The Unassuming Economist

From Dani Rodrik’s weblog:

“We launched today a new initiative for academic economists that we hope will make the discipline of Economics more relevant to today’s pressing policy problems. The initiative consists of a network called Economics for Inclusive Prosperity (EfIP) with an initial set of 10 policy briefs. The briefs open with an introductory statement of our philosophy and go on to specific policy recommendations for finance, trade, labor markets, social policy, technology policy, and political institutions. The network is co-directed by Suresh Naidu, Gabriel Zucman, and me, and has 11 additional founding members. We hope to expand the group and we will add more policy briefs in the months ahead.

As we state in our introduction, we believe

mainstream economics – the kind of economics that is practiced in the leading academic centers of the country – is indispensable for generating useful policy ideas. Much of this work is already being done. In our daily grind as professional economists, we see a lot of policy ideas being discussed in seminar rooms, policy forums, and social media. There is considerable ferment in economics that is often not visible to outsiders. At the same time, the sociology of the profession – career incentives, norms, socialization patterns – often mitigates against adequate engagement with the world of policy, especially on the part of younger academic economists.

The problem is compounded by the lousy reputation Economics has acquired among proponents of an inclusive economy. Too often the discipline is viewed as the source of the policies that have produced the excesses and fragilities of our time. Mainstream economics and neoliberalism are viewed as one and the same.

We beg to differ:

Many of the dominant policy ideas of the last few decades are supported neither by sound economics nor by good evidence. Neoliberalism – or market fundamentalism, market fetishism, etc. — is a perversion of mainstream economics, rather than an application thereof. And contemporary economics research is rife with new ideas for creating a more inclusive society. But it is up to us economists to convince their audience about the merits of these claims.”

From a new IMF working paper by Shekhar Aiyar and Christian Ebeke:

“We posit that the relationship between income inequality and economic growth is mediated by the level of equality of opportunity, which we identify with intergenerational mobility. In economies characterized by intergenerational rigidities, an increase in income inequality has persistent effects—for example by hindering human capital accumulation—thereby retarding future growth disproportionately. We use several recently developed internationally comparable measures of intergenerational mobility to confirm that the negative impact of income inequality on growth is higher the lower is intergenerational mobility. Our results suggest that omitting intergenerational mobility leads to misspecification, shedding light on why the empirical literature on income inequality and growth has been so inconclusive.”

 

From a new VOXEU post:

“Figure 1 shows the evolution of various worker outcomes – the employment probability, the number of hours worked, and total earnings and transfers – around the time of STW treatment and compares workers who receive STW treatment (in blue) with two groups of similar workers who do not receive treatment. The workers in the grey square series are of particular interest – they are workers, similar to our treated group, but in firms who cannot access STW programmes, and who are laid-off. The figure shows that two years after STW treatment, there are no significant differences in the employment probability, earnings, and total income of workers who were treated by STW and workers who were laid-off. In other words, STW does not seem to provide any significant insurance to workers in the medium or long run.

How can we explain the very temporary nature of the impact of STW? The first answer lies in the selection of firms into these programmes. In the Italian context, firms that were at the bottom of the productivity distribution before the recession are three times more likely than higher-productivity firms to take up STW during the recession and employment effects for them are significantly smaller. These results are confirmed in the French context by Cahuc et al. (2018). This clearly suggests that STW predominantly targets firms that have permanently lower productivity and helps explain why keeping workers in these firms does not entail significant long-term benefits. More importantly, it suggests that, by preventing workers from moving from low- to high-productivity firms during recessions, STW may have significant negative reallocation effects in the labour market. Leveraging the rich spatial variation available in Italy across more than 600 local labour markets, we can estimate how an increase in the fraction of workers treated by STW in a local labour market affects employment outcomes of non-treated firms. Our results provide evidence of the presence of equilibrium effects of STW within labour markets. STW significantly decreases the employment growth and inflow rates of non-treated firms, and has a significant (although small) negative impact on TFP growth in the labour market.

Another reason that may explain the absence of long-term employment effects of STW in the Italian context is the nature of the Italian recession, which was long and protracted. It is likely that when a shock is more temporary, the effects of STW will be larger and will last longer, as the desire for labour hoarding is much greater for temporary shocks, especially when the cost of replacing or training workers is high.”

From a new IMF Staff Discussion Note on Sustainable Development Goals:

“In September 2015, world leaders gathered at the United Nations endorsed the 17 Sustainable Development Goals (SDGs) as a road map to more inclusive growth and development that respects the limits of nature. In this Staff Discussion Note we focus on investment in human, social, and physical capital, which are at the core of sustainable and inclusive growth and represent an important share of national budgets—specifically, education, health, roads, electricity, and water and sanitation.

