Archive for March 3rd, 2023

Nation Building: Big Lessons from Successes and Failures

March 3, 2023

CEPR has released a new e-book on what it takes to build nations.

This book presents a synthesis of key recent advances in political-economy research on the various approaches and strategies used in the process of building nations throughout modern history. It features chapters written by leading scholars who describe the findings of their quantitative analyses of the risks and benefits of different nation-building policies. The book is comprised of 26 chapters organised into six sections, each focusing on a different aspect of nation building. The first chapter presents a unified framework for assessing nation-building policies, highlights potential challenges that may arise, provides a summary of each of the other chapters, and draws out the main lessons from them. The following chapters delve into the importance of social interactions for national identification, the role of education, propaganda and leadership, external interventions and wars, and the effects of representation and redistribution. The book offers a nuanced understanding of effective nation-building policies.

Key Lessons/ideas?:
Drawing on the insights of the eBook, five key lessons can be formulated:
  • Democracy is the backbone of sustainable and peaceful nation building. First of all, as shown throughout the book, the fate of nation states in all zones of the polarisation–segregation space are more favourable for democracies. This is particularly crucial in the zone of low polarisation and low segregation, when the nation-building strategy is in building a unitary state with a strong national identity, as democracy helps escape the perils of nationalist madness and fascism in this context.
  • Inter-group contact with horizontal equality and security guarantees can reduce inter-group animosity and promote a melting pot society. As shown in Section II of the book, in high-polarisation settings, more peaceful and fair interaction between groups nurtures inter-group trust. Importantly, local and national identities are not mutually exclusive. They are not a zero-sum game, as positive interaction can foster a sense of belonging to both the country and a local community.
  • Fostering a positive common identity, for example through education, is key with high polarisation and low segregation. In countries with high ethnolinguistic polarisation, where the groups share the same territory, fostering a common inter-group identity by building a ‘melting pot’ society is the only way to avoid discrimination and inter-group hostilities. As shown in Sections III and IV of the book, while democracies typically stress positive values of tolerance and common destiny through public education, some autocracies choose indoctrination and defamation of minorities both in education or through media propaganda with often dire consequences. Reducing polarisation by opening up to diverse migrants could reduce salience of the group divisions and facilitate the melting pot.
  • Power-sharing and federalism are crucial in high-segregation settings. As shown in Section VI of the book, power-sharing and federalist policies provide the glue holding together high-polarisation, high-segregation countries.
  • Unilateral military interventions and military aid often backfires in terms of their effect on attitudes of local population, yet UN peacekeeping security guarantees work to reduce conflict. As shown in Section V of the book, nation building pursued militarily from outside faces many risks and pitfalls, but multilateral UN peacekeeping can create the favourable ground conditions for national reconciliation in post-conflict settings.


Evolution of Indian cities, land use restrictions, charter cities and more

March 3, 2023

Shruti Rajagopalan in her latest podcast talks to Alain Bertaud who has written this book “Order Without Design: How Markets Shape Cities.”

In this episode, Shruti speaks with Alain Bertaud about how Indian cities have evolved, utilities pricing, land use restrictions such as floor area ratio and floor space index, slums, charter cities, urbanization in Africa and much more. Bertaud is an urbanist, distinguished visiting scholar at the Mercatus Center at George Mason University, and senior research scholar at New York University’s Marron Institute of Urban Management. From 1980 to 1999, he was the principal urban planner at the World Bank. His book about urban planning is titled “Order Without Design: How Markets Shape Cities.”

US macreconomics news and the Global Financial Cycle

March 3, 2023

Christoph E. Boehm and T. Niklas Kroner in this Federal Reserve research shows hos US macroeconomic news imoacts global financial cycle:

We provide evidence for a causal link between the US economy and the global financial cycle. Using intraday data, we show that US macroeconomic news releases have large and significant effects on global risky asset prices. Stock price indexes of 27 countries, the VIX, and commodity prices all jump instantaneously upon news releases. The responses of stock indexes co-move across countries and are large – often comparable in size to the response of the S&P 500. Further, US macroeconomic news explains on average 23 percent of the quarterly variation in foreign stock markets. The joint behavior of stock prices, bond yields, and risk premia suggests that systematic US monetary policy reactions to news do not drive the estimated effects. Instead, the evidence points to a direct effect on investor’ risk-taking capacity. Our findings show that a byproduct of the United States’ central position in the global financial system is that news about its business cycle has large effects on global financial conditions.

India Derailed: A Falling Investment Rate and Deindustrialisation

March 3, 2023

Prof R Nagaraj (was earlier with the Indira Gandhi Institute of Development Research, Mumbai) in this speech/article at TheIndiaForum:

In 2021–22, India’s GDP, net of inflation, was marginally higher by 1.5% compared with 2019-20, that is, the pre-pandemic year. It means that the country recovered in a year from the economic contraction caused by the pandemic . It also means that India lost two years of output and employment growth, with the per capita income falling marginally. The human costs of the pandemic may have been substantial – probably much more than what the government cares to admit – but the quick recovery provided a welcome relief. The output rebound was respectable compared to, say, China, which is still grappling with its policy flip-flops.

Though the Covid-19 shock is now behind us now, the world economy is grappling with the Russia-Ukraine war and distinct signs of the end of globalisation as we knew it. The world economy is apparently fracturing along geopolitical fault lines, along axes reminiscent of the Cold War era. With its large domestic market, though at low levels of per capita income, India is perhaps better placed to cope with the possible de-globalisation.

The pandemic, unfortunately, deflected the public’s and policymakers’ attention from India’s  decade-long economic slowdown. The country’s growth declined in the 2010s after it witnessed rising growth from the early 1980s to the end of the 2000s. If the doubts raised on the official GDP estimates are reckoned with, the average annual growth rate during the decade is probably 4.5–5%, compared to official estimates of more than 6–7% per year. The growth reversal has reverberated through the economy, resulting in adverse employment effects, and a rise in the levels of absolute poverty and malnutrition.

The decade-long growth derailment was accompanied by an unprecedented fall in the fixed investment and domestic savings rates as proportions of the GDP.

Despite all the public attention the Make in India and Atmanirbhar Bharat initiatives attracted, the manufacturing sector’s share in fixed investment has fallen, contributing to deindustrialisation. India’s import dependence, especially on China, for edible oils to electronics hardware has gone up for lack of domestic production capacity.  The dependence is so structural that it is hard to correct quickly with the price mechanism alone. This is a serious strategic shortcoming the country faces, perhaps without appreciating its full implication.

Policymakers seem to be seized of the problem of a contraction in the investment rate. Recent announcements of large projects in the manufacturing sector to reduce import dependence (semiconductor chips, for example) and boost employment (Tata’s proposal to assemble iPhones as a contractor for Foxconn) seem to suggest an upturn in investment is coming. The falling NPAs of the banking sector could improve the supply of bank credit to industry.

However, the private sector still seems hesitant, given global geopolitical uncertainties and the lack of domestic demand. But with deindustrialisation and a structural dependence on China, the government cannot simply wait for the private sector to wake up. It will have to step up public industrial and infrastructure investment to create policy certainty for the private sector. Raising public investment without jeopardising the fiscal and external balances will require making efforts to raise the domestic savings rate and boost long-term financial institutions.


China’s Loan Diplomacy: Heads I win, tails you lose

March 3, 2023

My debut piece for Deccan Herald on China’s Loan Diplomacy.

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