macroeconomic stability

structural change the real exchange rate and the balance of payments in mexico 1960 2012 this paper estimates a structural model of the balance of payments with disaggregated exports manufactures and other and imports final and intermediate and a reduced form model of the trade balance for the mexican economy the analysis identifies structural changes in the composition of mexico s trade and the parameters that affect it across five subperiods marked by statistical breakpoints the results indicate that a tightening of the balance of payments constraint may account for the post liberalization slowdown in mexico s growth only during certain subperiods and that the impact of real exchange rate changes on the trade balance has diminished most likely as a result of the increasing integration of export industries into global supply chains the results also suggest an asymmetry whereby a country cannot sustain growth above the rate consistent with balance of payments equilibrium as expected but it can grow persistently below that rate when other constraints are more binding

demand and defective growth patterns the role of the tradable and non tradable sectors in an open economy developing countries in the post war period provide a wide range of case studies on successful and unsuccessful or defective growth patterns there are two classes of defective growth patterns the first class fail to generate strong growth at their start a country isolated by policy from the global economy may grow very slowly but high growth is unattainable without the enabling features of the global economy inbound technology transfer and sizeable external demand the second class of defec

the high frequency trade off between speed and sophistication abstract central to the ability of a high frequency trader to make money is speed in order to be first to trading opportunities firms invest in the fastest hardware and the shortest connections between their machines and the markets yet this is not enough algorithms must be short no more than a few instructions as a result there is a trade off in the design of optimal high frequency trading strategies being the fastest necessitates being less sophisticated to understand the effect of this tension a computational model is presented that captures latency both of code execution and information transmission trading algorithms are modelled through genetic programming with longer programmes allowing more sophisticated decisions at the cost of slower execution times it is shown that depending on the market composition short fast strategies and slower more sophisticated strategies may both be viable and exploit different trading opportunities the relative profits of these different approaches vary however slow traders benefit and social welfare increase in the presence of hfts a suite of regulations are tested to manage the risks associated with high frequency trading the majority are found to be ineffective though constraining the ratio of orders to trades may be promising

good bye financial crash hello financial eclecticism latin american responses to the 2008 09 global financial crisis abstract 1985 saw the publication of carlos diaz alejandro s classic article good bye financial repression hello financial crash 1985 writing in the wake of drastic financial blowups in the southern cone diaz alejandro nonetheless argued that a believable alternative system could be designed avoiding many of the inefficiencies of financial repression and blending both public and private financial agents 18 nearly three decades after the publication of this prescient work there are credible signs that such an arrangement is now emerging within some latin american emerging economies ees just as diaz alejandro studied how the 1982 debt shocks both exacerbated and shed light on financial sector policies and institutions in the southern cone countries we use the 2008 09 global financial crisis gfc as a lens through which to examine the policymaking capabilities of six latin american countries we find that several of the countries successfully weathered the 2008 09 financial shocks and argue that this is due to institutional modernization that facilitated policy learning and a more business friendly climate and to sustainable improvements in income distribution that may have facilitated consensus building these factors we suggest gave policymakers both the expertise and the political space to employ more nuanced fiscal and financial policies

what explains the speed of recovery from banking crises abstract while a large body of research has explored the causes and effects of banking crises less is known about what determines recovery from banking crises despite large variations in post crisis performances across countries in order to identify local and global factors that determine the length of recovery i e the time it takes until countries reach their pre crisis level of per capita gdp this exploratory paper employs event history analysis on 138 incidents of banking crises between 1970 and 2012 regarding domestic factors the simultaneous occurrence of currency crises large financial sectors overvalued currencies and large primary deficits are associated with later recovery whereas higher debt to gdp ratios or inflation levels do not exhibit a negative effect on post crisis performances regarding external factors a low growth of world trade as well as indicators of uncertainty in financial markets are correlated with later recovery global interest rate shocks are particularly harmful for the speed of recovery among middle income countries with a strong reliance on external capital the results are similar when using the length of recessions as an alternative indicator of post crisis performances

holding on ethnic divisions political institutions and the duration of economic declines abstract we analyze the duration of large economic declines and provide a theory of delayed recovery we show theoretically that uncertain post recovery incomes lead to a commitment problem which limits the possibility of cooperation in ethnically heterogeneous countries strong constraints on the executive solve this problem by reducing the uncertainty associated with cooperative behavior we test the model using standard data on linguistic heterogeneity and detailed data on ethnic power configurations our findings support the central theoretical prediction countries with more constrained political executives experience shorter economic declines the effect is large in ethnically heterogeneous countries but virtually non existent in homogeneous societies our main results are robust to a variety of perturbations regarding the estimation method the estimation sample measures of heterogeneity and measures of institutions

