The Unassuming Economist

Excerpts from a column by Professors Martin Ravallion (Georgetown University) and Shaohua Chen (Xiamen University) for Vox EU CEPR.

Ravallion and Chen’s newest paper (2021) highlights some theoretical arguments about potential trade-offs between reducing income polarisation and other valued goals, including poverty reduction, discussions on which are contained in their column for Vox EU CEPR.

“China’s well-documented success in reducing absolute poverty came, of course, with a rising share of its population living above official poverty lines (Chen and Ravallion 2021). Many of those who escaped absolute poverty joined China’s middle-class. Naturally, what this means depends on the setting. The prevailing definition of a middle-income group can be expected to change over time with rising living standards; what was considered a middle income in the China of the 1980s is clearly not the same today. “Fleshing out the olive” can be interpreted as reducing the spread of incomes relative to the current median, which may provide a more relevant reference point than a fixed absolute level of real income. 

This perspective suggests that the concept of polarisation as found in economics is relevant to monitoring China’s performance in “fleshing out the olive” and identifying potential trade-offs against other goals. And there is a measure available in the literature, namely the Foster-Wolfson (FW) polarisation index (Foster and Wolfson 2010). The greater the spread of incomes relative to the median (in either direction), the higher the FW index. What trade-offs might be found between this concept of polarisation and other goals for the distribution of income? And what does the time-series evidence suggest?”

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In a recent column for Social Europe, a public policy discussion and publication platform, and the IPS-Journal, the reputed development economist Dr. Jayati Ghosh writes about finding a blueprint for an economy that serves the public rather than the other way around.

“Feminist economists have long argued that the purpose of an economy is to support the survival and flourishing of life, in all its forms. This may seem obvious but it turns on its head the prevailing view, which implicitly assumes the opposite causation: the economy runs according to its own laws, which must be respected by mere human actors. In this market-fundamentalist perspective, it is a potential angry god which can deliver prosperity or devastation and must be placated through all sorts of measures—including sacrifices made in its name. “ 

Ghosh, J. (2021). The feminist building blocks of a sustainable, just economy. Social Europe.

Taking a cue from UN Women’s report titled, Feminist Plan for Sustainability and Social Justice, she writes about expanding the purview of economic valuation to include unpaid care work and environmental costs in it, the need for gender-sensitive institutions, regulations, and policies, and a boost to public investment.

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In a recent working paper of the Bank of England (2021), authors Jonathan Bridges, Georgina Green, and Mark Joy evaluate a panel dataset of 26 developed nations over 5 decades preceding the Covid-19 pandemic to show that inequality rises following recessions, and rapid credit growth in the time until downturn exacerbates that effect. This growth, whether financial or normal in nature, increases unemployment and inequality effects. They observe that “one standard deviation credit boom leads to a 40% amplification of the distributional fallout in the bust that follows”.

Moreover, “low bank capital ahead of a downturn amplifies the inequality increase that follows. These insights add a new dimension to policy cost-benefit analysis, at the distributional level.” The paper’s results indicate that a 55% amplification in the cyclical response of income inequality to a recession if a country enters the recession with bank capital ratios one standard deviation lower than average. The authors note that using the tools established in new macroprudential norms empower economies to safeguard their financial stability using both borrower and lender resilience, but can also lead to distributional costs in the event of an untamed crisis.

“Taken together, these results suggest an important link between credit, crises, and inequality. They demonstrate that tail events for the macroeconomy also represent distributional shocks.” Vulnerabilities like the rapid accumulation of debt, weakening of bank capital, and an increased risk of recession transforming into a full-fledged financial crisis can all contribute to distributional effects and rising inequalities when a crisis actually strikes. While the use of macroprudential policies to address these vulnerabilities has both, associated costs and benefits, entirely avoiding the usage of these policies entirely can lead to severe macroeconomic and distributional ill effects.

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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”.

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