Archive for the ‘Growth and development’ Category

Economics of socialism and transition: The life and work of János Kornai, 1928-2021

October 26, 2021

Prof Janos Kornai passed away recently.

Prof Gerald Ronald of University of California, Berkeley pays tribute to Kornai in this voxeu piece.

The famous Hungarian economist János Kornai has left us. He was one of the most important intellectuals of the twentieth century. He suffered personally from both Nazism and communism, the two totalitarian regimes of the twentieth century. As a young Jew growing up in Budapest, he lost his father and a brother to the Nazis. Like many young Jews in Central Europe who survived the holocaust, he was for a couple of years an enthusiastic supporter of communism, the arch-enemy of Nazism. He became disillusioned after a few years, especially when learning about the Stalinist purges in Hungary in the early 1950s. He had been a journalist at that time.

His doctoral dissertation in economics, Overcentralization in Economic Administration, was full of facts about the flaws of central planning and represented a great breath of fresh air in the intellectual atmosphere of the times. He defended that dissertation just before the Soviet repression of the Hungarian revolution of 1956. His defence was attended by a big crowd and was one of the important intellectual events of that year. Given the visibility of his doctoral thesis, when the repression came, he lost his job at the Institute of Economics (later a hotbed of thinking about reforms), was interrogated, and eventually got marginal jobs, first at the Light Industry Planning Bureau and later at the Textile Industry Research Institute. 

Instead of becoming discouraged or cynical, he used the free time he had in these obscure jobs to study economics seriously and to get better acquainted with economic research that was being practiced in the West, on the other side of the Iron Curtain. His work on two-level planning with Tamás Lipták was published in Econometrica and became an important paper in the literature on the economics of planning. This earned him the recognition of top economists of the time: Kenneth Arrow, Leonid Hurwicz, Tjalling Koopmans, Edmond Malinvaud and others. The Hungarian authorities, who were more liberal than other communist regimes, even allowed him to travel to conferences in the West, albeit under heavy supervision of the secret police. 

Structural change revisited: The rise of manufacturing jobs in the service sector

October 25, 2021

Dominik Boddin and Thilo Kroeger in this Bundesbank paper  analyse the labor market consequences of structural change in Germany over the past 43 years:

This paper reconsiders the labor market consequences of structural change over the past 43 years. Taking two different ways of defining manufacturing and service employment as point of departure – according to the industry classification of firms or establishments and
according to the occupation and hence the tasks of the workers – we show that structural change is far less pronounced than generally perceived.

Manufacturing and service employment numbers based on the occupations of workers deviate markedly from the employment
numbers based on the industry classification of employers. The decline in manufacturing jobs in Germany is far lower if the measurement of employment is based on the occupation of the worker. About 52% of manufacturing jobs that were lost in manufacturing industries
between 1975 and 2017 are offset by new manufacturing jobs in service industries. This also has important implications for empirical applications.

By way of example, we reestimate the effect of international trade on manufacturing employment based on the occupation of
the worker. Contrary to previously identified negative effects, we cannot identify significant effects of import exposure on employment in manufacturing occupations.

Using detailed, comprehensive German social security data, we show at the worker level that the service sector increasingly acts as a valuable alternative employment option for workers with manufacturing occupations. We estimate the causal effect s of a switch to the service sector on employment outcomes by following workers over time after mass layoffs. The results reinforce our claim that structural change is less pronounced than perceived, as workers who retain their initial occupation and switch to employment in the service sector experience no significant differences in future employment trajectories compared to workers who manage to stay in the manufacturing sector.


The impact of the euro on trade: two decades into monetary union

October 12, 2021

Team of 5 ECB economists (Vanessa Gunnella, Laura Lebastard, Paloma Lopez-Garcia, Roberta Serafini and Alessandro Zona Mattioli) in this paper assess the impact of Euro on trade:

The consensus back in 2008 – ten years after the introduction of the euro – was that the adoption of a common currency had made a limited impact of around 2% in total on the trade flows of the first wave of euro area countries (Baldwin et al., 2008). Since then, six more countries have joined the euro area, and firms have internationalised their production processes. These two phenomena are interrelated and may have changed the way the common currency affects the euro area economy. Therefore, with the common currency now into its third decade – and with more countries queuing to adopt it – this paper revisits the trade effects of the euro, focusing on the newer euro adopters (i.e. those countries that have adopted the euro since 2007) and their interaction with the first wave of euro area members via supply chains. The contribution of the paper is twofold.

