The Unassuming Economist

From Noahpinion:

“Some people are going to see this post as premature. Though the Ukrainians have turned the tide against the Russian invaders, the outcome is still in doubt, and much destruction still lies in the future. But at this point it seems likely that a country called Ukraine will survive this conflict, with most or all of the territory it possessed before Putin invaded. So it’s time to start thinking about reconstruction and growth after the war’s end.

Certainly after the shooting stops, the first order of business — and the task of several years — will be to rebuild the parts of the country torn down by Putin’s assault. Cities like Mariupol and Kharkiv are being reduced to rubble, much of the country’s infrastructure is being torn up, and about a quarter of the entire population has been displaced. It took Japan and Germany both slightly over a decade after the end of WW2 to reach the level of income they had enjoyed before the war. Ukraine hopefully won’t be in quite such bad shape after this conflict, but this isn’t going to be the kind of thing a country bounces back from in 1 or 2 years.

Ukrainians will work very hard to rebuild their country, but they’re going to need help. And given the U.S. and Europe’s copious military assistance, it seems likely that they’ll offer rebuilding assistance as well. In fact, the EU has just started setting up a postwar reconstruction fund, and the U.S. has already spent $13 billion helping the Ukrainians. Both the U.S. and EU leadership know that they can’t afford to have a weak, economically backward Ukraine as the first line of defense against a newly malevolent Russia, and the Ukrainians’ cause has resonated deeply with the U.S. and EU populations alike. So expect copious economic aid to flow for at least a decade.

But aid alone doesn’t build a country into an economic powerhouse. We Americans tend to think that the Marshall Plan was how Germany rebuilt its economy after WW2, but in fact this only provided a small initial kick — most of West Germany’s economic rise in the mid and late 20th century happened via its own investment and industrialization, helped by favorable trade treaties with allied countries. Ditto for Japan.

And Ukraine really needs to build itself into an economic powerhouse. Russia has four times Ukraine’s population; having a higher GDP than a sanctions-stricken postwar Russia would help Ukraine even up the balance of power a bit. Remember that before the war, Ukraine’s economy had languished for three decades, with living standards well below those of Poland, Russia, or even Belarus:”

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From Econbrowser:

From EconoFact:

“The Issue:

Over the past four decades, less-educated workers, particularly non-college men, have experienced an actual fall in their real earnings (that is, after adjusting for inflation). An important reason for this decline in the earnings among low-income workers is the shifting structure of occupations, with a hollowing-out of what had been middle-income jobs. This is especially true in urban and metropolitan areas, places where there had been good job opportunities for those without a college education but, increasingly, the jobs available to those with a high school education in these places are in low-paid occupations with little opportunity for upward mobility.

The Facts:

• Rising wage inequality is a well-documented characteristic of the U.S. labor market over the past 40 years; but such divergence in earnings was not a feature of the preceding decades. The post-World War II period can be divided into three eras with respect to the distribution of wages. The period from immediately after World War II until 1972 was a time when wages were rising evenly for people with all levels of education. In contrast, the period that began with the first oil shock in 1973 through the end of the 1970s saw inflation-adjusted earnings stagnate across the board. Subsequently, beginning in 1980 and continuing to the present there has been rising wage inequality, with wages rising robustly for the most educated and falling, in real terms, for the least educated. This is especially striking because the supply of highly-educated workers has increased while that of less-educated workers has declined; the share of hours worked by those without a college degree fell from 75 percent in 1963 to less than 40 percent in 2017 while over the same period the share of hours worked by those with a bachelor’s or post-college degree rose from less than 15 percent to more than 35 percent.

• An important source of these shifts in wages and hours is the hollowing out of middle-income jobs. While there are a range of reasons for the decline in wages and hours worked for those with less than a college education (including eroding union power, rising trade in manufacturing goods from low-labor-cost countries, and falling real values of minimum wages), an important reason that has not had as much attention is the decline in jobs that had provided middle-class wages for those with less than a college education. The shrinking share of these middle-income jobs appears as a “barbell effect” with the decline of middle-paid jobs contrasted by the rise in the employment share for both lower- and higher-paid jobs (see chart). Employment can be sorted into three broadly defined sets of occupations: those with typically low pay and education requirements that require little specialized skills or training (health aids and personal services, cleaning and security, and operators and laborers); middle-paid occupations that do not necessarily demand a four-year college degree but do require specialized skills (production workers, office/administrative workers, and sales workers); and high-paid occupations that typically require a four-year degree (technicians, professionals, and managers). In 1980, non-college workers were evenly split between low- and medium-paid occupations (at 42 percent and 43 percent, respectively) and the remaining one-seventh of workers without college degrees were in traditionally high-paid occupations. By 2016, the share of non-college educated workers in mid-pay occupations had fallen to 29 percent, with about 12 of the overall 14 percentage point decline representing a shift to the low-paid category and less than a 1.5 percentage point increase in the high-pay category. Over this same period, there was a more modest barbell effect for college-educated workers, with those in the mid-pay occupations declining from 27 to 20 percent, those in high-pay occupations rising from 57 to 61 percent, and those in low-paying occupations rising from 16 to 19 percent.

