It has been a hectic few weeks in the Baltic. Sweden spent nearly seven days searching for a possible Russian submarine, NATO fighters were scrambled to intercept a Russian Ilyushin-20 surveillance aircraft and Estonia reported the abduction of a security official into Russia. This is on top of Cold War era harassment of the U.S. embassy in Moscow and recent cyberattacks in the United States. Following Russian activities in Ukraine, we have to ask if Russia is turning its machinations to the Baltic. Is the bear coming out of hibernation?What Is Russia Up To?
In a recent speech, Russian Foreign Ministry special representative for human rights, democracy and the rule of law Konstantin Dolgov said “The international community must decisively prevent the further gross restriction of the rights of the Russian-speaking population of the Baltic countries and the worsening of already alarmingly politicized Russophobia.”
This is reminiscent of President Putin’s remarks in the Kremlin on March 18: “We hoped that Russian citizens and Russian speakers in Ukraine, especially its southeast and Crimea, would live in a friendly, democratic and civilized state that would protect their rights in line with the norms of international law. However, this is not how the situation developed. Time and time again attempts were made to deprive Russians of their historical memory, even of their language and to subject them to forced assimilation.”
Why is Russia focusing so much of its foreign policy on ethnic Russians and Russian-speakers in neighboring states, risking further alienation and sanctions? An argument can be made that it is a diversionary tactic meant to distract from internal issues. Internal politics are a major factor in Russian foreign policy, but this may not be the whole story.A New Foreign Policy
The Kremlin’s foreign policy appears inspired in part by the work of Alexander Dugin, a Russian philosopher who has been described as a crazy ideologue, a modern Rasputin and, in a March 31 article in Foreign Affairs, as “Putin’s brain.” Dugin, a former chairman of the geopolitical section of the Duma’s advisory council on national security, professor at Moscow State University and head of the Russian Center for Conservative Studies, has been a staunch advocate of Russian expansionism and the fight against Western values. He referred to the struggle in Ukraine on March 7, a week and a half before Putin’s address to the Kremlin, as “a struggle for reunification of Slavic people.”
Dugin has been a strong opponent of Western political systems, offering instead a fourth political theory in opposition to liberalism, communism and fascism. He does not advocate a return to Soviet borders or alliances, but rather proposes a new concept. In his book The Fourth Political Theory, Dugin advocates a system of “large spaces” or “Regional Universalism” in which regions like Eurasia coalesce over centuries and unite politically, culturally, economically, socially and psychologically. His envisions a multipolar world where the solution to “the American Century” is “a global crusade against the U.S., the West, globalization and their political-ideological expression, liberalism.”Beyond Ukraine (and North Africa)
Dugin’s hopes for Russia are purely expansionist, and his vision is clear: “Our revolution will not stop in Western Ukraine. It must go further into Europe. We will begin the expansion of liberation (from American) ideology into Europe. It is the goal of full Eurasianism – Europe from Lisbon to Vladivostok. Great Eurasian Continental Empire.”
There is a great scene in the movie “Patton” in which the general’s portrayer, George C. Scott, beats back an attack by German General Rommel in North Africa and yells, "Rommel, you magnificent bastard, I read your book!" If the world wants to better understand Russia’s current and future intentions, perhaps we should take a look at Alexander Dugin.Authors
- Robert N. Hein
Hutchins Roundup: Spillover Effects of the Recovery Act, Liquidity Regulation's Impact on Bank Lending, and More
Recovery Act spending had substantial spillover effects
Bill Dupor and Peter McCrory of the Federal Reserve Bank of St. Louis find that fiscal stimulus spending had substantial spillover effects. Every $1 of American Recovery and Reinvestment Act spending in one part of a labor market increased labor income by $0.79 in that community and $.59 in the neighboring community. The authors estimate that the Recovery Act created jobs at a cost of $63,700 per job-year, substantially lower than previous studies suggest.Tighter liquidity regulation does not adversely impact bank lending
Ryan Banerjee of the Bank for International Settlements and Hitoshi Mio of the Bank of Japan conclude that tighter liquidity regulation on banks in the United Kingdom did not have a detrimental impact on either the price or quantity of lending from those banks to the non-financial sector. Furthermore, banks responded to the regulation primarily by adjusting the composition, rather than the overall size of their balance sheets. They conclude that the regulation “reduced the interconnectedness of the banking sector without affecting lending to the real economy.”Lump sum payments are more effective at delaying Social Security claims
Surveying 2,500 adults, Raimond Maurer, Ralph Rogalla, and Tatjana Schimetschek of Goethe University and Olivia Mitchell of the University of Pennsylvania find that people offered a lump sum payment, rather than an increase in monthly benefits, are more likely to defer claiming Social Security and continue working. They estimate that people would delay collecting benefits for six months if the lump sum were paid for taking benefits after age 62, and about nine months if the lump were paid for taking them only after reaching the full retirement age (67 for those born in 1960 or later.)Chart of the Week: School Bucks Speech of the Week: Threat of deflation is overstated, but ECB must remain “vigilant”
“The risk of deflation is limited. I find it difficult to accept the high probability of deflation (30%) published by the International Monetary Fund for the euro area. Our models come up with much lower figures. But we do need to be vigilant. A prolonged period of low inflation harbors the risk that an economic shock may trigger negative inflation. If you’re hovering close to zero and you experience a new shock, the risk of negative inflation is by no means negligible.” -- Peter Praet, Member of the Executive Board, European Central Bank
- Brendan Mochoruk
- David Wessel
In today’s world, global supply chains are a sexy topic. As a large manufacturer, you can be more competitive if you expand your firm to remote countries where it is cheaper to produce some of your inputs. Why not? Obviously firms aim to minimize costs.
But the world is more complicated than a cost function. Firms also want to be the best at what they do and serve their clients in the best possible way. At least, that is true for firms that want to survive.
Click to enlarge image
The network represents the links from the home countries of multinational corporations (MNCs) to the countries of their vertically linked foreign affiliates. The sizes of the nodes are proportional to the number of MNCs in the country (that own vertical subsidiaries abroad) and the thicknesses of the lines represent the number of vertical relationships between each pair of countries.
While we already knew that most of the FDI flows from rich to rich countries (what economists know as the Lucas Paradox) it is still striking to see this image. In particular two main empirical facts caught my attention.
First, rich countries often outsource to other rich countries. This suggests that the decision to outsource is not only a cost-related one; other variables are also driving this decision. Rich countries produce a lot of sophisticated goods that often require sophisticated inputs. Thus, firms must outsource to places that have the knowhow to provide such inputs.
Second, connections to and from poor countries are weak. There may be many reasons for this, such as inappropriate institutional frameworks, excessive regulation, among others. But in particular, it also says something about the productivity curse of these countries: by being marginalized from capital flows, they are also being marginalized from the diffusion of knowhow. The chicken and egg problem arises: firms in developing countries do not have the incentive to acquire knowhow for their foreign customers because there is no demand, which in turn happens because there is no proper knowhow to begin with. Lower costs are not enough to break the cycle.
In the era where many governments put their efforts into joining global supply chains, they must ask themselves what market failures have impeded them to do so and what else they can provide to their clients besides low costs.Authors
It looks as if labor markets in Latin America have not been following the economic news—literally! Economic activity has slowed markedly in the last three years, with some South American countries slipping into outright recession more recently. Yet, labor markets still appear remarkably strong, with unemployment rates, in particular, hovering at record-low levels in most countries (Figure 1). So, what is going on? Has the region discovered how to defy the law of gravity?
To analyze this apparent disconnect, we first scrutinize recent labor markets developments in more depth. We then assess to what extent these developments really deviate from historical patterns. Overall, we find that labor markets are not as strong as they appear, and their behavior can in fact be reconciled with the weakness in economic activity.
Some weakening beneath the surface
If we compare the evolution of labor market indicators in the first three quarters of 2014 with the average over 2011-13, we do find signs of weakening conditions across the region (Figure 2). Employment was still growing in 2014 in most countries (left panel), but generally at a softer pace than a few years ago (Uruguay stands out as having seen stronger employment growth more recently). In Brazil, job creation has stalled altogether.
Even the historically low unemployment rates disguise some softening in recent months (middle panel). Specifically, unemployment rates were on a downward path in most countries in the region during 2011-13. This year, though, the record has become more mixed. While unemployment rates have continued to decrease in a few countries (Colombia, Brazil, Mexico, and Peru, though generally at a slower pace), they have started to edge up in several others (Argentina, Chile, Costa Rica, Ecuador, and Uruguay).
