Regime-specific impact of financial reforms on economic growth in Pakistan

This study uses and proposes a new methodological approach to construct a financial liberalization index on the basis of the dynamic factor model technique. The resulting index is used to investigate the impact of the financial sector reforms in Pakistan on economic growth. Using the Markov regime-switching model over the period 1972–2015, the empirical results showed that the examined relationship is nonlinear, nonmonotonic, state-dependent, and better described by the two-state Markov switching model characterized by the high growth regime and low growth regime. Despite the positive impact of financial liberalization on economic growth in both the high and low growth regimes, financial liberalization relatively strongly affects real GDP growth in the high growth regime. The results further demonstrate that transition probabilities establish an inordinate episode of the low growth regime. Furthermore, the high growth regime is relatively short-lived than the low growth regime. Among the other variables, trade openness and physical capital stock have a positive impact on economic growth, while labor force and government expenditure exert a negative effect on economic growth. Several economic policies are proposed and discussed for better functioning of financial sector development in Pakistan.     

Impact of finance on growth: Does it vary with development levels or cyclical conditions?

Financial systems are complex and may support economic growth differently at various stages of economic development. This study of 90 countries extends the financial development-economic growth literature by using four proxies of financial development (banking, stock market, bond market and insurance), and considering a country’s level of economic development, on both a full and pre-global crisis sample. As expected financial markets have different effects on growth where the level of economic development vary. Policy makers should find that the insurance sector offers the most benefit for economic growth at all levels of development. Stock markets promote growth for middle income countries. Similarly bond markets promote growth with middle and high income countries. Some bond market and stock market results differed in the pre-crisis sample. Policies which promote trade but limit other areas such as inflation, government consumption and crises, should also support growth.     

Financial development and economic growth: New evidence from Tunisia

This paper examined an empirical investigation of whether financial development can boost economic growth in Tunisia. We used an Autoregressive Distributed Lag method to assess the finance-growth relation taking private credit, value traded and issuing bank's securities on the financial market as financial development indicators.The empirical results showed that the domestic credit to private sector has a positive effect on the economic growth suggesting that the financial development is a driver of a long term economic growth, but subject to a financial fragility at the short run. Moreover, this study confirmed the view of bidirectional relationship between credit and economic growth. However, we found that neither the stock market development nor the intervention of banks in the stock market had robust and positive effects on the economic growth. Thus, Tunisia is recommended to accelerate in priority the financial reforms of the Tunisian stock market in order to contribute to mobilize savings and promote long run economic growth.     

Debt threshold for fiscal sustainability assessment in emerging economies

This paper explores the debt threshold for fiscal sustainability assessment for 14 emerging economies during the period 1999–2016. The threshold point is identified as the level which, if exceeded, promptly raises sovereign risk to an unsustainable level. As such, we employ a panel threshold analysis to the determination of debt limit, which can serve as a distinctive feature from other studies on fiscal sustainability. Our results demonstrate that non-Latin American economies are considered to be sustainable in the short run, as their debts remain below the threshold bounds of 40–55% of GDP. However, the long-run sustainability risk may emerge from a continuous upward trend in debt paths, implying the need for rebuilding fiscal buffers. It is important to emphasize that fiscal sustainability is far more challenging for most Latin-American economies. This is indicated by their debt accumulation beyond the threshold level of roughly 35% of GDP which is relatively lower than that estimated for the other countries. Indeed, during times of high debt, emerging countries in Latin America also face higher default risk since their sovereign risk premium respond more strongly to debt rise. Their paths toward fiscal sustainability, hence, requires an immediate imposition of strict fiscal discipline to relieve the debt pressure.     

