The Unassuming Economist

From a new IMF working paper by William Gbohoui,W. Raphael Lam and Victor Duarte Lledo:

“Growing regional inequality within countries has raised the perception that “some places and people” are left behind. This has prompted a shift toward inward-looking policies and away from pro-growth reforms. This paper presents novel stylized facts on regional inequality for OECD countries. It shows that regional disparity in per-capita GDP is large (even after adjusting for regional price differences), persistent, and widening over time. The paper also finds that rising nationwide income inequality is associated with both rising within-region income inequality and widening average income across regions. The rise in inequality is related to declining incentives for interregional labor mobility, especially for poor households in lagging regions, which are estimated to reduce by as much as one-third in the United States. Against these facts, the paper proposes a framework to identify whether, how and by whom fiscal policies can be used to tackle regional inequality. It outlines conditions under which those policies should be spatially-targeted and illustrates how they can be complementary to conventional means-testing methods in mitigating income inequality.”

From a VoxEU post by Markus Eberhardt:

“Recent evidence suggests that a country switching to democracy achieves about 20% higher per capita GDP over subsequent decades. This column demonstrates the sensitivity of these findings to sample selection and presents an implementation which generalises the empirical approach. If we assume that the democracy–growth nexus can differ across countries and may be distorted by common shocks or network effects, the average long-run effect of democracy falls to 10%.

In a recent paper, Acemoglu et al. (2019), henceforth “ANRR”, demonstrated a significant and large causal effect of democracy on long-run growth. By adopting a simple binary indicator for democracy, and accounting for the dynamics of development, these authors found that a shift to democracy leads to a 20% higher level of development in the long run.¹

The findings are remarkable in three ways:

1. Previous research often emphasised that a simple binary measure for democracy was perhaps “too blunt a concept” (Persson and Tabellini 2006) to provide robust empirical evidence.
2.  Positive effects of democracy on growth were typically only a “short-run boost” (Rodrik and Wacziarg 2005).
3. The empirical findings are robust across a host of empirical estimators with different assumptions about the data generating process, including one adopting a novel instrumentation strategy (regional waves of democratisation).

ANRR’s findings are important because, as they highlight in a column on Vox, there is “a belief that democracy is bad for economic growth is common in both academic political economy as well as the popular press.” For example, Posner (2010) wrote that “[d]ictatorship will often be optimal for very poor countries”.

The simplicity of ANRR’s empirical setup, the large sample of countries, the long time horizon (1960 to 2010), and the robust positive – and remarkably stable – results across the many empirical methods they employ send a very powerful message against such doubts that democracy does cause growth.

I agree with their conclusion, but with qualifications. My investigation of democracy and growth (Eberhardt 2019) captures two important aspects that were assumed away in ANRR’s analysis:

• Different countries may experience different relationships between democracy and growth. Existing work (including by ANRR) suggests that there may be thresholds related to democratic legacy, or level of development, or level of human capital, or whether the democratisation process was peaceful or violent. All may lead to differential growth trajectories.²
• The world is a network. It is subject to common shocks that may affect countries differently. The Global Crisis is one example, as are spillovers across countries (Acemoglu et al. 2015, in the case of financial networks).”

Continue reading here.

From Branko Milanovic:

“To think correctly about globalization one needs to think of it in historical context. This means seeing today’s globalization and its effects, positive and negative, as in many ways a mirror-replay  of the first globalization that took place from the mid-19^th century to the First World War.

That globalization, underpinned by the Industrial Revolution in Western Europe, transformed the economic map of the world by making Europe much richer and politically and militarily more powerful than any other part of the world. It allowed European countries, and later the United States, to conquer most of Africa and significant parts of Asia, which even when they were not formally ruled by Westerners were subjected to their strong influence in terms of economic policy (opening to trade, control of custom revenues), or even juridical extraterritoriality for European citizens.

Advanced European countries became much richer, so that by 1914 the ratio of per capita income, according to the Maddison project database, between the UK and China was 8 to 1 compared to 3 to 1 one century earlier. (The figure below shows the reverse of this ratio: Chinese, Indian and Indonesian GDP per capita as percent of comparable West European GDPs per capita. It thus highlights the recent rise of Asian countries.) Moreover, the fruits of industrialization and globalization began to be spread across Western countries’ income distributions thus making even the poor people there richer than almost all Africans and most Asians. European dominance allowed it to “export” its surplus population and to blunt the edge of the incipient class  conflict.

This very short sketch of the well-known effects of the first globalization allows us  to remind ourselves of both its positive and negative sides: huge technological progress as against exploitation, increased incomes for many vs. grinding poverty and exclusion for others, European mastery of the world vs. a colonial status of Africa and much of Asia.

In what ways should it inform our thinking about the current globalization? First, in making us realize that broad historical movements cannot bring only benefits to everybody. Some will inevitably lose, others gains; and at times the loss of some is a condition for the gain of others. Second, thinking of the past enables us to see how the current globalization is in many respects a mirror-image of the first—but shorn of its more brutal effects of conquest and exploitation.”

Continue reading here.

From a new VOX post:

“Despite the growing importance of inequalities in policy debates, it is still difficult to compare inequality levels across European countries and to tell how European growth has been shared across income groups. This column draws on new evidence combining surveys, tax data, and national accounts to document a rise in income inequality in most European countries between 1980 and 2017. It finds that income disparities on the old continent have increased less than in the US and shows that this is essentially due to ‘predistribution’ policies.”

“Figure 1 shows how bringing together surveys, tax data, and national accounts can greatly improve traditional survey-based estimates. In Poland, fiscal (pre-tax) top income shares obtained from Bukowski and Novokmet (2017) reveal a large and growing underrepresentation of top incomes in surveys. After correction, the top 10% pre-tax income share appears to be underestimated by more than 10 percentage points in 2017. By contrast, surveys are more efficient at measuring top incomes in Denmark, but accounting for the large share of undistributed profits accruing to resident households (more than 8% of GDP in recent years) leads to important upward revisions of inequality at the top end.”

From a new VOX post:

“A growing number of companies place a high priority on the wellbeing of their workers, assuming that happier workers will lead to improved productivity. This column examines this link based on a meta-analysis of independent studies accumulated by Gallup, covering the wellbeing and productivity of nearly 2 million employees and the performance of over 80,000 business units, originating from 230 independent organisations across 49 industries in 73 countries. The results suggest a strong positive correlation between employee wellbeing, productivity, and firm performance.”

“Figure 1 presents our main finding – it shows true score correlations between employee wellbeing (measured as employees’ satisfaction with the firm as a place to work), employee productivity, and firm performance as means, taken across all industries and regions. We focus on four key performance indicators, arguably the most important ones from a business perspective: customer loyalty, employee productivity, business unit profitability, and staff turnover.”