Areendam Chanda

The Influence of Capital Controls on Long Run Growth: Where and How Much?

The recent financial crisis in East Asia has generated a revival of interest in the merits of financial openness. The ensuing debate on the benefits of openness has focused more on short and medium run issues than on the long run effects. Within the empirical literature on economic growth, little or no attention has been paid to the effects of financial openness. Contrary to the orthodox position, the few results that exist suggest that capital controls have no effect on economic growth. This paper argues that this conclusion emerges from a failure to account for underlying differences across countries with similar degrees of capital controls. I show that the degree of ethnic and linguistic heterogeneity in a country plays a significant role in explaining the effects of controls on economic growth. For countries with relatively higher degrees of ethnic heterogeneity, the effects are particularly adverse whereas for countries with high degrees of homogeneity, capital controls actually have a net positive effect on economic growth. On balance, more developing countries suffered due to controls than not. Within the sample of 57 non-OECD countries that did implement controls for the period 1975-95, as many as 39 saw a reduction in their growth rates. This result is robust to a number of variables commonly used in the economic growth regressions.

Dual Economies and International Total Factor Productivity Differences: Channelling the Impact from Institutions, Trade, and Geography

This paper provides a framework that decomposes aggregate total factor productivity (TFP) into a component reflecting relative efficiency across sectors, and another component that reflects the absolute level of efficiency. A development accounting analysis suggests that as much as 85% of the international variation in aggregate TFP can be attributed to variation in relative efficiency across sectors. Estimation results show that recent findings highlighting the importance of strong protection of property rights, financial development and geographical advantage for the level of TFP, can be explained by their impact on relative efficiency.

Dual Economies and International Total Factor Productivity Differences

This paper shows that a significant part of measured total factor productivity (TFP) differences across countries is attributable not to technological factors that affect the entire economy neutrally, but rather, to variations in the structural composition of economies. In particular, the allocation of scarce inputs between agriculture and non-agriculture is important. We provide a framework which maps the composition of the economy to measured aggregate TFP. A decomposition analysis suggests that as much as 85 percent of the international variation in TFP can be attributed to the composition of output. Estimation exercises indicate that recent findings of the conduciveness of good institutions, and, to some extent trade, on levels of TFP, may be thus explained.

FDI Spillovers, Financial Markets, and Economic Development

This paper examines the role financial markets play in the relationship between foreign direct investment (FDI) and economic development. We model an economy with a continuum of agents indexed by their level of ability. Agents can either work for the foreign company or undertake entrepreneurial activities, which are subject to a fixed cost. Better financial markets allow agents to take advantage of knowledge spillovers from FDI, magnifying the output effects of FDI. Empirically, we show that well-developed financial markets allow significant gains from FDI, while FDI alone plays an ambiguous role in contributing to development.

State Effectiveness, Economic Growth, and the Age of States

In the late twentieth century, makers of maps and atlases faced the challenge of keeping up with numerous changes in countries’ names and borders. One thing remained a constant, however: find a piece of inhabited territory, and it was certain to belong to some country or other—a country with a government, a flag, an army, and all of the other trappings of the modern nation state. For a country to lack a central government, as, for example, Somalia did during most of the 1990s, was a noteworthy and exceptional fact.

Early Starts, Reversals and Catchup in The Process of Economic Development

Early states like China, India, Italy and Greece have been experiencing more rapid economic growth in recent decades than have later-comers to agriculture and statehood like New Guinea, the Congo, and Uruguay. We show that more rapid growth by early starters has been the norm in economic history, and that the “reversal of fortune” associated with European overseas expansion from about 1500 to 1960 was an exception. We demonstrate that the colonial era reversal was in the process of being reversed in recent decades, and that this second reversal is in line with longer-term trends dating back to the first agricultural revolution.

The influence of capital controls on long run growth: Where and how much?

Abstract The financial crisis in East Asia generated a revival of interest in the merits of financial openness. The ensuing debate on the benefits of openness has focused more on short and medium run issues than on the long run effects. Within the empirical literature on economic growth, little or no attention has been paid to the effects of financial openness. Contrary to the orthodox position, the few results that exist suggest that capital controls have no effect on economic growth. This paper argues that this conclusion emerges from a failure to account for underlying differences across countries with similar degrees of capital controls. We show that the degree of ethnic and linguistic heterogeneity in a country plays a significant role in explaining the effects of controls on economic growth. For countries with relatively higher degrees of ethnic heterogeneity, the effects are particularly adverse whereas for countries with high degrees of homogeneity, capital controls actually have a net positive effect on economic growth. On balance, more developing countries suffered due to controls than not. Within the sample of 57 non-OECD countries that did implement controls for the period 1975–1995, as many as 39 saw a reduction in their growth rates. This result is robust to a number of variables commonly used in the economic growth regressions.

Productivity Growth in Goods and Services Across The Heterogeneous States of America

In this paper, we compare the relative roles of multi-factor productivity (MFP) growth and factor accumulation in goods and services for states in the US from 1980 to 2007 using the dual growth accounting framework. We find that while MFP growth was relatively high, and converged in the goods sector, it was low and diverged in services. Though the low growth in MFP in services was due to declining real user cost, the divergence itself was due to variation in wage growth. We also document that while the gap between productivity and wage growth was higher in goods, the two series were more strongly correlated in services. Finally, states with higher initial human capital experienced higher growth in both sectors.

Education, Growth, and Redistribution in the Presence of Capital Flight

We construct an overlapping generations model to study the effect of capital controls on human capital investments and the incidence of redistributive taxation in a growing economy. We argue that the conventional wisdom linking higher capital controls to lower growth is reproduced only when an economy is sufficiently developed. For under-developed countries, higher capital controls are beneficial for human capital as well as domestic physical capital accumulation suggesting that the conventional wisdom does not apply. In an augmented version of the model, we show that a modern sector characterized by positive levels of investment in education may not exist unless capital controls are sufficiently high. Higher capital controls make it feasible for a modern sector to exist by lowering the threshold income level required by workers to invest in human capital. Our results are consistent with recent evidence suggesting that capital account liberalization positively affects growth only after a country has achieved a certain threshold level of absorptive capacities.

Early Urbanization and the Persistence of Regional Disparities within Countries

We explore the extent to which present day economic development at the sub-national level captured by GDP per capita, urbanization, and night-time light density is correlated to regional economic development in 1850. Drawing on historical city data, we construct a measure of urban population density and other features of urbanization in 1850 for 2,055 sub-national regions covering 135 countries. We find strong evidence of persistence in regional development. In our baseline estimates, a one standard deviation increase in urban density in 1850 raises 2005 GDP per capita by almost 10%. Further, the presence of the largest national city in 1850 confers significant advantages to the region even 150 years later. While, our findings are robust to a large range of geographic and spatial controls, proximity to the coast and rivers continues to have a significant effect. We also find that while persistence is generally true there is also considerable heterogeneity across subsets of nations with it being strongest in Asia and West Europe. Finally, early urbanization is also associated with human capital and infrastructure differences across regions.