To be sure, the recent weakening of labor market conditions does not necessarily imply that these markets already have slack. In most Latin American countries, unemployment remains well below the long-term average or typical estimates of the natural rate (i.e. the rate consistent with non-accelerating inflation). And while real wage growth is slowing in most countries, it is still firmly in positive territory (right panel).
Not that different from historical patterns
Once we found that labor market conditions are indeed weakening, the question is whether we should have expected even greater weakness given the extent of the current economic slowdown.
Our recent Regional Economic Outlook Update addresses this question for the case of Brazil, Chile, Colombia, Peru, Mexico, and Uruguay. We look at country-specific historical relationships between output and employment (a version of the so-called Okun’s Law), and find that employment growth in the four quarters through June 2014 was not stronger than expected for any of these countries (Figure 3, left panel). In fact, job creation fell significantly short of what economic activity would have predicted in some cases (Brazil and Mexico).
Notwithstanding the still low unemployment rates, the change in unemployment dynamics for particular countries over the last year can also be broadly explained by output growth (right panel). The notable exception is Brazil, where by June 2014 the unemployment rate was about 1 percentage point lower than would have been expected given the economy’s sharp slowdown. The reason is a surprisingly large drop in labor participation (by about 1½ percentage points). If this drop in participation were to prove temporary, unemployment could increase rather quickly going forward.
Prospects and policy options
More generally, employment growth is likely to remain subdued for some time, as changes in labor markets typically lag those in the overall economy, and output growth is not expected to revert to the high rates of the “golden decade” anytime soon.
In this context, unemployment rates will probably rise somewhat and real wage growth may well moderate further. The resulting slower growth of aggregate wage income will make it increasingly difficult to sustain the pace of poverty reduction and other social achievements observed in previous years.
What can be done? The overwhelming priority across the region is to rekindle economic growth while preserving macroeconomic stability. Given that economic slack is still limited in most Latin American countries, there is little scope for demand-side stimulus, even less so in economies with weak fiscal balances.
Instead, the focus should be on reforms to foster higher productivity and create better conditions for private investment. Improvements in physical infrastructure, educational systems, and the general business environment are key priorities. Pursuing targeted reforms in these areas is the most promising avenue not only for reviving growth, but also for generating more and better-paid jobs over the medium term.
I spent last week in Hong Kong, talking to a range of people about the tense situation there. The views ranged from optimism to pessimism. Each person struck a different balance between hope and fear. The immediate challenge is a find a way to end without violence the occupation of three major urban thorough fares by the protesters of the Occupy Movement (aka Umbrella Movement). Even if that happens, it will be necessary to try work out arrangements for the election of the chief executive in 2017 that both stay within the parameters that the Chinese government laid down on August 31 this year and give the public that opposes those parameters a meaningful choice in picking their leaders. That is a tall order. But without broad agreement on those arrangements, sufficient to secure the support of two-thirds of the Legislative Council, Beijing has promised that the next chief executive will again be picked by a 1,200-member selection committee instead of on the one-person, one-vote basis it had promised. If that happens, more political instability will likely follow.
I came away from my visit with these six observations.
1) Life goes on for most Hong Kong residents, even as the protests continue. People go to work, get their children to and from school and socialize on nights and weekends, as they have always done. The streets that the Occupy protesters still hold (in Admiralty, between the east and west sides of Hong Kong island; Causeway Bay, a major shopping area on Hong Kong island; and Mongkok, at the very center of Kowloon peninsula) are a relatively small area of the total territory. But those streets are major traffic arteries. Their continued blockage has a ripple effect on anyone who relies on surface transportation to get from here to there. Only those residents who have the luxury of relying on crowded subways are spared inconvenience. Whatever the views of Hong Kong people about the protests, however, they are doing their best to cope.
2) Political conflict in Hong Kong is not just about the mechanisms for picking the chief executive and members of the Legislative Council (LegCo). Also at play is the impact of long-standing economic policies on society. Inequality in Hong Kong is perhaps the most severe of any economy in the world. The middle class feels squeezed – literally when it comes to the tight housing market and figuratively regarding the search for jobs. Young people are particularly pessimistic about their life chances. Globalization and technological change certainly have helped create this situation, as they have in most advanced economies. But competition from an increasingly capable Chinese economy is also at play, particularly on the jobs front. So too is the preferential access of Hong Kong’s economic elite to political power, through the structure created by the British colonial government and consolidated by Beijing before Hong Kong reverted to Chinese sovereignty in 1997. It is this political structure that Hong Kong’s democratic camp and the Occupy Movement would like to democratize.
The protests for constitutional reform we have seen this year are a symptom of these underlying social divisions. No matter what happens on constitutional reform, the policy roots of those divisions will have to be addressed. Yet constitutional reform is now a separate and independent issue of political contention.
3) The three occupations are different in character. The one in Causeway Bay is small and, it seems, is dominated by students. The one in Admiralty, also dominated by students, is the largest and takes up stretches of two east-west roads. It is also the one that makes the strongest political statement, because it is close to the offices of the Hong Kong government and LegCo. Indeed, it is not possible to get to those buildings without seeing the sweep of the protest encampment. The third site, Mongkok, is socially mixed and reflects a dark side of Hong Kong society. That area has a significant Triad (gangster) presence, and those groups have engaged in some serious attacks on the local occupiers. For now, protesters and the police peacefully coexist in Causeway Bay and Admiralty, while Mongkok is more complicated and conflict-prone.
4) Ending the occupations in a way that is non-violent and acceptable to the contending parties is the focus of current attention. People are aware that the Chinese government, which ultimately calls the shots concerning this crisis, may be holding back on repressive action until after the Asia-Pacific Economic Cooperation meetings in Beijing in the second week of November and President Obama’s one-day bilateral meeting with Chinese President Xi Jinping right after. Also hanging over the Hong Kong standoff is the memory of the Tiananmen crisis of the spring of 1989 and the violent way it ended.
There is a widespread belief in Hong Kong that an end to the occupation would be in the public interest. The issue is who concedes more and who concedes first. The Occupy Movement, after taking an idealistic, moral stand and receiving significant public support, does not wish to stand down without getting something tangible for its efforts. Moreover, it is a coalition of various groups and tendencies without an integrated leadership, which makes it difficult to make strategic decisions and then effectively carry out whatever commitments it might make to the government. For its part, the Hong Kong government is constrained by the parameters already set down by Beijing on how candidates will be selected for the 2017 election for chief executive. And the gap between the two sides remains wide: the Occupy forces are holding out for “public nomination” by a relatively small percentage of Hong Kong voters; Beijing and the Hong Kong government have consistently rejected that approach.
The first step towards bridging that gap came last week, on October 21, when senior officials of the Hong Kong government met in a televised dialogue with leaders of the Hong Kong Federation of Students, one of the organizations at the core of the Occupy Movement. Nothing was resolved, but that is to be expected in the first round of any talks when each side presents its opening position. The government floated some ideas to demonstrate that some flexibility was possible within China’s parameters. It is hoped that more dialogue sessions will occur soon, and that they will ultimately facilitate an end the current standoff.
5) It seems that the leadership of the Hong Kong government is not speaking with one voice. On the one hand, the senior officials who spoke at the dialogue session acknowledged the idealism and sincerity of the students. They laid out in a steady and non-confrontational way why existing legal and policy provisions ruled out some of the movement’s proposals, and how a peaceful resolution to the crisis was in the interests of the whole community. They offered a few ideas in the hope of conveying flexibility and good faith. (The students were similarly professional and substantive in their presentations.)
The day before, however, Chief Executive C.Y. Leung, who is disliked by many Hong Kong residents, adopted a different approach and tone in an interview with foreign media. He essentially confirmed the view of the democratic camp that the local political system is, and should be, biased in favor of the business elite. According to the New York Times account of the interview, Leung argued that screening candidates by the Beijing-designed nominating committee would be a check against their giving into lower-class pressure for welfare state, and so protect the political interests of business. He reportedly said, “You have to take care of all the sectors in Hong Kong as much as you can, and if it’s entirely a numbers game and numeric representation, then obviously you would be talking to half of the people in Hong Kong who earn less than $1,800 a month. Then you would end up with that kind of [populist] politics and policies.” Stephen Vines responded in Hong Kong’s South China Morning Post on October 24: “Leung adequately reflects the contempt he has for the ordinary people of Hong Kong and fails to understand that in this community, largely composed of immigrants and the offspring of immigrants, the work and self-help ethic is very strong indeed. The people he and his colleagues despise are pragmatic and sensible. So why, then, does he believe that they would rush like sheep into an orgy of emptying the public coffers?”
