The Unassuming Economist

Source: VoxEU

In a recent paper, economists Choi and Levchenko (2021) study firm-level industrial policy measures in South Korea in the 1970s to examine their impact on the South Korean economy.

“South Korea’s experience with industrial policy is important to understand, as it is one of the ‘growth miracle’ economies of the post-war era, known for its rapid transformation from a commodity and light manufacturing producer to a heavy manufacturing powerhouse. It has been argued that industrial policy played a central role in this transformation, with the temporary subsidies having had a large and statistically significant effect on firm sales as long as 30 years after they ended.”

The authors conclude that South Korea’s activist industrial policy appears to have succeeded even after taking into account its fiscal costs and general equilibrium effects. However, they also add a word of caution with this encouragement, that today’s policymakers face the same challenge as policymakers in the past: to identify conditions – such as dynamic productivity effects or externalities – under which activist industrial policy is welfare-improving. 

Click here to read the full article.

From a VoxEU post by Avinash Persaud:

“John Williamson, one of the icons of international economics, passed away in April 2021. This column outlines some of his many and varied contributions to economic analysis and economic policymaking. In his work on exchange rates, the international monetary system and the challenges of economic crises, transition and development, he was the consummate problem-solver and understood any problem in the round of politics, economics and institutions. 

One of the icons of international economics, John Williamson, passed away in April of this year. I had the honour of being invited by the family to say a few words about John as a colleague at his Memorial on Sunday, 7 November 2021 at “Hemlock Grove”, Woodend, Audubon Naturalist Society, where John volunteered (he was a very keen birdwatcher). The following is what I said. 

In an age in which fundamentalism no longer slips between the shadows, but openly stalks the pastures of thought, and even the ramparts of Capitol Hill, John Williamson could be counted on to be the grown-up in the room.

He was seldom ‘black or white’ in his thinking. He revelled in the grey. In the nuance. He was neither ‘Dirigiste’ nor ‘Laissez-Faire’; neither fixed nor floating; neither full nor anti capital mobility. He made the case for the intermediate, to paraphrase one of his papers (Williamson 2007). His was a Golden Mean; between two vices or two corners if you may.¹

He did not set out to arrive at balance, for the sake of balance. He was more considered than that. He got there in active pursuit of the right solution to the right problem given the time and place. He was the consummate problem-solver and understood the problem in the round of politics, economics, and institutions.²

Which is why he cared so much about refining an idea, always trying to make it better, more suited to time and place. And which is why too, his contributions seem so varied. They are spread across the critical problems of the day, which did not always arrive in logical order.

When in the 1970s, Bretton Woods collapsed into the ‘Non-System’, as he called it, he wrote about the reform of the international monetary system and later its failure (Williamson 1977). And played more than a bit part too in the development of ideas at the time.³ He was a lanyard-carrying member of the Second Row Club – that group of senior officials who sat behind their ministers trying their best to advise and nudge them to greater ambition during the day, and drowning disappointments with laughter and drink in the evenings.⁴

When the newly floating exchange rates were stretching their muscles and exploring their limits in the 1980s and 1990s, he wrote about and developed new exchange rate arrangements (Miller and Williamson 1987). For instance, he and Fred Bergsten played a significant role in the ‘reference rate’ design of the Louvre Accord of February 1987 that tried to stabilise the dollar – an effort thwarted by the October 1987 stock market crash. 

When Asia arrived, the Berlin Wall tumbled, and Latin America found its footing, he wrote about transition, development, and, of course, the Washington consensus around such matters (Williamson 1990). And when commercial debt to middle-income countries emerged as an intractable problem, he wrote in praise of new instruments that could better share the risks between borrower and creditors, like GDP-linked bonds (Williamson 2017, Benford et al. 2018).

So far, I may have given the impression that his work was largely responsive, but in truth it was just as anticipatory. My recent proposal here on Vox for the regular issuance of $500 billion of Special Drawing Rights (SDRs) in order to support the huge investment required to halt climate change (Persaud 2021), in its design, owes a debt to John Williamson’s earlier Vox column on the desirability of regular issuance of SDRs (Williamson 2009).”

