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Macroeconomics and Economic Growth

Recoupling or Switchover

Otaviano Canuto's picture

The current recovery in advanced economies is now exhibiting several signs of fragility. Their medium term growth prospects also look difficult. In this environment two questions arise: Will developing economies experience a renewed downward “recoupling” as a result of a low-growth scenario in advanced economies?

Re-thinking Trade Policy

Ravindra A. Yatawara's picture

Trade theory has always been lagging behind reality. From Ricardo ‘s (1817) explanation of trade based on relative productivity/technology differences among nations, it took over a century for Eli Heckscher and Bertil Ohlin (1933) to formalize a model that would explain inter- industry trade patterns based on a countries ’natural resources or factor endowments.

A Primer on Export Diversification: Key Concepts, Theoretical Underpinnings & Empirical Evidence

Salomon Samen's picture

This new paper provides a basic understanding of: (i) the concepts of Export Development and Export Diversification, (ii) what the theory says about Export Development and Diversification? and (iii) what empirical evidence shows on the links (correlates) between export diversification, exports growth, and overall growth.

What Drives Productivity

Raj Nallari's picture

Productivity is the efficiency in converting inputs to outputs. It is also called TFP (total factor productivity) and measured as a residual – the difference between outputs and a set of inputs (e.g. labor, capital, and intermediate goods, including energy, land and buildings). Measurement problems plague both inputs (e.g. how do you account for quality of labor or capital) and outputs.

To wit, managers with MBAs, flexibility in labor and capital markets, fuel efficiency, relatively higher spending in IT (computers) and R&D, and policies that promote market competition, trade liberalization, deregulation of energy, and encouragement of foreign direct investment that brings in technical progress and leads to learning (catch-up) is shown to contribute to higher productivity. Exporting firms tend to have higher productivity. Inefficient firms can still survive in stable industries where technology is static, and where market competition is limited by a variety of local factors and relationships (e.g. China where the protection is afforded by local governments).

The Service Revolution

Ihssane Loudiyi's picture

by Ejaz Ghani

China and India are both racing ahead economically. But the manner in which they are growing is dramatically different. Whereas China is a formidable exporter of manufactured goods, India has acquired a global reputation for exporting modern services. Indeed, India has leapfrogged over the manufacturing sector, going straight from agriculture into services.

Re-thinking Fiscal Multipliers

Raj Nallari's picture

Keynes is best known for suggesting fiscal stimulus policies and programs to increase aggregate demand to get out of a deep recession. Since the marginal propensity to consume is positive and less than one; the bigger it is, the larger the fiscal multipliers will be and the faster we will get out of a recession.

Re-thinking Economic Policy: An Overview

Raj Nallari's picture

The global financial and economic crisis of 2008 has brought an urgency to focus on shorter-term policy issues related to managing bubbles, analyzing current development paradigms, and drawing out policy lessons for future action, particularly lessons learned during the past two years. At the same, longer-term development challenges also must be addressed to avoid the mistakes of 1970s and 1980s when managing stabilization issues dominated economic policy making and development economics was pushed aside for a while. For example, with the exception of East Asian countries and more recently India, why are African, Eastern European and Central Asian, and other South Asian countries unable to sustain high growth rates for more than five to seven years? What are the policy implications of demographic changes and climate change? There is a need for policy discussion on frontier topics such as rethinking globalization in trade, finance, and labor; new economic geography; green growth; and inclusive, balanced, and sustainable growth.

The 15th-century Florentine Niccolo Machiavelli is said to be the first to state, “Never waste the opportunities offered by a good crisis.” During a crisis, countries experiment with policies and learn a lot in a hurry. This overview shares this learning on early policy responses to the current economic crisis, focusing particularly on specific issues that are of interest to policy makers and practitioners in the developing countries. The overview is a compilation of notes that staff members of the World Bank Institute have used during global dialogues and international seminars and conferences since October 2008.

What brought the world to the edge of an abyss in September 2008? After quickly recovering from the Asian crisis of 1997-98, world economic growth accelerated during the period 2000-07. However, in hindsight, there was a ‘perfect storm’ in the making as US and European housing defaults began to pile up beginning in late 2006, oil prices doubled in a few months during late 2007 and early 2008, while rice, wheat, and corn prices jumped by 40-50% during the same period.

Have Institutions Failed Us?

Raj Nallari's picture

Institutions matter was the oft chanted mantra for the past fifteen years. We were told that in the presence of social conflict between various groups, between haves and have-nots, political power precedes political institutions, economic institutions and economic policies. But, political power could be de jure (due to constitution, fair elections and smooth transition to political power) or de facto such as dictatorships and authoritarian leaders usurping power by coups and violence. Sixteenth century colonialism established ‘settler’ and ‘exploitative’ institutions depending on the then existing ‘climate’ in the colonized countries. For example, if the climate was unbearable and malaria-stricken, the colonial masters established an exploitative relationship of shipping out natural resources. If the climate was hospitable, they settled in with family in these countries and started administration and other institutions.

More recently good institutions were supposed to emerge when only de jure political power is in place. Also, a political and legal system that places constraints on elites is often conducive for better institutions. Following this logic, institutional economists have reasoned that advanced economies with de jure democratic political institutions have smooth transition, predictability and place constraints on elites and abuse of political power, and have strong institutions that ensure a system of checks on the executive, law and order, property rights, etc. The theory of institutions is that bad policy outcomes are the result of bad institutions and these are common in developing countries, where the distribution of political power needs to be reformed and deeper causes need to be strengthened. Others have argued that market-oriented institutions are important for economic policy management. By this categorization, advanced economies had better institutions that led to sound economic performance and consistently higher economic outcomes.

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