• There are technological, global and institutional reasons why this “barbell effect” was concentrated among workers in urban and metropolitan areas. In the 1950s and 1960s, workers in urban areas who did not have college degrees disproportionately held middle-education, middle-income, blue-collar production jobs and white-collar office, administrative and clerical jobs as compared to workers in suburban and rural areas. These jobs involved close collaboration with more highly-educated professional, managerial and technical workers who oversaw factories and offices. This collaboration benefited workers holding these middle-income jobs since their value to their companies was enhanced by high-education coworkers. But starting in the 1970s, the demand for mid-education urban workers declined due to rising automation in factories, greater use of computers and information technology in offices, and greater pressure from international trade. Workers without a college degree moved from middle-income occupations to those that traditionally require less education and offer lower wages – and because middle-income jobs for those without a college degree were more prevalent in urban and metropolitan areas, this had a proportionally bigger effect in those places. “

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Source: NBER Working Paper

Standard macroeconomic models that explain business cycles in the economy, like the real business cycle or Solow model, usually propound the existence of a momentary economy-wide equilibrium, a long-run steady-state equilibrium, and a unique convergent path to arrive at that steady-state equilibrium. However, in this paper for NBER, economists Tomohiro Hirano and Joseph Stiglitz demonstrate using the life cycle model with production a situation where multiple equilibria can exist. They suggest that this multiplicity of equilibria can give rise to “wobbly macro-dynamics”, i.e. a dynamic situation for the economy wherein it can bounce around infinitely without converging, all the time doing so in ways perfectly consistent with rational expectations. They further go on to add, “this wobbly macro-dynamics is driven by people’s beliefs or sentiments, and doesn’t even have regular periodicity”. “As a result, laissez-faire market economies can be plagued by repeated periods of instabilities, dynamic inefficiencies, and unemployment.”

From Tony Blair Institute for Global Change:

“Since the early 2010s, economists and policymakers have noted that several countries are stuck in what has come to be known as the “middle-income trap”. Three main explanations are posited:

1. Lack of structural transformation and weak industrial policies: the level of development of productive capacities, which includes the level of export sophistication, the change in their composition through comparative advantage and the state’s role in industrial upgrading.
2. Lack of human-capital development and innovation: the unsuccessful transition to innovation-based growth (from factor-based growth), notably due to lack of investment in research and development (R&D) and education.
3. Poor governance, weak institutions and an extractive political economy: the low quality of institutions and government effectiveness, and the role of political economy and political stability in explaining countries’ development paths.

While few countries have succeeded in their transition to the high-income level – based on gross national income (GNI) – including the East Asian “tiger economies” of South Korea, Taiwan, Hong Kong and Singapore, the development trajectory of several countries currently in the middle-income trap validates the explanations cited in the academic literature on the subject. In this paper, we highlight the development paths of successful countries like South Korea, and of middle-income countries that are in the trap or at risk of being trapped, such as Malaysia, Brazil, Tunisia, Morocco, Vietnam and Bangladesh.

There are three factors that have contributed to South Korea’s success: a well-planned and consistent government policy combined with effective implementation, conditional support to companies that ensured the reduction of the rent-seeking approach, and an effective channelling of public resources, together with an early transition towards innovation, including a focus on short-cycle technology-based sectors.

The experiences of Malaysia, Brazil, Tunisia, Morocco, Bangladesh and Vietnam highlight that economic growth is not enough to enable countries to move up the income ladder. It is essential to have a commitment to industrialisation, to strengthening the rule of law and to moving away from an extractive political economy, and this must be set against the backdrop of political stability and equality. In addition, the level of investment in both human-capital development and innovation is a significant variable in determining countries’ development paths and in explaining their middle-income trap.

Latin America – with the notable exception of Chile – has failed to make the transition from middle-income to high-income status. In this paper we take the example of Brazil which, in common with much of the region, had – in the 1960s – been predicted to achieve a level of growth that would ultimately have led to it reaching the high-income level. However, poor levels of investment, low take-up of tertiary education, political instability and high inflation have all conspired to leave Brazil mired in the middle-income trap for more than half a century.

Ghana and Kenya, both of which have the potential to become the dominant hubs in west and east Africa respectively, have witnessed relatively high economic growth over the past decade and have transitioned quite recently to the lower-middle-income status. Both countries have the capacity to become pre-eminent centres of innovation and to help drive growth and trade in neighbouring countries. However, their current growth is not geared towards economic transformation, and there are signs that both countries are at a high risk of remaining trapped at the middle-income level. Productivity in agriculture remains low and exports of goods are concentrated on natural resources (oil and gold in Ghana and unprocessed agricultural products in Kenya) with only a small number of technology-intensive products. Moreover, the level of human-capital development remains relatively low compared with other lower-middle-income countries such as Tunisia and Morocco. Services play an important role in both economies but most jobs are in low-productive service sectors such as wholesale and retail. The digital economy and other highly productive sectors such as financial services have significant potential for growth in both countries, given the emerging technology hubs in Accra and Nairobi, but they currently represent a small share of service exports and don’t create enough jobs fast enough.

It is essential for both countries to invest in industrialisation by focusing on agri-processing, manufacturing and high-value-added tradable services enabled by information and communications technology (ICT) and other innovations, following a consistent, pragmatic and visionary approach. For industrialisation to be successful, it is important for political leaders to consider it as a political project to transform the economy by building productive industries, rather than seeing it as a technocratic reform. This political project requires strong political coalitions, institutional capacity and alignment within government for effective implementation, areas where both Ghana and Kenya can significantly improve. In parallel, there is a need to improve critical enablers for industrialisation, including agriculture transformation, human-capital development, energy access and reliability, while ensuring macroeconomic stability and a business environment conducive to entrepreneurial activity.”