First, it revisits the estimated aggregate impact of the euro on euro area trade, as well as on trade within and between the two waves of adopters. Data on bilateral flows between 1990 and 2015 for an extended sample of countries to estimate a gravity equation indicate a significant trade impact, ranging between 4.3% and 6.3% in total on average, with the magnitude being the highest for exports from the second wave of adopters to the first wave of adopters.

The second contribution made by this paper relates to the channels through which trade might be affected by a currency union. This question is explored by looking separately at trade in intermediate goods and final products. While we find that trade gains were mainly driven by trade in intermediate goods among countries that adopted the currency earlier (5.3%), our results also show that the euro had a positive effect on the exports of final products from the second wave of adopters to other euro area countries. 


Left and right: Examining the evolution of political ideologies with Prof Pranab Bardhan

October 11, 2021

Interesting conversation between Prof Pranab Bardhan and Ashok Kotwal of

With the advent of globalisation, the struggle between the ‘left’ and ‘right’ – as defined in Marxian terms – rapidly evolved from one between economic ideologies, to cultural wars. In this context, I4I Editor-in-Chief Ashok Kotwal engages in a deep-dive with Prof. Pranab Bardhan (University of California, Berkeley) on issues ranging from growing resentment towards educated elite, shifts in the form of capital and employment patterns, role of communities, to emergence of illiberal political movements, and the different types of nationalism and populism.

Reading the economic history of Aghanistan

October 6, 2021

Prof Tirthankar Roy of LSE in this interesting paper discusses economic history Afghanistan:

Twentieth-century Afghanistan offers a lesson for the historian of comparative economic development. Two conditions help to understand Afghan history better, resource poverty and the absence of European colonial rule. In a resource-poor region, the possibility of rapid economic change depends to a great extent on the capability and stability of the states; at the same time, attempts to create strong centres of power with a weak tax base can generate debilitating conflicts. European colonialists in some cases managed to overcome the dilemma. In the absence of colonialism, old elites and old rivalries survived and intensified the conflict. These two features appeared in the histories of many of the world’s poor regions. They shaped the process of economic and political change in Afghanistan with great force.

The demise of Doing Business: Goodhart’s Law in action

September 30, 2021

Thorstan Beck in this voxeu research:

History of Urban Resilience: What happens to cities post Covid-19 shock?

September 30, 2021

Prof Edward Glaesar in this NBER paper reflects on how Covid-19 will impact urban locations. For this, he goes back to history of urban resilience. He is hopeful that most urban places will rebound post the covid shock.

Superb narration..

South Korea’s development: From hermit kingdom to miracle on the Han

September 23, 2021

Dowug Irwin recently wrote a paper on how ideas led to export-led growth in Taiwan.

In another paper, he tracks the Korea story:

In 1960, South Korea’s exports were about 1 percent of GDP, and the country’s ability to import depended almost entirely on US aid. After changing its foreign exchange and trade policies in the mid-1960s, Korea saw a surge in exports to more than 10 percent of GDP by the end of the decade. What factors account for the shift in policy that enabled this dramatic export growth to occur? The United States helped initiate the process by withholding financial assistance, pressuring Korea to devalue its currency and reform its foreign exchange regime. Initially, the Korean government resisted taking these steps, but in 1964 it became firmly committed to an export promotion strategy to boost foreign exchange earnings and end its dependence on American aid.

From a Communist Heritage to an Unwanted Past: The Case of Romania

September 22, 2021

Ricardo Parra and Jorge Ferraz in this short paper write on Romania’s attempts to hide its communist past:

Communist ideologies and political regimes have had their specific models of tourism. These models reflect on the way former communist countries view tourism today. Despite the long communist period, Romania refuses to accept Communism as an integral part of its historical culture and society, being perceived as a dark period of its history.

Several campaigns which were broadcasted as a way to show the cultural and natural beauty of the country, promote rural tourism and the ancient Romanian History, eluding themes and subjects related with that recent past. Even though there has been a growing touristic interest in Romania’s communist heritage, the country’s strategies express the difficulty in accepting Communism as part of the Romanian cultural identity and history.

Thus, what communication strategies does Romania use to promote its culture, in order to avoid its communist heritage? What are the reasons behind the country’s vehement silence about its past? This article aims to discuss how and why the country and its population promote specific tourist products as a way to avoid their communist legacy.

Ricardo is a MA student and Jorge a Prof of Sociology at Estoril Higher Institute for Tourism and Hotel Studies. Interesting background which provides an interesting way to explore Romania’s economic history.

