Jaejoon Woo

Public Debt and Growth

This paper explores the impact of high public debt on long-run economic growth. The analysis, based on a panel of advanced and emerging economies over almost four decades, takes into account a broad range of determinants of growth as well as various estimation issues including reverse causality and endogeneity. In addition, threshold effects, nonlinearities, and differences between advanced and emerging market economies are examined. The empirical results suggest an inverse relationship between initial debt and subsequent growth, controlling for other determinants of growth: on average, a 10 percentage point increase in the initial debt-to-GDP ratio is associated with a slowdown in annual real per capita GDP growth of around 0.2 percentage points per year, with the impact being somewhat smaller in advanced economies. There is some evidence of nonlinearity with higher levels of initial debt having a proportionately larger negative effect on subsequent growth. Analysis of the components of growth suggests that the adverse effect largely reflects a slowdown in labor productivity growth mainly due to reduced investment and slower growth of capital stock.

The Role of Policy and Institutions for Productivity and Firm Dynamics

This paper presents empirical evidence on the role that policy and institutional settings in both product and labour market play for productivity and firm dynamics. It exploits a new firm-level database for ten OECD countries and industry-level data for a broader set of countries, together with a set of indicators of regulation and institutional settings in product and labour markets. Aggregate productivity patterns are largely the result of within-firm performance. But, the contribution from firm dynamic processes should not be overlooked, most notably in high-tech industries where new firms tend to play an important role. Industry productivity performance is negatively affected by strict product market regulations, especially if there is a significant technology gap with the technology leader. Likewise, high hiring and firing costs seem to hinder productivity, especially when these costs are not offset by lower wages and/or more internal training. Moreover, burdensome regulations ...

Public Expenditures on Social Programs and Household Consumption in China

This paper shows that increasing government social expenditures can make a substantive contribution to increasing household consumption in China. The paper first undertakes an empirical study of the relationship between the savings rate and social expenditures for a panel of OECD countries and provides illustrative estimates of their implications for China. It then applies a generational accounting framework to Chinese household income survey data. This analysis suggests that a sustained 1 percent of GDP increase in public expenditures, distributed equally across education, health, and pensions, would result in a permanent increase the household consumption ratio of 1¼ percentage points of GDP.

Distributional Consequences of Fiscal Consolidation and the Role of Fiscal Policy: What Do the Data Say?

The 2007-09 Great Recession has led to an unprecedented increase in public debt in many countries, triggering substantial fiscal adjustments. What are the distributional consequences of fiscal austerity measures? This is an important policy question. This paper analyzes the effects of fiscal policies on income inequality in a panel of advanced and emerging market economies over the last three decades, complemented by a case study of selected consolidation episodes. The paper shows that fiscal consolidations are likely to raise inequality through various channels including their effects on unemployment. Spending-based consolidations tend to worsen inequality more significantly, relative to tax-based consolidations. The composition of austerity measures also matters: progressive taxation and targeted social benefits and subsidies introduced in the context of a broader decline in spending can help offset some of the adverse distributional impact of consolidation. In addition, fiscal policy can favorably influence long-term trends in both inequality and growth by promoting education and training among low- and middle-income workers.

Social polarization, industrialization, and fiscal instability: theory and evidence

This paper is motivated by an important puzzle that arises from the contrasting macroeconomic experience across developing regions in the recent decades. In sharp contrast to East Asia, the fiscal policies in much of Latin America and sub-Saharan Africa are characterized by large fiscal deficits and volatilities of fiscal outcomes. In order to address both large deficits and volatile fiscal outcomes, we develop a simple model of endogenous fiscal policy in which government spending is strategically determined by heterogeneous policymakers in a dynamic game. In an economy that is highly polarized due to unequal income distribution, a larger fiscal deficit results, and the intertemporal fiscal policy path becomes more volatile. It is because the polarization of preference leads a policymaker representing each sector to spend more for her favorite sector, collectively contributing to large deficits. This polarization effect implies that a shock to tax revenue is translated into a more than proportional change in spending. Econometric evidence provides support for these predictions. Countries that have suffered from the greatest fiscal instability are those with highly polarized economic societies as measured by indicators of income inequality.

The US Health System

This paper assesses the performance of the United States health system in an international context and discusses potential directions for reform. The US health system is unique among OECD countries in its heavy reliance on the private sector for both financing and delivery of health care. The public sector plays a not-insignificant role, providing coverage for the elderly, disabled and poor, and spending as much on health as a share of GDP as is spent in total by many OECD countries. The system is considered highly flexible, capable of evolving quickly to address the changing preferences of consumers and the incentives put in place by the requirements of payers and government regulation. It is also characterised by excellent access by the insured population to the latest advances in medical technology. However, 14 per cent of Americans lack insurance coverage, and the decentralised, multi-payer approach to financing and regulation provides relatively few levers to control ...