Not surprisingly, there is a range of views on whether the loose leadership of the Occupy Movement and the Hong Kong government (with Beijing in the background) can find a formula for ending the occupation of public spaces that is face-saving for all concerned. Optimists remain hopeful, but cautiously so. Pessimists worry that factions on each side prefer confrontation to compromise.
6) Even if the occupations end, it is still an open question whether acceptable arrangements for the chief executive election can be formulated that are sufficient to head off new, mass protests. Several questions are relevant here.
- Was there a sensible compromise available back in the summer, before Beijing decided on a hardline? Hong Kong views differ, but my conversations last week strengthened my conviction that a deal had been possible.
- If a deal was thus possible, why didn’t it happen? Some Hong Kong observers believe that the Chinese government was unwilling to run even a small risk of a competitive election that produced a winner who might challenge Chinese interests. Others believe that it was spooked by the original Occupy Central movement or turned off by the tactics and demands of the democratic camp. These specific reasons suggest that Beijing was not opposed to competitive elections per se but just to one in 2017. If that contest had gone well, then a liberalization of the rules for future elections might have been possible. Indeed, in recent statements Hong Kong officials indicate that the electoral arrangements for 2017 can evolve thereafter.
- Is it possible to liberalize the operation of the nominating committee so that the 2017 election so is “competitive enough”? Some Hong Kong observers are skeptical, on the grounds that screening by a committee dominated by the supporters of Beijing will by definition limit voters’ choice too much. Others are more optimistic, believing that the nominating committee can be made more representative of Hong Kong society, with procedures that make possible the nomination of a leader of democratic camp. Moreover, the optimists say, the dynamics of a popular election almost ensure that even conservative candidates would have to appeal to voters in the democratic camp (who, by the way, constitute 55 to 60 percent of the total vote in the most representative LegCo elections). Hong Kong government officials have signaled a willingness to take liberalizing steps, but the democratic camp will withhold judgment until they see the details.
In my view, there are two related tests of the value of a liberalized nominating committee. The first is whether a member of the democratic camp is actually picked to run. The second is whether the election campaign fosters a serious discussion of the government policies that have created high income and wealth inequality and fostered such deep political alienation and division. The two are obviously related, but a contest that ignores fundamental policy issues will not inspire public confidence in the electoral system, no matter how competitive and democratic it may become.
The immediate priority, however, is finding a way to terminate the current standoff and so avoid the possibility of a coercive end to the crisis. In a climate of deep mutual mistrust between the two sides and of growing physical fatigue and emotional stress, that will not be easy.Authors
I met Gilford Jirigani at a workshop in Port Moresby a few months ago. What struck me about him was his natural confidence and poise as he captured the audience’s attention - including mine-as he told us how one project changed his life. He went from being an unemployed kid, down and out and unclear about his life in the city, to eventually becoming one of the pioneers of a youth program aimed at increasing the employability of unemployed youth in Port Moresby in 2012.
Tremendous efforts are under way to upgrade sub-Saharan Africa’s infrastructure. But the needs on the ground are still immense as evidenced by the frequent electricity blackouts, poor roads, and insufficient access to clean water in many countries.
Infrastructure is one of the key challenges facing policymakers in the region—I experienced it first hand when I was finance minister of Liberia before coming to the IMF. The benefits are fairly clear: with improved infrastructure, new growth opportunities in the manufacturing and services sector can be generated, barriers to intraregional trade can be reduced, and economies will be better positioned to transition from low to higher productivity activities. Without improved infrastructure, I fear the increase in productivity and greater economic diversification necessary to sustain Africa’s current growth momentum will not materialize.
In this spirit, in the latest Regional Economic Outlook: Sub-Saharan Africa economists from the IMF’s African Department looked at progress so far in addressing the infrastructure deficit and discussed policies needed going forward.
Prepare tomorrow’s growth
Their findings are heartening.
- First, many countries have managed to maintain, or even increase, their public investment in infrastructure over the last decade.
- The lion’s share of infrastructure projects are still financed domestically, either from increased tax revenues or local investors buying domestic public debt. African banks are also increasingly stepping in to finance infrastructure projects.
- Things also have been changing for the better on the external financing front. Foreign investors, recognizing the attractiveness of the region as an investment destination, have been increasingly drawn to sub-Saharan Africa. New partners have emerged, most notably China.
- And with new financing instruments, institutional investors—including pension funds both from inside and outside the continent—could soon be more willing to finance relatively risky, but high-return, projects in the region.
More to be done
That said, much remains to be done. My colleagues’ work underscores the extent to which higher investment has not always translated into better outcomes for the population.
Yes, sub-Saharan Africa has experienced a revolution in access to telecommunications, and mobile phone subscriptions have exploded. Market liberalization and emergence of competition in the sector no doubt have been big drivers of that success.
But, unfortunately, progress has been far more limited elsewhere. The region still lags far behind other developing regions in the world when it comes to supplying electricity and water, as well as to road and railway development.
We see three things that need to be done to engender better outcomes going forward.
First, it is not always obvious that lack of financing is the main constraint to better infrastructure outcomes. Instead, in many countries, what needs to be improved, within the existing resource envelope, is the capacity of the public administration to identify, implement and monitor often complex projects.
Bear in mind, this is a hard task for any government. But scaling up the infrastructure effort should go hand in hand with “investing in investment”—that is, developing a clear vision for the whole sector, and planning spending beyond the current budget. One key element of this process would be to have a central agency that prioritizes the projects proposed by the various ministries and conducts cost-benefit analyses.
Involving the private sector
Second, with available public resources always likely to be limited, it will be essential to look beyond purely public investment and involve the private sector whenever possible. True, as has been the case until now, the public sector will remain a critical provider of infrastructure investment. But with public debt sustainability also on policymakers’ minds, the risk is that some valuable projects may be postponed or even abandoned—to the detriment of future growth.
Hence, private companies should be encouraged to get involved as appropriate. The recent telecommunications revolution on the continent should act as a reminder that private companies can invest in infrastructure on their own if the business is sufficiently appealing and the business environment conducive to investment. This model could work in some cases for railway construction or electricity generation.
There is also a middle range where public and private sectors can work together, with the former bringing in some form of insurance, and the latter its expertise executing projects and tapping innovation. Public-private partnerships are such examples, where private companies are typically contracted to build and operate projects before transferring them back to the public sector after an agreed period. Appropriately designed user fees allow companies to recoup their investments, while minimizing recourse to taxpayer money. However, experience had taught us that in such contracts, the role, responsibilities, and potential financial liabilities of the public and private partners need to be clearly defined.
Public enterprises’ environment
Third and finally, companies already active in sectors such as electricity generation and water provision need to operate on a sound footing. In many cases, these are state-owned utility companies operating as monopolies, either lacking proper funding to invest or unable to generate adequate revenue because government agencies set prices at too low a level. Hence, going hand in hand with the steps I highlighted earlier, it will be critical to strengthen the performance of these companies and improve the regulatory environment. This will allow public enterprises to deliver better services, and may even catalyze interest from private investors to support their investment efforts.
The formidable growth momentum of recent years in the region is still on—our latest forecasts do show that sub-Saharan Africa will continue to be the second fastest–growing region in the world, just behind emerging and developing Asia. But this momentum needs to be nurtured to ensure sustained and durable growth. Infrastructure investment is part of the solution, but it needs to be well implemented. It is an opportunity not to be missed, and I strongly believe it can be done.
What role does agriculture play in structural change? In other words, how does agriculture affect the long-term societal process whereby labor moves from low productivity rural food production to higher productivity urban sectors like manufacturing and services? Moreover, how can we unpack the black box of agriculture to understand the components that lead to its progress in the first place? Our new working paper, “Fertilizing Growth: Agricultural Inputs and their Effects in Economic Development,” provides new evidence to help answer these questions.The Debate
Scholars often disagree on the role of agriculture in structural change. Some argue that societies have a first-order need to feed themselves, so increases in agricultural labor productivity are a necessary precursor to the labor force shifting from agriculture into other sectors that offer higher incomes. Advocates for this perspective point towards the Green Revolution in Asia as a precursor to its subsequent rapid economic growth.  Others argue that the last half-century’s success of export-oriented developing economies plus the globalized market for food trade suggest that countries should focus their scarce public resources on fostering manufacturing sectors that can absorb the labor force that was previously so unproductive in the rural areas. This and other evidence regarding agriculture’s relatively low value added per worker compared to other sectors has prompted some researchers to recommend agriculture as a priority sector for fewer and fewer developing countries in light of higher prospective growth returns in non-agricultural sectors.
