César Calderón

The Direction of Causality Between Financial Development and Economic Growth

This paper employs the Geweke decomposition test on pooled data of 109 developing and industrial countries from 1960 to 1994 to examine the direction of causality between financial development and economic growth. The paper finds that (1) financial development generally leads to economic growth; (2) the Granger causality from financial development to economic growth and the Granger causality from economic growth to financial development coexist; (3) financial deepening contributes more to the causal relationships in the developing countries than in the industrial countries; (4) the longer the sampling interval, the larger the effect of financial development on economic growth; (5) financial deepening propels economic growth through both a more rapid capital accumulation and productivity growth, with the latter channel being the strongest.

The Effects of Infrastructure Development on Growth and Income Distribution

This paper provides an empirical evaluation of the impact of infrastructure development on economic growth and income distribution using a large panel data set encompassing over 100 countries and spanning the years 1960-2000. The empirical strategy involves the estimation of simple equations for GDP growth and conventional inequality measures, augmented to include among the regressors infrastructure quantity and quality indicators in addition to standard controls. To account for the potential endogeneity of infrastructure (as well as that of other regressors) we use a variety of GMM estimators based on both internal and external instruments, and report results using both disaggregated and synthetic measures of infrastructure quantity and quality. The two robust results are: (i) growth is positively affected by the stock of infrastructure assets, and (b) income inequality declines with higher infrastructure quantity and quality. A variety of specification tests suggest that these results do capture the causal impact of the exogenous component of infrastructure quantity and quality on growth and inequality. These two results combined suggest that infrastructure development can be highly effective to combat poverty. Furthermore, illustrative simulations for Latin American countries suggest that these impacts are economically quite significant, and highlight the growth acceleration and inequality reduction that would result from increased availability and quality of infrastructure

Trade Intensity and Business Cycle Synchronization: Are Developing Countries Any Different?

Some key criteria in the optimal currency area literature are that countries should join a currency union if they have closer international trade links and more symmetric business cycles. However, both criteria are endogenous. Frankel and Rose (1998) find that trade intensity increases cycle correlation among industrial countries. We study whether the same result holds true for the case of developing countries, as their different patterns of international trade and specialization may lead to cyclical asymmetries among them and between industrial and developing countries. We gather annual information for 147 countries for 1960-99 (33,676 country pairs) and find: (i) countries with higher bilateral trade exhibit higher business cycle synchronization, with an increase of one standard deviation in bilateral trade intensity raising the output correlation from 0. 05 to 0. 09 for all country pairs; (ii) countries with more asymmetric structures of production exhibit a smaller business cycle correlation; (iii) the impact of trade integration on business cycles is higher for industrial countries than both developing and industrial-developing country pairs; (iv) a one standard deviation increase in bilateral trade intensity leads to surges in output correlation from 0. 25 to 0. 39 among industrial countries, from 0. 08 to 0. 10 for our sample of industrial-developing country pairs, and from 0. 03 to 0. 06 among developing countries; (v) the impact of trade intensity on cycle correlation is smaller the greater the production structure asymmetries between the countries.

Causality and Feedback Between Institutional Measures and Economic Growth

Recent cross-section studies have demonstrated a strong link between measures of corruption, bureaucratic quality, property rights, and other institutional variables, and economic growth. In this paper we build on previous research and present some empirical evidence on the direction of causality between institutional measures and growth. It appears that the poorer the country, and the longer the wait, the higher the influence of institutional quality on economic growth. However, we also show the existence of reverse causality. Indeed, it appears that economic growth also causes institutional quality. Copyright 2000 Blackwell Publishers Ltd..

Determinants of Current Account Deficits in Developing Countries

The authors examine the empirical links between current account deficits and a broad set of economic variables proposed in the literature. To accomplish this, they complement and extend previous research by using a large, consistent set of macroeconomic data on public and private domestic savings, external savings, and national income variables; focusing on developing economies by drawing on a panel data set for 44 developing countries and annual information for the period 1966-95; adopting a reduced-form approach rather than holding to a particular structural model; distinguishing between within-country and cross-country effects; and employing a class of estimators that controls for the problems of simultaneity and reverse causation. Among their findings: Current account deficits in developing countries are moderately persistent. A rise in domestic output growth generates a larger current account deficit. Increases in savings rates have a positive effect on the current account. Shocks that increase the terms of trade or cause the real exchange rate to appreciate are linked with higher current account deficits. Either higher growth rates in industrial economies or higher international interest rates reduce the current account deficit in developing economies.

