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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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Related research
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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    Other versions:
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    Other versions:
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    Other versions:
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    Other versions:
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