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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