One reason for the difficulty in identifying the causal role of agricultural productivity on structural change is that the relevant indicators trend together in the process of development. As per Figures 1 and 2, an increase in fertilizer use might occur alongside increased crop yields and decreasing labor shares in agriculture, but that doesn’t mean that an increase in fertilizer use is driving those changes. It is possible, for example, that increasing urban incomes lead to increased food prices, which allow farmers to invest in more fertilizer—implying that the structural change is driven by urban productivity growth.Figure 1: Yields and Fertilizer Use, Selected Developing Countries, 1961-2001 Figure 2: Growth in GDP Per Capita Versus Growth in Cereal Yields, 1965-2001 New Evidence
Our paper considers the role of agricultural inputs as drivers of higher yields and subsequent economic transformation. The main contribution of the paper is a novel instrument for fertilizer use that can enable causal claims for the effects of fertilizer use on yields, income growth, labor shifts out of agriculture, and subsequent increases in labor productivity outside of agriculture. A valid instrument needs to be correlated with countries’ fertilizer use and satisfy the exclusion restriction of not affecting yields through any channel besides fertilizer use. We use fluctuations in the global fertilizer price to generate temporal variation exogenous to conditions in any one developing country. In order to generate the instrument’s cross-country variation we exploit the fact that the production of nitrogen fertilizer is intensive in natural gas usage and therefore produced in only a select number of locations around the world, most of which are in developed countries.
The instrument is constructed by using a Geographic Information System (GIS) to calculate the agriculturally-weighted centroid of each country, using data on the percentage of each 5 arc-minute grid cell’s area planted to staple crops (maize, wheat, rice, sorghum or millet). Next, we mapped the facilities of the world’s top nitrogen fertilizer companies, and then calculated the minimum cost-adjusted distance from each country’s agriculturally-weighted centroid to the nearest fertilizer production site, using a 1:7 transport cost ratio to optimize travel over sea versus travel over land, in line with previous evidence around land-ocean transport costs. The centroids, fertilizer production sites and optimal cost-distance function are mapped below.Figure 3: Cost-Adjusted Distance to Major Fertilizer Production Sites
The distance component of the instrumental variable is itself strongly correlated with fertilizer use across countries, as shown in Figure 4 below, which plots the log of fertilizer use per hectare at the 1985 sample midpoint against the indexed distance measure. Towards the top left of the scatter plot, a country like Vietnam has an distance index value of 3,954 and uses 84 kg/ha of fertilizer, while Rwanda, towards the bottom right, has a distance value of 13,083 and fertilizer use of 1.7 kg/ha.Figure 4: Fertilizer Use in 1985 and Indexed Cost-Distance to Fertilizer Production Sites
With the help of this novel instrument, our cross-country econometric strategy proceeds in two parts. First, we assess the inputs that contributed to increased productivity in staple agriculture, as proxied by cereal yields per hectare, from 1960-200. We find evidence for fertilizer, modern variety seeds and water as key inputs to yield growth, controlling for other factors such as human capital and land-labor ratios. Specifically, we find that a representative country with yields of 1.5 tons per hectare that introduces an input package to jump from, say, 15 kg per hectare to 65 kg per hectare (0.05 tons) of fertilizer use would be expected to see an average yield jump of 0.15-0.47 tons per hectare; while increasing from 10 to 50 percent use of modern seed would be expected to increase yields by approximately 0.48 tons per hectare.
Second, we deploy the instrument to examine the causal link between changes in cereal yields and aggregate economic outcomes, including gross domestic product (GDP) per capita, labor share in agriculture, and non-agricultural value added per worker. We find evidence that increases in cereal yields have both direct and indirect positive effects on economy-wide outcomes. Results suggest that a half ton increase in staple yields generates a 13-19 percent higher GDP per capita, a 3.3-3.9 percentage point lower labor share in agriculture five years later, and approximately 20 percent higher non-agricultural value added per worker a decade later. This last finding for non-agricultural value added is not significant at standard 5 percent levels in all specifications, but our exploration of the time lags is suggestive that the relevant coefficient is not zero.
The structural change literature has struggled to identify causal effects given the economy-wide nature of the transformation and the fact that the process takes decades. This paper offers an empirical strategy that provides evidence of strong causal effects on yield and economic growth resulting from adoption of a green revolution-type package of inputs in economies with low agricultural productivity and a large share of the labor force still in agriculture. At a minimum the results provide a clear counterpoint to arguments for “pull only” strategies that focus on manufacturing and service sectors as the sole drivers of economic growth. The evidence suggests a particularly strong role for fertilizer and fertilizer-responsive modern variety seeds, which is highly consistent with field station agronomic research. Fertilizer’s high private return both in experimental plots and in the field suggest some sort of market failure that policy can address. Scholars debate whether the failure is due to credit constraints or non-rational behavior on the part of farmers. Regardless, the evidence presented in this paper suggests social returns from fertilizer that exceed the immediate private returns, furthering the case for policy efforts.
Gordon C. McCord is an assistant professor at the School of International Relations & Pacific Studies at the University of California, San Diego. He can be reached at firstname.lastname@example.org.
- John McArthur
- Gordon C. McCord
Ukrainians went to the polls on Sunday to elect a new Rada (parliament). The election revalidates the Rada’s democratic legitimacy and should result in a parliament that better reflects the national mood, which has changed significantly since the last election in 2012.
In a country with a simmering separatist conflict and a host of domestic problems, the election produced good news. First, the Organization for Security and Cooperation in Europe (OSCE) and other observers gave the election process high democratic marks. Second, of the parties set to enter the new Rada, those favoring a pro-reform, pro-European Union course won a large majority of the votes.
President Poroshenko’s party appears to have won the most seats, though it will need to put together a coalition to organize a stable majority in the Rada. The coalition should be formed quickly so that the Rada can approve a new prime minister and cabinet, and then tackle the long list of critical challenges facing Ukraine. Expectations for genuine progress on domestic reforms, both on the part of Ukrainians and Kyiv’s supporters in the West, will be high.Ukrainians Go to the Polls
For the second time in five months, Ukrainians went to the polls in a national election. This time they chose a new Rada (on May 25, they elected Petro Poroshenko as president).
The Central Electoral Commission put turnout at 52.4 percent. By all appearances, the election proceeded normally, with just minor incidents reported. The OSCE observer mission said the election process met Ukraine’s democratic commitments and offered the electorate a genuine choice. Other observers likewise gave the election high marks. That’s good news for democracy in Ukraine.
Voters had two ballots to cast. First, a party-list vote determines the distribution of 225 of the Rada’s 450 seats. A party has to secure at least 5 percent of the votes cast in order to win party-list seats (the votes that go to parties that fail to cross the 5 percent threshold will be redistributed among parties that did).
Second, each voter also votes for a Rada deputy to represent his/her constituency. Nominally, Ukraine is divided into 225 constituencies. In Sunday’s election, however, 27 constituency seats went unfilled—12 in Russian-occupied Crimea and 15 in parts of Donetsk and Luhansk that are controlled by pro-Russian separatists. Candidates for constituency seats can run with party affiliations or as independents.The Election Results
Exit polling is more art than science, but in Ukraine it has become a well-developed art (for example, exit polls very closely predicted the official results of the May 25 presidential election). According to Sunday’s exit polls:
• The Party of Poroshenko (the president’s party) came in first, winning 23 percent of the party-list vote, down from pre-election projections that it would win 30 percent.
• The People’s Front, led by Prime Minister Yatseniuk, won 21 percent of the party-list vote, considerably out-performing pre-election forecasts.
• The Self-Reliance Party led by reformist Lviv Mayor Sadovy won 13 percent, also doing better than expected.
• The Opposition Bloc, the successor to former president Yanukovych’s Regions Party, won 8 percent of the vote to come in fourth.
• The Radical Party, which many analysts had projected to win the second largest number of party-list votes, in fact came in fifth with 6 percent.
• Rounding out the list, the Svoboda (Freedom) Party placed sixth at 6 percent, while the Batkivshchyna (Fatherland) Party of former Prime Minister Tymoshenko squeaked across the 5 percent threshold.
With about half of the party-list ballots tabulated, the Central Election Commission’s numbers generally matched those reported by the exit polls, with two exceptions. The People’s Front had a very slight lead for first place over the Party of Poroshenko, and the Svoboda Party had not (yet) cleared the 5 percent threshold.
One notable party did not reach the 5 percent threshold. For the first time since Ukraine regained independence in 1991, the Communist Party will hold no party-list seats.
The Central Electoral Commission is also counting individual constituency seats, where it appears that the Party of Poroshenko will do well, making it the largest party in the parliament. It may take some time to sort out final affiliations. One problem in the past has been the practice of bribing constituency deputies to align with particular parties. Many proposed doing away with the constituency vote and instead having all 450 seats allotted by the party-list vote, but that would have required amending the constitution, and there was no time before this election.
