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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 2013 TR 1 – 2:15 pm Why Nations Fail Exorbitant Privilege Talvi/Lombardi: New International Monetary Architecture Reinhart: Debt and Crisis Crisis: Is This Time Different? Graham: Measuring Happiness Antholis: China/India Federalism Kimenyi: Educational Reform Can It Scale? Elusive Quest for Growth McMafia: Global Crime Gaddy: Virtual Economy Bear Trap Soviet Extraction: Ukrainian Famine Thinking Long-Run Extractive institutions Vicious circles Critical Junctures –Contingency/Reversal of fortune Inclusive institutions Virtuous circles 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 Political institutions • Insecure property rights • Absolutism • Slavery/Plantation system • Infighting/Failed state • Encomienda • Ethnic fractionalization • Mita/Repartimiento • Iron Law of Oligarchy • Reversal of fortune • Elites: Libro d’Oro • Monopoly: La Serrata • Indirect rule • Dual economy • Patronage networks • Crony capitalism • Marketing boards Apartheid/Jim Crow Why Nations Fail: Institutions Hypothesis Inclusive Institutions Virtuous Circles Economic institutions Political institutions • Enforced property rights • Pluralism • Patent protection • Constraint on executive • Rule of law • Secret ballot/Wide suffrage • Open Markets • Free media: Muckrakers • Commenda Creative Destruction (pursuit of transient rents) Critical junctures we have known Theory of Development • Neolithic Revolution • Institutional Drift • Fall of Rome • Critical Juncture • Black Plague • Atlantic Trade • Contingency • Glorious Revolution Preconditions • Industrial Revolution • Centralized State • French Revolution • Colonialism • Constraint on executive • The Great War • Pluralistic coalition • Energy Crisis 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 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 there’s 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 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 don’t matter • Easterly and Levine – Africa’s Growth Tragedy: Ethno linguistic fractionalization – Tropics, Germs, Crops • Institutions: protection of property rights index • Endowments—geography: 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 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/Paym’t by gov’t more delayed • Kimenyi concludes: Don’t leave education reform to government • Alternative conclusion: Clean up the payroll system and public education will do fine – Equal fractions of NGO and gov’t teachers did well enough to be hired full time 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 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 can’t 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 The Short-Run in a Floating Age Managed float: intervention $ reserves $ privilege Currency misalignments Currency crises Latin America’s “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? 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 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 Carmen Reinhart’s 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, don’t need external debt, just debt – China slowdown commodity price collapse This Time Ain’t 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. U.S. Debt History This Time Ain’t Different (but it’s not another Depression, ECON 403) Consequences of banking crises • Real GDP down – Unemployment up • Government revenue down • Government bailout of banks • Government debt/GDP UP – But 90% is not a ratio to be particularly feared – Austerity sucks...and doesn’t 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 Aggressive Policy Response No Depression