The goal of this paper is to estimate the additional annual spending required for meaningful progress on the SDGs in these areas. Our estimates refer to additional spending in 2030, relative to a baseline of current spending to GDP in these sectors. Toward this end, we apply an innovative costing methodology to a sample of 155 countries: 49 low-income developing countries, 72 emerging market economies, and 34 advanced economies. And we refine the analysis with five country studies: Benin, Guatemala, Indonesia, Rwanda, and Vietnam.

Our main finding is that delivering on the SDG agenda will require additional spending in 2030 of US$0.5 trillion for low-income developing countries and US$2.1 trillion for emerging market economies.

There is a sharp contrast between the two groups. For emerging market economies, the average additional spending required represents about 4 percentage points of GDP. This is a considerable challenge, but in most cases these economies can rely on their own resources to achieve these SDGs. How it can be done is illustrated by the country study for Indonesia.

The challenge is much greater for low-income developing countries. Here, the average additional spending represents 15 percentage points of GDP. Some countries in this group—such as Vietnam—have additional spending needs similar to those of Indonesia and other emerging market economies. But others, including Rwanda and Benin, will require additional spending of more than 15 percentage points of GDP in 2030.

Countries themselves own the responsibility for achieving the SDGs, especially through reforms to foster sustainable and inclusive growth that will in turn generate the tax revenue needed. Efforts should focus on strengthening macroeconomic management, combating corruption and improving governance, strengthening transparency and accountability, and fostering enabling business environments.

Raising more domestic revenue is an essential component of this strategy. Increasing the tax-to-GDP ratio by 5 percentage points of GDP in the next decade is an ambitious but reasonable target in many countries.

Addressing spending inefficiencies is also critical—countries need to spend not only more, but better. We estimate that countries could save about as much through efficiency efforts as through tax reforms.

But in addition to domestic resources, the scale of the additional spending needs in low-income developing countries requires support from all stakeholders—including the private sector, donors, philanthropists, and international financial institutions. Delivering on official development assistance targets can help in closing development gaps in many LIDCs. A national reform agenda that maps the SDGs to national circumstances should articulate the complementary role of the various development partners.”

From a new IMF Staff Discussion Notes on youth employment:

“Economic development and growth depend on a country’s young people. With most of their working life ahead of them they make up about a third of the working-age population in the typical emerging market and developing economy. But the youth in these economies face a daunting labor market—about 20 percent of them are neither employed, in school, nor in training (the youth inactivity rate). This is double the share in the average advanced economy. Were nothing else to change, bringing youth inactivity in these economies down to what it is in advanced economies and getting those inactive young people into new jobs would have a striking effect. The working-age employment rate in the average emerging market and developing economy would rise more than 3 percentage points, and real output would get a 5 percent boost.

• A two-pronged strategy focused on better learning opportunities and improved job prospects for young people is needed. Secondary and postsecondary schooling has doubled over the past 25 years in the average emerging market and developing economy, which is impressive. But it will take further improvements in education and learning opportunities to close the gap with advanced economies, respond to technology-driven changes in the nature of work, and cope with aging populations. At the same time, young people who are not in school need help so they can find their place in the labor market. This discussion note draws on new analyses that use macro- and microeconomic data to look at how broad structural policies, including labor and product market reforms, can address challenges in the youth labor market.
• Poor labor market outcomes for youth can be traced in part to large and persistent gender gaps. Young women’s inactivity rate, at about 30 percent in the average emerging market and developing economy, is almost twice that of young men. Some of this can be explained by the effects of marriage and children on young women’s employment prospects. The right policies can make a difference. For example, when women receive equal employment protection under the law, the gender gap in employment and participation is smaller; women’s outcomes are better without men’s outcomes being worse—for workers of all ages.
• In areas that are more vulnerable to automation fewer young men—and to a lesser extent, older men—participate or are employed. As technology makes it easier to substitute capital for labor, men may contend with a tougher labor market. Targeted expansion in the social safety net, enhanced general education, and active labor market policies may help the young better cope with such disruptions.
• Aggregate youth unemployment in all economies is twice as sensitive to overall demand as adults’, underscoring how countercyclical macroeconomic policy can help protect young people from economic fluctuations. As emerging market and developing economies continue to develop and formal employment—which is more sensitive to the business cycle—rises, prompt countercyclical policy will be imperative.
• Everyone in emerging market and developing economies seems to benefit from broad policies that enhance the flexibility of the formal labor market and improve job quality—there is no trade-off between youth and adults’ job prospects, even though young people tend to benefit more. Lower business start-up costs, more openness to trade, and encouraging greater competition and entrepreneurship also point to better youth outcomes. These findings are consistent with the very strong positive correlation between youth and adult employment across emerging market and developing economies. Broad structural reforms should therefore be part of the toolkit, alongside more targeted improvements in education and active labor market policies.”

Continue reading here.