Luigi Bonatti

Environmental and social degradation as the engine of economic growth

Abstract In this paper, a commonly owned resource (an environmental or social asset) and a private good are substitutes in consumption. The households can buy the private good on the market, while the resource is available for free. The resource is renewable, but its ability to regenerate declines with the level of aggregate production: each single firm producing the private good has only a negligible impact on the resource, but the impact caused by the entire population of firms is considerable. In the face of a decrease in the stock of the resource, households are induced to increase their participation in market activities in order to raise their income and buy more private goods. Hence, each household contributes to a further increase in aggregate production, thus causing additional damage to the resources ability to regenerate and feeding the growth process. Given the presence of negative externalities, multiple equilibrium paths are possible. In this situation, social conventions may guide individuals to coordinate expectations and behavior toward a particular steady state: one can speculate that the dominance of cultural values favorable to a lifestyle based on a mix of high consumption and hard work leads the economy to converge on a Pareto-inferior steady-state.

The German Model and the European Crisis

The large current account imbalances in the eurozone reflect persistent diverging trends between core and periphery countries, also fed by low interest rates and abundant capital flows brought about by the introduction of the euro. With the global financial crisis, the market sentiment has changed, and capital has left the periphery countries suffering from debt and growth problems due to their failure to bring price–wage dynamics into uniformity with those of the more disciplined countries. Germany is called upon to provide financial assistance and additional external demand; however, though the euro is at stake, Germans are recalcitrant. This article investigates the rationale of the German stance in light of the (corporatist‐etatist, neo‐mercantilist) German socio‐economic model and the widespread concern about losing the competitiveness that Germany regained through painful reforms and changes in the last two decades.

Undesirable growth in a model with capital accumulation and environmental assets

The expansion of private production erodes the quality of commonly owned assets, thereby forcing individuals to rely increasingly on private goods to satisfy their needs. In the face of this deterioration, households increase their work effort and accumulate more capital in order to buy more consumer goods both in the present and in the future. By so doing, each household contributes to an increase in production and thus has a detrimental—though negligible—impact on commonly owned assets. Hence, the economy converges to a long-run equilibrium level of production that is higher than the level associated with the Pareto-efficient path.

Global Rebalancing and the Future of the Sino-US Codependency

The crisis of 2008 has shown the unsustainability of the global imbalances centered on the US-China symbiotic relationship that characterized the previous decade. This has revived the so-called growth-rebalancing debate. In particular, the new emerging consensus calls for a re-orientation of the US economy away from consumption and toward exports, and for policy shifts that can help China to reduce its dependence on external demand and inefficiently high rates of capital accumulation. We discuss the economic and political feasibility of the proposed patterns of re-adjustment by focusing on the short-term and long-term trade-offs faced by the policy-makers. We argue that the rebalancing will be gradual and partial because of the costs associated with a radical shift in the growth models adopted by both countries. We believe that this scenario will be consistent with a world economy expanding at lower rates than over the past decade. Copyright (c) 2010 The Authors Journal compilation (c) 2010 Institute of World Economics and Politics, Chinese Academy of Social Sciences.

Does international coordination of pension policies boost capital accumulation

Within an OLG framework we study a perfectly balanced Pay-As-You-Go (PAYG) pension scheme: in spite of its depressive impact on national saving, PAYG is implemented for operating intergenerational transfers. With international capital mobility, the national adoption of PAYG determines a spill-over effect through the world capital stock. This creates a situation of interdependence among national pension policies, that we model as a n-countries dynamic game. In contrast with previous literature, it is shown that in general the international coordination of pension policies does not boost world savings and capital accumulation.

Unbalanced Growth and the Sustainability of the Current Account Deficit

In an endogenous growth framework, a two-country economy is modeled with an integrated product and asset markets. The countries differ with respect to the share of their GDP that is redistributed through the fiscal system, and the country where this share is smaller tends to grow faster. This high-growth country finances a portion of its investment expenditures by attracting funds from the low-growth country, whose growth rate is depressed by this outflow. The high-growth country runs ever-increasing current account deficits and its negative net international investment position rises without bounds. This notwithstanding, sustainability is guaranteed.

Growth and Accumulation as Coordination Failures

We show that accumulation and growth can be fed by negative externalities. We modify a growth model a la Solow-Ramsey, in which the labor\leisure choice has been included, in three ways: i) the welfare of agents also depends on a common; ii) the latter is deteriorated by the production of the output; iii) the output can be used as a substitute for the common besides satisfying needs different from those satisfied by the common. We show that the reaction of agents to negative externalities is an increase in their labor supply and accumulation aimed at raising their (present and future) production and consumption of the output, in order to off-set the decline of their well-being. By doing so they feed back the deterioration of the common, generating a self-reinforcing mechanism in which growth causes negative externalities and negative externalities cause growth. The main motivation behind the construction of a model based on this mechanism is to provide a formal structure for the enormous quantity of literature and knowledge (a) on the environmental, social and cultural fractures generated by growth, and (b) on the fact that these cleavages are, paradoxically a necessary condition for growth. By interpreting the resource as the capacity of the natural and social environment to provide welfare to the agents, we refer to a knowledge that has traversed two centuries of industrial history.

Dualism and growth in transition economies: a two-sector model with efficient and subsidised enterprises

We develop a growth model distinguishing between a private sector that generates learning-by-doing and technological spillovers and a sector of technologically obsolete and subsidised state-owned enterprises. This distinction allows us to trace the inescapable dual-economy stage of development observed in transition economies. While in some of them this stage was rather brief, laggard reformers continue to display this pattern. The model predicts that the larger the initial fraction of the workforce employed in the obsolete sector and the stronger the politico-ideological hostility towards reform, the lower will be the speed of convergence to the income level of the most advanced countries.

MODELLING THE TRANSITION TOWARDS THE RENMINBI'S FULL CONVERTIBILITY: IMPLICATIONS FOR CHINA'S GROWTH

There is a widespread consensus that China’s growth paradigm needs a rebalancing away from investment and external demand and towards consumption and domestic demand. This rebalancing process is supposed to be accompanied by the transition towards Renminbi’s full convertibility. In contrast, it is controversial to what extent this adjustment will accelerate the slowdown of China’s growth, which will likely occur because of other structural factors. We address these issues by means of a two-country two-stage (before and after Renminbi’s full convertibility) model, which reproduces some qualitative features of China’s growth pattern and its relationship with the US. We analyze to what extent altering the Chinese exchange rate policy, as well as other structural and policy variables, may have (short-, medium- and long-term) effects on the evolution of the Chinese economy. The paper shows that by lifting the controls on the capital account and letting the currency float, the Chinese authorities will not only expose the economy to the risks of free capital mobility, but will also renounce to important policy instruments for controlling the dynamics of China’s economy and the allocation of the national resources.

TRADE AND GROWTH IN A TWO-COUNTRY MODEL WITH HOME PRODUCTION AND UNEVEN TECHNOLOGICAL SPILLOVERS

We develop a two-country growth model distinguishing between a market sector producing services that can also be home produced and a market sector producing goods without home-produced substitutes. The former is a technologically ‘stagnant’ sector, while the latter is subject to learning-by-doing and technological spillovers. This distinction coincides in the model with the distinction between the sector producing non-tradables and the sector producing internationally tradable goods. We study how differentials in labor tax rates across countries influence the mix of tradable and non-tradable goods that characterizes the market output of each country, thus affecting their bilateral trade balance and growth rates.