The Unassuming Economist

A new paper from the Bank of England says that “liberalising services trade, levelling up to the liberalisation seen in goods trade, could reduce excess global imbalances by around 40%. […] The potential rewards [of services trade liberalisation] are much broader. The great prize could be reinvigorating global growth.”

The paper notes that “seminal work by Baumol (1967) underpinned the ‘classical view’ of the contribution of services to growth. This view was unambiguously negative, indicating that services were largely non-tradable and exhibited little scope for productivity improvements. But services have changed significantly since then and evidence today suggests that services are widely traded across borders (Loungani et al (2017)) and that, when services productivity is correctly measured, historical services productivity growth has been as strong as manufacturing (Young (2014)). Many studies confirm positive linkages between service sector liberalisation and economic growth. There are three aspects to this: direct benefits for the services sector, downstream benefits for production in other sectors which use services, and the potential distribution benefits from services growth.” Continue reading here.

The Loungani et al paper and our new data set on services trade are available here.

Source: Loungani et al (2017).

From my latest IMF working paper with Davide Furceri, Jun Ge, and Giovanni Melina:

“We construct unanticipated government spending shocks for 103 developing countries from 1990 to 2015 and study their effects on income distribution. We find that unanticipated fiscal consolidations lead to a long-lasting increase in income inequality, while fiscal expansions lower inequality. The results are robust to several measures of income distribution and size of the fiscal shocks, to an alternative identification strategy, across expansions and recessions and across country groups (low-income countries versus emerging markets). An additional contribution of the paper is the computation of the medium-term inequality multiplier. This is on average about 1 in our sample, meaning that a cumulative decrease in government spending of 1 percent of GDP over 5 years is associated with a cumulative increase in the Gini coefficient over the same period of about 1 percentage point. The multiplier is larger for total government expenditure than for public investment and consumption (with the former having larger effect), likely due to the redistributive role of transfers. Finally, we find that (unanticipated) fiscal consolidations lead to an increase in poverty.”

From a new IMF working paper:

“We study economic globalization as a multidimensional process and investigate its effect on incomes. In a panel of 147 countries during 1970-2014, we apply a new instrumental variable, exploiting globalization’s geographically diffusive character, and find differential gains from globalization both across and within countries: Income gains are substantial for countries at early and medium stages of the globalization process, but the marginal returns diminish as globalization rises, eventually becoming insignificant. Within countries, these gains are concentrated at the top of national income distributions, resulting in rising inequality. We find that domestic policies can mitigate the adverse distributional effects of globalization.”

From a new paper on China’s labor market:

“A stable labor market is a policy priority for most countries, especially after the burst of the global financial crisis. Unlike most countries, the labor market in China appears to be holding up well, despite sharp slowdown in economic growth. This paper argues that there are underlying fundamental mechanisms that help explain the resilience of China’s labor market. The key to understanding labor market dynamics in China is that rural-to-urban migrant flows are more sensitive to growth than urban workers in the process of fast urbanization, which serves as a main shock absorber to buffer employment against adverse shocks. Therefore, we propose a generalized Okun’s Law (GOL) that incorporates migrant flows with unemployment rates to capture the relation between labor market dynamics and economic cycles. The original Okun’s Law can be regarded as a special case of the GOL for developed countries that have already completed urbanization. Conducting empirical analysis with both China’s national- and city-level data and cross-country panel data, we find strong evidence supporting the GOL theory. Findings in the paper have implications for a deeper understanding of the wisdom of Okun’s Law and its application in labor market policies.”

The latest IMF report on Malaysia says the “Malaysia’s economy and its labor market have undergone significant shifts in the last three decades. The labor market is now more urban and has a higher share of female workers and workers with tertiary education. Employment has kept pace with labor supply, keeping the unemployment rate stable for more than a decade. Meanwhile, reliance on non–citizen workers has also increased against the backdrop of slower growth in citizen population. Continuing with its economic transformation, Malaysia aspires to achieve high–income status, with a labor market that is ready for the economy of the future: a market that can support more female workers, more skilled jobs, and a higher labor productivity growth.”