How misunderstanding economic history past jeopardizes our future: New Zealand Edition

September 22, 2021

NZ Finance Minister Grant Robertson in Budget 2020 speech remarked the need to build NZ economy post pandemic:

Mr Speaker,

Today’s Budget represents the next steps in our recovery and rebuild. The world is still learning what the impacts of COVID-19 will be. We owe it to New Zealanders to work carefully through our next steps, recognising that the decisions we are making will define the lives and livelihoods of many people for years to come.

The weight of those decisions comes with a spirit of optimism in what New Zealand can be. The glimmer of silver lining on this darkest of clouds comes from the knowledge that we have the opportunity to build back better. There are few times in your life when you get to hit the reset button. It is a privilege that many countries do not have right now as they still struggle to get the virus under control. It is an opportunity we will not squander.

Our rebuild must be one that takes the very best of who we are, and uses it to take on the issues and challenges in front of us. Some of them are old – inequality, low productivity, polluted rivers, some are newer, the transition to a low carbon economy, adjusting to the rapidly changing world of work, maintaining social cohesion.

Robertson picks on NZ’s history for lessons:

All of them are in front of us in stark relief. We can draw on the lessons of the past as to how to deal with them. The answers lie in the great traditions of the First Labour Government who rebuilt New Zealand after the Great Depression. It was a time when they understood a genuine partnership between government and the people. That each and every person in this country deserved the right to take up the chances afforded by being lucky enough to live in, as my predecessor Peter Fraser called it, this green and pleasant land. They built houses, rail and roads, they created the welfare state and a strong public health system, and they backed shopkeepers and manufacturers. We are taking those principles into the modern era.

We can also draw the lessons of the past as to what not to do in response to a major economic shock. In this case Mr Speaker I can draw on the experiences of my own life. As the economic carnage of the 1980s and 1990s wreaked havoc in our communities, I saw that up close. It was based on a tired set of ideas that the market would save us, that if government sat on the sidelines all would be well. Well, it didn’t work out that way and lives and livelihoods were lost.

That will not happen again, not on the watch of this government. We know that we must work in partnership with iwi, business, unions, community groups, every one of the team of five million to make sure we all not only get through this, but that we thrive on the other side.

That means continuing to be bold as we have been in the last two months. We are not always all going to agree on the path, but it must be one that gives each and every New Zealander a stake in our future. Decent, well paid work that provides respect and dignity. Looking after our most vulnerable. Where we make good on our promise to future generations that we will take on climate change and leave them a legacy to build from.

So, the call is that government will be there to support and build economies.

Bryce Wilkinson of NZ Initiative, a thinktank responds to the Minister’s speech via a report:

Politicians can usefully look to the past for future guidance – as long as they do not misread it. A government that models itself on a misdiagnosed past risks repeating past follies.

The risk of error is considerable. Politicians and historians have different motivations. Incumbent politicians need to get re-elected. They may draw lessons from the past that best serve that purpose. Historians may not draw the same conclusions.

This report examines the accuracy of the Minister’s representations of those two episodes in New Zealand’s economic history.

Wilkinson reflects on the two historical episodes cited by the Minister and shows how much of Minister’s speech is misplaced.

Well this is not where it ends.

Prof Michael Reddell who writes a terrific blog on NZ economy says the report goes overboard:

To close, the New Zealand Initiative’s report ends up being a funny beast. For better or worse, most people probably won’t care about the pre-84 history, and it isn’t clear how much relevance the specifics have to today anyway. And if there is a lot wrong with this government’s economic policy (and there is) this report is too once-over-lightly (and a little florid in places, given our relative macro stability) to add much value or get much traction. Perhaps there is still a place for debates about the 1984-93 period – in fact there definitely is, even granting that to many younger people it is (my daughter’s phrase) “ancient history” – but to do so usefully probably needs more space, more nuance, and more data than is in the relevant section of this report.

Industrial Policy and South Korea

September 20, 2021

Two new NBER papers discuss industrial policy in South Korea.