Continue reading here.

“Today, wherever people live, they don’t have to look far to confront inequalities. Inequality in its various forms is an issue that will define our time.“

As the United Nations puts it, inequality of income, opportunity, and a variety of other factors is among matters of utmost importance to governments, multilateral institutions, and people at large today. Modern-day discussions on the theme seek to understand inequality by analyzing it through multiple lenses, discussing conflicting opinions, and contrasting approaches to tackle it.

In one such discussion presented underneath, economists David Green of the University of British Columbia and Parikshit Ghosh of Delhi School of Economics deliberate on factors influencing the state of inequality today such as trade and globalization, the gradual ideological shift to the ‘right’, changing nature of work – the role of technological advancements, hierarchies created by higher education, and ‘rents’ rather than returns to skill, and the new role of social protection that goes beyond income support.

The entire video can be accessed here.

On the other hand in their latest blog economists, Rohini Pande and Nils Enevoldsen discuss the salience of redistribution policies in poverty and inequality eradication. They contend that country-level catch-up in incomes will not be sufficient to eradicate extreme poverty, as the blessings of this ‘growth’ are not reaching the poor. Inclusive prosperity requires a political solution – redistribution.

Click here to read the full blog.

” Children’s experiences during early childhood are critical for their cognitive and socio-emotional development, two key dimensions of human capital. However, children from low-income backgrounds often grow up lacking stimulation and basic investments, leading to developmental deficits that are difficult, if not impossible, to reverse later in life without intervention. The existence of these deficits are a key driver of inequality and contribute to the intergenerational transmission of poverty.”

This paper by Attanasio, Cattan, and Meghir for the NBER (2021), discusses models of parental investments and early childhood development and uses them as an organizing tool to review some of the empirical evidence on early childhood research. Among other things, results demonstrate that addressing development deficits doesn’t always have to be a costly policy affair. Incorporating conversations, playtimes, and reading into the pedagogy does wonders for cognitive development. Policies that are designed to target development delays must ensure scalability even in terms of cultural acceptability of interventions, rather than just cost minimization. 

Click here to read the full paper.

Who pays when minimum wage hikes come through the drawn-out demand-supply legislative processes?

This is precisely the question taken up by researchers Christopher Esposito of the University of Chicago and Edward Leamer and Jerry Nickelsburg of UCLA in an interesting working paper series. Drawing on a unique set of mandated wage hikes in the Los Angeles area, they present evidence that minimum wage changes led area restaurants to raise prices, change menu items, obtain lower rents in the high wage areas and, in some cases, caused eateries to shut down.

Results from the paper suggest that policymakers face an important dilemma when designing minimum wage policies to redistribute income while minimizing job loss. So, on one hand, restaurants in high-income neighborhoods studied by the authors passed on the full incidence of the minimum wage differential to their customers suggesting that minimum wages should be set relative to local income levels. The price passthrough channel for income redistribution is optimized when minimum wages are set uniquely for fine-grained spatial units, such as neighborhoods, within which the elasticity of demand for restaurant meals is homogenous. However, on the other hand, their findings also indicate that customers’ demand for restaurant meals can spill across jurisdictional borders with different minimum wages. Therefore, different minimum wages across fine-grained spatial units have the potential to move customer demand, jobs, and tax revenue out of jurisdictions that enact higher minimum wages. A universal minimum wage increase is not sensitive to this heterogeneity in the elasticity of demand, while minimum wage increases enacted at the neighborhood scale may cause restaurants to relocate out of higher-wage areas. The optimal spatial scale for setting minimum wages must balance these two offsetting forces.

In addition to these policy considerations, the study also raises the possibility that some of the incidence of minimum wage increases falls on landlords. The theoretical model predicts that land rents in regions subject to larger minimum wages will decrease, particularly at locations close to areas with lower minimum wages. This proposition is further strengthened because restaurant properties have specific use characteristics which are costly to change.

Click here to read the full explainer article/ full paper.

Source: Esposito et al. (2021). NBER. Who Paid Los Angeles’ Minimum Wage? A Side-by-Side Minimum Wage Experiment in Los Angeles County.