The political budget cycles in the presence of a fiscal rule: The case of farm debt waivers in India

Farm debt waivers which are meant to be a one-time settlement of loans have become common in India. This paper finds, after controlling for variables related to farming distress, that the timing of waiver announcements by state governments between 2001-02 and 2018–19 is associated with the timing of elections. This points toward a pattern of policy manipulation that suggests election-year targeting of the largest special interest group in India, namely farming households. The debt waivers, either announced as policies by incumbent governments prior to upcoming elections or as election pledges by political parties which are fulfilled after winning elections, are unanticipated shocks to government revenue expenditure. We find that the waivers are associated with an increased revenue deficit, which is accommodated by a nearly 1/3rd cut in capital outlay to control the fiscal deficit, given the presence of a fiscal rule. Given its path dependence, lower capital expenditure also reduces the quality of government spending in subsequent years.     

Globalization,financial development and economic growth: Perils on the environmental sustainability of an emerging economy

The study examines the effects of globalization, financial development, economic growth, and energy consumption on environmental sustainability in India over the period 1980–2015. The novelty of the study is the assessment of environmental sustainability in a single framework encompassing globalization, financial development, and growth effects. Findings reveal that an increased level of globalization and financial development while improving economic performance are inimical to the sustainability of the environment. In the short-run, globalization, economic growth, and increased energy consumption are contributing directly to environmental degradation, while banking sector development is impacting environmental sustainability adversely through the economic growth channel. Given the severity of the findings amidst India’s tryst with economic growth, proactive policies are warranted to encourage adaptation of greener and cleaner technologies in environmentally sustainable areas. This necessitates improved institutional quality encompassing stringent environmental standards, legal systems, property rights, corruption, financial information quality, etc., alongside the provision of incentives and subsidies to manufacturing firms undertaking technological innovations and complying with the environmental standards.     

Effect of financial development on economic growth in sub-Saharan Africa

This paper examines the overall economic growth effect when the growth in finance and real sector is disproportionate relying on panel data for 29 sub-Saharan African countries over the period 1980–2014. Results from the system generalized methods of moments (GMM) reveal that, while financial development supports economic growth, the extent to which finance helps growth depends crucially on the simultaneous growth of real and financial sectors. The elasticity of growth to changes in either size of the real or financial sector is higher under balanced sectoral growth. We also show that rapid and unbridled credit growth comes at a huge cost to economic growth with consequences stemming from financing of risky and unsustainable investments coupled with superfluous consumption fueling inflation. However, the pass-through excess finance–economic growth effect via the investment channel is stronger.     

经济刺激计划的负面效应分析——以美国为样本

在经济萧条时,经济刺激计划对于避免震荡、稳定市场、恢复信心、促进增长有重要作用。但当经济止跌企稳时,经济刺激计划要适时退出,否则会带来政府财政负担加大,赤字增加,潜在通货膨胀压力加大,财政政策的挤出效应,助长道德风险和逆市场化改革等一系列负外部效应。以美国为例,分析美国经济救援和经济刺激计划的负外部效应,从而提出对中国四万亿经济刺激计划实施的反思与启示。     

The feasibility of alternative IMF-type stabilization programs in Mexico, 1983–1987

In November 1982, Mexico announced an agreement with the International Monetary Fund (IMF) on a program to ease the country's large foreign debt. Mexico may recieve nearly $4 billion worth of credit if the government reduces the deficit, raises taxes and curbs imports. This article investigates whether an IMF program like this can work in Mexico without a serious and immediate economic contraction. A model is constructed to examine the impact of government fiscal activity under alternative stabilization programs. The analysis suggests a critical element for success is the ability and willingness to raise tax revenues.     

财政收入垂直分配关系及其均衡增长效应(英文)

不断扩大的地区间差异困扰着中国发展,并成为社会稳定的重要隐患。为了缓解地区间差距可能引发的各种矛盾,中国政府在1994年分税体制改革之后确立了具有集权倾向的财政收入垂直分配关系。通过财政资金的大规模双向流动,这种财政收入垂直分配关系促进了财政资金的跨区域配置和财政能力的地区间均等。但作为分权体制的重要制度安排,其在均衡地区间经济增长方面的作用却很有限,主要表现为大规模收入集中对经济发达地区的增长抑制。财政收入垂直分配关系的这些影响与地方财政非税收入依赖程度以及中央专项补助水平存在明显交互作用,前者显著弱化了财政收入过度集中的不利增长效应,后者却显著弱化了中央补助的增长激励。     

