Global Economics and Development

1. Global Economics and Development • Long-Run: Centuries • Medium Run: Decades • Human Development Index/Inequality Adjusted HDI • Purchasing Power Parity Income Per Capita • Health • Education • Short Run: Shocks  Fluctuations • ECON 403 Topics in Macroeconomics Fall 2013 TR 1 – 2:15 pm

2. Why Nations Fail Elusive Quest for Growth Exorbitant Privilege Graham: Measuring Happiness Antholis: China/India Federalism McMafia: Global Crime Talvi/Lombardi: New International Monetary Architecture Reinhart: Debt and Crisis Kimenyi: Educational Reform Can It Scale? Gaddy: Virtual Economy Bear Trap Crisis: Is This Time Different? Soviet Extraction: Ukrainian Famine

3. Thinking Long-Run Extractive institutions  Vicious circles Critical Junctures • Contingency/Reversal of fortune Inclusive institutions  Virtuous circles

4. Endowments – Institutions - Endowments Inequality, cause and effect: Political power  Economic power Reinforce status quo? Promote progress? • Why nations fail: Geography hypothesis/Culture hypothesis/Ignorance hypothesis  Prescriptions: Authoritarian growth/Modernization Theory/Washington Consensus Acemoglu and Robinson: Institutions hypothesis Extractive Institutions  Vicious Circles • Economic institutions • Insecure property rights • Slavery/Plantation system • Encomienda • Mita/Repartimiento • Reversal of fortune • Monopoly: La Serrata • Dual economy • Crony capitalism • Marketing boards • Political institutions • Absolutism • Infighting/Failed state • Ethnic fractionalization • Iron Law of Oligarchy • Elites: Librod’Oro • Indirect rule • Patronage networks Apartheid/Jim Crow

5. Why Nations Fail: Institutions Hypothesis • Economic institutions • Enforced property rights • Patent protection • Rule of law • Open Markets • Commenda • Political institutions • Pluralism • Constraint on executive • Secret ballot/Wide suffrage • Free media: Muckrakers Inclusive Institutions  Virtuous Circles Creative Destruction (pursuit of transient rents) • Theory of Development • Institutional Drift • Critical Juncture • Contingency • Preconditions • Centralized State • Constraint on executive • Pluralistic coalition • Critical junctures we have known • Neolithic Revolution • Fall of Rome • Black Plague • Atlantic Trade • Glorious Revolution • Industrial Revolution • French Revolution • Colonialism • The Great War • Energy Crisis

6. The Medium-RunCumulative Causation: Stuck in a Trap Lack of social infrastructure • Low payoff to skill  Little skill acquisition  Lack of social infrastructure Lack of skills/lack of means to employ knowledge  Primary production  Primitive techniques  Stagnation  Poverty Trap

7. Cumulative CausationEscaping the Trap: The Elusive Quest for Growth Build social infrastructure • Subsidize targeted industries/Tax consumption • Coordinate...industrial complex development...assure critical mass • Foster “Great expectations”  Self-fulfilling optimism Exploit Technology LEAPS • Creation without destruction...when there’s nothing to destroy Take Advantage of Demography • Age and vested interest • Immigration: the future of the West Harness Creation without Destruction...Pursue Increasing Returns • Complementary inventions and technologies • Railroads and the steam engine/The internet and PCs  Increasing Returns

8. Development (per capita income): What Matters? • Sala-i-Martin: 2 million regressions testing 59 suspects • Rule of law, accumulation, initial education, openness help • War, political instability, primary goods specialization hurt • Government stance, price distortion, ethnic fractionalization don’tmatter • Easterly and Levine • Africa’s Growth Tragedy: Ethno linguistic fractionalization • Tropics, Germs, Crops • Institutions: protection of property rights index • Endowments—geography: Settler mortality, latitude, landlocked, crops, minerals • Policies: Openness to trade, overvaluation, inflation • Other variables: Ethnic fractionalization, religion, legal origin FINDINGS: Endowments  Institutions  Economic Development Engerman & Sokoloff/Acemoglu, Johnson and Robinson get the ring • What about policies? • Once per capita income is explained by institutions, policy variables individually and together are insignificant CONCLUDE: Policies may affect growth over a decade, as found by other studies Bad policies are symptoms of bad institutions INSTITUTIONS MATTER FOR LONG-RUN DEVELOPMENT

