Niloy Bose

Public Expenditure and Economic Growth: A Disaggregated Analysis for Developing Countries

In this paper, we examine the growth effects of government expenditure for a panel of 30 developing countries over the 1970s and 1980s, with a particular focus on disaggregated government expenditures. Our methodology improves on previous research on this topic by explicitly recognizing the role of the government budget constraint and the possible biases arising from omitted variables. Our primary results are twofold. First, the share of government capital expenditure in GDP is positively and significantly correlated with economic growth, but current expenditure is insignificant. Second, at the disaggregated level, government investment in education and total expenditures in education are the only outlays that are significantly associated with growth once the budget constraint and omitted variables are taken into consideration.

Endogenous Corruption in Economic Development

This paper presents an analysis of the joint determination of bureaucratic corruption and economic development. The analysis is based on a simple neo-classical growth model in which bureaucrats are employed as agents of the government to collect taxes from households. Corruption is reflected in bribery and tax evasion as bureaucrats conspire with households to provide false information to the government. Costly concealment of this activity leads to a loss of resources available for productive investments. The incentive for an individual bureaucrat to accept a bribe depends on the number of other bureaucrats who are expected to accept bribes. This strategic interaction in bureaucratic decision making produces multiple (frequency-dependent) equilibria associated with different incidences of corruption. The predictions of the model accord strongly with recent empirical evidence.

Asymmetric Information and Loan Contracts in a Neoclassical Growth Model

The authors consider a neoclassical growth model with risky investment projects in which a borrowers (an investors) risk type is private information. Their innovation is to determine jointly the equilibrium loan contract and the economys growth path and the steady state capital stock. The authors show that as capital accumulates, credit rationing may fall as an increasing number of lenders choose to acquire costly information to separate borrowers as to type. This transition from credit rationing to screening in turn results in a higher capital accumulation path and a higher steady state capital stock. They also investigate the effects of a decrease in the cost of information on the economys capital accumulation path and steady state capital stock. The authors show that the cost of information must fall below a threshold level before the economy moves from a credit rationing equilibrium to a screening one. Thus a threshold must be crossed before the steady state capital stock is increased with a decrease in the cost of information. Copyright 1997 by Ohio State University Press.

The Optimal Public Expenditure Financing Policy: Does the Level of Economic Development Matter?

This paper explores how the optimal mode of public finance depends on the stage of economic development. The theoretical analysis is based on an overlapping generations growth model with an imperfect capital market. Random shocks create a demand for liquidity and establish a role for financial intermediaries. In this model, inflation matters because it affects the relative rates of return on assets in such a way that money becomes the preferred asset in the portfolio holdings of banks, causing a detrimental effect on economic growth. Such an effect is stronger (weaker) at lower (higher) levels of economic development due to the higher (lower) default risks associated with lending. Consequently, income taxation (seigniorage) is a relatively less distortionary way of financing public expenditure for low-income (high-income) countries. We provide empirical support for our model’s predictions using a panel of 21 OECD and 40 developing countries observed over the period 1972-1999.

The impact of banking development on the size of shadow economies

Purpose – The purpose of this paper is to examine the relationship between banking development and the size of shadow economies by employing data on 137 countries over the period from 1995 to 2007. Both cross-sectional and panel analysis suggest that an improvement in the development of the banking sector is associated with a smaller shadow economy. In addition, the authors find that both the depth and the efficiency of the banking sector matter in reducing the size of shadow economies. These results are robust to a variety of specifications that address multi-colinearity and endogeneity issues. Design/methodology/approach – Empirical cross-section and panel analysis were undertaken. Findings – The authors find that both the depth and the efficiency of the banking sector matter in reducing the size of shadow economies. Originality/value – This paper is original. Existing literature has identified a number of factors (e.g. the burden of taxation or regulation, the quality of government, legal enforcement, corruption, etc.) that create such incentives. In this paper the authors highlight another factor – the level of banking development – as a determinant of the shadow economy.

Causality Between Public Investment in Transport and Communication and Economic Growth

This paper aims to provide an explanation for the robust and consistent relationship between public investment in transport and communication and economic growth that has frequently surfaced in recent empirical studies. Using both informal and formal causality tests, the paper finds that, for a set of developing countries, the strong association is the result of the effect running from growth to public investment rather than vice versa.

Mitigating the Growth-Effects of Inflation through Financial Development

This paper examines the growth-effects of inflation at alternative stages of financial development. We propose an endogenous growth model where intermediated savings generate capital. Informational problems cause banks to ration credit and hold liquid assets offering (real) returns that vary inversely with inflation. Inflation therefore acts like a tax on capital accumulation. However financial development lessens credit-rationing, which reduces the demand for these liquid assets and softens the incidence of the inflation tax. Sizeable and statistically significant interactions between inflation and measures of financial development in cross-country and panel regressions provide empirical support for our model.

Asymmetric Cointegration, Nonlinear ARDL and the J-curve: A Bilateral Analysis of China and its 21 Trading Partners

ABSTRACT This article follows the nonlinear Autoregressive Distributed Lag (ARDL) error-correction methodology to explore nonlinearity in the relationship between the trade balances and the real exchange rates for China and its 21 partners. We find evidence for short-run asymmetric effects of exchange rate in cases of 18 partners, short-run adjustment asymmetry in cases of 11 partners, short-run cumulative asymmetry in cases of seven partners, and a significant long-run asymmetric effect cases of five partners. We find support for the “J-curve” that is only due to appreciation or depreciation of the Yuan in cases of five partners, including the U.S.

Explaining the Effect of Financial Development on the Quality of Property Rights

Recent empirical evidence suggests that financial development can catalyze property rights reforms, and for such effect to materialize financial development must cross a threshold. This paper offers a theory of financial markets to explain both stylized facts defining the relationship. The explanation is based on a simple trade-off between the costs and the benefits of securing property. Securing the right to property at a cost allows agents to post collateral against loans. However, the benefits of collateral vary according to the existing credit market conditions. We include this information in the trade-off between the costs and the benefits of securing property rights along the path of financial development to explain the conditions under which financial development can create incentives for better property rights institutions.

To Stay or Not to Stay: Location Choice of Foreign Born U.S. Doctorates

Over the past few decades, foreign-born U.S. PhDs have played a crucial role in shaping the landscape of the U.S. skilled workforce. Not all foreign-born U.S. doctorates however choose to remain in the U.S. workforce. This paper uses a new set of data – the International Survey of Doctoral Recipients (ISDR) - to explore factors that are relevant for location choice of work for foreign-born individuals receiving their doctorates from the U.S. This data set is unique in a number of respects and alleviates current challenges facing the research community. Our analysis identifies a number of demographic and country specific factors having implications for the location choice. We also find that as a part of a growing trend, foreign-born U.S. PhDs who choose to emigrate are positively selected in terms of skills as measured by the quality of the programs they attended. This result deserves attention since it implies that the U.S. may be losing premium talent to global competition.