The Unassuming Economist

Interesting new research in this IMF WP by Niels-Jakob H Hansen and Albe Gjonbalaj:

“Over the last two decades, Cambodia’s consumption inequality and poverty have declined. However, income inequality is higher, and large gaps remain between urban and rural residents. At the same time, domestic revenue mobilization has improved substantially, but collection of tax revenue is biased towards non-progressive sources. We use the model to evaluate the growth and inequality impact of reforms that increase infrastructure spending by raising (i) VAT, (ii) property tax, or (iii) personal income tax. We find that using property taxes delivers the largest increase in GDP and reduction in inequality. Reaping the gains from property taxation will however require additional investments in tax administration”

From a new IMF working paper by Natalija Novta and Evgenia Pugacheva:

“We examine the extent to which declining manufacturing employment may have contributed to increasing inequality in advanced economies. This contribution is typically small, except in the United States. We explore two possible explanations: the high initial manufacturing wage premium and the high level of income inequality. The manufacturing wage premium declined between the 1980s and the 2000s in the United States, but it does not explain the contemporaneous rise in inequality. Instead, high income inequality played a large role. This is because manufacturing job loss typically implies a move to the service sector, for which the worker is not skilled at first and accepts a low-skill wage. On average, the associated wage cut increases with the overall level of income inequality in the country, conditional on moving down in the wage distribution. Based on a stylized scenario, we calculate that the movement of workers to low-skill service sector jobs can account for about a quarter of the increase in inequality between the 1980s and the 2000s in the United States. Had the U.S. income distribution been more equal, only about one tenth of the actual increase in inequality could have been attributed to the loss of manufacturing jobs, according to our simulations.”

A new IMF paper by Djeneba Doumbia and Tidiane Kinda:

“Can a government reduce income inequality by changing the composition of public spending while keeping the total level of expenditure fixed? Using newly assembled data on spending composition for 83 countries across all income groups, this paper shows that reallocating spending toward social protection and infrastructure is associated with reduced income inequality, particularly when it is financed through cuts in defense spending. However, the political and security situation matters. The analysis does not find evidence that lowering defense spending to finance infrastructure and social outlays improves income distribution in countries with weak institutions and at higher risk of conflict. Reallocating social protection and infrastructure spending towards other types of spending tends to increase income inequality. Accounting for the long-term impact of health spending, and particularly education spending, helps to better capture the equalizing effects of these expenditures. The paper includes a discussion of the implications of the findings for Indonesia, a major emerging market where income inequality is at the center of policy issues”

From VOX post by Eduardo Levy Yeyati, Martín Montané, and Luca Sartorio:

“Governments around the world spend a large portion of their budgets on active labour market policies aimed at improving access to new jobs and higher wages. This column presents the first systematic review of 102 experimental interventions comprising a total of 652 estimated impacts. It finds that programmes are more likely to yield positive results when GDP growth is higher and unemployment lower, and that programmes aimed at building human capital show significant positive impact.”

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From a VoxEU post by Rabah Arezki:

“Algeria’s recent victory in the Africa Cup of Nations has united a country whose development model has frustrated its young and educated workforce. This column offers four lessons for economic development from the national football team’s success: on the role of competition and market forces, mobilising talent, the role of managers, and the importance of referees (i.e. regulation). 

On 19 July, Algeria won the 2019 edition of the Africa Cup of Nations. The victory was the culmination of a strongly contested international football tournament with 24 teams where we saw the best of competition, talent, and refereeing on the continent. Algeria’s consecration comes amid sweeping political transformation triggered by massive demonstrations in the past few months, in turn driven by youths asking for radical change. This has united Algerians and emboldened the national team. This can-do spirit and renewed momentum are likely to be key ingredients for delivering big reforms.

On the economic front, Algeria’s development model has frustrated an educated young and increasingly female labour force aspiring to economic empowerment beyond subsidies and public jobs. The model is essentially stuck in the transition from an administrated economy to a market economy. Moreover, decades of state domination with episodes of liberalisation have yielded crony capitalism, further distancing the population from appreciating the power of harnessing markets for development.

In Algeria, as in many countries, football has triggered passions capturing dreams of greatness and unifying nations. Football can offer four lessons for economic development in Algeria, which is looking to revamp its economic model (see also Kuper and Szymanski 2009 and Palacios-Huerta 2014).

The first lesson is on the role of competition and the power of market forces. In too many sectors in Algeria, prices are controlled and state or private monopolies are the rule, stifling the space for talented Algerians to transform their economy and deterring foreign investment. This is unsustainable considering the shrinking rents coming from oil and gas ever since oil prices collapsed in 2014. Football illustrates how market mechanisms are an important filter for detecting and rewarding talent based on performance and for moving away from favouritism. Without free entry and failure, as in football, economic dynamism and momentum rapidly come to a halt.”

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