Alberto Botta

Economic Development, Structural Change and Natural Resource Booms: A Structuralist Perspective

In this paper we present a structuralist two-sector model on economic development, structural change and natural resource booms. We describe a multiple equilibria scenario, in which manufacturing development is the main source of economic progress. Natural resource booms, by modifying the productive structure of the economy, may set destabilizing forces. De-industrialization processes may take place, confining developing countries in poverty traps. Public intervention in the economic sphere, both through short-run macro policies and through long-run development strategies, may help to free the economy from poverty traps and to foster the development process.

Financial–Real-Side Interactions in an Extended Monetary Circuit with Shadow Banking: Loving or Dangerous Hugs?

Abstract: Monetary circuit (MC) theory is one of the most interesting attempts to formally describe the functioning of a monetary production economy as centered on the concept of the flux–reflux of money. Endogenous money creation by commercial banks allows the circuit to open and firms to implement production processes. Financial markets “passively” close the circuit by intermediating savings via bond and equity issuance. Despite its natural focus on financial-real side links, the monetary circuit literature has paid relatively little attention to “financialization” and the way it has modified real-financial dynamics. In this article, we analyze whether the flux–reflux perspective of the circuit may be fruitfully applied to the description of the linkages between the real economy and finance in a financialized economy. We propose two interconnected circuits, one for the real economy and one for the financial one. In this context, finance can still ensure a consistent closure of the whole system, thus directly allowing the functioning of the real economy. Newly developed inside-finance interactions, however, may indirectly influence real world dynamics, by easing/restricting access to credit/financial markets, and give rise to boom-and-bust cycles. Our aim is twofold: modeling modern financial worlds within an MC framework and understanding how financialization could have changed real-financial interactions.

Structural asymmetries at the roots of the eurozone crisis: What's new for industrial policy in the EU?

In this paper, we analyze and try to measure productive and technological asymmetries between central and peripheral economies in the eurozone. We assess the effects such asymmetries would likely bring about on center–periphery divergence/convergence patterns, and derive some implications as to the design of future industrial policy at the European level. We stress that future European Union (EU) industrial policy should be regionally focused and specifically target structural changes in the periphery as the main way to favor center–periphery convergence and avoid the reappearance of past external imbalances. To this end, a wide battery of industrial policy tools should be considered ranging from subsidies and fiscal incentives to innovative firms, public financing of R&D efforts, sectoral policies, and public procurements for home-produced goods. All in all, future EU industrial policy should be much more interventionist than it currently is, and dispose of much larger funds with respect to the present setting in order to effectively pursue both short-run stabilization and long-run development goals. Keywords: Center–Periphery Structural Symmetries, EU Industrial Policy JEL Codes: E12, F15, O25, O52

Conflicting Claims in the Eurozone? Austerity's Myopic Logic and the Need for a European Federal Union in a Post-Keynesian Eurozone Center-Periphery Model

In this paper we study the role of the eurozones institutional design in determining the sovereign debt crisis of the peripheral euro countries by means of a post-Keynesian eurozone center–periphery model. Within this framework, three points are formally addressed: (1) the incomplete nature of the eurozone with respect to a fully fledged federal union has significantly contributed to generating diverging trends and conflicting claims between central and peripheral eurozone countries in the aftermath of the 2007–2008 financial meltdown; (2) center–periphery diverging trends may disappear and a systemic crisis may occur should financial turbulences deepen in big peripheral economies, possibly spreading to the center; and (3) fiscal austerity does not address the core problems of the eurozone. The creation of a European federal government, capable of implementing anti-cyclical fiscal policies through a federal budget, and of a government banker constitutes the most promising solution to stabilize the macroeconomic picture of peripheral countries and to tackle the crisis. The unlimited bond-buying program recently launched by the ECB is a positive albeit mild step in the right direction away from the extreme monetarism that has shaped eurozone institutions thus far.

The complex inequality-innovation-public investment nexus: what we (don’t) know, what we should know, and what we have to do

Abstract In this paper, we deal with the complex relationship connecting inequality to innovation, and the ways through which public investment can affect it. We first stress that inequality and innovation may interact in many different ways. The positive relation that part of the economic theory often assumes to exist between (initially) rising inequality and improving innovation performances emerges as only one among many other far less virtuous dynamic trajectories. We then analyse the specific case of the US. We put emphasis on the possible perverse effects that the financialization of the US economy may have on the inequality–innovation nexus. We note that the US developmental state—very often neglected by the economic literature—can effectively mitigate such undesirable outcomes. According to our interpretation of recent developments in the US economy, the widespread belief in the positive pro-innovation effects of fierce cut-throat remuneration systems may prove to be ungrounded.

