Endogenous Growth

financed by UEFISCDI, Human Resources Young Research Teams project TE 298

Project title: MODELLING ENDOGENOUS GROWTH AND THE MACROECONOMIC POLICY MIX IN ROMANIA AND OTHER EMERGENT COUNTRIES FROM CENTRAL AND EASTERN EUROPE

Principal investigator: Dr. Monica Ioana Pop Silaghi

Project duration: August 2010 - July 2013

Project summary

The macroeconomic policies if they are well implemented have a certain role in the macroeconomic stabilization of a country. By assuring a non-inflationary environment, they facilitate the firms' decisions and consumers' ones to invest and to save so as to assure an economic long-lasting economic growth. The recent academic research is oriented more and more upon the role of macroeconomic policies in the determination of the economic growth rates. In the present project, we model the endogenous growth in Romania including variables as research and development, human capital, foreign direct investments, government size, initial conditions for structural reforms such as the liberalization index and conditions for the development of the private sector in Romania, inflation. The key factor in the economic development of a country is given by the education level and for Romania we need such a study that takes into consideration variables that are a good proxy for this indicator. The relationship between the government size and the economic growth is largely debated in the literature and reflects the way in which it exists the law of diminishing returns to scale as long as the government increases. The analysis of the factors of economic growth taking into account the policy mix at which we assist since 1990 represents the important purpose of the present project.

Main Results

The methodology that we apply is Granger causality for individual analyses for Romania and other emergent countries as Bulgaria, Czech, Estonia, Latvia, Lithuania, Hungary, Poland, Slovak and Slovenia, during 1998-2008. For the whole panel, we employ dynamic panel estimation ( GMM estimator) which is robust in the presence of endogenous covariates, allowing for individual fixed effects, heteroskedasticity and autocorrelation. Interesting results are obtained for private R&D business as an enhancing factor of economic growth. Based on these results, some policy implications are drawn, in accordance with EU 2020 Strategy of intellingent economic growth.

Team

Dr. Monica Pop Silaghi, monica.pop at econ.ubbcluj.ro - principal investigator

Drd. Diana Alexa - until September 2012

Dr. Cristina Jude

Dr. Simuna Mutu - starting from November 2012

Dr. Cristian Marius Litan

Project objectives. Literature review

From our survey, it becomes clear that more of the actual researches are based on the methodological and theoretical elements which the endogenous growth theoreticians brought by the eighties, respectively nineties. The empirical literature follows the developing of some existing approaches in the growth theory, the originality being consisted of the modern instruments applied to test the economic hypotheses.

The world experience show that the catching-up process impose high rates of economies and investments, the continuous improvement of the competitiveness, the high percentage of research-development and the total factors productivity, in other words the technical progress rate, which was named by Solow a residual factor. In what extent succeed Romania to accomplish these factors which permit convergence - even if not at the level of projections and actual expectations – represents our task in this project. In this sense, we mention the contribution of the Romanian author Daniel Dăianu, „Cât de posibilă este convergenţa economică”, Oeconomica, 2003, who analyzes the dynamic macroeconomic properties of Central and East Europe, relevant for catching up western societies.

The present project is meant to analyze the impact of the determinants of economic growth using the times series econometrics for Romania and for a sample of emergent countries i.e. Bulgaria, Czech, Hungary, Slovenia, Lithuania, Slovak, Latvia, Poland, Estonia.

The fundamental research character is being given by the theoretical and empirical conceptual examination of the growth’s factors impact on the long term growth rate of GDP; we mean the analysis of an endogenous growth model in the case of Romania and its neighbors. The accomplishment of our purposes assumes a research work focused over the development of some important concepts from the economic growth theory, work that we intend to cover at the highest possible level.

The lack of such a comprehensive study for Romania and also for the whole sample of emergent countries that we consider make very difficult the elaboration of good portfolio of macroeconomic policies for a sustainable economic growth. The efforts that we find in the literature are oriented more upon some of the determinants that we propose and in many cases on one country, less Romania. The recent financial and economic crisis obliges us to take into account the impact of macroeconomic policies and to study empirically and theoretically the role of government in the macroeconomic stabilization. We describe now the objectives of our project.

