The Unassuming Economist

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.

Forging new paths to action for the Sustainable Development Goals

The Centre for Sustainable Development at The Brookings Institution and The Rockefeller Foundation convened the fourth annual 17 Rooms global flagship process to augment action, insight and community initiatives across the realm of the 17 sustainable development goals (SDGs). 17 working groups or “rooms” were developed, one per SDG, and leaders came together to advance action on each goal while also expanding opportunities to cooperate across goals.

Several themes were discussed and deliberated upon, some of which are as follows.

• Digital Public Goods: Discussions involved themes like the use of digital cash transfer systems to respond to emergencies, preempt disasters, broaden inclusion and reduce poverty, use of DPGs for gathering public health data, the need to educate communities, etc.
• Climate Change: This room discussed the role of leveraging societies’ dependency on the nature to catalyze large scale investments into preserving natural ecosystems, the need for new financing methods, etc.
• Support to Local Communities and Women’s Empowerment: This room discussed the dire need for international actors need to embrace existing local models and update legacy funding structures, focus on financial transparency, etc.
• Justice and Equity: The focus here was on promoting intergenerational learning teams, network for women leaders, community best practices in education, leadership and innovation, etc.
• Private Capital and Businesses: This room concentrated its attention at new tools, metrics, data systems, and reporting requirements that can help drive better alignment between private sector incentives and SDG outcomes.

Besides, several rooms also called for reframing the SDG ambitions, reflecting a desire for ongoing improvement in how the SDGs can promote human dignity, opportunity, and co-benefits across Goals.

Click here to read the full report.