Globalization, institutions, and income convergence

Globalization and Income Convergence

How did the COVID-19 pandemic impact foreign direct investment (FDI)? Following the outbreak of COVID-19, the overall volume of FDI inflows plummeted. However, COVID-19’s adverse effects on FDI in host countries exhibited discernible variability contingent upon the characteristics of domestic institutions, particularly the robustness of property rights within these countries. While host countries with strong property rights experienced a mitigated negative impact on FDI, contrary to general expectations, our analysis suggests that host countries with weak property rights may have also evaded a significant reduction in FDI inflows during the pandemic. This was primarily because both strong and weak property rights institutions in host countries conveyed positive signals to investors, which may have incentivized them to continue their investments even amidst the pandemic-induced crisis. Analyzing a time-series cross-sectional dataset of 126 developing countries covering the period 2009–2021, our findings reveal a U-shaped relationship between FDI and property rights. This implies that COVID-19’s impact manifested as a weak negative force on FDI inflows in host countries with weak property rights as well as those with strong property rights. Conversely, host countries with moderately strong property rights tended to suffer a substantial reduction in FDI.

The causal effects of rule of law & property rights on fiscal capacity

Taking climate funds (e.g., the Green Climate Fund) as the main financial mechanism for providing funding to developing countries, this paper examines a long-term climate funding relationship between two parties—the rich country and the poor country. Conflicts between the rich and poor countries arise when determining (1) the size of climate funding that the rich country contributes to the poor country and (2) the funding allocation between climate adaptation and mitigation projects in the poor country. In addition, the rich country cannot be forced to commit contractual contributions to the poor country, and in each period, there is a probability that the countries can renegotiate the contract. This paper derives two main dynamic comparative–static results: (1) climate funds converge to the first-best in the long run, both in the size of climate funding in adaptation and mitigation projects, if and only if climate damage becomes sufficiently severe; (2) fewer renegotiations between the rich and poor countries make climate funding contracts more efficient, remedying inequality between the poor and rich countries. These results highlight how increasing climate damages and reducing the frequency of renegotiation can push climate funds closer to a first-best allocation, suggesting design principles for climate funding mechanisms like the Green Climate Fund.

PurposeThe purpose of this study is to identify the impact of legal institutions and property rights protection on corporate innovation among developing countries.Design/methodology/approachTo testify these hypotheses, we use firm-level data from the World Bank Enterprise Survey, and country-level information from Worldwide Governance Indicators, World Development Indicators and Global Competitiveness Reports. The final data set consists of 24,166 firm observations, from 41 developing countries.FindingsBy using a wide range of control variables, the results propose that well-organized legal institutions stimulate corporate innovation . More precisely, a strong rule of law, effective government and protected property rights encourage firm-level innovation. Countries’ rule of law guarantees to solve disputes between parties and provide legitimate rights in case of innovation replication. Rule of law also directs that rules made by policymakers to secure the rights of innovators are well enforced. Moreover, strong property rights ensure innovators that the innovations are protected, and in case of any infringement, the guilty party will be punished and fined.Originality/valueThis study aims to investigate the role of all effective aspects legal institutions and property rights protection on corporate innovation among developing countries. Such security to prevent unlawful duplication will ultimately increase innovation.

This paper estimates informal entrepreneurship prevalence across 60 countries during 2006–2022. It examines how business regulation, property rights, and rule of law affect formal and informal entrepreneurship. The results show that burdensome regulations increase informal entry, while stronger property rights and rule of law promote formal entrepreneurship and deter informal activity. Additionally, high informal entrepreneurship rates impede growth aspirations and negatively influence the relationship between gender and entrepreneurial ambition, suggesting broader economic and social implications tied to the informal economy.

Objective. Applying existing theories relating to investment risk, this article examines the effects of judicial strength and adherence to the rule of law on portfolio investment in the developing world. We aim to demonstrate that countries with higher levels of judicial strength and rule of law are more able to attract portfolio investment because they provide greater protection of property rights and a better risk environment for investors.Methods. Using time‐series data for 79 developing countries for the period 1996–2005, we employ panel‐corrected standard errors multivariate regressions to demonstrate that higher levels of judicial strength and rule of law are associated with higher levels of portfolio investment.Results. We find that a one standard deviation increase in overall judicial strength and rule of law results in more than a 50 percent increase in portfolio investment. In separate analyses, we show that a one standard deviation increase in specific measures of judicial independence, impartial courts, and protection of property rights leads to increases in portfolio investment ranging from 27 percent to 184 percent.Conclusion. Judicial strength and adherence to the rule of law are important determinants of portfolio investment in the developing world.

Introduction: The main goal of this paper is to investigate the influence of the quality of (economic) institutions according to the data from the World Bank's specialized Worldwide Governance Indicators database on the gross domestic product per capita of 7 Western Balkan countries: Albania, Bosnia and Herzegovina, Montenegro, Croatia, North Macedonia, Serbia and Kosovo. Methods: We applied Correlation and regression analysis were used for the set of mentioned data for the period from 2008 to 2022. Results: The analysis showed that the indicator of the dependent variable (GDP/pc) has a statistically significant strong positive relationship with all indicators of the independent variable (quality of economic institutions), while the regression model determined that only the constant term and Rule of Law are statistically significant. Discussion: The results of the research can serve to better understand the relationship between institutions and economic growth, and as such can be a starting point for future policies aimed at improving institutions and economic growth in Western Balkan countries.

There is a consensus that stronger property rights advance financial development. We provide evidence that the reverse hypothesis is also true. We isolate the structural component in the finance–property rights relationship using an instrument for financial development (private credit) based on an index of exposure to foreign crises, in addition to generalized method of moments approaches for panel data. Our results suggest a one standard deviation increase in private credit from its average in 2005 translates into a 0.5‐ to 1.0‐point increase in property rights. To contextualize this, the difference in property rights between Israel and Uruguay, two countries separated by about one standard deviation in the volume of private credit, was 0.67 points.

