Finance, private sector development and inequality

The first chapter seeks to reveal the long-run causal relationship among financial development, savings, openness and growth in Ethiopia using annual data from 1970 through 2010 in a VAR framework. I find no causal relationship between the series, to the dismay of the large “finance-openness-led growth” literature. The evidence, nevertheless, does not entail the impression that financial repression or trade restriction propels economic growth. The early 1990’s and 2000’s are identified as the periods when apparent regime shifts are observed in the economy of the country. Identifying the economic sector that ensures maximum jobs creation remains the most challenging tasks for local and national governments. Chapter Two, explores the local multiplier effect of entry into the tradable sector on that of entry to the nontradable sector using a large panel dataset obtained from the South Africa’s CIPC’s databases on South African metropolitan cities. I find that new entry to tradable sector is significantly associated with entry to nontradable businesses. For each additional establishment of firms in the manufacturing sector in a given municipal unit, 15.26 firms are created in the nontradable sector in the same place. There is an ongoing debate on inequality as a cause for a delay in recovery in the aftermath of recession. Using a simulation of U.S. household income and consumption, I show in Chapter Three that it is possible to get significant differences in savings across income groups based on income-smoothing alone. I have statistically shown that the “rich” may appear to save a higher share of their income than the rest of the people even though the saving rate out of permanent income is the same for all individuals, by assumption. It is, however, less clear that the transitory income effect does, in fact, explain most of the saving rate differences across income groups.