progressive tax and inequality in a unionized economy in this paper we develop a heterogeneous agent endogenous growth model of a unionized economy with distinct progressive tax schedules on labor and capital income with time preference heterogeneity the effective labor force balanced growth and income inequality are endogenously determined and these interact with each other a reduction in the degree of progressive labor tax yields a double dividend in terms of reducing income inequality and boosting economic growth while capital income progressivity displays the usual growth inequality trade off particularly the double dividend effect becomes more pronounced when unionization is declined or trade unions become more wage oriented leading to the so called cheshire cat phenomenon

democracy diversification and growth reversals there exists convincing evidence that democratic countries are less volatile this conclusion is usually reached with respect to volatility as measured by the standard deviation of annual growth rates of per capita gdp which includes both low and high frequency fluctuations however recently several studies have documented that significant changes in trend growth such as growth accelerations that last a decade or similar periods of negative growth are quite common in this paper we ask whether democracy also has a stabilizing effect on trend volatility i e whether more democratic countries experience fewer and milder swings of trend growth we find a common phenomenon medium term reversals of growth that is periods of exceptionally high growth are on average followed by periods of exceptionally low growth and vice versa the propensity to experience large swings of trend growth is not uniform across countries less democratic countries are more susceptible to it when compared with factors commonly associated with volatility such as measures of quality of institutions macroeconomic policies and financial development we find that democracy is the most robust predictor of a country s propensity for growth reversals we construct a model in which non democracies have high barriers of entry for new firms this leads to less sectoral diversification fewer sectors are operated but more resources are channeled to each in an uncertain environment this leads to infrequent but large growth accelerations when one of the few sectors operated is successful however these accelerations are followed by large declines when fortunes change in favor of the missing sectors we present empirical evidence that confirms the positive relationship between democracy and industrial diversification

social identity and inequality the impact of china s hukou system abstract we conduct an experimental study to investigate the causal impact of social identity on individuals performance under incentives we focus on china s household registration hukou system which favors urban residents and discriminates against rural residents in resource allocation our results show that making individuals hukou identity salient significantly reduces the performance of rural migrant students relative to their local urban counterparts on an incentivized cognitive task and consequently significantly lowers their relative ranking in the earnings distribution under the piece rate regime however the impact of hukou identity salience is insignificant in the tournament regime suggesting that its negative effect on migrant students performance may be mitigated when competition is introduced the results demonstrate the impact of institutionally imposed social identity on individuals economic performance and potentially on inequality

empirics of hills plateaus mountains and plains a markov switching approach to growth abstract most economic growth research has been aimed at explaining cross country differences in average growth rates however it is well known that growth experiences differ over time within a country almost as much as they differ among countries this paper builds on pritchett s 2000 pritchett lant understanding patterns of economic growth searching for hills among plateaus mountains and plains world bank economic review may 2000 14 2 221 250 observation that the growth process can be thought of as transitions between different growth regimes and proposes a framework for systematic analysis of such regimes and the dynamics of the transitions i estimate a markov switching regression to characterize four distinct growth regimes and transitions between them the results show that countries switch among regimes of stable growth miracle catch up stagnation and crisis with the transition probabilities determined by the quality of institutions better institutions appear to improve long run growth by making episodes of fast growth more persistent low average growth rates in countries with weak institutions are a result of these countries spending more time in stagnation regimes rather then being incapable of fast growth at all weak institutions do not rule out growth takeoffs but limit their sustainability the approach directs attention to shifts in growth performance and highlights the fact that identical average growth rates can mask very distinct growth paths

exogenous shocks and growth crises in low income countries a vulnerability index summary this paper develops a new index which provides early warning signals of a growth crisis in the event of large external shocks in low income countries lics multivariate regression analysis and a univariate signaling approach are used to map information from a parsimonious set of underlying policy structural and institutional indicators into a composite vulnerability index both the in sample and out of sample predictive power of the index are high in particular it explains well the growth crises observed in lics during the global financial crisis

does fdi actually affect income inequality insights from 25 years of research while there are 25 years of empirical research on how fdi may affect income inequality there is surprisingly no consensus on this issue in this paper we conduct a meta analysis on the effect of fdi on inequality using 543 empirical studies from 1995 to 2019 among various factors we find that the development level of the study country has the strongest influence on the direction in which fdi affects income inequality when the primary studies are sorted into three groups based on the gdp per capita of their sample areas the within group estimates on the effect of fdi on income inequality become strongly consistent with each other particularly we find that fdi is associated with higher inequality for the low income group has no statistically significant effect for the middle income group and is associated with lower inequality for the high income group this observation suggests that fdi may increase income inequality as a country initially develops but reduce inequality as development deepens

