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Creative Destruction and Development : Institutions, Crises and Restructuring

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Author Info
Ricardo J. Caballero
Mohamad L. Hammour

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Abstract

There is increasing empirical evidence that creative destruction, driven by experimentation and the adoption of new products and processes when investment is sunk, is a core mechanism of development. Obstacles to this process are likely to be obstacles to the progress in standards of living. Generically, underdeveloped and politicized institutions are a major impediment to a well-functioning creative destruction process, and result in sluggish creation, technological "sclerosis," and spurious reallocation. Those ills reflect the macroeconomic consequences of contracting failures in the presence of sunk investments. Recurrent crises are another major obstacle to creative destruction. The common inference that increased liquidations during crises result in increased restructuring is unwarranted. Indications are, to the contrary, that crises freeze the restructuring process and that this is associated with the tight financial-market conditions that follow. This productivity cost of recessions adds to the traditional costs of resource under-utilization.

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Publisher Info
Paper provided by DELTA (Ecole normale supérieure) in its series DELTA Working Papers with number 2001-04.

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Length: 41 pages
Date of creation: 2001
Date of revision:
Publication status: Published in Annual World Bank Conference on Development Economics 2000, pp. 213-241.
Handle: RePEc:del:abcdef:2001-04

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Keywords: PRODUCTION INVESTMENTS ECONOMIC DEVELOPMENT COSTS

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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bartelsman, Eric & Haltiwanger, John & Scarpetta1, Stefano, 2004. "Microeconomic evidence of creative destruction in industrial and developing countries," Policy Research Working Paper Series 3464, The World Bank. [Downloadable!]
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  2. Ricardo J. Caballero & Kevin N. Cowan & Eduardo M.R.A. Engel & Alejandro Micco, 2004. "Effective Labor Regulation and Microeconomic Flexibility," Cowles Foundation Discussion Papers 1480, Cowles Foundation, Yale University, revised Oct 2006. [Downloadable!]
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  3. John E. Jackson & Jacek Klich & Krystyna Poznanska, 2001. "Economic Transition and Elections in Poland," William Davidson Institute Working Papers Series 391, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  4. Murat Iyigun & Dani Rodrik, 2004. "On the Efficacy of Reforms: Policy Tinkering, Institutional Change, and Entrepreneurship," NBER Working Papers 10455, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Kevin Cowan, Alejandro Neut, 2007. "Intermediate Goods, Institutions and Output per Worker," Working Papers Central Bank of Chile 420, Central Bank of Chile. [Downloadable!]
  6. Imbs, Jean, 2002. "Why the Link Between Volatility and Growth is Both Positive and Negative," CEPR Discussion Papers 3561, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Ricardo J. Caballero & Eduardo M.R.A. Engel & Alejandro Micco, 2004. "Microeconomic Flexibility in Latin America," Working Papers 884, Economic Growth Center, Yale University. [Downloadable!]
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  8. Ramirez-Rondán Nelson, 2007. "Nonlinear Volatility Effects on Growth in Developing Economies," Working Papers 2007-016, Banco Central de Reserva del Perú. [Downloadable!]
  9. Jurajda, Stepán & Terrell, Katherine, 2002. "Job Growth in Early Transition: Comparing Two Paths," IZA Discussion Papers 589, Institute for the Study of Labor (IZA). [Downloadable!]
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  10. Arvind Virmani, 2004. "Economic reforms: Policy and institutions some lessons from Indian reforms," Indian Council for Research on International Economic Relations, New Delhi Working Papers 121, Indian Council for Research on International Economic Relations, New Delhi, India. [Downloadable!]
  11. Lucia Foster, 2006. "Reallocation and Productivity Dynamics in the Appalachian Region," Working Papers 06-03, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
  12. Maxim Bouev, 2004. "Diverging Paths: Transition in the Presence of the Informal Sector," William Davidson Institute Working Papers Series 2004-689, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  13. Pasi Huovinen & Hannu Piekkola, 2001. "Unemployment and Early Retirements of the Aged Workers in Finland," Discussion Papers 750, The Research Institute of the Finnish Economy. [Downloadable!]
  14. Mika Maliranta, 2002. "From R&D to Productivity Through Micro-Level Restructuring," Discussion Papers 795, The Research Institute of the Finnish Economy. [Downloadable!]
  15. Laura Valkonen, 2006. "Deregulation as a Means to Increase Competition and Productivity," Discussion Papers 1014, The Research Institute of the Finnish Economy. [Downloadable!]
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