Archive for the ‘Growth and development’ Category

Tariffs and the Exchange Rate: Evidence from Trump’s Tweets

July 29, 2021

Dmitry Matveev and Francisco Ruge-Murcia in this Bank of Canada working paper:

US commercial policy during the presidency of Donald Trump led to renewed interest in the macroeconomic effects of trade tariffs. It has become common to use tariffs and other restrictions on international trade in an attempt to boost the domestic economy. One factor affecting the impact of tariffs is the response of local currency after tariffs are imposed. The effects of tariff changes can be eased or overturned if the local currency appreciates and prevents the relative prices of local and foreign goods from adjusting. 

The behaviour of the exchange rate following an increase in tariffs has not been fully evaluated empirically because of lack of data and challenges in methodology. Our assessment focuses on the recent renegotiation of the North American Free Trade Agreement (NAFTA).

During this period, a key source of news about tariffs was public communication by the US president—often in the form of tweets. We use the US president’s tweets to quantify how potential and actual tariffs on Canada and Mexico affect their bilateral exchange rates with the United States.

Our results show that the anticipation of higher tariffs on goods imported from Canada led on average to a 0.022 percent appreciation of the US dollar relative to the Canadian dollar within five minutes of the publication of a tweet. In the case of Mexico, the average effect was twice as large—a 0.049 percent appreciation of the US dollar. We find that these numbers are economically and statistically significant.

Interesting how Twitter is being used for economic research.

When the stadium goes silent: How crowds affect the performance of discriminated groups

July 28, 2021

Mauro Caselli, Paolo Falco and Gianpiero Mattera in this voxeu research show that when there are no spectators in football matches, African players do well:

Racism in football returned to the headlines recently following racial abuse of England players on social media after the final of the UEFA European Championship. How does the harassment of supporters affect discriminated athletes? Using the COVID-19 lockdown as a natural experiment, this column compares the performance of individual football players in the Italian Serie A with and without fans at the stadium. The evidence shows that players of African origin, who are most frequently targeted by racist abuse, perform better in the absence of supporters.

Our results fit a broader framework that stretches beyond the world of sports, whereby individuals who belong to historically discriminated groups perform worse than their peers when the task takes place in an environment in which discriminatory behaviour occurs manifestly. More generally, the analysis fits within an ever-growing literature documenting the role of racial discrimination in driving labour market disparities (e.g. Deschamps and De Sousa 2015, Lang and Spitzer 2020, Aizer et al. 2020, Bayer and Charles 2018). Furthermore, since the research shows that discriminated players do better in the absence of fans while no other groups do worse, the evidence suggests that racial harassment leads to an overall decrease in productivity and efficiency. The issue has also begun to attract the attention of the media and new statistics on the issue have circulated after the release of the working paper, corroborating the findings (e.g. The Economist 2021).

Finally, it is worth pointing out that the results are particularly striking because they concern elite athletes, who are the best in their profession and typically enjoy high earnings as well as enviable social status. Further investigation would be necessary to test the impact of racism on the performance of athletes in lower-ranked leagues, and especially among youth, where one can imagine the impacts of discrimination being even more significant and harmful.

The conclusion of the study is that racism can do economic harm to the football industry. Football, like other sports, thrives on fans from all over the world seeking to watch and emulate extraordinary players who perform beyond the normal. When a significant share of players cannot express their full potential, the ‘beautiful game’ becomes less beautiful and less appealing.

Damning from so called developed world.

Let me work from home, or I will find another job

July 27, 2021

Jose Maria Barrero, Nicholas Bloom and Steven Davis in this interestung voxeu post point how the pandemic has impacted the work patterns in US (perhaps forever).

They show via a survey that employees prefer to work for home and will switch jobs if they are asked to return full-time to office:


U.S. Healthcare: A Story of Rising Market Power, Barriers to Entry, and Supply Constraints

July 27, 2021

Li Lin, Mico Mrkaic and Anke Weber in this IMF WP analyse US healthcare system:

Healthcare in the United States is the most expensive in the world, with real per capita spending growth averaging 4 percent since 1980. This paper examines the role of market power of U.S. healthcare providers and pharmaceutical companies. It finds that markups (the ability to charge prices above marginal costs) for publicly listed firms in the U.S. healthcare sector have almost doubled since the early 1980s and that they explain up to a quarter of average annual real per capita healthcare spending growth.

The paper also finds evidence that the Affordable Care Act and Medicaid expansion were successful in raising coverage and expanding care, but may have had the undesirable side-effect of leading to labor cost increases: Hourly wages for healthcare practitioners are estimated to have increased by 2 to 3 percent more in Medicaid expansion states over a five-year period, which could be an indication that the supply of medical services is relatively inelastic, even over a long time horizon, to the boost to demand created by the Medicaid expansion.

