1. 3. INTRODUCTION TO GROWTH ECONOMICS
POLITICAL ECONOMY OF GROWTH SECS-P01, CFU 9 Finance and Development academic year
3. INTRODUCTION TO GROWTH ECONOMICS
Roberto Pasca di Magliano
Fondazione Roma Sapienza-Cooperazione Internazionale

2. 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

3. Changes in the world GDP

4. 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
Roberto Pasca di Magliano

5. 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, who published in 1936 “General Theory of Employment, Interest and Money”
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
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) than the one that the market itself would have been able to realize if operating alone.
Roberto Pasca di Magliano

6. Role of public policy
As in the short run, during recession, economy is influenced by aggregate demand public economic policies have to push aggregate demand towards the productive capacity of the economy
The economic performance is influenced by a host of factors and sometimes behaves erratically, affecting production, employment, and inflation.
Keynesian economists argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector in order to stabilize output over the business cycle:
monetary policy actions by the Central Bank 
fiscal policy actions by the government
Keynesian economics advocates a mixed economy – mainly private sector, but with a role for government intervention during recessions.
Roberto Pasca di Magliano

7. 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 financiary activities at the international level
This has been, on the one hand, one of the cornerstones of globalization but on the other it has also brought about the huge expansion of a market that is less stable and less predictable than the real markets
From the 1970s to the 1990s, the volume of trade grew exponentially: suffice it to say that since the early 80s to the mid 90s, the trade volume produced by mutual funds, pension funds and institutional investors has increased tenfold
The conjunction between the expansion of financial wealth, the introduction of new derivative contracts and the growth of the debts of advanced countries has led to finance taking over the real economy. These phenomena are at the origin of the widespread crisis exploding in 2008, slowing down the global economic growth, causing recession and unemployment government intervention during recessions.
Roberto Pasca di Magliano

8. Financial Markets
They move volumes of wealth built on the trade of derivatives and other 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
They are maneuvered by investment banks and big investors, but are a cause of growing concern for the small savers
They are particularly volatile, and above all, moody: perceptions of the market compared to hypothetical scenarios may give rise to chain reactions
They influence real activities through banks and other financial intermediaries
Roberto Pasca di Magliano

9. Reasons of the actual crisis
Many people who have denounced the end of a financial system recall the need of rules of supervision and surveillance
On the other hand, the same liberal view, while it encourages private activity, also places it in a balanced interaction between market and institutions
The present crisis originates in a guilty lack of governance, representative of the liberal culture that was indulged in during the times in which the strong economic growth facilitated financial activities (Grennspan, Federal Reserve Bank)
Investment banks, and not only, have taken advantage of this, thrusting on much higher leverage ratios than those of the commercial banks, eventually bringing about the creation of high-risk financial products
Roberto Pasca di Magliano

10. The actual crisis: potential solutions
EU’s 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)
Government guarantee both on deposits and interbank loans
Lighten the regulatory capital requirements of Basel 2
Appeal to FDI by promoting cooperation agreements with Sovereign Funds
Greater flexibility in the budgetary constraints imposed by the Maastricht Treaty, revising the budgetary discipline
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 OPA in businesses to avoid hostile participations
Intervention of the European Stability Mechanism (ESM) and other monetary policies to support inflation rate
Roberto Pasca di Magliano

11. 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