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

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  • Raouf BOUCEKKINE

    () (Université Catholique de Louvain and IRES-CORE, Université de la Méditérranée and GREQAM)

  • Patrick A. PINTUS

    () (Universite de la Mediterranee and GREQAM-IDEP, Institut Universitaire de France)

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.

Suggested Citation

  • Raouf BOUCEKKINE & Patrick A. PINTUS, 2010. "Is History a Blessing or a Curse? International Borrowing without Commitment, Leapfrogging and Growth Reversals," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2010038, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvir:2010038
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    References listed on IDEAS

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    1. Romain Rancière & Aaron Tornell & Frank Westermann, 2008. "Systemic Crises and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 359-406.
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    Cited by:

    1. BOUCEKKINE, Raouf & FABBRI, Giorgio & PINTUS, Patrick, 2012. "On the optimal control of a linear neutral differential equation arising in economics," CORE Discussion Papers RP 2449, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Bambi, Mauro & Gozzi, Fausto & Licandro, Omar, 2014. "Endogenous growth and wave-like business fluctuations," Journal of Economic Theory, Elsevier, vol. 154(C), pages 68-111.
    3. Raouf Boucekkine & Giorgio Fabbri & Patrick-Antoine Pintus, 2011. "On the optimal control of a linear neutral differential equation arising in economics," Working Papers halshs-00576770, HAL.

    More about this item

    Keywords

    Growth Reversals; Leapfrogging; International Borrowing; Open Economies;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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