The election will bring many newcomers to the Rada’s ranks, including reform activists who decided that they must work from within the system to effect dramatic change. The election also returns some members of the old guard who were affiliated with disgraced former president Yanukovych; their votes and views will come under close scrutiny.
On the whole, the election showed the practical, moderate side of the Ukrainian electorate. The Poroshenko, People’s Front, Self-Reliance and Batkivshchyna parties all have pro-reform, pro-European Union platforms. There is a coalition to be had in the new parliament that can command a significant majority—perhaps even 300 votes, which would be sufficient to amend the constitution. (Among the reforms proposed by Mr. Poroshenko, decentralization of certain authorities from Kyiv to the regions will require changing the constitution.)
Of the parties that crossed 5 percent threshold, only one—the Opposition Bloc—may be sympathetic to Russian policy preferences. Moscow has itself to blame. First, Russia’s seizure of Crimea and support for the separatists in Donetsk and Luhansk fueled the development of a stronger Ukrainian national identity, one that increasingly looks to Europe as its model. Second, the voters in Crimea and separatist-controlled Donetsk and Luhansk traditionally have been more pro-Russian than the rest of Ukraine, but they could not vote.A Daunting Agenda… and a Need to Get Moving
The immediate task for the Rada is formation of a coalition and appointment of a prime minister and cabinet. Both Mr. Poroshenko and Mr. Yatseniuk have indicated that they want to move quickly on this. Some had suggested that Mr. Poroshenko might seek to replace Mr. Yatseniuk with Deputy Prime Minister Groysman, but the strong showing of the People’s Front will strengthen Mr. Yatseniuk’s hand.
Once the coalition, prime minister and new cabinet are in place, they need to work with Mr. Poroshenko to tackle a daunting agenda of needed political and economic reforms, anti-corruption measures, overhaul of the judicial system and urgent changes to the energy sector. The distraction of the conflict in eastern Ukraine has absorbed most of Kyiv’s attention the past six months. Mr. Poroshenko also said that Ukraine needed a new parliament before it could undertake serious reforms.
The president now has his new Rada. It is time to move. Urgent reforms are needed in the economic and energy sectors if Ukraine is to avoid becoming—some would say remaining—an economic basket case.
Public expectations for change will be high, now that the election is done. Frustration was growing before the election with the slow pace of reform. If there is no tangible action soon, public support for Mr. Poroshenko may begin to erode. Progress on fighting corruption will be a particular metric by which the president and Rada’s performance is judged.
Expectations in the West regarding progress on reforms likewise will be high. Kyiv needs to deliver to maintain the support of the International Monetary Fund program and to make the case—as it seems that it will have to—for additional Western financial assistance. Securing U.S. and European agreement to provide more help will be difficult enough; it will prove impossible if Kyiv delays much needed reforms.
A strong Rada coalition that works with Mr. Poroshenko to advance a reform agenda will send a useful signal to Russia. Moscow cannot be pleased by the election results and the number of votes that went to pro-European Union parties. If the Rada fails to produce a stable coalition, however, the Kremlin will be tempted to engage in political mischief-making in Kyiv with the goal of making it harder for Ukraine to pursue needed policies.
Much is riding on the performance of the new Rada and how it works with Mr. Poroshenko. Ukraine has little time to waste.Authors
European banks are in much better shape than many had feared, if the results announced yesterday for the combined “asset quality review” and “stress tests” are accurate measures of the underlying situation and future prospects for the banks. I know the key people involved and they are highly professional and had a strong incentive not to be too lenient, so I tend to take these results as truly positive. They had political room to produce somewhat more pessimistic results, so I interpret these optimistic findings as their true beliefs. On the downside, the European Central Bank (ECB) now “owns” any major banking problems in Europe and runs real risks if these tests were in fact too optimistic, or even if they were broadly right but new problems develop. Observers generally will not distinguish after the fact between new problems and the playing out of old weaknesses. It is hard to read these results as excessively harsh, which would have been the only protection for the ECB.
What was so good about the results? Only 10 percent or 13 banks out of 130 need to raise any additional capital and the total requirement is a miniscule 10 billion euros compared to 22 trillion euros of assets owned by these banks. This not only says positive things about the current state of the banking system, but also removes the threat of regulatory pressure to deleverage further, which might have inhibited needed lending.
Previous estimates of capital needs have ranged upwards from about 50 billion euros to many hundreds of billions, although the latter tended to be based on very broad, and rather pessimistic, assumptions. In truth, the results are a bit above the lower end of the private estimates because the final numbers reflect considerable capital raising taken by banks in anticipation of these tests. If you add the 57 billion euros of equity raising in 2014, and other actions taken to reduce capital needs, then the results come into line with a number of earlier private estimates.
Overall, one has to be very pleased with these results, unless one doubts the methodology. There are three broad strands of attack. One is that political and institutional pressures, such as “regulatory capture” by the banks or excessive reliance on national bank supervisors, makes the figures unbelievable. Another points to earlier alternative estimates, such as those by Viral Acharya and co-authors, that were much bigger. The third set gets more into the details and disputes important methodological choices. Sovereign debt is assumed to be fully repaid; the stress tests do not include a deflation scenario; parts of the banking system that were not included in the tests are argued to be severely troubled; et cetera.
There is a strong likelihood that the system’s capital needs are somewhat higher than shown here because of some of the exclusions from the analysis. However, I tend to believe that the ECB, and the European Banking Authority (EBA) with which it cooperated, got this largely right. The ECB is taking over as the Single Supervisor for the new European Banking Union and is well aware that this is its one chance to start with a clean slate. Any problems identified in the tests belong to previous supervisors; anything not identified upfront will be blamed on the ECB in the future. There were political pressures on the ECB to be lenient, but by far the greatest pressure was for them to be tough to protect themselves. I know the senior people involved and have spent considerable time talking with them about the process. They are smart, expert, tough-minded, and well aware that their interests lay in rigor, not leniency.
So, I am pleased by the results, but well aware that the ECB is now at risk. If the findings are fundamentally right, it will be the best of both worlds, with a relatively benign banking situation and growing credibility for the ECB. If the examiners missed some significant problems, then it will be the worst of both worlds, with a banking system whose ills spill into the real economy and an ECB that has been wounded by its mis-estimates. My money is on the ECB, but it is impossible to be certain. They could have been operating with the wrong conceptual framework and, as a result, missed important risks and problems. “Asset quality” is about the likelihood and size of future repayments from a loan or other asset, and therefore something of a prediction of the future. And, as all of us know, predictions are fallible.
The US stress tests of 2009 are a hopeful precedent. They came in considerably more optimistic than the market had expected and there were many criticisms of the assumptions, but the authorities turned out to be fundamentally right. Sometimes the people in charge do know what they are doing.Authors
The Dodd-Frank Wall Street Reform and Consumer Protection Act made the financial system safer, stronger and less prone to a repeat of the 2007-09 crisis, but the law could be tweaked to make it better, say Brookings' Martin Baily and Aaron David Klein, director of the financial regulatory reform initiative at the Bipartisan Policy Center.
Baily and Klein, in a presentation at a University of Michigan conference, “Financial Reform: Preventing the Next Crisis,” divide Dodd-Frank’s provisions into five categories:
Clear wins: where provisions increase financial stability with little damage to economic growth
Clear losses: where provisions decrease financial stability without benefit to economic growth
Costly trade-offs: where little increase in stability is achieved at considerable cost to the economy
Didn’t go far enough: where the law failed to adequate address a threat to financial stability
Too-soon-to-tell: where only time will tell
Figure 1 below summarizes their analysis. They say, for instance, that the increase in bank capital and the new rules for the government to take off big failing financial institutions are “clear wins” while restrictions on Federal Reserve lending and on the Federal Deposit Insurance Corporation’s ability to guarantee bank liabilities in a crisis are “clear losses.”
Figure 1: Dodd-Frank Impact Across Five Categories
A more detailed version of their presentation is available here.
"Most major pieces of legislation are followed by a corrections bill," Baily and Klein said. "But with Dodd-Frank, political gridlock has made it extraordinarily hard to get anything accomplished."
The presentation stems from work the two did in a Bipartisan Policy Center’s Financial Reform Initiative.
Having grown up in Cagayan, a province in the northeastern most part of the Philippines, our lives have always been defined by the wet and dry season as well as typhoons. My childhood memories are dotted with events when our village would be flooded or hit by typhoons. There were times when we had to evacuate and once permanently relocate following a catastrophic flooding of the province due to the swelling of the Cagayan River. My grandfather, then a tobacco farmer, would despair as his crops were frequently wiped out due to either flooding or drought. I recall that he once said that perhaps the seasons were also going senile (the popular saying in Filipino is “ulyaning panahon”) as they cannot seem to remember when they are supposed to occur.
