In this revised and expanded version of a classic IEA text, first published in 1983, but revised and expanded in 1997, Professor Lal provides a robust critique of the statist model of development which denigrates both trade and open markets. He concludes that the demise of this dogma would be beneficial to the health of both the economics and the economies of developing countries. The history of the last twenty years has demonstrated the force of the Lal critique. The dogma in its old form has gone, as Professor Lal shows in a postscript that brings the original text up to date both in terms of statistics and in terms of the history of ideas. Nevertheless, as he warns, dirigiste tendencies have not disappeared, but are emerging in new guises.

The Poverty of `Development Economics'.

We quantitatively analyze the role of financial frictions and resource misallocation in explaining development dynamics. Our model economy with financial frictions converges to the new steady state slowly after a reform triggers efficient reallocation of resources; the transition speed is half that of the conventional neoclassical model. Furthermore, in the model economy, investment rates and total factor productivity are initially low and increase over time. We present data from the so-called miracle economies on the evolution of macro aggregates, factor reallocation, and establishment size distribution that support the aggregate and micro-level implications of our theory.

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Financial Frictions and the Persistence of History: A Quantitative Exploration

This paper provides evidence that suggests that financial repression has substantial direct effects on financial development, independently of its well-known influence through the level of the real interest rate. It also demonstrates that the process of economic growth is not weakly exogenous with respect to financial development. Thus financial repression may impose real costs that are additional to those suggested by previous empirical studies.

https://www.jstor.org/stable/pdfplus/2951464.pdf

The Direct Costs of Financial Repression: Evidence From India

Why doesn't capital flow into fast-growing countries? In this paper, we provide a quantitative framework incorporating heterogeneous producers and underdeveloped domestic financial markets to study the joint dynamics of total factor productivity (TFP) and capital flows. When an unexpected once-and-for-all reform eliminates non-financial distortions and liberalizes capital flows, the TFP of our model economy rises gradually and capital flows out of it. The rise in TFP reflects efficient reallocation of capital and talent, a process drawn out by frictions in domestic financial markets. The concurrent capital outflows are driven by the positive response of domestic saving to higher returns, and by the sluggish response of domestic investment to the higher TFP--the latter being another ramification of domestic financial frictions. We use our model to analyze the welfare consequences of opening up capital accounts. We find that the marginal welfare effect of capital account liberalization is negative for workers and positive for entrepreneurs and wealthy individuals.

Productivity Growth and Capital Flows: The Dynamics of Reforms

Financial restraints in the South Korean miracle

In less-developed countries, open markets for common stocks, bonds, mortgages, or even commercial bills are insignificant. This does not constitute a ‘distortion’, but merely reflects low per capita income and the resulting small scale of individual acts of saving and investment. Information is insufficient to have small farmers or merchants issue their own notes or shares that are publicly traded.

Ronald Mckinnon

Papers

Financial Repression and the Liberalisation Problem within Less-Developed Countries