Good Riddance to the License Raj. Prior to India's economic reforms in 1991, businesses needed government permission to do just about anything -- to enter an industry or leave one, to grow, to shrink, to import machinery, etc. The nominal goal was to protect small firms from big bad ones, though, the "License Raj" rapidly devolved into a honey pot for ethically challenged bureaucrats. One of the few virtues of the four-decade experiment was that its end has given researchers a chance to measure just how distorting India's version of capitalism-with-a human-face really was.
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The answer, according to Laura Alfaro (Harvard Business School) and Anusha Chari (University of North Carolina) was very distorting. No surprise there, but their analysis is enlightening in other ways. Post-1991 deregulation increased both the number of small firms, which were no longer blocked from entering industries, and the number of large firms, presumably because the efficient medium-size ones were also no longer blocked from growing. Overall, industries became less concentrated rather than more, as measured by the index used by antitrust authorities. One other striking point: The failure to fill in the missing middle in the years since deregulation suggests that small firms still face substantial hurdles to growth -- principally, lack of competitive access to credit. Harvard Business School Working Paper 13-056. Download free here.
The Rising Tide. The price of economic growth in emerging market countries, we've been told time and again, is rising inequality. The best one can hope for is that the tide will carry all boats, even if the poor occupy less buoyant craft. And that's certainly been true in China, where a half-billion people have been rescued from abject poverty, yet migrant workers still huddle in the shadows of flashy skyscrapers.
But happily, it's not true everywhere. According to World Bank researchers Nora Lustig, Luis F. Lopez-Calva and Eduardo Ortiz-Juarez, most of Latin America has been bucking the trend over the last decade, growing fairly briskly even as inequality shrinks. And since much of the inequality on the continent has been associated with lack of competition, the decline actually went hand in hand with greater efficiency.
Why the good news, and why now? The three economists offer a close look at Mexico, Brazil and Argentina. Argentina's a bit of an anomaly; the country benefitted enormously from the temporary run-up in export prices for grain and meat early in the decade, and its Peronist government distributed much of the windfall to the party's labor union constituents. But in Mexico and Brazil, declining inequality seems to be in large part a durable payoff for very well targeted social benefits for the poor. World Bank Policy Research Working Paper 6248. Download free here.
Future Shock. Other things equal, global financial integration makes emerging market economies (EME) more vulnerable to financial shocks. If you doubt that, think about what happened to East Asia -- and then in Russia and Brazil -- in 1997.
But all things aren't equal. Since the 1997 debacle, most EMEs have pulled their socks up, avoiding big budget deficits and inflationary monetary growth, while imposing tighter regulation on banks. So, are these economies more or less susceptible to external shocks than they were two decades ago?
According to Gustavo Adler and Camilo Tovar of the IMF, EMEs are, on balance, less vulnerable: Improved macroeconomic management paid off big-time for countries ranging from Indonesia to Brazil to Egypt during the 2008 global financial crisis. The only glaring exceptions are the western-oriented Eastern European countries that have become ever more integrated with the rich western European economies -- notably Germany. But even there, the cloud has a silver lining; European economic integration has dramatically increased productivity and living standards on its eastern periphery. IMF Working Paper 12/188. Download free here.
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