Financial constraints and innovation: Why poor countries don’t catch up
June 18, 2010 Editor 0
How can poor countries stop playing catch up? The question continues to puzzle economists. This column argues that the innovative and productive activities of domestic firms in emerging markets are inhibited by financial frictions. Financial reforms will be most effective if they target the vulnerable small and young domestic firms and those in the service sector.
Does international assistance spur development? Dambisa Moyo’s critical evaluation of aid in Africa has once more caused us to question what we really know about growth and development (see for example Easterly 2009, Moyo 2009, Sachs 2009).
- Why do large disparities in income and development between countries persist despite increasing globalisation?
- How can poor countries catch up?
Much of the empirical and theoretical research has been developed to identify factors that prevent less developed countries from “catching up” with developed countries. But after decades of research, the question continues to puzzle the profession.
Most of the difference in income across countries is attributed to differences in productivity. But “productivity”, in the words of Zvi Griliches, is a measure of our ignorance.
A prominent theory advocates that cross-country differences in credit market development considerably contribute to cross-country differences in incomes and productivity (see for example Banerjee and Duflo 2008 and Levine 2005 for surveys). Indeed, there is ample macroeconomic evidence that the development of financial markets is strongly correlated with the development of a country. But while the microeconomic channels for this relationship are an area of active research, many aspects of micro-level determinants remain unclear. The lack of micro-level evidence is particularly striking for non-OECD countries and for dynamic aspects of productivity gains such as innovation flows.
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Tags: active research, banerjee, catc, country differences, critical evaluation, disparities, dynamic aspects, financial constraints, financial reforms, frictions, international assistance, micro level, moyo, oecd countries, poor countries, productive activities, productivity gains, service sector, theoretical research, zvi griliches
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