The cliché of the single male jihadi took a blow last week when a Frenchman trying to reach Raqqa was stopped at an airport with his two daughters, ages four and two. This came days after reports that an entire French family of 12 had traded the northern city of Lille for greener pastures under the control of the “Islamic State” in the Levant.
The news echoes another exodus taking place at French airports: more than 5,000 French Jews – 1 percent of the community – made Aliyah to Israel this year amid a spike in anti-Semitic incidents at home. At a closed door meeting on anti-Semitism in Paris last week, officials estimated that only one-third of the 1,000 departures for Syria and Iraq are active fighters while the rest are making Hijra – a symbolic return migration to the holy lands of Islam.
Currently home to Europe’s largest Muslim and Jewish communities, 2014 France will be remembered as the year that record numbers of French Muslims and Jews heeded the old populist call to “love it or leave it.”
Does France deserve this grief? On the one hand, the French are part of a larger contemporary wave of cultural-economic malaise. But since France is suffering the worst of it, its political leaders should address the part of it they can control.
France is neither uniquely anti-Semitic nor is it the most anti-Muslim European country. The emigration waves reflect a pervasive social discomfort shared by many, adding a 21st century twist to the old concept of “circular migration”: Western Jihadis wend their way to the Islamic State, Ukrainian and Russian Jews flee to Israel and young Israelis move to Berlin. It’s a haunting game of musical chairs: sit down when the malaise stops.
Economic motivations also play a role in the decision to leave. In 2010, Germany was a net exporter of longtime residents who “returned” to Turkey in the context of growing anti-Muslim sentiment – and a Turkish economy that was growing at more than twice the German rate.
During the last major wave of anti-Semitic acts in 2002, French unemployment was under 8 percent (it’s 10.5 percent now). That year, Israel’s recruitment of French Jews paled in comparison to its success attracting almost 4 percent of the Jewish community candidates from Argentina, where the economy had collapsed. 6,325 Argentinians made Aliyah that year – nearly one in every thirty Jews – compared to 2,500 French citizens.
Today’s French Jews, traumatized by anti-Jewish riots and the second anti-Semitic murder spree by a French Muslim in two years, form the largest national group in the current cohort of immigrants to Israel. The reasons for leaving are different but the patterns are symptomatic of a French republican model under serious strain. In the context of estimated 40 percent unemployment rates for French Muslims, the 180 per million departures to the “Islamic State” is a tiny fraction but still twice the proportion of Libyan, Moroccan or Saudi citizens who have made their way to Syria and Iraq.
Unlike Germany, whose postwar vocation included “mastering the past,” French politics never fully digested the impact of the last century’s colonial and wartime history on the current political position of its minorities. As a result, Jews and Muslims in France feel more victimized by discrimination than any of their European brethren – despite the fact that Jewish and Muslim community organizations enjoy excellent access to policymakers.
Paradoxically, it is that very political clout and the embrace of outward signs of collective identity other than as French citizens – whether Islamic headscarves or Israeli flags – that remain the third rail of French politics. Feeling vulnerable, French minorities don’t see any advantage to forgoing a strong community identity. But organized lobbying groups are resented by those without the same influence and by republican purists for their resemblance to an American free for all. Recent surveys, however, suggest that American Jews and other ethnic groups feel less attached to their communities over time, not more so. Perhaps Aesop was right: the best way to get a man to remove his coat may be the warm sun, not a bitter wind.
If the current trend of self-exile and autonomy movements across Europe contains a lesson for policymakers it is that some form of devolution, whether for Scots in the United Kingdom or for Kurds in Turkey, is always preferable to dissolution. Just as the British political class visibly mobilized to persuade the Scots not to go, French leaders need to make a dramatic stand for pluralism in the Republic and demonstrate their commitment to win back their most alienated citizens before the drips become a flood.Authors
Hutchins Roundup: The Optimal Top Marginal Tax Rate, the Economic Benefits of Bankruptcy Protection, and More
What’s happening in fiscal and monetary policy right now? Here are this week's top pieces of research. We hope you find it useful.Optimal top marginal tax rate is close to World War II levels
Fabian Kindermann of the University of Bonn and Dirk Krueger of the University of Pennsylvania find that a 90% marginal income tax rate on the top 1% of earners provides the optimal level of social welfare. This result is primarily based on the increased level of social insurance benefits that the higher tax rate would allow.Credit availability has a big impact on auto sales
Using consumer survey data, Kathleen Johnson, Karen Pence, and Daniel Vine of the Federal Reserve Board conclude that vehicle financing conditions play a significant role in automotive sales – on par with factors like unemployment and income. This finding is important, as auto sales usually account for a disproportionately large share of the contraction of economic activity during recessions.Bankruptcy protection confers significant economic benefits
Studying a dataset of 500,000 bankruptcy filings, Will Dobbie of Princeton University and Jae Song of the Social Security Administration determine that Chapter 13 bankruptcy protection provides significant economic benefits to debtors. Comparing the outcomes of those granted protection and those whose cases were dismissed, Dobbie and Song find that Chapter 13 protection increased annual earnings by $5,562, decreased five-year foreclosure rates by 19.1%, and lowered five-year mortality rates by 1.2 percentage points.Chart of the week: U.S. bank revenues outpacing that of European banks Speech of the week: Rising college costs may prevent some from reaping the benefits of higher education
“Rising college costs, the greater numbers of students pursuing higher education, and the recent trends in income and wealth have led to a dramatic increase in student loan debt. Outstanding student loan debt quadrupled from $260 billion in 2004 to $1.1 trillion this year…Higher education has been and remains a potent source of economic opportunity in America, but I fear the large and growing burden of paying for it may make it harder for many young people to take advantage of the opportunity higher education offers.”
–Janet Yellen, Chair, Federal Reserve Board
- Brendan Mochoruk
- David Wessel
(version in 中文)
Raising the minimum wage is a polarizing issue. One side worries that raising it will lower employment. The other side downplays the impact on employment and plays up the positive impact on the living standards of the poor. Both sides are able to cling to their beliefs as the evidence, much of which comes from high-income (“advanced”) economies, is mixed.
The majority of the global labor force, however, is in the emerging markets. Moreover, for a number of these countries, instituting a minimum wage or raising it is squarely on the policy agenda. But little is known about the impacts of minimum wages on employment and living standards in emerging markets.
My recent work with Yi Huang and Gewei Wang tries to fill this gap by studying the impact of minimum wage policies on employment in China. As China accounts for nearly 25 percent of the global labor force, this evidence is important in its own right; it may also be more relevant for other emerging markets than the evidence from high-income countries.
Our study is the first to use data on minimum wage changes for over 2400 counties in China. We combine the information on minimum wages changes with employment data from the Annual Survey of Industrial Firms, which covers over 70 percent of China’s manufacturing employment. While China instituted a minimum wage system in 1994, enforcement of compliance with the law was significantly tightened only in 2004; the results described below are based on post-2004 data.
So what does the evidence show? On average across all firms, we find that an increase in the minimum wage leads to a small decline in employment: a 10% percent increase in the minimum wage lowers employment by a little over 1% percent.
The impact differs across firms, being greater in low-wage firms than in high-wage firms. This is shown in Figure 1, where firms are grouped into deciles based on the average wage. In the decile of firms with the lowest wages, a 10% increase in minimum wages lowers employment by nearly 1.8%. The impact declines steadily such that for the decile of firms with the highest wages, the impact is 0.6%.
We also find that the impact of the minimum wage on a firm’s wages depends on where the firm stands in the distribution of wages. On average, an increase in the minimum wage raises wages by about 1%. But, as shown in Figure 2, for firms in the lowest decile, the increase is about 2.5%. The effect declines steadily and there is essentially no impact for the highest decile.
A glimpse behind the scenes
Teasing out the impact of the minimum wage on employment is a difficult task. A firm’s employment can be affected by many factors, not all of which can be accounted for easily. Hence there is often a concern that the impact attributed to changes in the minimum wage may in fact be due to some factor that remains unaccounted for or is unobservable to the researcher.
To guard against this, the evidence presented above is based on analysis in which numerous other factors that could affect employment are accounted for, as described in detail in the working paper. One strategy we use is akin to the study of twins in many areas of research—the idea there is that since twins share much of the same genetic make-up, any observed differences between them are likely not due to genetic reasons but to other factors. In our study we make the assumption that firms in contiguous regions are more likely to have similar employment trends.
