The Unassuming Economist

In their recent study (2021), professors Alex Armand, Britta Augsburg, and Antonella Bancalari examine whether externally incentivizing maintenance can sustainably improve the quality of public infrastructure using interventions adopted for maintaining community toilets in India.

Two different types of interventions were analyzed. Firstly, the ‘maintenance’ intervention which offered a one-off grant at the facility level, followed by a significant bimonthly financial reward to the facility’s caretaker or the person in charge of its maintenance (40% of the caretakers’ monthly salary, conditional on keeping the facility clean). The second type was ‘maintenance plus sensitization’, supplementing the maintenance intervention with an intensive sensitization campaign to raise awareness among potential users about the importance of a well-kept facility and of avoiding free riding to support good services.

It was observed that the maintenance intervention led to improvements in the observed quality of facilities, accompanied by a significant reduction in free riding among users, but incentivizing maintenance had no impact on the value use and attitudes of potential users. As for the other intervention, it was found that the sensitization campaign alone had no effects other than increasing overall health awareness among users.

The column also sheds light on policymakers’ decisions on financing interventions and draws out pertinent policy implications for various approaches.

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In a column for the Center for Economic and Policy Research, a Washington DC-based think tank, economist Dean Baker writes on the opportunity for China to invest in clean energy to resolve its “demographic crisis”. An excerpt from the article is as follows.

“As Paul Krugman wrote in a recent column, China is going to have to make a massive adjustment in its economy in the years ahead. It has been spending an incredible 43 percent of its GDP on capital formation, either investment goods purchased by businesses, or residential housing. By comparison, the figure for Japan is 24 percent and for the United States less than 22 percent.

This massive spending on capital formation made sense when China was seeing rapid growth in its labor force and also a huge shift in its population from rural to urban. But this process is now reaching an endpoint, both with a decline in its working-age population and the rural to urban shift largely completed.

It is also important to note that China is already heavily invested in clean energy. China is by far the world leader in solar energy, with more than twice as much as the United States, the second-largest user of solar power. It is also by far the world leader in wind energy, again with more than twice as much installed wind power as the United States. And, China also has more than twice as many electric cars on the road as any other country. This means that China has a large domestic clean energy sector which can stand to gain by further spending on reducing greenhouse gas emissions.

If China wants a path through its “demographic crisis,” or, in other words, coping with secular stagnation, devoting substantial resources towards greening its economy would be a great path forward. In the process, they can also give a big hand to the rest of the world, both by sharing the technology and showing how it can be done, as well as reducing the damage they are doing to the planet themselves.”

Source: Baker, D. (2021). CEPR. Combatting Global Warming: The Solution to China’s Demographic “Crisis”.

Click here to read the full article.

How does economic growth depend upon the nature of bureaucracy and the effectiveness of institutions in a nation?

Historically and empirically speaking, the two are often, if not always very strongly correlated.  Besides, evidence gathered by historians and political scientists also fuels the idea that establishing an effective bureaucracy has been vital to the development of modern nation-states, particularly around functions such as national defence.

In their column for VoxEU, economists Tim Besley, Robin Burgess, Adnan Khan, Jonathan Old and Guo Xu present a review of the literature to broaden the discussion on the role that political institutions play in economic progress. They study parameters like the use of incentives in improving performance, selection criteria used in recruitment, relationships between the politicians and bureaucrats, and the role of non state actors like civil society organisations and NGOs in this column.

Finally, they suggest the following three methods to transition from a micro perspective to a much broader one to study this aspect. a transition from the study of microeconomic phenomena towards understanding larger, more complex mechanisms is an important next step to fully grasp how effective bureaucracies support development.

• “First, gathering economy-wide micro-data to evaluate system-wide reforms would enable researchers to better study structural transformations.
• Second, understanding how politics and the bureaucracy interact to generate state capacity has largely been ignored, but seems important given the unavoidable interactions and interdependencies between the two.
• Third, the examples of structural transformation in China and East Asia show that studying the relationship between the private sector and bureaucracy requires closer attention. Whether bureaucracies can innovate and adapt to future challenges will have important economic implications”.

Click here to read the full article.

Source: VoxEU

In a recent paper, economists Choi and Levchenko (2021) study firm-level industrial policy measures in South Korea in the 1970s to examine their impact on the South Korean economy.

“South Korea’s experience with industrial policy is important to understand, as it is one of the ‘growth miracle’ economies of the post-war era, known for its rapid transformation from a commodity and light manufacturing producer to a heavy manufacturing powerhouse. It has been argued that industrial policy played a central role in this transformation, with the temporary subsidies having had a large and statistically significant effect on firm sales as long as 30 years after they ended.”

The authors conclude that South Korea’s activist industrial policy appears to have succeeded even after taking into account its fiscal costs and general equilibrium effects. However, they also add a word of caution with this encouragement, that today’s policymakers face the same challenge as policymakers in the past: to identify conditions – such as dynamic productivity effects or externalities – under which activist industrial policy is welfare-improving. 

Click here to read the full article.

“Today, wherever people live, they don’t have to look far to confront inequalities. Inequality in its various forms is an issue that will define our time.“

As the United Nations puts it, inequality of income, opportunity, and a variety of other factors is among matters of utmost importance to governments, multilateral institutions, and people at large today. Modern-day discussions on the theme seek to understand inequality by analyzing it through multiple lenses, discussing conflicting opinions, and contrasting approaches to tackle it.

In one such discussion presented underneath, economists David Green of the University of British Columbia and Parikshit Ghosh of Delhi School of Economics deliberate on factors influencing the state of inequality today such as trade and globalization, the gradual ideological shift to the ‘right’, changing nature of work – the role of technological advancements, hierarchies created by higher education, and ‘rents’ rather than returns to skill, and the new role of social protection that goes beyond income support.

The entire video can be accessed here.

On the other hand in their latest blog economists, Rohini Pande and Nils Enevoldsen discuss the salience of redistribution policies in poverty and inequality eradication. They contend that country-level catch-up in incomes will not be sufficient to eradicate extreme poverty, as the blessings of this ‘growth’ are not reaching the poor. Inclusive prosperity requires a political solution – redistribution.

Click here to read the full blog.