Growth Economics and Fund-raising in International Cooperation

1. GROWTH ECONOMICSand Fund-raising in international cooperationSECS-P01, CFU 9Growth Economicsacademic year 2018-19 3. INTRODUCTION TO GROWTH ECONOMICS Roberto Pasca di Magliano Fondazione Roma Sapienza-Cooperazione Internazionale roberto.pasca@uniroma1.it

2. Differences between Development and Growth Development: • newly-bornbackwardcountriesafter World War II • developmentis a four-legchairwhereinstitutional, social, civil and economicaspects are stabilised • interdisciplinarystudies Growth: • dominance of the economy over the behavior of institutions and individuals Mainaspects to be explained: • explainingwhygrowthisconcentrated in a fewcountries, whilemanyothers are stillwaitingalong the road • explaininghow some developingcountries are redeemed and crowding the group of the emergingcountries • Explaining the dynamicsthatmove the transitioncountries Roberto Pasca di Magliano

3. Changes in the world GDP 2018-19

4. The free market and its consequences • The consequence of the free market hypothesisisalltooobvious: the market workswellonlyifitisleft free (hence the famousexpression“laissez faire”) • Therefore, the market, notonlydoesnotneedany help, butifanything, just needs tobe freed of obstacles and regulationsthatmightpreventitsaction • Itisinteresting to note that in this last consideration, one can find an argumentthatisoften made in favour of the market, evennowadays: The market must be left free, it must not be cagedbutitneedseffective public policies and a goodgovernancerules Roberto Pasca di Magliano

5. The role of the State in the economy • The founderof the theory of the role of the State in the market isJohn Maynard Keynesasithasbeenanalised in “General Theory of Employment, Interest and Money” 1936 • The innovative idea isthat the role of the State isfundamental. Indeed, the market can, according to Keynes, produce resultsthat are notoptimal, and the State’sroleis to help the market to work well and in a correctdirection • The duty of the State is on the onehandto mitigate and control the economiccyclesand on the otherhand 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

6. 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

7. The market in the face of crisisOrigins of the financial crisis 2007/08 • Since the 1980s, liberal pressures and the dissemination of new and revolutionarycommunicationtechnologies –ICT- haveproduced an enormousexpansion of the financialactivitiesat the internationallevel with respect to real economy (10 to 1, nowdays) • The new technologicalrevolutiongenerates the so-calledmarket globalizationby generatingadvantages(icome-gap reducingamongcountries) but in the same time increasingmany social disadvanteges(Incomeinequalitieswithineach country, povertyincrease, uncontrolledmigrationflows, social disease, market uncertainty) • Advantagesevidence: begining 90s, the the internationaltradeisgrowncontinuosly, numebers of the emergingcountries are increasingaswellastheirGdp, Volume of financialinvestment, mergers and aquisitions are growingprogressively due to mutual funds, pension funds and soverignwealth funds • Disadvantagesevidence: allocationspreferedfinancialproducts (derivatives, etc.) otherthanrealinvestment (thatremainfaible), inlandpovertymisallocationincreased, underdevopedcountriesbecameevenpoorer Roberto Pasca di Magliano

8. Financial Markets • The totalvalue of financialactivitiesisestimatedatleast 10 timesthelevel of the realincome • Theymovevolumes of wealthbuilt on the trade of derivativesand otherfinancialproductsthat are detached from economicactivities, wherebyeveryturbulencegeneratespsychologicalrepercussionsnotonly on the stock marketsbutalso on the loans to businesses • New financialallocationauthoritiesare the investmentbanks and big investorswho do not care aboutreal economy • The concentrationin the financialallocationscausesgrowingconcern for the small and medium enterprices in term of lack of investments • The perceptionsof the market can be compared to an hypotheticalscenarios of risingchainreactions in depressive direction Roberto Pasca di Magliano

9. Reasons of the crisis started in 2007 • The crisisoriginatedat the end of the 2007 with the crash of the Lehman Brotherscomany. Itwas the result of a guiltylack of governance, representative of the liberal culture thatwaslenientintimeswhen strong fianancialwerefacilitatingeconomicactivities and theirgrowth (Federal ReserveBank with Grennspan, bothRepublican and DemocraticGovernments in the Usa) • Investmentbanks, and notonly, havetakenadvantagesof this, thrusting on muchhigherleverageratiosthanthose of the commercial banks, eventuallybringingabout the creation of high-riskfinancialproducts • Expansivepoliciesadopted by advancedcountriesafter 2015 (in Italytoo) obtain some positive results in stimulatingGdp and in reducing the rate of unemployment. • But in the same time, the advantages of globalizationhaveexacerbatedincomeinequalitybetween the poor and lesswell-to-do and richclasses. Thisis the reason for the growingimpoverishment, the onset of migratoryflows, the protectionist and nationalisticreactions of the advancedcountries and populations. Roberto Pasca di Magliano

10. 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

11. Following lectures in details • from theories to models • Classicaltheories of development • The Keynesiangrowth model of Harrod-Domar • Neo-classicalmodels of growth: Solowapproach • Analysis of growthbased on the production function • The new endogenousgrowththeory (NTC) and macrodeterminants of growth 2018-19