The Unassuming Economist

A new IMF paper by Djeneba Doumbia and Tidiane Kinda:

“Can a government reduce income inequality by changing the composition of public spending while keeping the total level of expenditure fixed? Using newly assembled data on spending composition for 83 countries across all income groups, this paper shows that reallocating spending toward social protection and infrastructure is associated with reduced income inequality, particularly when it is financed through cuts in defense spending. However, the political and security situation matters. The analysis does not find evidence that lowering defense spending to finance infrastructure and social outlays improves income distribution in countries with weak institutions and at higher risk of conflict. Reallocating social protection and infrastructure spending towards other types of spending tends to increase income inequality. Accounting for the long-term impact of health spending, and particularly education spending, helps to better capture the equalizing effects of these expenditures. The paper includes a discussion of the implications of the findings for Indonesia, a major emerging market where income inequality is at the center of policy issues”

From VOX post by Eduardo Levy Yeyati, Martín Montané, and Luca Sartorio:

“Governments around the world spend a large portion of their budgets on active labour market policies aimed at improving access to new jobs and higher wages. This column presents the first systematic review of 102 experimental interventions comprising a total of 652 estimated impacts. It finds that programmes are more likely to yield positive results when GDP growth is higher and unemployment lower, and that programmes aimed at building human capital show significant positive impact.”

Continue reading here.

From a VoxEU post by Rabah Arezki:

“Algeria’s recent victory in the Africa Cup of Nations has united a country whose development model has frustrated its young and educated workforce. This column offers four lessons for economic development from the national football team’s success: on the role of competition and market forces, mobilising talent, the role of managers, and the importance of referees (i.e. regulation). 

On 19 July, Algeria won the 2019 edition of the Africa Cup of Nations. The victory was the culmination of a strongly contested international football tournament with 24 teams where we saw the best of competition, talent, and refereeing on the continent. Algeria’s consecration comes amid sweeping political transformation triggered by massive demonstrations in the past few months, in turn driven by youths asking for radical change. This has united Algerians and emboldened the national team. This can-do spirit and renewed momentum are likely to be key ingredients for delivering big reforms.

On the economic front, Algeria’s development model has frustrated an educated young and increasingly female labour force aspiring to economic empowerment beyond subsidies and public jobs. The model is essentially stuck in the transition from an administrated economy to a market economy. Moreover, decades of state domination with episodes of liberalisation have yielded crony capitalism, further distancing the population from appreciating the power of harnessing markets for development.

In Algeria, as in many countries, football has triggered passions capturing dreams of greatness and unifying nations. Football can offer four lessons for economic development in Algeria, which is looking to revamp its economic model (see also Kuper and Szymanski 2009 and Palacios-Huerta 2014).

The first lesson is on the role of competition and the power of market forces. In too many sectors in Algeria, prices are controlled and state or private monopolies are the rule, stifling the space for talented Algerians to transform their economy and deterring foreign investment. This is unsustainable considering the shrinking rents coming from oil and gas ever since oil prices collapsed in 2014. Football illustrates how market mechanisms are an important filter for detecting and rewarding talent based on performance and for moving away from favouritism. Without free entry and failure, as in football, economic dynamism and momentum rapidly come to a halt.”

Continue reading here.

A new IMF working paper, by authors Niels-Jakob Hansen, Joannes Mongardini and Fan Zhang, discusses the labor market slack and outgap through the Korean experience :

“Output gap estimates are widely used to inform macroeconomic policy decisions, including in Korea. The main determinant of these estimates is the measure of labor market slack. The traditional measure of unemployment in Korea yields an incomplete estimate of labor market slack, given that many workers prefer involuntary part-time jobs or leaving the labor force rather than registering as unemployed. This paper discusses a way in which the measure of unemployment can be broadened to yield a more accurate measure of labor market slack. This broader measure is then used to estimate the output gap using a multivariate filter, yielding a more meaningful measure of the output gap.”

A new paper by authors Werner Eichhorst, Arne L. Kalleberg, André Portela de Souza and Jelle Visse discusses on how to design sustainable labor market institutions:

“Demographic shifts, technological innovation, institutional reforms and global economic integration affect the way people work. Technological innovations have a major impact on occupations and industries, changing the ways economies in different world regions, in both developed and developing countries, work along with new division of labour that are facilitated by global economic integration. This paper is based on the joint work within the International Panel on Social Progress. It highlights three main areas of attention: a) skill formation, d) the challenges to collective bargaining, and e) social protection and labour market policies. Based on an assessment of the existing evidence, the paper suggests some policy principles and concrete policy options that might further those objectives, not ignoring some tensions that might exist between flexibility and security in the different labour markets. The ultimate direction of reforms in line with an idea of social progress lies in institutional arrangements that facilitate the reconciliation of flexibility and productivity with access to decent jobs and social protection. We argue that distinct policy options are available that can be implemented more globally in order to achieve these goals simultaneously”