These findings suggest that promoting more competition in healthcare markets and reducing barriers to entry can help contain healthcare costs.


Moving from a poor economy to a rich one: The role of migrant job tasks

July 21, 2021

Prof Eran Yashiv of Tel Aviv University in this voxeu research shows what happens to a migrant moving from a poor economy to a rich economy:

A European and Rawlsian view on inequality, inclusive growth and monetary policy

July 19, 2021

Olli Rehn, Governor of the Bank of Finland, in this speech quotes Rawls to justify low for long interest rate policy of central banks:

In the euro area, national policies determine labour market outcomes. However, monetary policy can support full employment without prejudice to price stability. In the presence of a flattened Phillips curve, policies aiming at full employment are likely to have a moderate inflationary impact in the short term. Under such circumstances, monetary policy can also help us get closer to full employment.

In fact, considerations about labour-income and wealth inequality strengthen the case for a “lower for longer” strategy, when monetary policy is constrained by the effective lower bound. This is to my understanding in line with considerations that featured prominently in the Federal Reserve’s recent framework review and have contributed also to the new ECB monetary policy strategy, of which President Christine Lagarde informed the public earlier today.

So, let me ask, on the basis of these reflections: what should one as a central banker think about inequality and inclusive growth in the making of monetary policy? In my view, the philosophy of John Rawls is a most helpful guide here. One of his key insights, or one of his three principles of a just society, is that inequalities are acceptable only in case that they benefit the less well-off members of the society.

That is by no means a carte blanche for e.g. advocating tax cuts that benefit the richest or believing in some trickle-down theory of economic growth. But it implies that as the main impact of monetary policy in the proximity of effective lower bound has been to raise output and employment, and thus reduce income inequality by helping create millions of jobs and enhance the income of the previously unemployed and other less well-off members of the society, even if it had limited negative side-effects on wealth inequality, then the policy has been in line with the pursuit of a just society.

Linking Rawlsian thinking to monetary policy is interesting…

Linking Container shipping and US business cycle fluctuations

July 15, 2021

Lutz Kilian, Nikolaos Nomikos and Xiaoqing Zhou in this voxeu research:

Technological Progress, Artificial Intelligence, and Inclusive Growth

July 15, 2021

Anton Korinek ; Martin Schindler and Joseph Stiglitz in this IMF research paper:

Advances in artificial intelligence and automation have the potential to be labor-saving and to increase inequality and poverty around the globe. They also give rise to winner-takes-all dynamics that advantage highly skilled individuals and countries that are at the forefront of technological progress. We analyze the economic forces behind these developments and delineate domestic economic policies to mitigate the adverse effects while leveraging the potential gains from technological advances. We also propose reforms to the global system of governance that make the benefits of advances in artificial intelligence more inclusive.


What can development practice learn from AK47?

July 14, 2021

Superb interview of Prof Lant Pritchett (HT: Econforeverybody blog, a must read blog). In the short interview, Pritchett discusses several problems in development sector from education to copying success stories blindly only to fail.

In one q, he speaks about what development sector can learn from AK47:

Ann Bernstein: ….. I often say that we South Africans like to introduce Rolls Royce policies and laws when as a country we drive Toyotas. You have thought about this issue a lot and you have written that development practice can learn a lot from the AK47. Can you explain this controversial remark?

Pritchett: The AK47 is the world’s most popular weapon. The M16, which is the standard weapon in the US army, is far and away a more accurate weapon than the AK47, which beyond a few hundred yards, cannot hit a thing. The AK47 emerged from the Soviet Union, where they designed their weapons for the soldiers they had, low capability with little training. They also designed the AK47 to be unbelievably robust; no matter what you do to it, when you pull the trigger, it fires. You can basically hand anybody an AK47 and it will be a reasonably effective weapon. The United States took the opposite approach of designing the best possible weapon and training soldiers to match the weapon. It is an excellent weapon, but if you do not keep it clean and in good functioning order, it will misfire.

The problem is when you give the M16 with its perfect design to a poor soldier it won’t work. This mirrors a lot of what has happened in development – the desire to adopt best practice, leads to a gap between practice design and the capability for implementation. Rather than organically building designs that work in a low implementation environment, policymakers have tried to borrow designs and fit them into countries, and it just does not work. When well-designed programmes are poorly implemented the reason is obvious, but the problem repeats itself, because no one ever admits that what they need is an AK47. You need to design the programme for the soldiers you have.