Implicit debt in public‐sector pension plans: An international comparison

Most countries have separate pension plans for public‐sector employees. The future fiscal burden of these plans can be substantial as the government usually is the largest employer, pension promises in the public sector tend to be relatively generous, and future payments have to be paid out directly from government revenues (pay‐as‐you‐go) or by funded plans (pension funds) which tend to be underfunded. The valuation and disclosure of these promises in some countries lacks transparency, which may hide potentially huge fiscal liabilities to be passed on to future generations of workers. In order to arrive at a fair comparison between countries regarding the fiscal burden of their public‐sector pension plans, this article recommends that unfunded pension liabilities should be measured and reported according to a standard approach for reasons of fiscal transparency and better policy‐making. From a sample of Member countries of the Organisation for Economic Co‐operation and Development, the size of the net unfunded liabilities as of the end of 2008 is estimated in fair value terms. This fiscal burden can also be interpreted as the implicit pension debt in fair value terms.     

When can fiscal consolidation be expansionary? Evidence from a small open economy

The paper focuses on the implications of stabilisation policies in a small open economy that were introduced to reverse burgeoning public sector deficit. In particular, I examine the hypothesis that such stabilisation policies can actually have expansionary effects on business investment. While this goes against the standard Keynesian view that the institution of more conservative fiscal and monetary programmes will, at least initially, lead to deflationary outcomes, there are important reasons for believing that such policies will in fact be expansionary. Such predictions are made in a dynamic setting, which weighs the short-term consequences of curtailed government expenditures against their long run implications for future increases in government spending, a reduction in debt burdens and greater stability. With the introduction of expectations, the positive implications of such policies can be immediate. This paper tries to clarify the ‘expectational crowding-in’ process and investigates whether the effects of stabilisation on business investment were due to that process or to other features of the stabilisation programmes. The policy message from my analysis is that budget consolidations producing expansionary effects are more than a theoretical construction. The experience of small open economies mentioned above should be taken into account also in policy making. Empirical findings indicate that EMU countries may need to carry out budgetary consolidations to dispose of room for manoeuvre against first the fiscal constraints in smoothing the business cycle imposed by the Stability Pact, and second, the looming budgetary implications of ageing populations.     

Threats,chances and opportunities: social capital in Europe in times of social and economic hardship

The 2008 financial and economic crisis, characterized by an economic breakdown unparalleled since the Great Depression, provides a unique opportunity to study the relationships between economic developments and social capital by asking: How does social capital change in times of social and economic hardship? In order to explore the trends of social capital development, data from the European Social Survey 2002–2016 are used. The results suggest that economic decline – particularly increasing unemployment – is associated with a decline in social capital, especially in southern European countries. Furthermore, increasing long-term interest rates as an indicator of government future debt sustainability appear to be detrimental for social capital development. The impact of economic decline, however, appears to be contingent upon the functioning of state institutions: especially in countries characterized by well-functioning governments social capital is significantly less affected by economic decline than other countries.     

Financing and managing epidemiological-economic crises: Are we ready for another outbreak?

An epidemiological-economic crisis presents countries with two significant challenges, in addition to the health challenge - a growing deficit due to fiscal policy measures, and a shortage of essential workers needed to manage the crisis successfully. In this study, we propose an outline for economic readiness in case of a future crisis in general, and a pandemic outbreak in particular. Through the establishment of a dedicated income-based tax-financed budget aimed at funding government excess expenditure during a crisis, and by adopting a reserve program in the essential sector of the economy, social and economic costs can be reduced.     

The size and structure of China's government debt

This paper analyzes the size and structure of China's government debt. In addition to explicit government debt, we consider three types of government contingent liabilities: local government debt, university debt, and state banks’ nonperforming loans. The size of each types of debt is estimated and the reasons for the emergence of each type of debt are analyzed. International comparisons are made and it is found that China's government debt is larger than many other developing countries. To insure fiscal sustainability and to leave rooms for future expansionary fiscal policies, the government should reduce contingent liabilities.     

