The Unassuming Economist

“The COVID-19 is the fourth crisis to have hit the Middle East and North Africa (MENA) region in the decade following the Arab uprisings, the 2014-16 oil price declines, and the 2019 resurgence of protests.  It differs from the other crises because of its broad impacts and its distributional consequences. But even before COVID-19 arrived in March 2020, MENA had been facing a number of serious economic challenges — high rates of unemployment, high levels of informality, low annual economic growth, low female labor force participation, an unconducive business environment, a lack of quality jobs, food insecurity, and fragility and conflict (with large numbers of refugees).”

A recent report by the World Bank Group titled, Distributional Impacts of COVID-19 in the Middle East and North Africa Region (2021), attempts to find answers to pertinent questions regarding this, such as what are the welfare of individuals and households in MENA, and what are the key issues that policymakers should focus on to enable a quick and sustained economic convalescence? 

“The report’s findings suggest a substantial rise in poverty, greater inequality, the emergence of a group of “new poor” (those who were not poor in the first quarter of 2020 but have become poor since), and changes in the labor market (notably how hard people work and how many people work). Top policy options center on stepping up vaccination programs, resuscitating economic activity, rethinking the approach to the informal sector, boosting resilience to future shocks, and improving data quality and transparency.” 

Click here to read the full report.

Excerpts from Professor Dani Rodrik’s working paper, A Primer on Trade and Inequality (2021), for the National Bureau of Economic Research:

“In the public imagination globalization’s adverse effects have loomed large, contributing significantly to the backlash against the political mainstream and the rise of far-right populism. The literature on trade and inequality is in fact exceptionally rich, with important theoretical insights as well as extensive empirical findings that sheds light on this recent experience. Some of the key results of this literature, discussed here, are as follows: Redistribution is the flip side of the gains from trade, and it becomes larger relative to net gains from trade in the advanced stages of globalization. Compensation is difficult for both economic and political reasons. International trade often differs from other market exchanges, raising fairness concerns in ways that domestic markets do not. The economic benefits of deep integration are generally ambiguous. Dynamic or growth gains from trade are uncertain.”

Moreover, on the role of financial globalization and capital mobility the paper takes the following stand. “Researchers at the IMF have found that greater capital mobility produces strong inequality effects (Jaumotte et al., 2013; Furceri and Loungani, 2015; Furceri et al., 2017). In particular, they find that capital-account liberalization leads to statistically significant and long-lasting declines in the labor share of income and corresponding increases in the Gini coefficient of income inequality and in the shares of top 1, 5, and 10 percent of income.”

Click here to read the full paper.

State capacity refers to the government’s ability to do its job effectively: to raise taxes, maintain order,
and provide public goods. A series of calamities during the 21st century—the Iraq War, Hurricane Katrina,
the financial crisis, and most recently the COVID-19 pandemic- all indicate the erosion of state capacity. A recent report by the Niskanen Centre (2021) discusses the same.

“The decline in state capacity since the 1960s can be traced to two distinctive but mutually reinforcing intellectual movements. One occurred on the political right while the other is associated mainly with the left. Both represent dysfunctional responses to America’s longstanding (and well-founded) fears of centralized power. On the right, healthy suspicion of rapid government expansion has given way to a toxic contempt for government and public service per se. On the left, efforts to expand “citizen voice” in government as a check on abusive power have produced a sclerotic “vetocracy” that makes effective governance all but impossible.”

Bold policy changes on many fronts are needed to bring back dynamism and inclusive prosperity.

Click here to read the full report.

While it has been postulated for long that wealth and aggregate income in the economy go hand in hand, developments in the last several decades point to a different phenomenon as the wealth to GDP ratio has been rising rapidly, reaching 6.1 times the GDP currently.

In a recent column for the Conversable Economist, Timothy Taylor writes on the issue, drawing insights from a 2021 McKinsey Global Institute report.

“…At the level of the global economy, the historical link between the growth of wealth, or net worth, and the value of economic flows such as GDP no longer holds. Economic growth has been sluggish over the past two decades in advanced economies, but net worth, which long tracked GDP growth, has soared in relation to it. This divergence has emerged as asset prices rose sharply—and are now almost 50 percent higher than the long-run average relative to income. The increase was not a result of 21st-century trends such as the increasing digitization of the economy. Rather, in an economy increasingly propelled by intangible assets, a glut of savings has struggled to find investments offering sufficient economic returns and lasting value to investors. These (ex-ante) savings have instead found their way into a traditional asset class, real estate, or into corporate share buybacks, driving up asset prices.”

Source: McKinsey Global Institute. (2021). The rise and rise of the global balance sheet: How productively are we using our wealth?

Real estate, rather than an ongoing investment boom in the 10 countries under study, is attributed to this rapid rise in global wealth. Furthermore, the study offers possible explanations for the consequences that such a trend might bring with it in the future- some happy and some not so happy ones.

Read on to know more. Click here.

Through cross-country evidence, the Organisation for Economic Co-operation and Development (OECD) has shown that economic inequality has risen in most OECD countries in the last thirty years or so while social mobility has stagnated or worsened. In its most recent report, the OECD turns its gaze to the question of how people perceive inequality and social mobility.

When it comes to questions on the perception of inequality, it has been shown in the report that there is overwhelming concern regarding income distribution and the lack of equal opportunities in the average world citizen. However, far from being an umbrella statement, there are instead a multitude of layers shaping people’s understanding of the phenomenon and factors affecting it.

In this report, emphasis is laid on providing an explanation to several such factors such as whether people care about inequality, how connected is their perception of inequality to the actually prevailing reality, how supportive is the general public for increased governmental action to bridge income gaps and how far are the people ready to go to hold governments accountable for failing to do so. It then moves on to providing interesting policy insights about the reform process and some hitherto ignored policies that have worked well.

Click here to read the full report.