The paper reviews the “stylized facts” on economic growth gathered by Easterly and Levine in their 2001 joint paper and illustrates some of the points made on the basis of data from the IMF’s World Economic Outlook on real growth and per capita GDP since 1970. The data show that the growth performance of many poor countries has been disappointing: most of the “developing” world, especially sub-Saharan Africa, has been getting poorer while the advanced economies have been getting richer. To reverse this trend requires finding ways to raise total factor productivity in poor countries; in turn, this implies letting entrepreneurs innovate—in the Schumpeterian sense—in order to bring about structural changes in the economy. The conclusion highlights several essential steps in creating a favorable environment for innovation and growth.
Our proposal draws on the premise that the availability of stable demand deposits for bank lending, in the process of which inside money is created, does not require any act of intentional saving. The mechanism allowing banks to lend deposits does not function well in low-income countries, owing to a number of structural constraints. We argue that separating inside money creation from lending, and distributing it on a nonlending basis to depositors through specialized payment service institutions, could broaden access to financial resources, fuel non-inflationary, demand-led growth; and foster financial deepening, diversification, and stability. We also argue that the proposed reform is consistent with market incentives and sound economic management.
and column totals).
A SAM is one approach to presenting the national accounts data of a country. It captures the circularflow of incomes from commodity markets through factor payments to households and back to product markets through spending on final goods ( Figure 2.1 ). A typical SAM includes accounts for production (activities), commodities, factors of production, institutions (households, enterprises, and government), and the rest of the world, all of which receive income and demand goods (see Table 2.1 ).
Figure 2.1. CircularFlow of Income as
their timing is concerned. The conclusions are affected, however, by changes in velocity in response to changes in the rate of interest, which occur primarily in the more developed countries. The variability of money holdings in these countries in response to changes in the rate of interest implies the necessity of greater intensity of credit policy than would be needed in most of the less developed countries in order to obtain a given change in money income.
I. Income and Money
T he circularflow of income
On the assumption of a constant ratio of income
circularflow of income
On the assumption of a constant ratio of income to money, the income process may be pictured as a circularflow in which the stock of money and the flow of income are uniquely related by proportionality, in much the same way as the quantity of water in a closed set of circuits would be related to the recordings on a flow meter set anywhere in these circuits.
The circular character of the income stream implies that the stream feeds on itself. There are qualifications to this, but they do not destroy the main proposition, viz., that income in
16/ Sandler and Cauley (1980) .
17/ See the discussion of “tightly coupled” versus “loosely coupled” international agreements and supranational structures in Sandler and Cauley (1980) .
18/ This point will receive further elaboration in Section III.2.c . below.
19/ This definition of a “tax” is based upon the notion of a two-sector, circularflow economy in which revenues extracted from the private sector finance public sector economic activities.
20/ It is interesting to observe that the “international tax” features of cost
normal economic incentives of higher emoluments and other net advantages. As examples one may point to the movement of Egyptian and Palestinian engineers, teachers, and doctors to Kuwait and other Arab countries, and of Indian and Pakistani technicians to Africa and the Persian Gulf states. This, incidentally, also goes to show that part of the so-called “brain drain” from the LDCs may really represent a circularflow among the LDCs themselves, rather than a once-for-all drain to the developed countries. Another channel of export of technical know-how from LDCs is the