Archive for May 5th, 2021

What Shanghai’s dynamic art scene reveals about the city’s middle class

May 5, 2021

As of 2019, Shanghai had 770 art galleries, more than Tokyo, London, Rome, Brussels, and Los Angeles.

In a Brookings photo essay adapted from his new book, Cheng Li explores Shanghai’s art scene and explains how it reflects the evolving cultural dynamics and aesthetic interests of the city’s growing middle class.

Among the many forces shaping China’s domestic transformation and its role on the world stage, none may prove more significant than the rapid emergence and explosive growth of the Chinese middle class. At the center of this story in China is the city of Shanghai.

Any comprehensive study of the middle class in Shanghai must include an exploration of the cultural discourse and dynamic activity of its artistic community. Shanghai historically has been a cradle for Chinese contemporary art, and the city’s art scene has enjoyed longstanding exposure to Western culture.

This does not just stem from Shanghai’s colo­nial legacy or the interaction and influence of the throngs of foreign visitors to the city; it also relates to the large proportion of students from Shanghai who have studied Western and foreign art abroad. Artists from Shanghai were among the first group of Chinese students to study abroad in the 1980s, and most of them later returned to live and work in Shanghai.

United States of Europe vs United States of America

May 5, 2021

Keith Head and Thierry Mayer in the new edition of Journal of Economic Perspectives analyse whether United States of Europe is getting any closer to United States of America. They compare progress across four freedoms: goods, services, persons, and capital. There has been progress in goods, services and capital. Persons is where there are issues:

In terms of formal institutions, the European Union is not on the verge of becoming a “United States of Europe.” But on multiple fronts, EU economic integration now matches or even beats the equivalent measure for the 50 American states. This is remarkable. The United States has more than 230 years as a federal state with a constitutional prohibition on barriers to interstate commerce.

Of course, all comparisons with the United States require caution since the last two additions for the United States occurred in 1959, whereas 22 countries have joined the European Union since that year, with the most recent entrant (Croatia) joining in 2013. Perhaps the most useful comparison across the US states is with the EU15, which includes the entry of some lower-income states but has had constant membership since 1995. The border tax equivalents implied by flows of goods and merger and acquisition transactions within the EU15 have reached the levels estimated for US states. When measuring integration as convergence in price levels the EU15 is quite similar to the American states. Focusing on a product for which we have detailed and comparable measures across all countries—compact, massmarket cars—we confirm the finding for the aggregate price index: the American states and the EU15 are again very similar.

Regarding what may be the most politically sensitive of the four movements, migration, our estimates suggest that barriers remain considerably higher in Europe. Despite the absence of formal restrictions on movement, Europeans act as if their human capital is very heavily taxed by moving countries. This lack of mobility across European borders likely reflects a variety of labor market frictions and cultural differences. On the other hand, the incentives to move have fallen substantially within the EU6, with dispersion in real incomes now essentially the same as that in core eastern states of the United States. Real income variation is three times as high in the European Union as a whole, but enlargement has been followed by a trend towards equalization, so there is little reason to think the EU28 has reached a steady state in terms of income disparities across its members.


Greening Monetary Policy: Evidence from the People’s Bank of China

May 5, 2021

Macaire Camille and Naef Alain in this Banque De France research:

In June 2018, the People’s Bank of China (PBoC) decided to include green financial bonds into the pool of assets eligible as collateral for its Medium Term Lending Facility. The PBoC also gave green financial bonds a “first-among-equals” status. We measure the impact of the policy on the yield spread between green and non-green bonds.

We show that pre-reform trends are minor, meaning that both green and non-green bonds yields evolved similarily at the time of the reform.

Using a difference-in-differences approach, we show that the policy increased the spread by 46 basis points.

Our approach differs from the literature in that we match bonds under review with non-green bonds with similar characteristics and issued by the same firm, which improves the relevance of firm fixed-effects. We also specifically investigate the impact on green bonds. The granularity of the data (daily) also allows us to conduct a dynamic analysis by dividing the sample into weekly, monthly and quarterly observations.

Our results also show that the impact of the reform starts to materialize after three weeks, has a maximum effect after three months, and has a persistent effect over six months.

Impacts of interest rate cap on financial inclusion in Cambodia

May 5, 2021

Dyna Heng, Serey Chea and Bomakara Heng in this IMF paper:

Interest rate caps, despite their intended objective of broadening financial inclusion, can have undesirable effects on financial inclusion under certain conditions. This paper examines the effect of microfinance-loan interest rate caps on financial inclusion in Cambodia. Based on a difference-in-difference analysis on bank and microfinance supervisory data, results show some unintended impact on financial inclusion.

The cap led to a significant increase in non-interest fees charged on new loans following the introduction of an annual cap. Microfinance borrowers declined immediately, amid an increase in credit growth, as microfinance institutions targeted larger borrowers at the expense of smaller ones.

Microfinance institutions, responded differently to the cap, considering their own operation and funding costs, and client base. Two years after the cap, institutions resumed lending to a wider group of borrowers with lower funding and operation costs brought by mobile payment development.

An Unusual History of University of Chicago’s revered Economics Department

May 5, 2021

Profs Arnold Harberger and Sebastian Edwards (both at UCLA) have written a paper on the history of the University of Chicago’s Economics Department.