Interestingly said…


Macron Commission on challenges facing French economy

July 9, 2021

French President Emmanuel Macron set up a commission under Jean Tirole and Olivier Blanchard to study economic challenges facing France. The Commission submitted its report:

Responding to the global challenges facing our societies requires new analytical frameworks and the emergence of new ideas, especially in the aftermath of the global health crisis. The President of the Republic asked Olivier Blanchard, Professor Emeritus at MIT, and Jean Tirole, Honorary President of the Toulouse School of Economics, to chair a commission of renowned international experts, supported by France Stratégie.

The committee focused on three long-term structural challenges: climate change, economic inequality and demographic change. Their work led to the production of a detailed report on these three challenges.

Climate change: time to act

The work of the IPCC has highlighted the role of human activities in climate change and the importance of acting now to limit the rise in temperatures to less than 2°C compared to the pre-industrial era. With this objective in mind, and following the signing of the Paris Agreement in 2015, France has set itself the objective of being carbon neutral by 2050. By committing today to ambitious policies and setting clear and credible milestones, France and Europe can play a leading role in international climate action. The commission, led by Mar Reguant, Associate Professor of Economics at Northwestern University, Illinois, and Christian Gollier, Professor and Director General of the Toulouse School of Economics (TSE), presented an analytical framework and proposals to accelerate the achievement of these goals.

Economic inequality and insecurity: measures for an inclusive economy

Equal opportunities, social protection, fair and efficient tax and social redistribution… Even if France is in a better position than most other countries, in order to ensure that economic opportunities benefit as many people as possible and are fairly distributed, France must act on several fronts and at different stages of people’s economic lives. The commission, led by Stefanie Stantcheva, Professor of Economics at Harvard University, and Dani Rodrik, Professor of Political Economy at the John F. Kennedy School of Government, Harvard University, makes the case and sets out a framework for good policy.

Facing demographic change: ageing, health and immigration

Ageing implies finding a fair and efficient balance between periods of employment and retirement. To achieve this, it is necessary to modernise the pension system, but also to support older people in their activities. This includes strengthening vocational training and the prevention and treatment of chronic diseases. Axel Börsch-Supan, Director of the Max Planck Institute for Social Law and Social Policy, Munich, Claudia Diehl, Professor at the Munk School of the University of Konstanz, and Carol Propper, Professor of Economics at the Imperial College Business School in London, have examined the facts and their perception before drawing up a series of recommendations.

Interview of the duo.

Dani Rodrik and Stefanie Stantcheva in this Proj Synd article:

Just as the pandemic was gathering pace in early 2020, French President Emmanuel Macron set up an international commission of economists to assess longer-term challenges and make policy proposals. While some of the recommendations are specific to France, many (if not most) are relevant to other advanced economies as well.


How India eradicated Polio?

July 6, 2021

Ayushi Kalyani in this Madras Courier article:

India’s battle against polio lasted over 66 years. The first research center to battle against polio was established in Mumbai in 1949. The vaccine was introduced in 1979. However, India faced unique challenges in eradicating polio.

In the mid-1980s, India reported two to four hundred thousand cases annually. Until the early 1990s, India was hyper-endemic for polio; an estimated 500 to 1000 children were paralysed every day from the disease. But India managed to eradicate polio completely. The last case was recorded in 2011.

How did India manage to eradicate polio? What lessons, if any, can we learn and apply in our fight against COVID-19?

A brief economic history of Swadeshi

July 5, 2021

Nitin Pai in the recent edition of Indian Public Policy Review traces history of Indian swadeshi movement:

This paper traces the history of the swadeshi idea from its origins to the present day, identifies its political trajectory, assesses its impact on the Indian economy and outlines how it could be interpreted in the context of an independent, liberal democratic republic. It shows that swadeshi has always been a political project cast in economic terms and its empirical track record is far less impressive than its exalted place in the popular narrative. It concludes by arguing that India’s national interest is better served by acquiring capability than self-reliance and most importantly, by embracing an open economy. 

Understanding Chile’s Social Unrest in an International Perspective

July 1, 2021

Metodij Hadzi-Vaskov and Luca A Ricci in this IMF WP analyse Chile’s social unrest:

We aim to provide a broad descriptive overview of Chile’s social issues, in comparison to other countries and over time, in order to place the recent social unrest in historical and international perspectives which can help prepare the ground for future policy priorities. We follow an eclectic approach, classifying a broad set of indicators along six dimensions—inequality across: i) income; ii) perception; iii) access; iv) opportunity; v) redistribution; and vi) location. The analysis puts forward a set of descriptive findings.

First, income inequality declined substantially but remains high, also compared to countries with similar level and path of development.

Second, Chile seems to be one of the few countries in Latin America with declining inequality where perceived inequality actually increased.