the rising resilience of emerging market and developing economies summary economic performance in many emerging market and developing economies emdes improved substantially over the past 20 years in the past decade emdes spent more time in expansion and had smaller downturns than advanced economies for the first time we document the history of emdes resilience over the past 60 years and investigate what factors have been associated with it we find that their improved performance since the 2000s is accounted for by both good policies and a lower incidence of external and domestic shocks better policies account for about three fifths of their improved resilience while less frequent shocks account for the remainder

a new database on the structure and development of the financial sector this article introduces a new database of indicators of financial structure and financial development across countries and over time the database is unique in that it combines a wide variety of indicators that measure the size activity and efficiency of financial intermediaries and markets it improves on previous efforts by presenting data on the public share of commercial banks introducing indicators of the size and activity of nonbank financial institutions and constructing measures of the size of bond and primary equity markets this article introduces a new database the first to provide comprehensive measures of the development structure and performance of the financial sector this database is the first to define and construct indicators of the size and activity of nonbank financial intermediaries such as insurance companies pension funds and non deposit money banks it is also the first to include indicators of the size of primary equity markets and primary and secondary bond markets in constructing the database authors carefully deflate measures and match stock and flow variables

history lessons institutions factor endowments and paths of development in the new world the explanations offered for the contrasting records of long run growth and development among the societies of north and south america most often focus on institutions the traditional explanations for the sources of these differences in institutions typically highlight the significance of national heritage or religion we in contrast argue that a hemispheric perspective across the wide range of colonies established in the new world by the europeans suggests that although there were many influences factor endowments or initial conditions had profound and enduring effects on the long run paths of institutional and economic development followed by the respective economies

public policies and the art of catching up matching the historical evidence with a multicountry agent based model in this paper we study the effects of industrial policies on international convergence using a multi country agent based model which builds upon dosi et al 2019b the model features a group of microfounded economies with evolving industries populated by heterogeneous firms that compete in international markets in each country technological change is driven by firms activities of search and innovation while aggregate demand formation and distribution follows keynesian dynamics interactions among countries take place via trade flows and international technological imitation we employ the model to assess the different strategies that laggard countries can adopt to catch up with leaders market friendly policies industrial policies targeting the development of firms capabilities and rd protectionist policies focusing on tariffs only we find that markets cannot do the magic in absence of government interventions laggards will continue to fall behind on the contrary industrial policies can successfully drive international convergence among leaders and laggards while protectionism alone is not necessary to support catching up and countries get stuck in a sort of middle income trap finally in a global trade war where developed economies impose retaliatory tariffs both laggards and leaders are worse off and world productivity growth slows down

how democracy affects growth abstract this paper introduces a new methodology to examine the empirical relationship between democracy and economic growth democratic institutions are assumed to affect growth through a series of channels we specify and estimate a full system of equations determining growth and the channel variables results suggest that democracy fosters growth by improving the accumulation of human capital and less robustly by lowering income inequality on the other hand democracy hinders growth by reducing the rate of physical capital accumulation and less robustly by raising the ratio of government consumption to gdp once all of these indirect effects are accounted for the overall effect of democracy on economic growth is moderately negative our results indicate that democratic institutions are responsive to the demands of the poor by expanding access to education and lowering income inequality but do so at the expense of physical capital accumulation

institutional causes macroeconomic symptoms volatility crises and growth countries that have pursued distortionary macroeconomic policies including high inflation large budget deficits and misaligned exchange rates appear to have suffered more macroeconomic volatility and also grown more slowly during the postwar period does this reflect the causal effect of these macroeconomic policies on economic outcomes one reason to suspect that the answer may be no is that countries pursuing poor macroeconomic policies also have weak institutions including political institutions that do not constrain politicians and political elites ineffective enforcement of property rights for investors widespread corruption and a high degree of political instability this paper documents that countries that inherited more extractive institutions from their colonial past were more likely to experience high volatility and economic crises during the postwar period more specifically societies where european colonists faced high mortality rates more than 100 years ago are much more volatile and prone to crises based on our previous work we interpret this relationship as due to the causal effect of institutions on economic outcomes europeans did not settle and were more likely to set up extractive institutions in areas where they faced high mortality once we control for the effect of institutions macroeconomic policies appear to have only a minor impact on volatility and crises this suggests that distortionary macroeconomic policies are more likely to be symptoms of underlying institutional problems rather than the main causes of economic

