Read more about the article Access to finance, product innovation and middle-income traps

Access to finance, product innovation and middle-income traps

Interactions between access to finance, product innovation, and labor supply are studied in a two-period overlapping generations model with an endogenous skill distribution and financial market imperfections. In the model lack of access to finance (induced by high monitoring costs) has an adverse effect on innovation activity not only directly but also indirectly, because too few individuals may choose to invest in skills. If monitoring costs fall with the number of successful projects, multiple steady states may emerge, one of which defined as a middle-income trap, characterized by low wages in the design sector, a low share of the labor force engaged in innovation activity, and low growth. A sufficiently ambitious policy aimed at alleviating constraints on access to finance by innovators may allow a country to move away from such a trap by promoting the production of ideas and improving incentives to invest in skills.

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Read more about the article The Global Economy Remains Unbalanced

The Global Economy Remains Unbalanced

Global imbalances have not gone away as an issue, as they reveal that the global economic recovery may have been sub-par because of asymmetric excess surpluses in some countries and output below potential in many others. The end of the “era of global imbalances” may have been called too early. Lord Keynes’ argument about the asymmetry of adjustments between deficit and surplus economies remains stronger than ever.

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Read more about the article Financial Deepening and Post-Crisis Development in Emerging Markets – Current Perils and Future Dawns

Financial Deepening and Post-Crisis Development in Emerging Markets – Current Perils and Future Dawns

This collection empirically and conceptually advances our understanding of the intricacies of emerging markets’ financial and macroeconomic development in the post-2008 crisis context. Covering a vast geography and a broad range of economic viewpoints, this study serves as an informed guide in the unchartered waters of fundamental uncertainty as it has been redefined in the post-crisis period. Contributors to the collection go beyond risks-opportunities analyses, looking deeper into the nuanced interpretations of data and economic categories as interplay of developing world characteristics in the context of redefined fundamental uncertainty. Those concerns relate to the issues of small country finance, the industrialization of the developing world, the role of commodity cycles in the global economy, sovereign debt, speculative financial flows and currency pressures, and connections between financial markets and real markets. Compact and comprehensive, this collection offers unique perspectives into contemporary issues of financial deepening and real macroeconomic development in small developing economies that rarely surface in the larger policy and development debates.

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Read more about the article Turkey’s Economy at the Crossroads

Turkey’s Economy at the Crossroads

Turkey’s economy is at a crossroads, and how the country emerges from the current period of political crisis could dictate its ability to meet its challenges. Will power consolidation and purges render a compromised central bank? Will truculence with major partners such as the EU and Russia lead to deceleration in real-sector growth? Will human rights abuses and risk aversion lead investors to steer clear of Istanbul? And how will a population on edge react to what many expect to be a miserable summer in tourism receipts?

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Read more about the article Tales of Emerging Markets

Tales of Emerging Markets

Emerging market economies (EM) as a special class of financial assets have recently been subject to two competing tales. On the one hand, there is evidence of continued financial deepening and further integration within the global financial system, while the offer of higher yields remains hard to find elsewhere. On the other hand, there are frequent bouts of fear of systemic unwinding of positions triggered by investors “exiting” EM that exhibit signs of weak or unclear macroeconomic foundations.

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Read more about the article Capital Flows and Deleveraging in Emerging Markets

Capital Flows and Deleveraging in Emerging Markets

Capital outflows from emerging market economies have substantially accelerated since last year. Some analysts have taken those features as pointing to a high likelihood of a “third wave” of the global financial crisis, this time centered on emerging markets. While arguably their combination may acquire a disorderly nature and materialize systemic risks to those economies as a group – and therefore to the global economy going forward – there are also reasons to expect the significant portfolio rebalancing at play not to lead to a disruptive break.

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Read more about the article Whither Emerging Markets Foreign Exchange Reserves

Whither Emerging Markets Foreign Exchange Reserves

After a exponential rise in foreign exchange reserves accumulation by emerging markets from 2000 onwards, the tide seems to have turned south since mid-2014. Changes in capital flows and commodity prices have been major factors behind the inflection, with the new direction expected to remain, given the context of the global economy going forward. Although it is too early to gauge whether the on-going relative unwinding of such reserves defenses will lead to vulnerability in specific emerging markets, the payoff from strengthening domestic policies has broadly increased.

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Read more about the article Middle Income Growth Traps

Middle Income Growth Traps

This paper studies the existence of middle-income growth traps in a two-period overlapping generations model of economic growth with two types of labor and endogenous occupational choices. It also distinguishes between “basic” and “advanced” infrastructure, with the latter promoting design activities, and accounts for a knowledge network externality associated with product diversification. Multiple steady-state equilibria may emerge, one of them taking the form of a low-growth trap characterized by low productivity growth and a misallocation of talent—defined as a relatively low share of high-ability workers in design activities. Improved access to advanced infrastructure may help to escape from that trap. The implications of other public policies, including the protection of property rights and labor market reforms, are also discussed.

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