Third, notwithstanding an increase in social spending, access to essential services appears limited, particularly for middle and lower income classes, amid fast growth of out-of-pocket health expenses, relatively faster growth of cost of living for the relatively poorer, and remaining weaknesses in the pension and education systems.

Fourth, inequality of opportunity is high, with limited competition.

Fifth, fiscal redistribution has improved markedly, but remains low by international standards.

Finally, inter-regional inequality has declined substantially over the last two decades, reaching levels similar to the OECD median.


Finance, Growth, and Inequality: A Literature Review

June 22, 2021

Ross Levine in this IMF paper surveys literature on impact of financial development on growth and inequality:

Finance and growth emerged as a distinct field of economics during the last three decades as economists integrated the fields of finance and economic growth and then explored the ramifications of the functioning of financial systems on economic growth, income distribution, and poverty. In this paper, I review theoretical and empirical research on the connections between the operation of the financial system and economic growth and inequality.

While subject to ample qualifications, the preponderance of evidence suggests that (1) financial development—both the development of banks and stock markets—spurs economic growth and (2) better functioning financial systems foster growth primarily by improving resource allocation and technological change, not by increasing saving rates. Some research also suggests that financial development expands economic opportunities and tightens income distribution, primarily by boosting the incomes of the poor.

This work implies that financial development fosters growth by expanding opportunities. Finally, and more tentatively, financial innovation—improvements in the ability of financial systems to ameliorate information and transaction costs—may be necessary for sustaining growth.

Capitalism after COVID: conversations with 21 economists

June 17, 2021

Luis Garicano in this voxeu piece points to this new edited book by him – Capitalism after COVID: Conversations with 21 Economists. The book emerged after discussions with leading economists:


Swedish school lunch reform, nutrition, and lifetime income

June 17, 2021

Petter Lundborg and Dan-Olof Rooth in this voxeu research:

Reflections on South Africa’s Lost Decade

June 14, 2021

So many economies are going through lost decade problem.

South Africa has been in the list. Former SA Finance Minister Trevor Manuel in this podcast speaks about how SA lost the plot:

When the apartheid regime ceded power following South Africa’s first democratic elections in 1994, the economy was in shambles. Debt service costs as a share of GDP were crippling. Trevor Manuel—a veteran of the anti-apartheid struggle and appointed minister of finance—revamped the budgeting process and set a stringent deficit reduction target. By 2006, the economy was growing at its fastest pace in more than two decades. In this podcast, Manuel looks back at what drove the country’s longest phase of economic growth and how he believes the ruling party he helped establish has lost its way

From Manuel:

You could bring people in because there was a project that people wanted to be part of. It was how we would deliver democracy. That doesn’t exist anymore. The ANC that we knew doesn’t exist.

How Indian National Congress and African National Congress lost the plots…

The Economic History Podcast

June 11, 2021

Seán Kenny, Postdoctoral fellow at und University Sweden has started a superb podcast on economic history.

The Economic History podcast is a platform for sharing knowledge, ideas and new research with a general interest audience. Each fortnight, we meet leading academics in the field and discuss a range of topics, including pandemics, long run economic growth, gender issues, financial crises, inequality, sustainable development and a number of weird and fun economic experiments in history. There is no time like the past to help us understand the present.

The podcast has featured 24 episodes so far and each one is a gem. It is amazing to grasp and understand economic history via this medium. The subject has many layers which papers, books etc. cannot cover and can be done much better in a conversation format. I think podcasts such as this one by Kenny could be used for teaching economic history.

Bureaucratic Indecision and Risk Aversion in India

June 7, 2021

Interesting paper by IDFC Institute researchers: Sneha P., Neha Sinha, Ashwin Varghese, Avanti Durani and Ayush Patel.

The Indian bureaucracy suffers from indecision and risk aversion, resulting in an inordinate focus on routine tasks, coordination failure, process overload, poor perception, motivational issues and a deterioration in the quality of service delivery. We argue that bureaucratic indecision, in a large part, is a form of rational self-preservation exercised by bureaucrats from the various legal and extra-legal risks to their person, careers and reputation. These risks originate from problems of organizational design, institutional norms and other political factors.

The research for this working paper included a review of interdisciplinary literature on bureaucracy and policy decisions, combined with semi-structured interviews. We interviewed current and ex-bureaucrats from India and other Asian and African countries, political scientists and other policy researchers. We also conducted a document analysis of historical and contemporary, administrative and legal documents including committee reports, acts and rules, annual reports and other government publications. We summarise the evidence on factors such as penal transfers, overload, inadequate training, process accountability, contradictory rules and political patronage. The paper concludes with a compilation of administrative and normative reform recommendations taking cues from history, state experiences and other country bureaucracies.

The impact of bankruptcy on innovative firms

May 31, 2021

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