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Macroeconomics and Economic Growth

Changing Development Paradigms

Raj Nallari's picture

This global crisis in not only about financial market failures but also government failures in several countries as reflected in failure to contain the housing bubbles and credit booms, bad regulations, and lack of supervision and enforcement). Both in advanced and developing countries, there are second thoughts on open markets, private ownership of nationally ‘strategic’ industries (autos, banks), and movement of transnational financial and industrial firms, and migrant labor. Trade and financial protection is on the increase as countries that have been less reliant on exports and foreign capital are weathering the storm better. In this semi-open global environment, would export-led growth strategy be combined with industrial policies to protect domestic industries, and/or emphasize resource-dependent growth, where possible?

Before we respond to these questions, it will be useful to focus on what went wrong in economics in 2007-08. Some economists are re-inventing economics to respond to such a query.

Transmission of Crisis from Home Mortgages to US Credit Freeze

Raj Nallari's picture

By early-2007, it became clear as housing prices began to decline, losses on sub-primate mortgages that originated in 2003-2006 were rising more rapidly than the assumptions used and risk-model predictions. The deterioration in borrowing quality and other shortcomings mentioned above gave little comfort to investors.

Does Successful Development and Economic Transformation Require State Intervention in Industry and Technology?

Raj Nallari's picture

Proponents of state intervention argue that ‘market failures’ in information, coordination, credit and others necessitate ‘infant-industry protection’ and therefore an activist role for the government. For example, information about success or failure of new industries or technological adoption may be only available to investors and innovators and not shared with other entrepreneurs. Also, new industries and technologies require complementary human capital, and basic infrastructure among other things.

Decoupling, Reverse Coupling and All That Jazz

Otaviano Canuto's picture

(By Otaviano Canuto)

In PREM Note 141 released last week, Milan Brahmbhatt and Luiz Pereira da Silva point to several structural differences between the global economy today and in the 1930s that tend to differentiate the current crisis from the Great Depression. The larger weight of faster-growing developing countries in the current world economy is among those differences, one that bodes well for recovery prospects.[1]

Microfoundations of Economic Growth

Raj Nallari's picture

Most growth analysis has been primarily a macroeconomic subject with particular emphasis on contribution of capital, education adjusted labor, and total factor productivity to output growth (see Collins and Bosworth 1996, Hu and Khan, 1997, Sarel 1997, Sala-i-Martin 2000, Hall and Jones, 1999, Easterly and Levine 2001). Importance of macroeconomic policies as represented by budget deficits, exchange rate premia, inflation, trade openness and inflow of foreign Investment etc are tagged on in the growth analysis at a macroeconomic level. A few studies have invoked ethnic differences and other exogenous factors to understand cross country differences in total productivity growth and per capita incomes. 

In trying to understand the rapid output growth of East Asian ‘miracle’ countries, Krugman (1994), Young (1995), and others were engaged in an interesting debate on whether capital accumulation or total factor productivity growth best explained the high and sustained output growth of these countries. Their conclusion that capital accumulation was most important was based on macroeconomic data analysis in a factors of production approach to sources of growth. Others have found that the growth of output is strongly correlated with productivity growth in developed and developing economies as reported by Kehoe and Prescott (2002) and Solimano and Soto (2004), and this co-movement appears to be stronger the longer is the time period considered.

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