We then estimate the impact of the minimum wage on a firm’s employment, controlling for developments in employment at its ‘twin firm’. Without such controls, the estimated impact of the minimum wage is qualitatively similar to that shown in Figure 1 above but quantitatively smaller on average (see an earlier blog for details).
Information on the employment and wage impacts of minimum wage changes is a critical ingredient in deciding where to set the level of the minimum wage. Our study provides the first comprehensive estimates of these impacts for China, which has a large labor force and whose experience may be relevant for several other emerging markets.
Our evidence suggests that a 10% increase in the minimum wage lowers employment by 1%. Impacts of this magnitude have been found in studies for high-income countries but generally for sub-groups such as teenagers or low-skilled workers.
We also find significant differences in the impact of minimum wages on employment and wages across low-wage and high-wage firms. In low-wage firms, raising the minimum wage lowers employment but raises wages more than in high-wage firms. The setting of the minimum wage has to be sensitive to these differential effects. As in the case of other labor market institutions, the design of a minimum wage system has to balance considerations of equity and efficiency (see Blanchard, Jaumotte and Loungani, 2014 for a fuller discussion). Minimum wages can help the cause of equity by ensuring that workers, particularly low-wage workers, have enough to live on. But if raising the minimum wage lowers employment, and ends up excluding low-wage workers from employment prospects, it may have adverse effects on both welfare and efficiency.
After about six months of forced detention in the Democratic People’s Republic of Korea (DPRK), Jeffrey Fowle, 56, was released to the United States on October 21, 2014. Another surprise action by North Koreans in a series of surprises in the last few months. No missile-testing but rather, testing engagement?
Mr. Fowle had been arrested in May while visiting the DPRK for allegedly leaving a Bible at a hotel or restaurant. He was one of three American citizens involuntarily held in North Korea. Kenneth Bae, a missionary, age 46, has been stuck in North Korea for almost two years. He has been imprisoned after undergoing a North Korean trial. The youngest, Matthew Miller, 24, was sentenced a month ago to six years in prison for alleged espionage and intent to defame the Pyongyang regime. Miller allegedly wanted to experience prison life in order to reveal North Korea’s human rights violations. Videotapes of him asking for his government’s help and expressing disappointment in his country and president have been aired publicly.
Why has Mr. Fowle alone been released?
- He was the only one of the three detained who had not been tried and sentenced. So Pyongyang can’t claim that he was culpable of crimes against the state or the people and is releasing a guilty man. Therefore, letting him go is a “cleaner” bit of business than constructing new legal narratives to release the two who already have been found guilty.
- Mr. Fowle is the oldest of the three and the last to enter the DPRK.
- Jeffrey Fowle also comes from a humble background, one that fits the ideological status categories of the DPRK: a laborer. Back home in Ohio, he was a road-maintenance worker.
Is the DPRK turning over new leaves- toward friendlier diplomacy?
- Let’s wait and see. There are two other Americans in prison enduring harsh labor and illness (Kenneth Bae is very ill and goes back and forth from prison and labor camps to hospitals). If the DPRK wants to engage the U.S., releasing the other two prisoners is imperative. The U.S. government cannot and should not enter into serious diplomacy with Pyongyang while two of its citizens are wasting away without any proof that they should have been detained in the first place.
- But Pyongyang is on the right path: If it wants Washington to consider a new round of diplomatic engagement, letting Mr. Fowle go back to the U.S. is definitely the right move.
- Behind-the-scenes diplomacy must be given credit:The Swedish Embassy in Pyongyang, which represents U.S. interests in the DPRK, the “new explorers” (of the world outside) within the Kim Jong Un regime, and the U.S. government as a whole have been working hard at quiet negotiations.
If we look at the release of Jeffrey Fowle in the context of more upfront and personable moves by DPRK officials to initiate new diplomatic encounters, if not relationships, in recent months—e.g., high-level visits to Europe, United Nations General Assembly, constructive negotiations with Japan on abductees, surprise diplomacy to South Korea at the Incheon games, and soon-to-come diplomatic visits to countries in the Middle East and Africa— yes, this latest positive move can be interpreted as a step toward improved relations with as many countries as the North Korean net can catch. The United States, of course, would be the biggest fish to catch.Authors
By Rabah Arezki
Natural gas is creating a new reality for economies around the world. Three major developments of the past few years have thrust natural gas into the spotlight: the shale gas revolution in the United States, the reduction in nuclear power supply following the Fukushima disaster in Japan, and geopolitical tensions between Russia and Ukraine.
Over the last decade, the discovery of massive quantities of unconventional gas resources around the world has transformed global energy markets, and reshaped the geography of global energy trade (see map). Consumption of natural gas now accounts for nearly 25 percent of global primary energy consumption. Meanwhile, the share of oil has declined from 50 percent in 1970 to about 30 percent today.
Natural gas, however, is different from other energy sources. Being lighter than air, it is a commodity that doesn’t travel very easily and is expensive to transport. Hence, natural gas markets tend to be regional, and much less integrated than oil markets. Shipping or transporting natural gas requires either costly pipeline networks or liquefaction infrastructure and equipment, including dedicated vessels, and then re-gasification at the destination. The limited global integration of gas markets has resulted in substantial price differences across regions in recent years due to the U.S. shale gas boom and the Fukushima disaster, in spite of increasing liquefied natural gas trade.
U.S. shale gas revolution
With advances in shale rock drilling, a sharp surge in U.S. gas production has made the country the world’s largest natural gas producer, and soon expected to become a net exporter of natural gas. The shale gas boom has also had a significant impact on the patterns of global energy trade: U.S. fossil fuel imports decreased to $225 billion in 2013 from $412 billion in 2008.
Surging supply has also steeply driven down natural gas prices in the United States by about 70 percent in recent years, introducing substantial price differences across other regions (see chart). For instance, U.S. gas sells for $4 per million British thermal units, compared with $10 in Europe and close to $17 in Asia.
The U.S. advantage in natural gas has also led to an increase in U.S. competitiveness in non-energy products, in turn affecting its competitors.
The share of energy-intensive manufacturing exports in total U.S. manufacturing exports has been rising steadily, whereas the share of non-energy intensive exports has been declining.
Estimates show that cheaper natural gas in the United States has helped lift manufacturing exports by about 6 percent since the start of the shale gas boom. Further evidence suggests that the channels through which cheaper domestic natural gas prices in the United States might have an impact on manufacturing exports are operating both at the intensive (expansion by existing firms) and extensive (new firm entry) margins.
As more countries exploit new sources of natural gas, not only is the geography of trade in energy products likely to continue to change, but the geography of manufacturing exports is likely to change as well.
While energy users in the United States have been the main beneficiaries of the energy price declines, the shale revolution has helped to stabilize international energy prices including by freeing global energy supply for European and Asian markets, offsetting some of the shortages due to geopolitical disruptions.
The Fukushima disaster and aftermath
The Fukushima Daiichi nuclear disaster in March 2011 highlighted the environmental liabilities associated with nuclear power generation, and induced a sharp increase in the use of natural gas.
Before the disaster, about one-quarter of Japan’s energy was generated by means of nuclear reactors. Following the disaster, the Japanese government decided to halt production at all nuclear power plants in the country. To compensate for the resulting loss in electricity generation, Japanese electric power companies increased their use of fossil-fuel power stations and appended natural gas turbines to existing plants.
As a result, Japan’s liquefied natural gas imports have increased dramatically—by about 40 percent—since the disaster, making Japan the world’s largest importer of liquefied natural gas. The sharp increase in natural gas demand has led to higher prices in Asia—and Japan in particular—double that in Europe and four times higher than in United States.
The ongoing crisis in Ukraine has highlighted European energy markets’ dependence on natural gas. Ukraine and countries in southeast Europe appear particularly vulnerable to potential disruptions of Russian gas supply. Should the gas cutoffs persist and be extended to other countries, the greatest impact will be on Ukraine and countries in southeast Europe that receive Russian gas transiting through Ukraine. Other countries, however, will be affected through rising spot prices, which may spread from natural gas to other fuels.
Fuel for thought
Overall, the pattern of global trade in liquefied natural gas, and energy more generally, is expected to evolve further. If the United States gradually becomes a net exporter of liquefied natural gas, we expect domestic natural gas prices to rise but still remain markedly lower than that in Europe and Asia, given liquefaction costs.
Natural gas is the cleanest source of energy among other fossil fuels (petroleum products and coal) and does not suffer from the other liabilities potentially associated with nuclear power generation. The abundance of natural gas could thus provide a “bridge” between where we are now in terms of the global energy mix and a hopeful future that would chiefly involve renewable energy sources.
