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

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

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

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: Libro d’Oro Indirect rule Patronage networks Apartheid/Jim Crow

Why Nations Fail: Institutions Hypothesis Inclusive Institutions  Virtuous Circles 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 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

The Medium-Run Cumulative 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 Causation Escaping 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

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 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

Development, One Schoolhouse at a Time Kimenyi: 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 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

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 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?

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 debt Reinhart: 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 weakened Fiscal policy would work, given the chance: STIMULUS NOW

Aggressive Policy Response  No Depression