This paper is about the Department of Economics at the University of Chicago, between 1947 and 1982. The paper has the form of a conversation between the two authors and covers issues such as the existence of a “Chicago School,” the Department’s governance, the personalities of some well-known members such as Frank Knight, Milton Friedman, and Robert Mundell, teaching, and the “Chicago boys.” It also deals with the relation between members of the Department and those of other leading Schools.

The two authors discuss some of the core ideas in this interview:

SE: Maybe we should end with a peroration of sorts, with a summary of what you see as the great advantage of the Chicago Department during the years we have been talking about. How would you summarize this advantage?

ACH: A clear advantage was that, among the leading departments, it was smaller; it was only half, or less, than Harvard and Yale. Hence, just about every professor at Chicago was not a supernumerary, everyone was important in his or her own field. The range that we had, from Milton, Harry Johnson, Bob Mundell, T.W. Schultz, John U. Nef, Jim Heckman. Everybody was a real leading person. Because of the size, the number of people responsible for a field was small, and that allowed us, for instance, to have Harry Johnson and Mundell in international, at the same time. So, it was a great Department. Now, our small size had to do with the fact that the University of Chicago didn’t have the great mass of undergraduates that other schools had. At the end, I think that we go back to my three points discussed above. The Chicago School was about the connection between theory and applied analysis. Always test the implications of the theory, confront data with predictions, and do it again and again. Take both theory and data seriously.

How China Is Offering an Alternative to the IMF

May 5, 2021

CP Chandrashekhar in this new INET paper:

China seems poised to take leadership of regional efforts to forge a safety net that protects countries in East Asia from the fragility that cross-border financial flows engender. My new INET Working Paper analyses why: Leadership stems from China’s important role in production value chains spread across the region and the support provided to those networks by the massive investments facilitated by China in projects launched as part of the Belt and Road Initiative (BRI). The Council on Foreign Relations estimates that by early 2020 China had spent an estimated $200 billion on BRI projects. But aside from the capital flows associated with the BRI, the People’s Bank of China (PBoC) has put in place a network of bilateral, local currency central bank swap arrangements that provide countries a much-needed safety net. These swaps are less highlighted instruments that have contributed to China’s growing global influence in developing countries worldwide. Between January 2009 and January 2020, the PBoC entered into such arrangements with 41 countries, including many in Asia.

These bilateral swap arrangements (BSAs), denominated in RMB and the currency of the relevant partner central bank, allow the latter to access RMB liquidity for short periods at relatively low rates of interest, in return for its own currency as implicit collateral. Under a swap arrangement, while the borrowing central bank has access to the foreign currency liquidity line, it can lend it to institutions and agents in its own jurisdiction that face shortages of the relevant foreign currency, in this case the RMB. For partner countries, the greater the availability of RMB swap lines, the larger their leeway in using available dollar earnings and reserves to settle transactions with other countries. They can also, as Argentina and Pakistan did, use, or showcase their ability to use, the RMB accessed through the swap line, to acquire dollars and shore up their dollar reserves to meet commitments to third parties.

In principle, the bilateral swap network provides countries a means of addressing foreign currency shortages and tide over balance of payments difficulties resulting from boom-bust capital flow cycles, without having to turn to the US and the IMF for assistance. Access to such a regional, IMF-independent safety net has been a need felt in the region ever since the 1997 Southeast Asian financial crisis, in the aftermath of which leading Southeast Asian nations availed of bail-out packages, which, though funded substantially by governments in the region, were crafted by the IMF. The policy conditions that accompanied the bail-outs severely damaged Southeast Asian economies, leading to the conviction that the IMF “didn’t know Asia” and that “its remedies were likely to do great damage to the Asian economy”. This experience triggered a search for regional, IMF- and US- independent arrangements that could be accessed in times of financial difficulty, without having to implement policies detrimental to the economic interests of countries in the region.

Twisted Democracies of Latin America: Why reforms intended to enhance democracy have achieved just the opposite?

May 5, 2021

Prof Andres Velasco of LSE in this Proj Synd article discuss how democracy in Latin America is just namesake:

In many democracies, particularly in Latin America, well-meaning reforms intended to enhance democracy have achieved just the opposite, with governments that are strong on paper but weak in practice. And with each election cycle, citizen rage is brought ever-closer to the boiling point.


The decline of parties throughout the region is partly the result of well-meaning reforms. It was thought that making the electoral system more proportional would better reflect society’s increasing diversity; instead, it produced myriad tiny parties that represent no one. Introducing primaries was supposed to make parties more democratic internally; it did, but at the risk of making them vulnerable to being taken over by media-savvy celebrities. The gain in transparency that came with campaign finance reform also caused a collapse in party discipline, as party bosses lost leverage over publicity-seeking parliamentarians. Greater use of plebiscites has allowed small groups of activists to hijack the policy agenda.

The problem is not uniquely Latin American. Yale political scientists Frances McCall Rosenbluth and Ian Shapiro argue that similar “decentralizing reforms” in the United States and Europe, meant to “return power to the people,” weakened parties and led to “policies that are self-defeating for most voters.” Paradoxically, the closer to the grassroots political power moves, the more disenchanted the grassroots become.

So, Peru and Ecuador, like Brazil and Chile before them, will have leaders that are strong on paper but weak in practice. They will promise much and be able to deliver little. Soon enough, voters will grow frustrated and vow to “throw the rascals out” and replace them with someone who truly takes popular interests to heart. Scholars and activists will propose further reforms meant to empower voters. And then the cycle will repeat, enraging citizens further. It is not a pattern that will end well.

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