The Unassuming Economist

A new IMF working paper by Rabah Arezki, Christian Bogmans, and Harris Selod provides “both theoretical and empirical evidence of farmland globalization whereby international investors directly acquire large tracts of agricultural land in other countries. A theoretical framework explains the geography of farmland acquisitions as a function of cross-country differences in technology, endowments, trade costs, and land governance. An empirical test of the model using global data on transnational deals shows that international farmland investments are on the aggregate likely motivated by re-exports to investor countries rather than to world markets. This contrasts with traditional foreign direct investment patterns where horizontal as opposed to vertical FDI dominates.”

From the World Economic Outlook Update, July 2018:

“Global growth is projected to reach 3.9 percent in 2018 and 2019, in line with the forecast of the April 2018 World Economic Outlook (WEO), but the expansion is becoming less even, and risks to the outlook are mounting. The rate of expansion appears to have peaked in some major economies and growth has become less synchronized. In the United States, near-term momentum is strengthening in line with the April WEO forecast, and the US dollar has appreciated by around 5 percent in recent weeks. Growth projections have been revised down for the euro area, Japan, and the United Kingdom, reflecting negative surprises to activity in early 2018. Among emerging market and developing economies, growth prospects are also becoming more uneven, amid rising oil prices, higher yields in the United States, escalating trade tensions, and market pressures on the currencies of some economies with weaker fundamentals. Growth projections have been revised down for Argentina, Brazil, and India, while the outlook for some oil exporters has strengthened.

The balance of risks has shifted further to the downside, including in the short term. The recently announced and anticipated tariff increases by the United States and retaliatory measures by trading partners have increased the likelihood of escalating and sustained trade actions. These could derail the recovery and depress medium-term growth prospects, both through their direct impact on resource allocation and productivity and by raising uncertainty and taking a toll on investment. Financial market conditions remain accommodative for advanced economies—with compressed spreads, stretched valuations in some markets, and low volatility—but this could change rapidly. Possible triggers include rising trade tensions and conflicts, geopolitical concerns, and mounting political uncertainty. Higher inflation readings in the United States,where unemployment is below 4 percent but markets are pricing in a much shallower path of interest rate increases than the one in the projections of the Federal Open Market Committee,could also lead to a sudden reassessment of fundamentals and risks by investors. Tighter financial conditions could potentially cause disruptive portfolio adjustments, sharp exchange rate movements, and further reductions in capital inflows to emerging markets, particularly those with weaker fundamentals or higher political risks.

Avoiding protectionist measures and finding a cooperative solution that promotes continued growth in goods and services trade remain essential to preserve the global expansion. Policies and reforms should aim at sustaining activity, raising medium-term growth, and enhancing its inclusiveness. But with reduced slack and downside risks mounting, many countries need to rebuild fiscal buffers to create policy space for the next downturn and strengthen financial resilience to an environment of possibly higher market volatility.”

From a new post by Tim Harford:

“Prof Rodrik has found evidence that unconditional convergence does happen, not for economies as a whole but for specific manufacturing sectors in those economies, such as “macaroni and noodles” or “knitted or crocheted apparel” or “plastic sacks and bags”.

If such a sector is well behind the global cutting edge, it can expect labour productivity to grow by 4-8 per cent a year, enough to double every decade or two. This tendency holds regardless of what else might be happening in the economy. Why?

The likely answer is that such manufacturing sectors get drawn into global supply chains. They can learn quickly, and must do so to respond to the incessant threat of competition. They will be doing business with suppliers and customers who can provide swift feedback and instruction. In the modern global economy, certain kinds of know-how travel fast, small tasks are unbundled, and part-finished goods and components shuttle back and forth across borders. Any enterprise plugged into this process will improve quickly. It may be more closely integrated into global supply chains than its own local economy, which might not keep up.

All of which brings us back to football. Two economists, Melanie Krause and Stefan Szymanski, decided to examine whether the unconditional convergence hypothesis holds for international men’s football, as it does for manufacturing sectors. (Prof Szymanski is the co-author, with the Financial Times’s Simon Kuper, of Soccernomics. (UK) (US)) Football, after all, offers a long data set and some clear measures of performance. International football’s governing body, Fifa, has more members than the UN.

Sure enough, Profs Krause and Szymanski found that the strength of international football teams is converging. The minnows are acquiring bite, and the old cliché, “there are no easy games in international football”, is far truer today than it was in 1950.

Perhaps we should not be surprised. As with manufacturing, the standard of competition is fierce, performance metrics unforgiving, and the very best ideas will be copied. As an additional spur to progress, elite football offers a global labour market: a strong player from a weak national team will spend most of his time at a top club side in the company of world-class dietitians, trainers, and teammates. His home nation will enjoy the benefits.

It is tempting to draw grand conclusions from all this, about the increasing importance of knowledge in globalisation; about the bracing effects of robust international competition; about the benefits of being open to international migrants. But perhaps it is better to just watch the football. In an age of distressing reality-TV politics, here, at least, is a competitive spectacle we can all enjoy.”

Continue reading here.

A new VOX column by Assaf Razin and Efraim Sadka argues that “Financial globalisation shifts the tax burden away from the mobile factor – i.e. domestic capital – to the immobile factor – i.e.  labour. However, the total tax burden becomes smaller, and consequently the provision of the social benefit is reduced. These results obtain regardless of which skill type form the majority. Naturally, the tax rates on capital and labour are higher when a low-skilled type form the majority than when the high-skilled type forms the majority. […] the welfare system, either under the high-skilled regime or under the low-skilled regime, acts as a device that compensates the loser at the expense of the winner in such a way that financial globalisation generates Pareto-improving changes.”

In my recent paper with Davide Furceri and Jonathan Ostry, we find that financial globalisation has led, “on average, to limited output gains while contributing to significant increases in inequality. Behind this average lies considerable heterogeneity according to country characteristics. Liberalization increases output in countries with high financial depth and that avoid financial crises (and vice-versa), but distributional effects are more pronounced in countries with low financial depth and inclusion, and whose liberalization is followed by a financial crisis.” My paper is available here.

A new IMF country report reviews the backdrop to the revamping of the inflation targeting framework in New Zealand. It says that “The Phase One of the Review of the Reserve Bank Act can be regarded as a next step in the gradual evolution of inflation targeting in New Zealand. The new PTA, with its qualitative description of the employment objective, can be regarded as a refinement in the current practice of inflation targeting. The flexible inflation targeting regime was successful in terms of stabilizing output and inflation while maintaining price stability. Recent episodes of inflation undershooting the target serve as an example of uncertainty on the real-time assessment of slack in the economy. The explicit dual mandate will require some changes in the communication of the central bank, including on maximum sustainable employment.”