Infrastructure and Economic Development in Sub-Saharan Africa

An adequate supply of infrastructure services has long been viewed by both academics and policy makers as a key ingredient for economic development. Sub-Saharan Africa ranks consistently at the bottom of all developing regions in terms of infrastructure performance, and an increasing number of observers point to deficient infrastructure as a major obstacle for growth and poverty reduction across the region. This paper offers an empirical assessment of the impact of infrastructure development on growth and inequality, with a focus on Sub-Saharan Africa. The paper uses a comparative cross-regional perspective to place Africas experience in the international context. Drawing from an updated data set of infrastructure quantity and quality indicators covering more than 100 countries and spanning the years 1960-2005, the paper estimates empirical growth and inequality equations including a standard set of control variables augmented by infrastructure quantity and quality measures, and controlling for the potential endogeneity of the latter. The estimates illustrate the potential contribution of infrastructure development to growth and equity across Africa.

Infrastructure and growth in Africa

The goal of the paper is to provide a comprehensive assessment of the impact of infrastructure development on growth in African countries. Based on econometric estimates for a sample of 136 countries from 1960-2005, the authors evaluate the impact on per capita growth of faster accumulation of infrastructure stocks and of enhancement in the quality of infrastructure services for 39 African countries in three key infrastructure sectors: telecommunications, electricity, and roads.Using an econometric technique suitable for dynamic panel data models and likely endogenous regressors, the authors find that infrastructure stocks and service quality boost economic growth. The growth payoff of reaching the infrastructure development of the African leader (Mauritius) is 1.1 percent of GDP per year in North Africa and 2.3 percent in Sub-Saharan Africa, with most of the contribution coming from more, rather than better, infrastructure. Across Africa, infrastructure contributed 99 basis points to per capita economic growth, versus 68 points for other structural policies. Most of the contribution came from increases in stocks (89 basis points), versus quality improvements (10 basis points). The findings show that growth is positively affected by the volume of infrastructure stocks and the quality of infrastructure services; simulations show that our empirical findings are significant statistically and economically. Identifying areas of opportunity to generate productivity growth, the authors find that African countries are likely to gain more from larger stocks of infrastructure than from enhancements in the quality of existing infrastructure. The payoffs are largest for telephone density, electricity-generating capacity, road-network length, and road quality.

Is infrastructure capital productive ? a dynamic heterogeneous approach

This paper offers an empirical evaluation of the output contribution of infrastructure. Drawing from a large data set on infrastructure stocks covering 88 countries and spanning the years 1960-2000, and using a panel time-series approach, the paper estimates a long-run aggregate production function relating GDP to human capital, physical capital, and a synthetic measure of infrastructure given by the first principal component of infrastructure endowments in transport, power, and telecommunications. Tests of the cointegration rank allowing it to vary across countries reveal a common rank with a single cointegrating vector, which is taken to represent the long-run production function. Estimation of its parameters is performed using the pooled mean group estimator, which allows for unrestricted short-run parameter heterogeneity across countries while imposing the (testable) restriction of long-run parameter homogeneity. The long-run elasticity of output with respect to the synthetic infrastructure index ranges between 0.07 and 0.10. The estimates are highly significant, both statistically and economically, and robust to alternative dynamic specifications and infrastructure measures. There is little evidence of long-run parameter heterogeneity across countries, whether heterogeneity is unconditional, or conditional on their level of development, population size, or infrastructure endowments.

External sector and income inequality in interdependent economies using a dynamic panel data approach

Abstract By using a panel of countries for 1960–1995 we show that the intensity of capital controls, the exchange rate, the type of exports, and the volume of trade appear to affect the long run distribution of income.

Greenfield Foreign Direct Investment and Mergers and Acquisitions: Feedback and Macroeconomic Effects

FDI flows to developing countries surged in the 1990s, to become their leading source of external financing. This rise in FDI volume was accompanied by a marked change in its composition: investment taking the form of acquisition of existing assets (M&A) grew much more rapidly than investment in new assets (“greenfield” FDI), particularly in countries undertaking extensive privatization of public enterprises. This raises two issues. First, is the M&A boom a one-time effect of privatization, or is it likely to be followed by a rise in greenfield investment? Second, do these two types of FDI have different macroeconomic causes and consequences – in relation to aggregate investment and growth? This paper focuses on establishing the stylized facts in terms of time precedence between both types of FDI, investment and growth, using annual data for the period 1987-2001 and a large sample of industrial and developing countries. We find that in all samples higher M&A is typically followed by higher greenfield investment, while the reverse is true only for developing countries. In industrial and developing countries alike, both types of FDI lead domestic investment, but not the reverse. Finally, neither type of FDI appears to precede economic growth in either developing or industrial countries, but FDI does respond positively to increases in the growth rate.