First one by Jaedo Choi & Andrei A. Levchenko on long term impact of ind policy in South Korea:

This paper provides causal evidence of the impact of industrial policy on firms’ long-term performance and quantifies industrial policy’s long-term welfare effects. Using a natural experiment and unique historical data during the Heavy and Chemical Industry (HCI) Drive in South Korea, we find large and persistent effects of firm-level subsidies on firm size. Subsidized firms are larger than those never subsidized even 30 years after subsidies ended. Motivated by this empirical finding, we build a quantitative heterogeneous firm model that rationalizes these persistent effects through a combination of learning-by-doing (LBD) and financial frictions that hinder firms from internalizing LBD. The model is calibrated to firm-level micro data, and its key parameters are disciplined with the econometric estimates. Counterfactual analysis implies that the industrial policy generated larger benefits than costs.

If the industrial policy had not been implemented, South Korea’s welfare would have been 22-31% lower, depending on how long-lived are the productivity benefits of LBD. Between one-half and two-thirds of the total welfare difference comes from the long-term effects of the policy.

Second by Minho Kim, Munseob Lee & Yongseok Shin look specifically at ind policy in Heavy and Chemical industries. Some what of a mixed bag here:

How the power of economic ideas led to Taiwan’s export-led growth

September 16, 2021

Douglas Irwin highlights the importance of economic ideas in pushing growth in Taiwan.

Irwin starts with Krugman pointing to the role of ideas in pushing economic growth:

In a recent New York Times piece, Paul Krugman discussed two drivers of the “hyperglobalization” era that began in the mid-1980s and lasted until the global financial crisis of 2008. These drivers are improved transportation technology (shipping containers and airfreight) and lower trade barriers (tariff reductions) in developing countries. These factors combined to reduce trade costs and dramatically increase global integration.[1]

Krugman calls particular attention to the “trade policy revolution” in developing countries.[2] (At the time, the managing director of the International Monetary Fund (IMF), Michel Camdessus, called it the “silent revolution.”) The opening of markets and reduction in trade barriers in China, India, Mexico, and many other countries during the 1980s and 1990s fundamentally reshaped the world economy. As Krugman put it, “We wouldn’t be importing all those goods from low-wage countries if those countries were still, like India and Mexico in the 1970s, inward-looking economies living behind high tariff walls.”

What accounts for this trade policy revolution? Many factors could have played a role, such as lobbying by exporting interests in each country or strong-arm tactics by the IMF and World Bank. But Krugman claims that ideas about policy brought about the change. Is that right?

Irwin points to the example of Taiwan in this regard:

Yes! After World War II, import substitution—an approach to economic development that emphasized protecting domestic industry with barriers against imports—was popular among economists and policymakers around the world. By the 1970s, as a result of theoretical developments (optimal policy ranking, effective rates of protection) and the successful experience of export-oriented countries (such as Taiwan and South Korea), support for this view diminished considerably. This sea change in economic ideas about trade policy—led by economists such as Bela Balassa, Jagdish Bhagwati, and Anne Krueger—eventually proved influential among policymakers in the 1980s.

Taiwan provides a concrete example of Krugman’s claim that economic ideas matter for policy. As explained in a new PIIE working paper, How Economic Ideas Led to Taiwan’s Shift to Export Promotion in the 1950s, economist S. C. Tsiang (then working at the IMF but acting in an unofficial capacity) convinced K. Y. Yin (a leading policymaker) to support a devaluation of Taiwan’s overvalued currency, the end of foreign exchange rationing, and a dismantling of import controls.

After heated debate within the Taiwanese government, Yin emerged victorious and was promoted to oversee far-reaching changes in the country’s trade regime from 1958 to1963. Taiwan did not change its policy because of export interests, which were politically weak, or because international financial institutions insisted upon a different policy stance. Nor was Taiwan in an economic crisis that required major policy adjustments. Instead, Tsiang’s then-novel idea that a realistic exchange rate and an open market in foreign exchange would promote exports and reduce distortions proved to be compelling to government officials—particularly in an environment where foreign exchange was scarce.

As a result, Taiwan became the first developing country after World War II to shift away from import substitution and focus on incentives for exports. Its economic success in doing so was widely noted at the time, and the country soon became a model for others.

Wow. Super interesting to know. We know of Taiwan’s economic growth but not the actors and the thoughts which led to the growth.

Profile of the architect of Taiwan reforms, Dr Sho-Chieh Tsiang is super interesting as well


Pofile of Solomon Hsiang, who uses big data to inform climate change policies..

September 15, 2021

Interesting profile of Prof Solomon Hsiang of University of California Berkeley (pronounced Shung):

Solomon Hsiang is a smart man. He listens to his wife.