preschool education in brazil does public supply crowd out private enrollment this paper examines whether an expansion in the supply of public preschool crowds out private enrollment the paper uses rich data for municipalities in brazil from 2000 to 2006 where federal transfers to local governments change discontinuously with given population thresholds the results from a regression discontinuity design reveal that larger federal transfers lead to a significant expansion of local public preschool services but show no evidence of crowding out of private enrollment this finding is consistent with a theory in which households differ in their willingness to pay for preschool services and private suppliers optimally adjust prices in response to an expansion of lower quality free of charge public supply

the debt crisis structural explanations of country performance abstract this paper develops a cross country statistical model of debt rescheduling and the secondary market valuation of ldc debt which links these variables to key structural characteristics of developing countries such as the trade regime the degree of income inequality and the share of agriculture in gnp our most striking finding is that higher income inequality is a significant predictor of a higher probability of debt rescheduling in a cross section of middle income countries we attribute this correlation to various difficulties of political management in economies with extreme inequality we also find that outward orientation of the trade regime is a significant predictor of a reduced probability of debt rescheduling

on the externality free shapley shubik index abstract we address the problem of extending the shapley shubik index to the class of simple games with externalities introduced in alonso meijide et al 2017 on the one hand we provide bounds for any efficient symmetric and monotonic power index on the other hand we characterize the restriction of the externality free value of de clippel and serrano 2008 to the class of games under study by adapting well known properties

the effects of income distribution and fiscal policy on aggregate demand investment and the budget balance the case of europe this paper develops a multi country post kaleckian model that incorporates the role of the government one key novelty of the model is that it integrates cross country effects of both changes in income distribution and fiscal policy the model is used to estimate econometrically the effects of income distribution and fiscal policy on the components of aggregate demand and the budget balance in eu15 countries the results show that a simultaneous increase in the wage share in all eu15 countries would increase demand and the primary budget balance in all countries a simultaneous increase in government spending turns out to boost economic activity in all the eu15 countries indicating the positive economic effects of expansionary fiscal policy moreover a progressive tax policy that would be implemented simultaneously at the eu level would lead to an increase in output in all countries

do weak institutions prolong crises on the identification characteristics and duration of declines during economic slumps this paper studies periods of prolonged contractions in output per capita in a sample of 145 countries from 1950 to 2014 economic slumps are defined as abrupt interruptions of a period of growth by several regime switches slumps start with a sharp contraction along with a trend break which is followed by another switch when growth stabilizes again the paper then analyzes the correlates of these slumps focusing on the length and depth of the contraction from the beginning of the slump to its trough the results establish three new stylized facts i weak political institutions predate crises whereas political reforms tend to follow them ii the length and depth of economic declines are robustly correlated with executive constraints and ethnic heterogeneity and iii there is a robust interaction between these two variables suggesting that institutions constraining leaders are important for stabilizing growth this is particularly relevant for sub saharan africa where politics are often ethnic and decision makers are comparatively unconstrained

aid dutch disease and manufacturing growth abstract we examine the effects of aid on the growth of manufacturing using a methodology that exploits the variation within countries and across manufacturing sectors and corrects for possible reverse causality we find that aid inflows have systematic adverse effects on a country s competitiveness as reflected in the lower relative growth rate of exportable industries we provide some evidence suggesting that the channel for these effects is the real exchange rate appreciation caused by aid inflows we conjecture that this may explain in part why it is hard to find robust evidence that foreign aid helps countries grow

the modern history of exchange rate arrangements a reinterpretation we develop a novel system of reclassifying historical exchange rate regimes one key difference between our study and previous classifications is that we employ monthly data on market determined parallel exchange rates going back to 1946 for 153 countries our approach differs from the imf official classification which we show to be only a little better than random it also differs radically from all previous attempts at historical reclassification our classification points to a rethinking of economic performance under alternative exchange rate regimes indeed the breakup of bretton woods had less impact on exchange rate regimes than is popularly believed

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

real income stagnation of countries 1960 2001 abstract this paper examines the phenomenon of real income stagnation in which real income growth is uninterruptedly negligible or negative for a sizable sequence of years we analyse data for four decades from a large cross section of countries real income stagnation is a conceptually distinct phenomenon from low average growth and other features of the growth sequence that have been previously considered we find that real income stagnation has affected a significant number of countries 103 out of 168 and resulted in substantial income loss countries that suffered spells of real income stagnation were more likely to be poor in latin america or sub saharan africa conflict ridden and dependent on primary commodity exports stagnation is also very likely to persist over time countries that were afflicted with stagnation in the 1960s had a likelihood of 75 per cent of also being afflicted with stagnation in the 1990s