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171. Sources and Effectiveness of Financial Development: What We Know and What We Need to Know

Author:
Panicos O. Demetriades and Svetlana Andrianova
Publication Date:
12-2005
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
Drawing on recent literature, the paper argue s that institutions and political economy factors hold the key to understanding why some countries have succeeded in developing their financial systems while others have not. The paper also reviews new evidence which suggests that institutional quality may influence the effectiveness of financial development in delivering economic growth. These new findings highlight the possibility that poor countries may be stuck in a bad equilibrium, in which weak institutions inhibit growth both directly and indirectly, through under-developed, low- quality finance. In addition, the paper identifies a number of unanswered questions in the financial development literature, including the precise role of important institutions like law in finance, and the influence of geographical factors.
Topic:
Development, Economics, Political Economy, and Third World

172. The Poverty Macroeconomic Policy Nexus: Some Short-run Analytics

Author:
George Mavrotas and S. Mansoob Murshed
Publication Date:
12-2005
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
The present paper utilises a short-run theoretical macroeconomic model of a small open economy to look at the impact of macroeconomic policies and financial deepening upon poverty through sectoral changes. This is because an expansion in certain sectors may cause greater poverty reduction. The model involves a non-traded and a traded sector on the formal side of the economy. The former is more capital intensive and the latter more unskilled labour intensive. Increased employment in the traded sector is more pro-poor compared to a similar rise in the non-traded sector as the former draws workers out of poverty in the informal sector. The model in our paper analyses short-run effects of devaluation, a rise in the money supply induced by financial deepening, and taxation to discourage non-traded goods consumption. Financial deepening can induce greater output and reduce poverty. Other results are mixed and taxonomic. We also attempt to differentiate between the stylised experiences of East Asia and Latin America. East Asian economies have relied more heavily on labour-intensive manufactured exports, whereas Latin America has had a relatively greater share of capital intensive and natural resource based exports. In recent decades countries in these two regions have had differing experiences in poverty reduction, with poverty arguably declining more in East Asia.
Topic:
International Relations, Development, Economics, and Poverty
Political Geography:
East Asia and Latin America

173. Does Financial Openness Promote Economic Integration? Some Evidence from Europe and the CIS

Author:
Fabrizio Carmignani and Abdur Chowdhury
Publication Date:
12-2005
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
We study whether financial openness facilitates the economic integration of formerly centrally planned economies with the EU- 15. Two dimensions of economic integration are considered: cross-country convergence of per-capita incomes and bilateral trade in goods and services. We find that more financially open economies effectively catch-up faster and trade more with the EU-15. These integration-enhancing effects occur over and above any effect stemming from domestic financial deepening and other factors determining growth and trade.
Topic:
Development, Economics, and International Trade and Finance
Political Geography:
Europe

174. The Effects of (within and with EU) Regional Integration: Impact on Real Effective Exchange Rate Volatility, Institutional Quality and Growth for MENA Countries

Author:
Iftekhar Hasan and Leonardo Becchetti
Publication Date:
12-2005
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
We analyse two potential effects arising from regional (and with EU) integration—increased quality of institutions (including the quality of financial institutions) and, economic policies and reduced multilateral exchange rate volatility— in a conditional convergence growth framework for MENA countries. To this purpose we outline an ad hoc methodology which implements the traditional bilateral exchange rate measures to test effects of multilateral exchange rate volatility on growth of per capita GDP. Our estimates show that both factors (quality of institutions and reduction of multilateral volatility) significantly and positively affect growth and conditional convergence. We observe that MENA countries are not far from EU and OECD countries in terms of exchange rate volatility, but much below in terms of institutional quality. We finally simulate the potential effects of an improvement in institutional quality in MENA countries on their process of growth and conditional convergence. We conclude arguing that regional integration may be highly beneficial for such countries, mainly because of its effects on institutional quality.
Topic:
Development, Economics, and Regional Cooperation
Political Geography:
Europe

175. Education, Financial Institutions, Inflation and Growth

Author:
Iftekhar Hasan, Leonardo Becchetti, and George Mavrotas
Publication Date:
12-2005
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
Our paper investigates the unexplored impact of education on inflation and of this relationship on economic growth. By using a sample of 102 countries observed on non-overlapping five-year data spells over the period 1963-2001, we find that average schooling years of the working population have a significant negative impact on inflation rates after controlling for the effects of the stance of domestic monetary policy. We also show that the negative impact of inflation on growth in conditional convergence estimates is significantly increased when the former is instrumented by educational variables. Our findings outline a third potential role of human capital on conditional convergence. They show that education is not only a production factor or a variable which may reduce demographic pressures, but also an important antidote against inflationary pressures which, in turn, negatively affect economic growth and conditional convergence. We interpret our findings by identifying three potential rationales for the education-inflation nexus: (i) education raises consumers' awareness of their power in contrasting producers' inflationary pressures; (ii) more educated individuals have lower inflationary expectations when they are also wealthier and their consumption bundle is relatively less (more) intensive in inferior (superior) goods with higher (lower) inflation potential; (iii) more (less) educated and wealthier (less wealthy) individuals tend to be net creditors (debtors) in their maturity, thereby contributing to increase (reduce) the power of anti-inflationary lobbies.
Topic:
International Relations, Development, Economics, and Education