Objective 1: The growth rate and some of the main determinants of economic growth

The first relationship as the first subobjective that we will study is the relationship between the physical and human capital and GPD per capita in Romania and the other countries from Central and Eastern Europe. For the physical capital, the theoretical arguments from the literature of economic growth, especially the Solow model are sufficient for the inclusion of physical capital accumulation in the model. More, we will include in the study the human capital a less studied variable for emergent countries. For these countries, such studies are missing, so it becomes essential the developing of the causal approaches for a new sample of countries. Some studies (de la Fuente, Domenech [2006]) use statistical regressions for determining the relation, we wish to imply more tools from time series analysis, which knows an evident progress nowadays by providing strong instruments of testing the sense of a relation. Jones and Schneider [2006] realize an interesting approach of the economic growth process by the interaction with human capital, doing a survey in the psychological literature of the intelligence tests. The authors reach the conclusion that a proper measure for human capital is the IQ tests. Using national data basis, the authors show that in the growth regressions which include strong control variables, the IQ coefficient is significant in 99.8% from 1330 regressions, passing easily the Bayesian robustness tests. A one percent rate increase of the IQ indicator is associated with a 0.11% increase of GDP. The authors do not intend to develop such a study for the transition countries and in our project we want to contribute to the literature in such a direction, also analyzing the bran drain effect. Bassanini and Scarpeta [2001] adopt the pooled mean estimation method for testing the role of human capital in the growth process. Again, the sample contains only OECD countries, the author do not propose to develop similar studies for emergent countries.

The second subobjective of our research is to investigate whether there is a relationship between foreign direct investments and economic growth. The approach that we will do here is meant to give insights about the impact that foreign direct investments (FDI) have upon economic growth by the view of labor migration. We start form the statement of Carlos Salinas de Gortari “We export goods, not people”, so we pose the problem of substitution between FDI and migration. Theoretical as we have more FDI more jobs are being created so immigration must decrease. In a reverse way, we pose the problem of identifying if the migration possibility of qualified workers increases or not the human capital investment in the origin country, attracting more FDI. The discussion in this direction must be detailed, as the effects are different for each type of qualification. We intend to analyze the impact of FDI upon labor migration by a panel analysis. We will identify also the main way in which FDI contribute to the economic growth (physical capital accumulation or technological transfers) and also the changes that intervene at this level in time. In particular, we want to see whether the conditioning of the FDI contribution to the economic growth by national performances in the field of the labor force quality, financial institutions and capital market, political stabilization and foreign trade liberalization.

As a third subobjective, we will analyse the interregional migration inside Romania as it has a great impact on reducing the disparities between regions and thus, achieving a sustainable economic growth.

Objective 2: The macroeconomic policy and economic growth in Romania

One of the most important objectives of the economic policy is to build and to improve continuously its economic system to be able to generate growth rates which are long lasting from economic, social and ecological point of view. The achievement of this objective permits to the country inhabitants to reach standards of living comparable with those from developed countries on reasonable periods of time. Anaman [2004] analyses the factors that influence long term economic growth in Brunei using the multiple regression method based on new cointegration techniques to build the neoclassical model of economic growth. The results showed that to the increasing rate of GDP per capita contributed the total increase of exports and the relative size of the government. Mervar and Nestic [2000] showed that for Croatia the price stability, the reduction of the governmental expenses and the correct implementation of the reforms is essential for a long lasting economic growth. Campos [2000] realized a complex study regarding economic growth of the emergent countries and the included determinants besides labor, investments, human capital where the government size and the initial conditions, respectively reforms.

The creation of an open market satisfies better the requirements of a strong economic growth. In transition period, many important reforms were implemented: price liberalization, exchange rates regimes, the liberalization of the foreign trade, the reformation of the banking system, the development of many institutions of the modern market economy. For the emergent countries, there were used among the dependent variables also a liberalization index and the results showed a high impact upon economic growth ([De Melo, Denizer and Gelb [1996], Selowsky and Martin [1997].

Fischer, Sahay and Vegh [1998a, 1998b] have used more indices of macroeconomic stability in order to explain economic growth besides those on structural reforms. Their conclusion was that countries that have achieved macroeconomic stability (reducing inflation and fiscal deficit) and have followed comprehensive structural reforms had faster growth rates.

For this objective, we analyse also the role of openess for the economic growth.

