3. INTRODUCTION TO GROWTH ECONOMICS GROWTH ECONOMICS and Fund-raising in international cooperation SECS-P01, CFU 9 Growth Economics academic year 2018-19 3. INTRODUCTION TO GROWTH ECONOMICS Roberto Pasca di Magliano Fondazione Roma Sapienza-Cooperazione Internazionale roberto.pasca@uniroma1.it

Differences between Development and Growth newly-born backward countries after World War II development is a four-leg chair where institutional, social, civil and economic aspects are stabilised interdisciplinary studies Growth: dominance of the economy over the behavior of institutions and individuals Main aspects to be explained: explaining why growth is concentrated in a few countries, while many others are still waiting along the road explaining how some developing countries are redeemed and crowding the group of the emerging countries Explaining the dynamics that move the transition countries Roberto Pasca di Magliano 2018-19

Changes in the world GDP 2018-19

The free market and its consequences The consequence of the free market hypothesis is all too obvious: the market works well only if it is left free (hence the famous expression “laissez faire”) Therefore, the market, not only does not need any help, but if anything, just needs to be freed of obstacles and regulations that might prevent its action It is interesting to note that in this last consideration, one can find an argument that is often made in favour of the market, even nowadays: The market must be left free, it must not be caged but it needs effective public policies and a good governance rules Roberto Pasca di Magliano 2018-19

The role of the State in the economy The founder of the theory of the role of the State in the market is John Maynard Keynes as it has been analised in “General Theory of Employment, Interest and Money” 1936 The innovative idea is that the role of the State is fundamental. Indeed, the market can, according to Keynes, produce results that are not optimal, and the State’s role is to help the market to work well and in a correct direction The duty of the State is on the one hand to mitigate and control the economic cycles and on the other hand to bring the market to a better situation (especially in terms of unemployment, well-being) compared to the one that could make the market free to operate Roberto Pasca di Magliano 2018-19

Role of public policy We know that in the short run economy is influenced by aggregate demand public economic policies. So, during recession the State have to push aggregate demand towards the productive capacity of the economy. When the economic performance is influenced by factors erratically affecting production, employment, and inflation, Keynesian economists argue that private decisions sometimes could lead to inefficient macroeconomic outcomes which require active public policy responses in order to stabilize output over the business cycles. Main policies regard: monetary policy actions by the Central bank  fiscal and budget policy actions by the Government Keynesian economics is then advocating a mixed economy system where the private sector continues to play an important role, even if they believe in an important role to be played by the State in recession periods. Roberto Pasca di Magliano 2018-19

The market in the face of crisis Origins of the financial crisis 2007/08 Since the 1980s, liberal pressures and the dissemination of new and revolutionary communication technologies –ICT- have produced an enormous expansion of the financial activities at the international level with respect to real economy (10 to 1, nowdays) The new technological revolution generates the so-called market globalization by generating advantages (icome-gap reducing among countries) but in the same time increasing many social disadvanteges (Income inequalities within each country, poverty increase, uncontrolled migration flows, social disease, market uncertainty) Advantages evidence: begining 90s, the the international trade is grown continuosly, numebers of the emerging countries are increasing as well as their Gdp, Volume of financial investment, mergers and aquisitions are growing progressively due to mutual funds, pension funds and soverign wealth funds Disadvantages evidence: allocations prefered financial products (derivatives, etc.) other than real investment (that remain faible), inland poverty misallocation increased, underdevoped countries became even poorer Roberto Pasca di Magliano 2018-19

Financial Markets The total value of financial activities is estimated at least 10 times thelevel of the real income They move volumes of wealth built on the trade of derivatives and other financial products that are detached from economic activities, whereby every turbulence generates psychological repercussions not only on the stock markets but also on the loans to businesses New financial allocation authorities are the investment banks and big investors who do not care about real economy The concentration in the financial allocations causes growing concern for the small and medium enterprices in term of lack of investments The perceptions of the market can be compared to an hypothetical scenarios of rising chain reactions in depressive direction Roberto Pasca di Magliano 2018-19

Reasons of the crisis started in 2007 The crisis originated at the end of the 2007 with the crash of the Lehman Brothers comany. It was the result of a guilty lack of governance, representative of the liberal culture that was lenient intimes when strong fianancial were facilitating economic activities and their growth (Federal Reserve Bank with Grennspan, both Republican and Democratic Governments in the Usa) Investment banks, and not only, have taken advantages of this, thrusting on much higher leverage ratios than those of the commercial banks, eventually bringing about the creation of high-risk financial products Expansive policies adopted by advanced countries after 2015 (in Italy too) obtain some positive results in stimulating Gdp and in reducing the rate of unemployment. But in the same time, the advantages of globalization have exacerbated income inequality between the poor and less well-to-do and rich classes. This is the reason for the growing impoverishment, the onset of migratory flows, the protectionist and nationalistic reactions of the advanced countries and populations. Roberto Pasca di Magliano 2018-19

The actual crisis: EU response Banking system approach: Public participation in the capitals of banks in crisis, provided it goes to fuel the loan supplies (bailout System) Private reforms and needs for stockholder to pay for that (bailin system) Need of Government guarantee both on deposits and interbank loans Lighten the regulatory capital requirements of Basel regulations Promoting cooperation agreements with Sovereign Wealth Funds to increase real investments Need to revise the tight discipline of the Maastricht Treaty to improve flexibility in the budgetary constraints even if within a sustainibility trend Boost the demand, by reducing the tax burden on families, in order to send a strong signal to the recovery of purchasing power Review the rules regulating the financial and stock markets in order to fight the speculative designs that preceed the speculation over the economic and patrimonial consistency of businesses Lower the minimum requirement for the public purchasing offer in businesses to avoid hostile participations Maintain the European Stability Mechanism (ESM) and other monetary policies to support inflation rate Roberto Pasca di Magliano 2018-19

Following lectures in details from theories to models Classical theories of development The Keynesian growth model of Harrod-Domar Neo-classical models of growth: Solow approach Analysis of growth based on the production function The new endogenous growth theory (NTC) and macrodeterminants of growth 2018-19