176. Financial Sector Development, Savings Mobilization and Poverty Reduction in Ghana

Author:
Peter Quartey
Publication Date:
12-2005
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
The paper primarily investigates the interrelationship between financial sector development and poverty reduction in Ghana. This is done using time-series data from the World Development Indicators from 1970-2001. The main findings are, first, that even though financial sector development does not Granger-cause savings mobilization in Ghana, it induces poverty reduction; and second, that savings do Granger-cause poverty reduction in Ghana. Also, the effect of financial sector development on poverty reduction is positive but insignificant. This is due to the fact that financial intermediaries in Ghana have not adequately channelled savings to the pro-poor sectors of the economy because of government deficit financing, high default rate, lack of collateral and lack of proper business proposals. Another interesting finding is that there is a long-run co integration relationship between financial sector development and poverty reduction.
Topic:
Development, Economics, and Poverty
Political Geography:
Africa and Ghana

177. Financial Markets and R Investments: A Discrete-Time Model to Interpret Public Policies

Author:
Marco Mazzoli
Publication Date:
12-2005
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
This paper introduces a discrete-time intertemporal investment model in which the flow of profits affects the risk premium on the cost of finance, and, as a consequence, the rate of discount of future profits. While public investments, according to a consolidated literature, constitute the main bulk of innovation policies, this model is used to comment and interpret the potential use of another, secondary, public policy, consisting of tax incentives for firms performing R expenditures and issuing securities in the stock market. Linking public policies for innovation to the stock market might help to reduce the problems of discretionality and the monitoring of public expenditure used to finance R and technical innovation.
Topic:
Security, Development, Economics, and Emerging Markets

178. Does Financial Liberalization Influence Saving, Investment and Economic Growth? Evidence from 25 Emerging Market Economies, 1973-96

Author:
Robert Lensink and Niels Hermes
Publication Date:
12-2005
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
This paper aims to investigate the relationship between financial liberalization on the one hand and saving, investment and economic growth on the other hand, using a new dataset for measuring financial liberalization for a sample of 25 developing economies over the period 1973-96. We find no evidence that financial liberalization affects domestic saving and total investment (although there are some signs to believe that liberalization may actually reduce rather than increase domestic saving), whereas it is positively associated with private investment, as well as with per capita GDP growth. We find a negative relationship between financial liberalization and public investment. These results suggest that financial liberalization leads to a substitution from public to private investment, which may contribute to higher economic growth.
Topic:
Development, Economics, Emerging Markets, and International Trade and Finance

179. Financial Sector Development and Productivity Growth

Author:
George Mavrotas and Subal C. Kumbhakar
Publication Date:
12-2005
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
Recent years have witnessed important structural changes around the world as a result of the globalization process, the creation of new economic blocks and the liberalization of financial sector in many countries. Responding to these changes many sectors of the industrialized countries have gone through major deregulatory changes to acclimate themselves to new environments. At the same time, many countries have undertaken institutional reforms to build a market-orientated financial system in the hope that transition towards market economy will improve productivity. In the face of uncertainty resulting from changes in regulatory structure and the development of financial institutions to foster market economy, many countries may not be able to achieve their maximum growth potential. In other words, productivity growth is likely to depend on the development of financial institutions and the stage of economic development That is, a less developed country is likely to benefit more (in terms of output growth rate) from the development of financial institutions than a developed economy with well-developed financial system. In this paper we document this by using data covering 65 countries, varying substantially in term s of level of development and geographic location, and spanning the period 1960-1999. Empirical results obtained from the estimation of two different empirical models regarding the measurement of total factor productivity growth seem to confirm a priori expectations about the overall positive influence of financial systems on productivity in line with previous work on this front. Our results remain robust with respect to alternative definitions of financial sector development we tried.
Topic:
Development, Economics, Globalization, and International Trade and Finance

180. The Tax Reform Experience of Kenya

Author:
Stephen Njuguna Karingi and Bernadette Wanjal
Publication Date:
12-2005
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
In evaluating tax reform in the developing countries, one first needs to determine what is the unique role of the tax system in each particular country. One of the key reasons for undertaking tax reforms in Kenya was to ad dress issues of in equality and to create a sustainable tax system that could generate adequate revenue to finance public expenditures. In this respect, the tax modernization programme introduced in the country was to achieve a tax system that was sustainable in the face of changing conditions domestically and internationally. Policy was shifted towards greater reliance on indirect taxes as opposed to direct taxes. Consumption taxes were seen to be more favourable to investments and hence growth. Trade taxes, instead of being used for protection or revenue-maximization purposes, were viewed more as instruments to foster export-led industrialization. Trade taxes were therefore used to create a competitive exports sector rather than protect the import-competing manufacturing sector, as had been done in the past.
Topic:
International Relations, Development, and Economics
Political Geography:
Kenya and Africa