WORKING PAPERS


Rising Income Inequality: Technology, or Trade and Financial Globalization?, with Florence Jaumotte, and Subir Lall, July 2008. Download PDF file | Data | Data Description.

We examine the relationship between the rapid pace of trade and financial globalization and the rise in income inequality observed in most countries over the past two decades. We find that technological progress has had a greater impact than globalization on inequality within countries. The limited overall impact of globalization reflects two offsetting tendencies: whereas trade globalization is associated with a reduction in inequality, financial globalization—and foreign direct investment in particular—is associated with an increase in inequality. We conclude that policies aimed at reducing barriers to trade and broadening access to education and credit can allow the benefits of globalization to be shared more equally. A key finding is that both globalization and technological changes increase the returns on human capital, underscoring the importance of education and training in both developed and developing countries in addressing rising inequality.


What Is the Impact of AIDS on Cross-Country Income So Far? Evidence from Newly Reported AIDS Cases, with Petia Stoytcheva , June 2008. Download PDF file. Earlier longer version PDF file.

This paper sheds new light on the impact of AIDS on cross-country income levels. We consider new UNAIDS/WHO data on officially reported AIDS cases for a panel of 89 countries over a 15 year period from 1986-2000 during which AIDS has spread across the world. These data are used to estimate cross-country level regressions employing panel data techniques. Our findings are as follows: First, when using the entire sample of countries we find that AIDS has a negative albeit marginally significant effect on the level of income. Second, when we control for regional effects we show that this negative effect is primarily driven by the sub-Sahara Africa and Latin America subsamples. Third, using AIDS data by age group, we find that the disease has a significantly negative impact on income only via infected people between the ages 16 and 34. Finally, while the economic impact of AIDS is negative and statistically significant, its economic significance measured by the estimated size of the AIDS coefficient is quite small.


Are any growth theories linear? Why we should care about what the evidence tells us, with Daniel Henderson , and Christopher Parmeter , May 2008. Download PDF file.

We construct a cross-country dataset on female human capital inequality. Unlike the existing literature that primarily focuses on the average years of women's education, we use this dataset to examine the relationship between female human capital inequality and infant mortality. We show that higher education inequality among women, measured by the Gini coefficient, leads to substantially higher infant mortality. This finding is robust to various alternative specifications and subsamples considered. We also consider whether this channel is important in explaining growth. Growth regressions show favorable but weak evidence that education inequality among women is associated negatively with growth via its effect on infant mortality. Our main results have implications related to the policy question on the optimal allocation of educational subsidies. If infant mortality reduction is a priority for policy makers, then educating the least educated women first seems to be an effective (and also simple) policy recommendation.


Education Inequality among Women and Infant Mortality: A cross-country empirical investigation, with Petia Stoytcheva , April 2008. Download PDF file.

We construct a cross-country dataset on female human capital inequality. Unlike the existing literature that primarily focuses on the average years of women's education, we use this dataset to examine the relationship between female human capital inequality and infant mortality. We show that higher education inequality among women, measured by the Gini coefficient, leads to substantially higher infant mortality. This finding is robust to various alternative specifications and subsamples considered. We also consider whether this channel is important in explaining growth. Growth regressions show favorable but weak evidence that education inequality among women is associated negatively with growth via its effect on infant mortality. Our main results have implications related to the policy question on the optimal allocation of educational subsidies. If infant mortality reduction is a priority for policy makers, then educating the least educated women first seems to be an effective (and also simple) policy recommendation.


Determining Growth Determinants: Default Priors and Predictive Performance in Bayesian Model Averaging, with Theo Eicher and Adrian Raftery , March 2008. Download PDF file.

Economic growth has been a showcase of model uncertainty, given the many competing theories and candidate regressors that have been proposed to explain growth. Bayesian Model Averaging (BMA) addresses model uncertainty as part of the empirical strategy, but its implementation is subject to the choice of priors: the priors for the parameters in each model, and the prior over the model space. For a well-known growth dataset, we show that model choice can be sensitive to the prior specification, but that economic significance (model-averaged inference about regression coefficients) is quite robust to the choice of prior. We provide a procedure to assess priors in terms of their predictive performance. The Unit Information Prior, combined with a uniform model prior outperformed other popular priors in the growth dataset and in simulated data. It also identified the richest set of growth determinants, supporting several new growth theories. We also show that there is a tradeoff between model and parameter priors, so that the results of reducing prior expected model size and increasing prior parameter variance are similar. Our branch-and-bound algorithm for implementing BMA was faster than the alternative coin flip importance sampling and MC3 algorithms, and was also more successful in identifying the best model.


Diseases and Development: A Theory of Infection Dynamics and Economic Behavior, with Shankha Chakraborty and Fidel Perez-Sebastian , March 2008. Download PDF file.

We propose an economic theory of infectious disease transmission and rational behavior. Diseases are costly due to mortality (premature death) and morbidity (lower productivity and quality of life). The theory offers three main insights. First, higher disease prevalence implies lower saving-investment propensity. Preventive behavior can partially offset this when the prevalence rate and negative disease externality are relatively low. Secondly, infectious diseases can generate a low-growth trap where income alone cannot push an economy out of underdevelopment. This is distinctly different from development traps in the existing literature. Since income per se does not cause health in this equilibrium, successful interventions have to be health specific. Thirdly, a more favorable disease ecology propels the economy to a higher growth path where health and income co-evolve and infectious diseases disappear. Even so, diseases significantly slow down convergence. These results suggest the empirical relationship between health and income at the aggregate level may be more nuanced than realized.


Trade Creation and Diversion Revisited: Accounting for Model Uncertainty and Natural Trading Partner Effects, with Theo Eicher and Christian Henn, January 2008. Download PDF file.

Trade theories covering Preferential Trade Agreements (PTAs) are as diverse as the literature in search of their empirical support. To account for the model uncertainty that surrounds the validity of the competing PTA theories, we introduce Bayesian Model Averaging (BMA) to the PTA literature. BMA minimizes the sum of Type I and Type II error, the mean squared error, and generates predictive distributions with optimal predictive performance. Once model uncertainty is addressed as part of the empirical strategy, we report clear evidence of Trade Creation, Trade Diversion, and Open Bloc effects. After controlling for natural trading partner effects, Trade Creation is weaker – except for the EU. To calculate the actual effects of PTAs on trade flows we show that the analysis must be comprehensive: it must control for Trade Creation and Diversion as well as all possible PTAs. Several prominent control variables are also shown to be robustly related to Trade Creation; they relate to factor endowments and economic policy.


Initial Conditions and Post-War Growth in sub-Saharan Africa, with Winford Masanjala, September 2007. Download PDF file.

We investigate the heterogeneous effects of initial conditions on post-World War II growth in sub- Saharan Africa. Our empirical strategy is based on Bayesian Model Averaging (BMA) that allows us to consider both model uncertainty (about the preferred theory and model) and parameter heterogeneity (that countries are not homogeneous objects) into an internally coherent estimation procedure. Our main fnding is that the impact of initial conditions on subsequent growth in sub-Saharan Africa is distinct. How and why these initial conditions have a differential effect on this region is examined.


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