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Creative Destruction and Development: Institutions, Crises, and Restructuring

  • Ricardo J. Caballero
  • Mohamad L. Hammour

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7849.

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Date of creation: Aug 2000
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Publication status: published as Annual World Bank Conference on Development Economics 2000.
Handle: RePEc:nbr:nberwo:7849
Note: EFG
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