As we will make our study in the context of the open economies, it is important to study the sectors in which Romania holds comparative advantage but also the branches in which it can create such advantages. The restraint of the analysis to the sectors identified in this way will give more relevance to our study and the causality between the factors of economic growth and GDP at the sectorial level represents an original element in the field consisted in the development of some approaches and the introduction of the methodology of testing causality. The studies in this direction (Gibbons, Katz, Lemiueux [2002], Hinloopen, van Marrewijk [2004], Vass [2005], Voinea [2002], Zaman [2004]) approach the dynamic comparative advantages by pertinent empirical analysis. We want to contribute at the literature in the field by a complex study which provides an extent view of the sectors that hold real comparative advantages or created ones and their causality or non causality with the economic growth of Romania.

For explaining economic growth in Romania we will include also the government size. In theory, the relation between government expenses and economic growth is very ambiguous. The governments can stimulate economic growth by protecting the property rights, by proposing a more coherent legislation, by assuring a stable monetary system by facilitating a healthy market economy, public goods [Gwartney et al. 1998]. The increased taxes and the additional borrowings influence the positive role of the governmental expenses upon the economic growth. As the government increases, the diminishing returns to scale law becomes more and more obvious. In the Romanian case the analysis of the government size was very seldom included so we intend to cover a gap from the literature.

For realizing this objective, we also intend to study the impact of the monetary policy impact and of inflation on the economic growth in Romania. Inflation can influence the economic growth by shifts in income so as to increase saving and investment rate in the economy. As a consequence of unanticipated inflation, it can exist a shift in distribution of income towards governments and most likely, from banks towards their clients, as a result (Bailey (1956), Cagan (1956). The research efforts are very alive in showing the critical relation which exists between inflation and economic growth. In particular, modeling the relationship between these variables takes into account the relevance of some nonlinear and threshold effects. Finding a level of inflation from which the negative influence upon economic growth is lower becomes essential. We will try to analyze also the mechanism of transmission of the monetary policy by measuring the impact of financial liberalization on the economic growth.

The achievement of the project objectives implies a high level of interdisciplinary as it assumes the combination of economics, mathematics, econometrics in order to reach to conclusions that are empirically validated.

Publications

ISI WoS journal papers

Monica Ioana Pop Silaghi, Subrata Ghatak, Why don’t they move from rural to urban? Inter-regional migration in Romania, in Romanian Journal of Economic Forecasting, no. 1/2011, pp. 143-158, impact factor 2011: 0.246, download

Cristina Jude, FDI, Productivity and wages. New evidence from a Romanian matched sample, accepted at Romanian Journal of Economic Forecasting

Codruta Mare, Cristian Litan, Perspectives on Euro Introduction in the Romanian Economy, in Baltic Journal of Economics, volume 12, no.1, 2012, pp.23-38, download

Theses and book chapters

Cristina Jude, Foreign Direct Investments, technology transfer and economic growth in Central and East Europe, PhD thesis, Babes-Bolyai University and Orleans University, September 2012, Magna Cum Laude

Cristina Jude, Monica Pop Silaghi, The role of labor costs in attracting foreign direct investment in Romania, in Population and Economy. Rural an Urban Instances, eds. Marin Balog, Ioan Bolovan, Rudolf Gräf, Ioan Lumperdean, supplement at Romanian Journal of Population Studies, vol. V, no.3, 2011

Cristina Jude, Monica Ioana Pop Silaghi, Foreign direct investments, employment creation and economic growth in CEE countries. An open issue, in Development, Energy, Environment, Economics, pp.352-356, 2010

BDI journal papers

Monica Ioana Pop Silaghi, Cristina Jude, Diana Alexa, Cristian Litan, Do business and public sector research and development expenditures contribute to economic growth in central and eastern European countries? A dynamic panel estimation, Economic Discussion Paper 2012-4, Kingston University, 2012, download

Monica Ioana Pop Silaghi, Diana Alexa, A growth accounting exercise in some Central and Eastern European Countries, in Calitatea Acces la Succes, supplement july 2012, pp. 734-746

Cristina Jude, Monica Ioana Pop Silaghi, Innovation versus income convergence in Central and Eastern Europe. Is there a correlation?, in Analele Universitatii din Oradea, Tom XX, no. 1 issue July 2011, p. 72-79

Ionut Trif, Marius Muresan, Monica Ioana Pop Silaghi, Monetary policy, inflation rate and real economic activity in Romania, in Revista Virgil Madgearu, no. 1/2011, pp. 181-198