Over breakfast a day or two after the California pandemic lockdown in March 2020, Google researcher Brenda Chen asked a question. Couldn’t her husband’s Global Policy Laboratory at the University of California, Berkeley, shed some light on the world’s fight against COVID-19?

“A lab called ‘the Global Policy Lab’ should be able to tackle this question,” she recalls saying.

He raised it with his team on a conference call that morning. The lab uses sophisticated statistical analysis of economic data—econometrics—and advanced computing power to address questions related to climate change, development, violence, migration, and disasters. When the group reconvened after a day of research, “we realized that nobody knew if all these lockdown policies would really work,” says Hsiang, a 37-year-old economist and climate physicist.

Over the next 10 days, Hsiang and 14 researchers worked around the clock gathering vast amounts of data on dozens of pandemic policies such as business and school closings, travel bans, social distancing mandates, and quarantines from China, France, Iran, Italy, South Korea, and the United States. Applying econometric tools, they found that the anti-contagion policies significantly slowed the spread of disease, averting 495 million infections. The paper they cranked out appeared June 8, 2020, in the journal Nature. It has been accessed 309,000 times and cited by 361 news outlets, according to Nature.

The episode shows how Hsiang (pronounced “Shung”) is helping to transform the way economists conduct research. He’s leading a new generation in leveraging newly available giant databases, massive modern computing power, and large, interdisciplinary teams to address thorny global issues such as climate change and the pandemic. Previous work on the economics of climate change relied largely on sweeping assumptions rather than hard data and was carried out mostly by solo researchers or a few collaborators.

Within just a decade of earning his doctorate from Columbia, Hsiang has published a raft of startling and sometimes controversial findings. He and various research partners showed that rising temperatures increase civil conflict and slow economic growth; that as tropical storms grow more intense, the economic effects are more severe and last longer; and that trying to fight climate change by mimicking volcanic eruptions to dim the sun would reduce global crop yields. Now he’s leading researchers in a years-long effort to calculate the true cost worldwide of greenhouse gas carbon emissions.

Inaugural Shaibal Gupta Memorial Lecture: Role of history in development economics

September 2, 2021

Prof Abhijit Banerjee of MIT gave the inaugural Shaibal Gupta memorial lecture in June-2021. Prof Banerjee speaks on role of history in development economics and says the main lesson is to be humble.

In June 2021, Nobel Laureate Abhijit Banerjee (Ford Foundation International Professor of Economics, MIT) delivered the inaugural Shaibal Gupta Memorial Lecture organised by Asian Development Research Institute, broadly discussing the role of history in development economics.

An important body of recent work emphasises the idea of the ‘long arm of history’, that is, history cannot be escaped totally and has durable effects. For example, countries that were British colonies several years ago, continue to have British-style legal systems. However, Prof. Banerjee contends that there is no logical reason why persistence has to mean determinism – it could just be that things are slow to change due to inertia or coordination failures. Persistence does not necessarily guarantee that there will be no change; just that change takes place in unexpected ways, for instance, long-term consequences on a country’s economy on account of sudden death of the leader.

At some level, one can never answer the question of determinism – it is a big philosophical debate with no real resolution. Yet, there is not enough evidence on determinism for us to become pessimistic. There are many examples of positive change in welfare outcomes over the past 20-50 years. Hence, in Prof. Banerjee’s view, we should continue to take practical action – with humility – and account for any specific constraints of culture, politics and institutions.


Does Bureaucracy lead to Development?

August 23, 2021

Taliban will not be able to access most Afghan central bank assets

August 20, 2021

I had blogged earlier on how the first thing Nazis did after invasion was to take over the central bank. After all that is where the money is.

Given Taliban’s yet another invasion of Afghan, will they be able to do the same?

Apparently not. There are articles on why Taliban will not get much of Afghan central bank assets.

For instance, see this BBC article by Daniel Thomas:


Expecting the Spanish Inquisition: Economic backwardness and religious persecution

August 16, 2021

As one sees shocking pictures from Afghanistan, here is a reminder from Spanish inquisition.

Mauricio Drelichman, Jordi Vidal-Robert, Hans-Joachim Voth present evidence:

How disruptive technologies diffuse and impact labour

August 11, 2021

Using macroeconomic indicators to measure poverty

August 9, 2021

Martin Ravallion in this voxeu research uses macro indicators to measure poverty:

Why Is Growth in Developing Countries So Hard to Measure?

August 6, 2021

Noam Angrist, Pinelopi Koujianou Goldberg and Dean Jolliffe in the recent Journal of Eco Perspectives:

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