The article analyses conditional β-convergence among the low income countries using a panel data framework covering the period 1960 to 2008. The estimation of conditional income convergence is based on the augmented Solow model with system GMM technique for the dynamic panel data. More importantly, the article assesses the role of initial human capital stock and the rule of law in the income convergence of poor countries by considering further categorizations of the poor countries based on these two variables. This is the first study on the comparative properties of human capital and the rule of law in the income convergence of poor countries utilizing a dynamic panel framework. The full sample of low income countries does not show any evidence of conditional income convergence. The categorizations on the basis of initial human capital stock do not alter the conclusion of no income convergence. However, the subsample of low income countries with a better rule of law exhibits positive evidence of convergence towards the steady states. The article concludes that there exists a greater role of the rule of law, than initial human capital stock, in the income convergence of poor countries and vice versa for the high and middle income countries.

Erratum

Following a vast expansion in the twentieth century, government is beginning to creak at the joints under its enormous weight. The signs are clear: a bloated civil service, low approval ratings for Congress and the President, increasing federal-state conflict, rampant distrust of politicians and government officials, record state deficits, and major unrest among public employees. In this compact, clearly written book, the noted legal scholar Richard Epstein advocates a much smaller federal government, arguing that our over-regulated state allows too much discretion on the part of regulators, which results in arbitrary, unfair decisions, rent-seeking, and other abuses. Epstein bases his classical liberalism on the twin pillars of the rule of law and of private contracts and property rights--an overarching structure that allows private property to keep its form regardless of changes in population, tastes, technology, and wealth. This structure also makes possible a restrained public administration to implement limited objectives. Government continues to play a key role as night-watchman, but with the added flexibility in revenues and expenditures to attend to national defense and infrastructure formation. Although no legal system can eliminate the need for discretion in the management of both private and public affairs, predictable laws can cabin the zone of discretion and permit arbitrary decisions to be challenged. Joining a set of strong property rights with sound but limited public administration could strengthen the rule of law, with its virtues of neutrality, generality, clarity, consistency, and forward-lookingness, and reverse the contempt and cynicism that have overcome us.

Income is one of the most popular dimensions for measuring welfare and development; hence, comparing welfare and well-being among countries can be conducted by comparing their per capita income. While income convergence is a certain implication in neoclassical growth theory, it does not always occur empirically. This study aims to investigate whether income convergence occurs among economies. Employing data from 93 countries from 1980 to 2022 obtained from the World Bank, the two-way fixed effect panel model is implemented to verify the existence of β-convergence. The result shows that the initial per capita gross domestic product, representing income, negatively affects income growth, indicating that β-convergence occurs in terms of global and club convergence. This implies that poor countries grew faster than affluent countries. After β-convergence is confirmed, σ-convergence is analyzed by measuring the income dispersion across countries over time. σ-convergence exists if the dispersion declines as time passes. The result shows that σ-convergence exists only among G20, OECD, lower-middle-income, higher-middle-income, and high-income countries. This fact implies that the income gap between poor and rich countries within those groups shrinks over time. In contrast, the income gap among low-income countries did not experience a significant decline during the period. Therefore, international organizations and partnerships must pay more attention to and assist lower-income countries to achieve higher growth rates.

Four points are made about globalization and health. First, economic integration is a powerful force for raising the incomes of poor countries. In the past 20 years several large developing countries have opened up to trade and investment, and they are growing well--faster than the rich countries. Second, there is no tendency for income inequality to increase in countries that open up. The higher growth that accompanies globalization in developing countries generally benefits poor people. Since there is a large literature linking income of the poor to health status, we can be reasonably confident that globalization has indirect positive effects on nutrition, infant mortality and other health issues related to income. Third, economic integration can obviously have adverse health effects as well: the transmission of AIDS through migration and travel is a dramatic recent example. However, both relatively closed and relatively open developing countries have severe AIDS problems. The practical solution lies in health policies, not in policies on economic integration. Likewise, free trade in tobacco will lead to increased smoking unless health-motivated disincentives are put in place. Global integration requires supporting institutions and policies. Fourth, the international architecture can be improved so that it is more beneficial to poor countries. For example, with regard to intellectual property rights, it may be practical for pharmaceutical innovators to choose to have intellectual property rights in either rich country markets or poor country ones, but not both. In this way incentives could be strong for research on diseases in both rich and poor countries.

Income convergence refers to the idea that poor countries grow more quickly than rich ones and catch up in terms of per capita income; as a result, the per capita income of integrated nations eventually converges. Beta convergence suggests that less developed nations grow more quickly than more developed ones and reach their average per capita income level by growing more quickly. Meanwhile, sigma convergence suggests that the per capita income disparity among the countries in a regional block narrows over time.The objective of this study is to test income convergence through beta and sigma convergence for Central and South Asia integration using data from 1990 to 2022. Sigma convergence is tested through the standard deviation and coefficient of variation of average per capita income, while beta convergence is tested using panel unit root tests. The results of the study confirm the beta convergence and sigma convergence, which implies income convergence for the integration of Central and South Asia.The implications of this study are manifold. It recommends that Central and South Asian countries ensure economic, political and social cooperation with one another. This is possible by eliminating trade restrictions and decreasing import taxes to increase free trade. Additionally, ensuring free labor, capital, and technology movement between Central and South Asia will be beneficial for ensuring economic integration, facilitating income convergence, and reducing income inequality between these regions. This study contributes to the income convergence literature by focusing on integration between Central Asia and South Asia.