While markets forces shape the energy mix, energy policy has a role to play, including for coal and renewable, in turn impacting global trade in energy. Here, Europe and Japan are at a crossroads, facing a difficult balance between environmental concerns, economic efficiency goals and energy security. Getting that balance right should figure prominently on policy makers’ agendas.
Read our commodities special feature in Chapter 1 of our October 2014 World Economic Outlook for more details on this issue.
I see it every time I come back to Honiara, Solomon Island’s bustling capital, soon after I arrive. Young people on the streets, wandering around in groups or by themselves with nothing to do. It’s the same thing my local friends and colleagues mention. Solomon Islanders also ask, “What kind of future lies ahead for our kids?”
Solomon Islands face new economic challenges and a rapidly expanding, youthful population. Seven out of 10 Solomon Islanders are under the age of 29.
Editor's Note: In this blog, Joshua Meltzer discusses the role of cross-border data flows and the Internet in bilateral trade and investment opportunities for the U.S. and EU. For a more detailed look at this topic, see his latest paper.
The most globally significant bilateral trade and investment relationship is between the U.S. and the European Union. An increasing amount of this economic relationship is underpinned by cross-border flows of data.
Whether the U.S. and the EU are able to take full advantage of the opportunities for international trade and investment presented by their increasingly online and digital populations will affect transatlantic economic relations. As the world’s two largest economies, the U.S. and EU decisions on support for cross-border data flows will also have global implications.
A recent paper of mine analyzes the importance of the Internet and cross-border data flows for US and E.U trade and investment with each other and globally.
Cross-border data flows between the U.S. and Europe are the highest in the world—50 percent higher than data flows between the U.S. and Asia and almost double the data flows between the U.S. and Latin America. (See the capacity of transcontinental fiber-optic cables in the figure below.)Submarine Cable Bandwidth (in Terabits per second, or TBPS)
Source: Telegeography 2014
The Internet and cross-border data flows are providing opportunities for small and medium-sized enterprises (SMEs) to participate in the global economy. SMEs can now use the Internet to reach customers globally wherever they have Internet access, process international payments, and, for a range of digital products, deliver them online. For instance, SMEs on eBay are almost as likely to export as large businesses and have a 54 percent survival rate compared with offline businesses (24 percent).
The Internet is also giving SMEs access to business services that can increase their productivity and global competitiveness. This includes online functions like Google search, which helps businesses develop market intelligence on competitors and learn about foreign laws and regulations. The cloud provides access to low-cost software on demand and data flows allow for regular updates and security patches. The Internet also provides opportunities for businesses to become part of global supply chains by providing discrete tasks.
In addition, businesses are increasingly using the Internet in innovative ways. For instance, the Internet has given companies the ability to harness the intelligence of users by interacting with customers, suppliers and other stakeholders in product development efforts. Crowdsourcing is another evolving Internet-based opportunity that allows people situated globally to contribute tasks or become co-creators. All of these new business models require data and information to move freely across borders.
There are no direct statistics that measure the value of transatlantic trade underpinned by data flows. Measuring digitally deliverable services—understood as services that may be, but are not necessarily, delivered digitally, reveals the capacity for the Internet to drive US-E.U. trade. For instance, in 2012, 72 percent of US services exports to the EU worth $140.6 billion were of digitally deliverable services.
Taking a global perspective, U.S. exports of digitally deliverable services in 2012 were $383.7 billion, comprising 61 percent of total U.S. services exports. And for the E.U. exports of digitally deliverable services in 2012 were $465 billion.
Digitally deliverable services such as consulting, engineering, design and finance are also inputs into the production of other goods and services. And where these products are exported, so are the digitally deliverable services used in their production. The following graph show that taking into account the value of digitally deliverable services in goods and services exports increases U.S. exports of digitally deliverable services to the world from $383.7 billion to $569.2 billion in 2012, equivalent to 32 percent of total U.S. exports. For the EU, exports of digitally deliverable services to the world increase from $465 billion to $748.8 billion, representing 24.8 percent of total EU exports.Digitally Deliverable Services Exports, 2012
Source: U.S. Bureau of Economic Analysis and Eurostat. For the EU, VA shares are from the most recent 2009 input-output tables, applied to 2012 gross exports.
It is also the case that a lot of U.S. imports of digitally deliverable services from the EU are used to produce goods and services that are then exported. This is increasingly the case in a world of global value chains; goods and services cross borders multiple times to produce a final product. WTO Director-General Pasqual Lamy has described this phenomenon as goods being “made in the world.”
The following graph shows the importance of intermediate services imports for U.S. and EU production of goods and services for export. For the U.S., almost $11.2 billion or 62 percent of digitally deliverable services imported from the EU were used to produce products for export. And for the EU, $22.3 billion or 53 percent of digitally deliverable services imported from the U.S. were used in the production of exports.EU Digitally Deliverable Services in U.S. Exports, 2009 U.S. Digitally Deliverable Services in EU Exports
Source: OECD-WTO Trade in Value Added database
 Jessica R. Nicholson and Ryan Noonan, “Digital Economy and Cross-Border Trade: The Value of Digitally deliverable Services”, US Department of Commerce, Economics and Statistics Division Issue Brief # 01-14, January 27, 2014
There’s been considerable discussion recently about building a “Culture of Health” in communities across the nation. This is now a core strategic focus of the Robert Wood Johnson Foundation, and it’s aligned with many pilot projects and other efforts in the public and private sectors to improve nutrition and exercise opportunities, early childhood programs, social supports, and the other big influences on population health. One of the most promising yet most challenging fronts in these efforts is bridging the gap between good “health” and good “health care.”
Insurers, hospitals, and healthcare systems are increasingly investing in efforts to improve prevention, wellness, and care management. Especially for populations with limited means, however, studies show that some of the best long-term ways to improve health outcomes are through addressing social service needs—including housing, environment, income and education. This means linking the healthcare infrastucture with public health, social service and community organizations. A hospital that invests in a community-based asthma program to teach patients how to manage their disease and avoid triggers, for example, may be able to prevent emergency room visits and hospital admissions by partnering with social workers or community health programs that can do family education and home modifications. But to make such a reform sustainable, the hospital would need to shift its payments from Medicaid, Medicare, and private health insurers from paying for the asthma complications to paying for keeping asthma patients well. This may be difficult – especially for hospitals that don’t have a well-integrated working relationship with social service providers, and for health insurers who would like hard evidence that these new payment reforms will really deliver on improving health and keeping overall costs down.
Health care reforms that focus on preventing complications are occurring. Payment reforms are now driving providers to better utilize health care resources to improve patient outcomes. After Medicare began penalizing hospitals with high levels of avoidable readmissions, many set up care management programs to help patients avoid readmission. This included clearer discharge instructions, medication assistance and better coordination with patients’ primary care physicians, and even some non-medical services like transportation to follow-up appointments for patients who can’t easily transport themselves. A growing number of health care providers have become Accountable Care Organizations (ACOs), which enables them to be paid at least in part based on reducing costly disease complications and providing better-coordinated care.
Unfortunately, proven, examples of extending health care reform to integrate community interventions that reduce short- and medium-term costs remain scarce. Collaborating with social service and community organizations also presents logistical and bureaucratic obstacles for clinicians. For this reason, ACOs have generally not made significant investments in non-medical, community-based prevention and wellness interventions
Some state Medicaid programs have tried to promote community-based reforms in ACOs or similar accountable-care arrangements. These initiatives involve a partial global or person-level payments that increase with better population health outcomes, plus steps intended to make it easier to coordinate services and integrate funding streams between health care providers and community-based health promotion initiatives. Some health care providers involved, including hospitals working with pediatricians, are using this promise of financial support if their efforts succeed to work with social service and community-level support systems. But many health care providers are reluctant to go down this path because of uncertainties about how and whether these programs would actually work, given the administrative and logistical challenges, not to mention uncertainties about whether these efforts will actually reduce costs enough to earn the additional funding.
Developing better evidence on health care reforms that bring health care delivery and community-based health improvement together is a critical policy priority. What evidence and changes in policy do health care payers and providers need to move forward with these reforms? Is it possible to develop better practical guidance for payers and providers on how they could implement such reforms now?
At the upcoming Population Health Forum on Oct. 22-24 in Washington, I plan to explore these kinds of novel payment approaches with on-the-ground implementers and experts who are developing successful strategies for health care providers to work more effectively with community health programs. Through collaboration and shared accountability between hospitals, health systems, clinics, behavioral health services, community organizations and patients, it is indeed possible to shift our focus from episodic acute care to a holistic approach that keeps populations well. But we have a lot of questions to answer before these strategies will successfully transform health care and population health.Authors