9. Development, One Schoolhouse at a TimeKimenyi: Can Contract Teacher Results be Scaled Up? • In randomized experiment implemented by NGOs, low-paid “contract teachers” performed better than higher paid civil service teachers in Western Kenya. • But can the result be scaled up, i.e., when implemented on large-scale by government agencies? • Another randomized experiment performed: half the contract teachers worked for NGOs, half for government agencies. • Government hired somewhat more “qualified” contract teachers • Government hires more likely related to someone in system  cronyism • Other things equal, only NGO contract teachers performed better than civil service teachers • Payroll delays significantly affected performance/Paym’t by gov’t more delayed • Kimenyi concludes: Don’t leave education reform to government • Alternative conclusion: Clean up the payroll system and public education will do fine • Equal fractions of NGO and gov’t teachers did well enough to be hired full time

10. Gaddy: Russia, Before and After Soviet growth under extractive institutions • The Easy Part: Move resources from low productivity agriculture to higher productivity manufacturing • The Hard Part: Spur innovation/Creative Destruction • Perverse quotas and prices The Post-Soviet Virtual Economy • Loss-making manufacturing ought to shut down • Unemployment/Social discontent • Siberian industries and cities ought to be downsized • Extreme cold/high transport costs  uneconomical settlement • Primary producers/fictitious prices maintain the status quo • Oligarchs keep export earnings • Putin maintains power: A “protection racket” • Required subsidy grows with time  Unsustainable Bear Trap

11. Antholis: China and India – The Political Realities • China and India are not monolithic states • Regions and provinces matter • India: 35 states/China: 22 provinces + Taiwan • Local issues  Beijing and New Delhi can’t easily lead • Migration • Land acquisition for industry and urbanization • Infrastructure provision • Fiscal federalism: Center bail-out of sub-national entities • China: GDP Monotheism/Fragmented Authoritarianism • Central Ministry – Provincial Government Matrix • Global Coast vs. Protectionist Interior • Special Enterprise Zones/Environmental sustainability issue • India: Secessionist Threat/Ethnic Conflicts/Caste Conflicts • Regional parties critical for Congress or BJP coalitions • Advanced States: Benefit from high-tech diaspora • Backward States: Cronyism • Legacy of socialist subsidies: Unreliable power/shoddy infrastructure

12. The Short-Run in a Floating Age Managed float: intervention  $ reserves  $ privilege Currency misalignments  Currency crises Latin America’s “Lost Decade” Tequila/East Asia Global demand for $s  Capital inflows to US US International Debt  Threat of “Bank Run” The US Housing Bubble  (Developed) World in a Slump Dysfunctional US Finance/Dysfunctional US Politics  Dawn of a new international monetary architecture?

14. The Euro: An Alternative to the $? Why a €? • Euro economics: Transactions costs/CAP/German Discipline • Euro politics: Integration  Peace/Tie Germany to West Europe Eurozone Imbalance • Early 2000s: German wage discipline  German competitiveness  Current account surplus • Capital inflows to peripheral countries  Financial bubbles/Housing bubbles/Fiscal bubbles Iceland/Cyprus/Ireland/Spain/UK/Greece/Italy/Portugal • Iceland: When fishermen become investment bankers Crash  Brit and Dutch Screwed • Cyprus: Oligarch/Mafiya Laundry Crash  Russians Screwed

15. Talvi: New Economic Geography • Latin American and other emerging economies not dragged down by the crisis • Chinese expansion  commodity boom • Latin American countries with relatively high net commodity exports advantaged by rising commodity prices • Advanced country deleveraging •  capital inflows to emerging economies •  growth of emerging economies

16. Carmen Reinhart’s Remarks: Carmen bemoans debt • Emerging economies had reduced debt • Deleveraging followed 1997-98 crises • Advanced countries (and Emerging Europe) entered crisis with high Public + Private Debt • Deleveraging has been and will continue to be prolonged ~ Decade  Downward pressure on demand, output, & employment • Massive monetary easing lightens debt burden • Stemmed debt deflation spiral • But private saving eaten up by public borrowing • Vulnerabilities for emerging economies • Build up of domestic debt • Brazil: private debt and non-federal government debt Reinhart: For a banking crisis, don’t need external debt, just debt • China slowdown  commodity price collapse

17. This Time Ain’t Different Reinhart and Rogoff • “Excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.” • “Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short term and needs to be constantly refinanced.” • Highly leveraged economies “can seem to be merrily rolling along for an extended period, when bang! - confidence collapses, lenders disappear, and a crisis hits.“ • Eight centuries of experience suggests this time is not different.

18. U.S. Debt History

19. This Time Ain’t Different(but it’s not another Depression, ECON 403) Consequences of banking crises • Real GDP down – Unemployment up • Government revenue down • Government bailout of banks • Government debt/GDP UP • But 90% is not a ratio to be particularly feared • Austerity sucks...and doesn’t spur recovery “A recession is no time to cut spending” • Prolonged slump • Deleveraging • Zero lower bound  Monetary policy weakened Fiscal policy would work, given the chance: STIMULUS NOW

20. Aggressive Policy Response  No Depression