The Unassuming Economist

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.

” Children’s experiences during early childhood are critical for their cognitive and socio-emotional development, two key dimensions of human capital. However, children from low-income backgrounds often grow up lacking stimulation and basic investments, leading to developmental deficits that are difficult, if not impossible, to reverse later in life without intervention. The existence of these deficits are a key driver of inequality and contribute to the intergenerational transmission of poverty.”

This paper by Attanasio, Cattan, and Meghir for the NBER (2021), discusses models of parental investments and early childhood development and uses them as an organizing tool to review some of the empirical evidence on early childhood research. Among other things, results demonstrate that addressing development deficits doesn’t always have to be a costly policy affair. Incorporating conversations, playtimes, and reading into the pedagogy does wonders for cognitive development. Policies that are designed to target development delays must ensure scalability even in terms of cultural acceptability of interventions, rather than just cost minimization. 

Click here to read the full paper.

Who pays when minimum wage hikes come through the drawn-out demand-supply legislative processes?

This is precisely the question taken up by researchers Christopher Esposito of the University of Chicago and Edward Leamer and Jerry Nickelsburg of UCLA in an interesting working paper series. Drawing on a unique set of mandated wage hikes in the Los Angeles area, they present evidence that minimum wage changes led area restaurants to raise prices, change menu items, obtain lower rents in the high wage areas and, in some cases, caused eateries to shut down.

Results from the paper suggest that policymakers face an important dilemma when designing minimum wage policies to redistribute income while minimizing job loss. So, on one hand, restaurants in high-income neighborhoods studied by the authors passed on the full incidence of the minimum wage differential to their customers suggesting that minimum wages should be set relative to local income levels. The price passthrough channel for income redistribution is optimized when minimum wages are set uniquely for fine-grained spatial units, such as neighborhoods, within which the elasticity of demand for restaurant meals is homogenous. However, on the other hand, their findings also indicate that customers’ demand for restaurant meals can spill across jurisdictional borders with different minimum wages. Therefore, different minimum wages across fine-grained spatial units have the potential to move customer demand, jobs, and tax revenue out of jurisdictions that enact higher minimum wages. A universal minimum wage increase is not sensitive to this heterogeneity in the elasticity of demand, while minimum wage increases enacted at the neighborhood scale may cause restaurants to relocate out of higher-wage areas. The optimal spatial scale for setting minimum wages must balance these two offsetting forces.

In addition to these policy considerations, the study also raises the possibility that some of the incidence of minimum wage increases falls on landlords. The theoretical model predicts that land rents in regions subject to larger minimum wages will decrease, particularly at locations close to areas with lower minimum wages. This proposition is further strengthened because restaurant properties have specific use characteristics which are costly to change.

Click here to read the full explainer article/ full paper.

Source: Esposito et al. (2021). NBER. Who Paid Los Angeles’ Minimum Wage? A Side-by-Side Minimum Wage Experiment in Los Angeles County.