Is History a Blessing or a Curse? International Borrowing without Commitment, Leapfrogging and Growth Reversals

Raouf Boucekkine () and Patrick Pintus

No 2010038, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: We develop a simple open-economy AK model with collateral constraints that accounts for growth-reversal episodes, during which countries face abrupt changes in their growth rate that lead to either growth miracles or growth disasters. Absent commitment to investment by the borrowing country, imperfect contract enforcement leads to an informational lag such that the debt contracted upon today depends upon the past stock of capital. The no-commitment delay originates a history effect by which the richer a country has been in the past, the more it can borrow today. For (arbitrarily) small deviations from perfect contract enforcement, the history effect offsets the growth benefits from international borrowing and dampens growth, and it leads to leapfrogging in long-run levels. When large enough, the history effect originates growth reversals and we connect the latter to leapfrogging. Finally, we argue that the model accords with the reported evidence on growth disasters and growth accelerations. We also provide examples showing that leapfrogging and growth reversals may coexist, so that currently poor but fastgrowing countries experiencing sharp growth reversals may end up, in the long-run, significantly richer than currently rich but declining countries.

Keywords: Growth Reversals; Leapfrogging; International Borrowing; Open Economies (search for similar items in EconPapers)
JEL-codes: F34 F43 O40 (search for similar items in EconPapers)
Pages: 30
Date: 2010-11-02
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Is History a Blessing or a Curse? International Borrowing without Commitment, Leapfrogging and Growth Reversals (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2010038

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