The Unassuming Economist

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.”

On cross-country:

• What happened to global house prices in 2021? – Knight Frank
• Demographia International Housing Affordability 2022 – Demographia

On the US:    

• The impact of Treasury’s pilot program on stemming the tide of dirty money into US real estate – Brookings  
• Early signs of Russian pullback in real estate – Axios
• The Threat of Environmental Hazards to the Rental Stock – Harvard Joint Center for Housing Studies
• Home mortgage and insurance systems encourage development in climate-risky places, and we all pay the price – Brookings
• U.S. Housing Wealth Skewed Even More Toward Affluent Over Past Decade. From 2010 to 2020, about 71% of increase in housing wealth was gained by high-income households, says National Association of Realtors report – Wall Street Journal
• Stagflation Is Already Here in the Housing Market. Soaring prices and low inventory are causing headaches for homebuilders and buyers but benefiting owners — and therein lies the Fed’s predicament as it seeks to lower inflation. – Bloomberg  

On China

• China’s Banking Regulator Welcomes Home Price Adjustments. Guo says current moves are good as long as not too volatile. Home prices have fallen for five months amid industry crisis – Bloomberg
• Shanghai homebuyers looking to capitalise on eased credit policies have to act fast amid expectations of price rise. Eased credit has prompted potential homebuyers to actively chase flats, property agent says. Average price of secondary homes sold last month was 0.5 per cent higher than in January, and 8.5 per cent higher year on year – South China Morning Post

On other countries:  

• [Norway] Coming of Age: Renovation Premiums in Housing Markets – SSRN
• [Singapore] Pricey Singapore rents go through the roof even as population dips – Reuters
• [United Kingdom] Help to Buy’s legacy: higher prices and richer builders. Now is a good time to pick over the bones of the UK government’s controversial equity loan scheme – FT
• [United Kingdom] Goodbye Londongrad: Russian Oligarchs Put Pressure on U.K. Property Market. Russian oligarchs stormed London’s high-end property market. Now they are under pressure and so is the city’s real-estate sector. – Wall Street Journal
• [United Kingdom] Cost versus availability of loans: which matters more for mortgagors? – Bank of England

From a new paper by Deniz Igan, Emanuel Kohlscheen and Phurichai Rungcharoenkitkul:

“House prices rose strongly in advanced economies during the pandemic, breaking with typical post-recession patterns. These developments support domestic demand in the short term but carry risks to the outlook if they reverse. Rapid economic recovery, fiscal support and high saving rates amid negative real interest rates explain part of the strong housing demand. Pandemic-induced demand for space, structural supply constraints and increased demand from investors provide additional support for house prices. The monetary policy response to inflationary pressures will be a relevant factor when assessing housing market risks. Moderate increases in interest rates could help forestall speculative demand.”

Source: Ideas for India

In a recent column for the Ideas for India blog, development economist Jean Dreze writes about the perils of experimental policymaking. While data-based policy design is quite the rage now with randomized control trials (RCTs) being used to gather evidence on “what works” and then scaling up whatever does, Dreze writes how a more comprehensive approach to policymaking would be one where insights from data are interspersed with a sound mix of understanding the issues, value judgments, and deliberation on inclusivity.

He makes a case for this argument by discussing an experiment conducted in the Indian state of Bihar during 2012-13 to study a new financial management system in the Mahatma Gandhi National Rural Employment Guarantee Act (Banerjee, Duflo, Imbert, Mathew, and Pande (2020). From delivering counter-productive results in the form of reducing, not enhancing, the baseline expenditure on this scheme to delays in workers’ payments and the lack of significant differences between outputs of the treatment and control groups, this article draws attention to the challenges associated with hasty rollouts of interventions and subsequent conclusions based on them without negating the learnings. It concludes with some best practices for engaging with governments, conducting experiments at scale, and ensuring that the “do no harm” principle of RCTs stays put.

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.”