The Unassuming Economist

A new Bruegel post estimates “the impact of large reform waves implemented in the past 40 years worldwide, [and shows] that reforms had a negative but statistically insignificant impact in the short term. […] Reforming countries, however, experienced significant growth acceleration in the medium-term. As a result, 10 years after the reform wave started, GDP per capita was roughly six percentage points higher than the synthetic counterfactual scenario.”

Figure 2. Statistical analysis on the difference between the two

Source: Marrazzo and Terzi (2017)

On the heterogeneity of reform impact, “The overall positive effect of reforms is confirmed in both instances (Table 1). However, advanced economies seem to have reaped fewer benefits from their extensive reform programmes than emerging markets. Moreover, the time-profiling of the pay-offs seems somewhat different; while countries closer to the technological frontier, and probably with better institutions, see benefits from reforms in the first five years, these materialise only in the longer run for emerging markets.”

Table 1. Average impact of reforms on yearly per capita GDP growth rate vis-à-vis counterfactual

Note: Bold indicates significance at the 5% level

Source: Marrazzo and Terzi (2017)

These findings are consistent with those in my forthcoming paper with Bibek Adhikari, Romain Duval, and Bingjie Hu. We use Synthetic Control Method (SCM) and implement six case studies of well-known waves of reforms, those of New Zealand, Australia, Denmark, Ireland and Netherlands in the 1990s, and the labor market reforms in Germany in the early 2000s. Our results suggest a positive but heterogenous effect of reform waves on GDP per capita.
Source: Adhikari, Duval, Hu, and Loungani (2018)

The Bruegel post is available here. Our paper is available here. For those who do not have access, the working paper version is available here.

From the IMF’s latest report on Luxembourg:

“Job creation is strong in Luxembourg, but unemployment is declining gradually and many newly created jobs go to cross-border workers. The employment rate of residents is relatively low, especially for low-skilled, young, and older workers. Moreover, female attachment to the labor market is weak, and the share of the long-term unemployed has increased over the last ten years, but seems to have come down somewhat in recent months. In addition to skills mismatches, work disincentives inherent to the tax-benefits system are a factor in explaining structural unemployment.”

“[…] low employment of older workers and women is largely driven by low participation rates among these groups, while both higher unemployment and lower participation contribute to the low employment rates of low-skilled workers. The relative importance of the different benefit schemes varies across groups of workers. The high unemployment of young and low-skilled workers reflects substantial unemployment traps inherent to the tax-benefits system, while high disincentives for second earners contribute to lower participation of women, and weak labor market attachment of seniors is predominantly driven by the generosity of the pensions system. Substantially increasing employment requires efforts to reduce skills mismatches and to make work more rewarding.”

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A new IMF report says that “Accommodative monetary policy has contributed to the performance of the Luxembourg economy through some expansion of aggregate demand and through its impact on the financial system. Banks have remained profitable and interest margins stable, while fee and commission income from fund and other activity has been healthy. The investment fund industry has benefited from various factors such as portfolio rebalancing, search for yield, and other market developments leading to strong inflows into various classes of investment funds, and through strong valuation effects. Scenario analysis suggest that the fund industry could be adversely impacted by sharp interest rate increases and that, because of interconnections, the banking system would also be affected. Margins of some banks could also decline when interest rate normalize. Against this backdrop, it is important to implement all 2017 FSAP recommendations that will contribute to making the financial system more resilient to shocks, including those arising from faster-than-expected monetary policy normalization.”

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In my new paper with Nathalie Gonzalez Prieto and Saurabh Mishra, “We find that Okun’s Law holds quite well for most U.S. states but the Okun coefficient—the responsiveness of unemployment to output—varies substantially across states. We are able to explain a significant part of this cross-state heterogeneity on the basis of the state’s industrial structure. Our results have implications for the design of state and federal policies and may also be able to explain why Okun’s Lawat the national level has remained quite stable over time despite an enormous shift in the structure of the U.S. economy from manufacturing to services.”

Fig. 3 National-level employment elasticities

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From the Independent Evaluation Office report on the IMF and Fragile States:

Executive Summary

“This evaluation assesses the IMF’s engagement with countries in fragile and conflict-affected situations (FCS). Helping these countries has been deemed an international priority because of their own great needs and the dangerous implications of persistent fragility for regional and global stability. With its crisis response and prevention mandate, the IMF has a key role to play in these international efforts. In practice, its contribution has been subject to considerable debate, and critics have called on the Fund to increase its engagement.”

Key Findings

“The evaluation recognizes the important contributions that the IMF has made in fragile states, including helping to restore macroeconomic stability, build core macroeconomic policy institutions, and catalyze donor support. In these areas, the IMF has provided unique and essential services, playing a critical role in which no other institution can take its place. Though the progress made by many FCS to escape fragility has been disappointingly slow and subject to reversal, it must be recognized that work on fragile states is inherently challenging, given their generally limited capacity, weak governance, and often unstable political and security environment. Moreover, the outcome of any IMF intervention is critically influenced by political, military, and security decisions including by international actors outside the Fund’s control. Against these challenges, the IMF on balance has performed its various roles quite effectively, particularly in years soon after countries first emerged from periods of violence and isolation.”

“Despite this overall positive assessment, the IMF’s approach to fragile member states seems conflicted and its impact falls short of what could be achieved. Even though the IMF has declared in several pronouncements that work on FCS would receive priority, it has not consistently made the hard choices necessary to achieve full impact from its engagement. FCS typically require long-term, patient modes of engagement that do not fit well with the IMF’s standard business model. Efforts have been made in the past to adapt IMF policies and practices to FCS needs, but initiatives have not been sufficiently bold or adequately sustained, leaving questions about the credibility of the Fund’s commitment in this area.”

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