Pensions in Nigeria: The performance of the new system of personal accounts

In 2004, Nigeria copied the 1981 Chilean pension reform and established a funded system based upon personal accounts. The new system was neither appropriate for a country such as Nigeria, nor did it meet aspirations of improving pension coverage or helping economic growth. The current financial and economic crisis hit the scheme in so far as it hit stock values. However, more important has been the negative real interest rates that can be earned on government bonds and on bank deposits — where the majority of contributions are invested. Bank scandals and rising fiscal deficits do not breed confidence in the system or the government's ability to deliver meaningful benefits in old age.     

China’s first priority in post-war state building: A wealthy state,or a strong army?

This analysis examined causal links in China’s defence–growth nexus in 1960–2016. The results show that better growth significantly reduces military-civilian ratio and propels military reforms. The unidirectional threshold causality from growth to defence shows that the military impact on a positive change in China’s growth is little in the long term. Conversely, the growth impact of a positive change in defence has accelerated after it reaches the threshold year in 1987. This finding explains why Chinese economy stagnated when defence was prioritised and why China has risen dramatically in the Far East after three decades of fast economic growth.     

Reforming public debt governance in Turkey to reach debt sustainability

The paper argues that the achievement of sustainability of public debt requiring the fulfillment of solvency and liquidity conditions in countries for which real interest rates are above the real growth rates is challenging and difficult. Since solvency is a rather complex concept and its governance is difficult and delicate, the paper maintains that such countries could try to achieve the sustainability of public debt by delegating the tasks of securing the observance of solvency and liquidity conditions to fiscal councils (FC) that need to be formed as autonomous public institutions with sufficient financial and technical resources. In Turkey FC needs to be assigned the further task of improving policymakers’ incentives to opt for sound government procurement and taxation policies that would lead to the achievement of efficient allocation of resources and elimination of corruption and nepotism in the economy.     

Does the twin deficit hypothesis hold in the OECD countries under different real interest rate regimes?

This paper explores the validity of the twin deficit hypothesis in selected 25 OECD countries with annual data for 2005–2016 by considering different real interest rate regimes. A non-dynamic panel threshold model, introduced by Hansen (1999), is employed. The novelty of the empirical findings from the present study is that there exists a non-linear relationship between the budget deficit and the trade balance, which is driven by a critical threshold level in the real interest rates. The findings suggest that twin deficit hypothesis holds only under the low real interest rate regime, that is, rises in budget deficits lead to deteriorations in the trade balance when the real interest rate is below the threshold level. When the high real interest rate (i.e. above-the-threshold) regime is concerned, increasing budget deficits give rise to improvements in the trade balance, a finding consistent with the twin divergence hypothesis. Thus, the effect on the trade balance of an expansionary fiscal policy that worsens the budget balance reverses substantially depending on the threshold level of the real interest rates. The major policy implication of this paper is that the policy makers in the selected OECD countries should pay a greater attention to fiscal discipline in order to prevent the trade balance from worsening, because the majority of the countries fall into the low real interest rate regime over the recent years of the sample period (i.e. between 2010 and 2016).     

Does economic policy uncertainty affect bank earnings opacity? Evidence from China

Uncertainty about economic policy (EPU) in today's interconnected world and its impact worldwide is more significant than ever before. Thus, this study examines EPU's impact on the bank's earnings opacity of the Chinese banking industry, using the two-step system GMM estimator and the time covering 2011–2018. Our finding shows a negative and statistically significant relationship between EPU and bank earnings opacity, implying that the Chinese banking sector decreases earnings opacity in times of high EPU to earn trust and show good banks’ financial image. Moreover, our finding reveals that the effect of EPU on earnings opacity relies on the banks’ financial strength. This study recommends that a policy to reduce earnings opacity should be in place and also the supervisory capability and financial regulation should be strengthened. Moreover, the regulators should be more vigilant while making economic policies during high economic uncertainties.