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

Why Nations Fail

Exorbitant Privilege

Elusive Quest for Growth

Talvi/Lombardi:New International

Monetary Architecture

Reinhart:Debt and Crisis

McMafia:Global Crime

Antholis:China/IndiaFederalism

Gaddy:Virtual Economy

Bear Trap

Kimenyi:Educational Reform

Can It Scale?

Crisis:Is This TimeDifferent? Soviet Extraction:

Ukrainian Famine

Graham: Measuring Happiness

Thinking Long-Run

Extractive institutions Vicious circlesCritical Junctures–Contingency/Reversal of fortune

Inclusive institutions Virtuous circles

Endowments – Institutions - EndowmentsInequality, 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 hypothesisExtractive 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: Libro d’Oro• Indirect rule• Patronage networks

Apartheid/Jim Crow

Inclusive Institutions Virtuous CirclesWhy 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

Creative Destruction(pursuit of transient rents)

Theory of Development• Institutional Drift• Critical Juncture• ContingencyPreconditions• 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

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

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 optimismExploit Technology LEAPS• Creation without destruction...when there’s nothing to destroyTake Advantage of Demography• Age and vested interest• Immigration: the future of the WestHarness Creation without Destruction...Pursue Increasing Returns• Complementary inventions and technologies

– Railroads and the steam engine/The internet and PCs

Increasing Returns

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’t matter

• 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 DevelopmentEngerman & 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 insignificantCONCLUDE: Policies may affect growth over a decade, as found by other studies

Bad policies are symptoms of bad institutionsINSTITUTIONS MATTER FOR LONG-RUN DEVELOPMENT

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

Gaddy: Russia, Before and AfterSoviet 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

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

The Short-Run in a Floating AgeManaged float: intervention $ reserves $ privilegeCurrency misalignments Currency crises

Latin America’s “Lost Decade”Tequila/East Asia

Global demand for $s Capital inflows to USUS International Debt Threat of “Bank Run”

The US Housing Bubble (Developed) World in a SlumpDysfunctional US Finance/Dysfunctional US Politics

Dawn of a new international monetary architecture?

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

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

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 debtReinhart: For a banking crisis, don’t need external debt, just debt

– China slowdown commodity price collapse

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.

U.S. Debt History

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 weakenedFiscal policy would work, given the chance: STIMULUS NOW

Aggressive Policy Response No Depression