Subrata Ghatak

Exports, export composition and growth: cointegration and causality evidence for Malaysia

This paper comprehensively tests the export-led growth (ELG) hypothesis for Malaysia for the period 1955 - 90, using cointegration and causality testing based on Hsiaos synthesis of the Granger test and Akaikes minimum final prediction error criterion. The results provide support for the ELG hypothesis; aggregate exports Granger-cause real GDP and non-export GDP. This relationship is found to be driven by manufactured exports rather than by traditional exports.

Budgetary deficits and Ricardian equivalence: The case of India, 1950–1986

Abstract In this paper we analyze the validity of the Ricardian equivalence (RE) theorem for a less developed country (LDC), i.e. India, for the period 1950–1986. The RE theorem states that it is inconsequential whether a government deficit is financed by debt issue or by tax increases, since under certain conditions, the effect of government consumption on aggregate demand is orthogonal to the mode of financing fiscal deficits because rational economic agents consider todays deficit financing as tomorrows tax liabilities. The use of multicointegration analysis and estimation of the rational expectations model both invalidate the RE hypothesis in India. There are significant crowding out effects on private consumption, but such effects on private investment are insignificant because they are expected to be already included in the effect of interest rates.

Trade liberalisation and endogenous growth: Some evidence for Turkey

This paper examines the impact of trade liberalisation on the long-run economic development as measured by the real GDP per capita in Turkey. Based on the ‘endogenous’ growth theory, we employ bivariate and multivariate cointegration analyses to test the long-run relationship among the relevant variables. Results for Turkey suggest a stable, joint long-run relationship among real GDP per capita, an index of trade liberalisation, human and physical capital in accordance with the ‘endogenous’ growth theory. Statistically significant error-correction terms provide further evidence that those variables are indeed cointegrated. This also implies causal effects.

Rural interest rates in the Indian economy

In this paper an attempt has been made to analyze some of the major features of the interest‐rates in the Indian rural money market. Such a market is distinguished by its duality, with the unorganised sector largely dominating the supply of funds even today. Rural interest‐rates are largely explained by risk and uncertainty rather than by the monopoly power of the moneylenders, though monopoly profit may have existed in some cases. A theoretical model is then constructed and statistical tests show positive correlation between farmers’ income and repayments and negative correlation between the interest‐rate, on the one hand, and income, repayments and monetization on the other. Thus, a rise in farm incomes may reduce the risk premium and, therefore, rural interest‐rates. Further econometric study revealed that the bank rate is more likely to be the leader than the follower of the bazaar rate.

Linkages and Industrial Policy for Eastern Europe

It is argued that insustrial policy for Eastern Europe is needed in order to reduce the social cost of transition. The industrial policy suggestes is based on unbalanced growth focused on key sectors that, according to linkage analysis, influence the economy more than other sector. An attempt should be made to increase efficency in key sectors, either by new investment or by closing down inefficient enterprises. This strategy could be adopted temporarily, gradually to move away from the existing structure of the economy rather than to reinforce it. In order to illustrate the potential of such an industrial policy, a sector-specific approach has been simulated for Poland using a compuable general equilibuium (CGE) model. The simulation results have shown that macroenonomic performance, measured by output, employment and funds available for invesment, is much better when industrial policy has been concentrated on a key sector.

Monetary policies in developing countries

The objectives of monetary policies in the LDCs are usually related to money and credit control, price stabilisation and economic growth. Many consider price stability as the most important objective of monetary policies in the LDCs since they are supposed to suffer more from inflation than the DCs, and monetary policies are considered to be more effective than the fiscal policies in dealing with inflation. A modest rise in prices (say between 5 per cent and 10 per cent: see Chapter 6) is not regarded as harmful to the economy. Indeed, in a growing economy, the rate of growth of money supply should keep pace with the rate of growth of output to avoid deflationary pressure, and a rate of price rise between 5 and 10 per cent could boost the level of profit, investment and rate of economic growth. In this way, some argue that monetary policy could enable the economy to achieve a higher rate of economic growth. The contribution of monetary policy in achieving a higher rate of economic growth could enable the authorities to attain another objective, full employment. In many LDCs, the existence of unemployment and underemployment, particularly in the agricultural sector, has emerged as a major problem. A better utilisation of resources is regarded as imperative to promote a more decent standard of living and a greater equality of income distribution in the LDCs.

Trade Liberalisation and Economic Development: The Asian Experience — Turkey, Malaysia and India

This paper examines, theoretically and empirically, the impact of trade policy on the long-run output growth rate in the context of the new endogenous growth model. In section II, we describe the old and the new views of the relationships between trade and economic growth. Section III reviews the different ways to measure trade liberalisation. Section IV provides the trade liberalisation experiences of Turkey, Malaysia and India since the 1950s which largely followed different strategies (e.g. inward-looking import-substitution industrialisation (ISI) policies via exchange rate distortions and other protectionist measures in the case of India and Turkey,1 and an open, export-led growth (ELG) strategy as in the case of Malaysia2) to promote physical and human capital accumulation and economic growth. Section IV sets out the cointegration and error-correction techniques to analyse the long-run relationship between an index of exchange rate distortions/trade liberalisation and economic growth of Turkey, Malaysia and India. The data and empirical results are described in section V. The final section draws some conclusions.

Rural financial institutions in LDCs

The major aim of this chapter is to discuss the nature and working of rural financial institutions. The network of rural financial agencies may be illustrated with a chart (see figure 10.1). It can be seen from the chart that the unorganised sector comprises different types of moneylenders and indigenous banks. The organised sector usually consists of commercial banks, development banks (for example, co-operative banks) and different types of credit societies. The organised sector is generally financed by the central bank of the country. These institutions provide short-term funds.

The role of money in a less developed country

The introduction of money in a barter economy is regarded as a very important phenomenon for several reasons. In a barter economy, goods are usually exchanged against goods. But to facilitate exchanges of goods among their producers, it is necessary to have ‘a double coincidence of wants’. For instance, a man from the plains may wish to exchange some cloth against some wood; if a man from the hills brings some wood which he wants to exchange against cloth in a common market at a mutually agreeable time and if the amount of cloth and wood to be exchanged are acceptable to both the parties, then exchange would take place. Such a barter system may operate in many villages of less developed countries (LDCs). But the defects of such a system are well known

Monetary institutions in LDCs

The growth of the monetary institutions has played a very useful role in promoting the economic development of the LDCs. These monetary institutions usually include the central banks, the commercial banks, the currency boards, the cooperative banks, development banks and the hire-purchase finance companies. These institutions are generally organised and can be regarded as ‘dealers of debt’. The central bank performs a variety of important functions in the LDCs as the principal pillar of a country’s financial stability. The commercial banks usually accept deposits and lend money to credit-worthy borrowers, mainly to finance trade, commerce, industry and transport. In this way the commercial banks mobilise financial surpluses and allocate them to different sectors of the economy for real capital formation. The co-operative banks usually operate in the agricultural sector. Their major aim is to meet the credit needs of the agriculturists and bring the unorganised rural sector into the fold of the organised money market. The rural money market usually consists of a large number of heterogeneous agencies like indigenous bankers, landlords, merchants, traders, village moneylenders, pawnbrokers, shop-keepers, etc. Sometimes the lack of specialisation in different activities can lead to the growth of ‘monopoly’ institutions where landlords may be moneylenders as well as traders. The non-banking financial institutions usually consist of those financial agencies which promote economic development without being engaged in the traditional banking practices. The workings of these institutions will now be discussed.