Joseph Schumpeter made pioneering contributions to economic theory on the relationship between the financial system and economic growth. However, the economic literature has often misinterpreted his work, particularly on the importance of banks and liquidity creation for development. This column argues that a correct interpretation of Schumpeter helps resolve many empirical puzzles which have emerged in the last decades. Using a panel of 43 countries, it finds strong positive effects of credit growth on GDP growth and little effect of saving on GDP and credit growth.
Peter Bofinger, Lisa Geißendörfer, Thomas Haas, Fabian Mayer, 03 February 2022
Marc Melitz, Stephen Redding, 28 July 2021
International trade is a key determinant of firm profitability and survival, so it is natural to expect it to influence both incentives to innovate and the rate of creative destruction. This column highlights four key mechanisms through which international trade affects endogenous innovation and growth: market size, competition, comparative advantage, and knowledge spillovers. Each of these mechanisms offers potential static and dynamic welfare gains. Discriminating between alternative mechanisms for these dynamic welfare gains and strengthening the evidence on their quantitative magnitude remain exciting areas of ongoing research.
Mathieu Cros, Anne Epaulard, Philippe Martin, 04 March 2021
Concerns have emerged that public support to firms in the COVID-19 crisis has been too generous, reducing exit of unproductive firms and preventing Schumpeterian creative destruction. Using data on French firm failures in 2020, this column suggests that these concerns are, at this stage, unwarranted. Although the number of firms filing for bankruptcy was well below its normal level, the same factors that predicted firm failures in 2019 – primarily low productivity and debt – were at work in a similar way in 2020. Overall, the findings point to hibernation rather than zombification.
Rabah Arezki, Rachel Yuting Fan, Ha Nguyen, 29 June 2019
The debate on the middle-income trap has largely focused on East Asia and Pacific countries, but the countries of Middle East and North Africa have significantly lower growth, which drops at an earlier level of income. The column argues that one factor is MENA's slow adoption of general purpose technologies. Barriers to the adoption of such technologies in key sectors could be an important transmission channel for the middle-income trap.
Christian Keuschnigg, Michael Kogler, 04 March 2019
Only strong banks can fulfil their Schumpeterian role by efficiently reallocating credit. The column argues that high capital standards, efficient bankruptcy laws, and a lower cost of bank equity improve credit reallocation and thereby support the productive specialisation of the economy. An efficient banking sector also magnifies the gains from trade liberalisation by easing the process of capital reallocation.
Leonardo Iacovone, Mariana Pereira-López, Marc Schiffbauer, 30 October 2017
In spite of its potential, the use of digital technology is still basic in most developing countries. This column presents evidence that firms in Mexico facing higher external competition have used IT more intensively and efficiently. External competition has encouraged them to make the necessary complementary investments in innovation and organisational changes.
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