There is No Such Thing as Development Economics

Alex Tabbarok post in MR blog:

I used to think there was such a thing as development economics. There are still richer and poorer countries, of course, but is there a “development economics,” a special type of economics for poor countries? I don’t think so. Maybe there once was. In the twentieth century, divergence in per-capita GDP increased big time and it was a burning question why poor countries weren’t on the same development path as the developed nations. Starting around 1990-2000, however, we have seen convergence. Most countries are now on the same path. Poorer countries and richer countries are becoming more alike, sometimes for good and sometimes for bad. I tweeted the following news headline recently:

Notice the commentary on NYC infrastructure but also the man bites dog angle. In Pakistan people on social media are apparently sharing videos of flooding in the New York subway to complain about the poor state of infrastructure in Pakistan!

My own anecdote fit the pattern. This week I am in Delhi and due to a series of unfortunate supply chain shocks at my house-build in the US, for the first time in 3 weeks I have running hot water and reliable internet access!  Not only that but although India has sadly fallen for the paper straw nonsense the top hotels remain free from flow constrictors so the water gushes out of the shower with elan just as God intended. Civilization is  truly moving back east.

Well…

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Explaining deviations from Okun’s law

Claudia Foroni and Francesco Furlanetto in this ECB paper:

Despite its stability over time, as for any statistical relationship, Okun’s law is subject to deviations that can be large at times. In this paper, we provide a mapping between residuals in Okun’s regressions and structural shocks identified with a SVAR model by inspecting how unemployment responds to the state of the economy. We show that deviations from Okun’s law are a natural and expected outcome once one takes a multi-shock perspective, as long as shocks to automation, labour supply and structural factors in the labour market are taken into account. Our simple recipe for policy makers is that, if a positive deviation from Okun’s law arises, it is likely to be generated by either positive labour supply or automation shocks or by negative structural factors shocks.

Entity-based vs activity-based regulation: a framework and applications to traditional financial firms and big techs

Claudio Borio, Stijn Claessens and Nikola Tarashev in this BIS paper clarify the differences between two types of financial regulations:

The long-standing policy debate about entity-based (EB) and activity-based (AB) regulation is marred by imprecision. This has obscured the different motivations for the two types of regulation. It has also made it more difficult to interpret catch phrases such as “same risk, same regulation”. And it has led to misleading inferences concerning the relationship between financial stability regulation and a level playing field.

To overcome the shortcomings and ambiguities in the current policy debate, we propose a framework for classifying financial stability regulation as either EB or AB. We also relate this framework to the classification of regulatory measures as either “microprudential” (MiP) or “macroprudential” (MaP). And we apply it to the regulation of banks, non-bank financial intermediaries (NBFIs) and big techs.

The framework clarifies the basics of financial stability policy. We define AB regulation as constraining individual activities directly and on a standalone basis; and EB regulation as constraining a combination of activities at the entity level. The widespread adoption of EB regulation reflects the fact that leverage and liquidity transformation, which lie at the core of financial instability, involve combinations of activities.

The choice between EB and AB regulation depends on where financial instability originates. AB regulation is justified when an activity can fail even if the entities performing it do not; EB regulation is justified when the failure of entities causes that of activities. Adopting both EB and AB regulation in a belts-and-braces approach helps overcome their individual shortcomings. Finally, applying the framework to NBFIs and big techs highlights deficiencies of current approaches to achieving financial stability objectives.

Relating the EB/AB distinction to the MiP/MaP one delivers two insights. First, as regards taxonomy, all four combinations are possible. Second, contrary to a widely held view, well structured AB measures are not necessarily consistent with a level playing field.