The Macroeconomics of a Financial Dutch Disease

We describe the medium-run macroeconomic effects and long-run development consequences of a financial Dutch disease that may take place in a small developing country with abundant natural resources. The first move is in financial markets. An initial surge in foreign direct investment targeting natural resources sets in motion a perverse cycle between exchange rate appreciation and mounting short- and medium-term capital flows. Such a spiral easily leads to exchange rate volatility, capital reversals, and sharp macroeconomic instability. In the long run, macroeconomic instability and overdependence on natural resource exports dampen the development of nontraditional tradable goods sectors and curtail labor productivity dynamics. We advise the introduction of constraints to short- and medium-term capital flows to tame exchange rate/capital flows boom-and-bust cycles. We support the implementation of a developmentalist monetary policy targeting competitive nominal and real exchange rates in order to encourage product and export diversification.

Economic development, technical change and income distribution: A conversation between Keynesians, Schumpeterians and Structuralists. Introduction to the Special Issue

The original “manifesto” that gave rise to the Structuralist development theory was written for the Economic Commission of Latin America (ECLA, subsequently ECLAC, after incorporating the Caribbean States in 1984) by Raul Prebisch (1949). This work had a strong impact on both the theoretical and policy debates and served as a rationale for the efforts at structural change and industrialization that many developing countries adopted in the following decades. By and large, the Latin American Structuralist tradition focuses on how the external constraint disproportionately affects output growth and domestic policies in less developed economies. The existence of bottlenecks in the productive system and labor market dualism characterizing peripheral economies opens space for state intervention and industrial policies as a way to promote structural transformation and economic development. JEL codes : 010; 033

THE MACROECONOMICS OF SHADOW BANKING

In this paper, we propose a simple short-run post-Keynesian model in which the key aspects of shadow banking, namely securitization and the production of structured finance instruments, are explicitly formalized. At the best of our knowledge, this is the first attempt to broaden purely real-side post-Keynesian models and their traditional focus on shareholder-value orientation, the financialization of non-financial firms, and the profit-led vs wage-led dichotomy. We rather put emphasis on the role of financial institutions and rentier-friendly environment in determining the predominance of specific growth and distribution regimes. First, we illustrate the macroeconomic rationale of shadow banking practices. We show how, before the 2007-8 crisis, securitization and shadow banking allowed for an increase in profitability for the whole financial sector, while apparently keeping leverage under control. Second, we define a variety of shadow-banking-led regimes in terms of economic activity, productive capital accumulation, and income distribution. We show that both an ‘exhilarationist’ and a ‘stagnationist’ regime may prevail, nevertheless characterized by a probable increase in income inequality between rentiers and wage earners.

The theoretical and empirical fragilities of the expansionary austerity theory

ABSTRACT Criticism to expansionary austerity theory has extensively addressed the methodological problems affecting the econometric techniques that underpin it; however, few efforts have formally analyzed its theoretical strictures. In this article, the authors develop a more general and comprehensive critique, both from a theoretical and from an empirical perspective. They first present a short-run model that formally describes the theoretical background of specific policy measures advocated by expansionary austerity supporters. They show how these measures might only have expansionary outcomes under extreme and unrealistic conditions. The authors then move to the data and provide an econometric analysis of the key variables that leave the results of our theoretical model undetermined; their findings reinforce the validity of our theoretical critique. Since 2007, when an important opportunity to test expansionary austerity presented itself with the recession, the core mechanisms of expansionary austerity theory seem to not have been working, to say the least. In fact, austerity measures delivered perverse results precisely in the countries where they were expected to be most effective.

Financial and capital account liberalisation, financial development and economic development: A review of some recent contributions

Abstract This article presents a review of some recent contributions on the relation between global finance and economic development in emerging economies. It first, stresses the growing consensus among economists on the financial instability that financial and capital account liberalization can possibly cause in emerging economies. It then outlines and compares two alternative strategies to tame such instability. The comparison is between the “good-institutions need-to-come-first” approach put forward by some mainstream economists, and the request for a deeper reform of the existing monetary system advocated by heterodox economists.