This week from CEPR: April 29

Thursday, April 29, 2021

Highlights from some of the latest research reports published in the Centre for Economic Policy Research (CEPR) network’s long-running series of discussion papers, as well as some other recent CEPR publications.

Also, links to some of the latest columns on Vox, the Centre’s policy portal, which provides ‘research-based policy analysis and commentary from leading economists’.

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    • New Discussion Papers


    • THE EFFECTIVENESS OF THE “WORLDWIDE APPROACH” AS A NEW ANTI-TAX AVOIDANCE MEASURE

    REAL RESPONSES TO ANTI-TAX AVOIDANCE: Evidence from the UK Worldwide Debt Cap
    Katarzyna Bilicka, Yaxuan Qi, Jing Xing  
    CEPR Discussion Paper No. 16068 | April 2021

    The UK’s worldwide debt cap (WDC) reform in 2010, part of a new “worldwide approach” to anti-tax avoidance measures, was effective at curbing excessive borrowing by Multinational Corporations (MNCs) in the UK. It also resulted in MNCs shifting significant proportions of their real business activities overseas, with foreign countries benefitting from the reallocation of investment and employment. However, the reallocation of business activities did not bring more tax revenue to foreign countries due to debt shifting occurring at the same time.

    These are among the main findings of a new CEPR study by Katarzyna Bilicka, Yaxuan Qi and Jing Xing, which provides the very first empirical investigation of the impact of a new form of debt-related anti-tax avoidance policy affects multinationals' debt and real activities allocations, using the UK as a case study. Among the findings: 

    • MNCs adjust their debt, operations, and organizational structures across different jurisdictions in response to the WDC. 
    • Multinationals affected by the reform reduced the amount of debt held in the UK and increased debt held abroad, shifting debt across borders to minimise the impact of the WDC.
    • Only foreign MNCs reduced the size of their UK operations significantly, while expanding the size of their non-UK operations more than domestic MNCs.
    • The WDC helped the UK tax authority to increase tax payments from affected domestic MNCs.
    • As affected foreign MNCs significantly reduced the size of their UK real operations, the WDC failed to collect more tax revenue from them even with their lower level of UK net debt.
    • Although affected MNCs shift debt abroad, their foreign tax payments did not significantly change.
    • Affected multinationals shrank their business operation in the UK while expanding it elsewhere. On average, over the period 2010-2014, affected MNCs reduced total assets, fixed assets, and employment in the UK by 7.5%, 11.4%, and 3.9% respectively.
    • Foreign countries, on the other hand, benefit from such reallocation as investment and employment shift there. However, the reallocation of business activities did not bring  more tax revenue to foreign countries due to debt shifting occurring at the same time.

    Such measures are becoming more prominent policy tools, with countries like the United States implementing similar restrictions in December 2017. These findings provide causal evidence for tax-motivated debt and real activity reallocation within multinationals and show how multinationals can circumvent tax avoidance regulations. 


    • THE ECONOMIC RIPPLE EFFECTS OF COVID-19  

    THE ECONOMIC RIPPLE EFFECTS OF COVID-19
    Francisco J Buera, Roberto Fattal Jaef, Hugo Hopenhayn, Pablo Andres Neumeyer, Yongseok Shin     
    CEPR Discussion Paper No. 16071 | April 2021

    Deep but short-lived Covid induced shutdowns of the economy results in a deep but short-lived recession followed by a swift recovery. While the recovery is fast in the aggregate, it carries lasting scarring effects on young non-essential firms.

    These are among the findings of a new CEPR study by Francisco J Buera, Roberto Fattal Jaef, Hugo Hopenhayn, Pablo Andres Neumeyer, Yongseok Shin evaluates the ripple effects of temporarily shutting down a large part of the economy, as implemented by many countries in response to the Covid-19 pandemic. Among the findings: 

    • Deep but short-lived shutdown results in a deep but short-lived recession followed by a swift recovery. 
    • While the recovery is fast in the aggregate, it carries lasting scarring effects on young non-essential firms. Some of them exit and, even for those that remain, it takes several years for their employment to fully recover.
    • Paying for capital costs while generating no revenue for one period, these firms sustain a significant damage to their balance sheets, which shows up as significantly lower growth over their entire life-cycle. 
    • In addition, if lockdowns lead to more permanent reallocation across industries, the recession becomes more protracted. 
    • Nevertheless, these firms do not account for a large share of the aggregate employment or output, and this channel has only a small macroeconomic effect and the aggregate variables bounce back quickly.
    • The reallocation shock generates not only unemployment but also misallocation of capital and labour, because some of those firms that become suddenly more productive are too credit-constrained to produce at the larger scale corresponding to their new productivity.
    • The effects are not persistent if (i) workers on temporary layoff can be recalled by their previous employers without having to go through the frictional labour market and (ii) the government provides employment subsidies to firms during the lockdown. 


    COVID-19 FATALITIES SHOW A BLACK FEMALE BIAS: Evidence from the United States

    Graziella Bertocchi, Arcangelo Dimico               
    23 April 2021

    A study by Graziella Bertocchi and Arcangelo Dimico uses detailed individual-level data and georeferenced data on daily deaths in Cook County, Illinois, to reveal a Black female bias in Covid fatalities. This bias is driven by Black women employed in high-exposure, frontline jobs in the healthcare and transportation sectors, that they reach by public transport from the historically poor neighbourhoods where they reside, having been disproportionately hit by the pandemic.  

     

    WEALTH INEQUALITY HAS REMAINED STABLE AT EXTREME LEVELS SINCE THE END OF THE APARTHEID REGIME, HIGHER THAN IN ANY OTHER COUNTRY IN THE WORLD

    Aroop Chatterjee, Léo Czajka, Amory Gethin                          
    24 April 2021

    A study by Aroop Chatterjee, Léo Czajka and Amory Gethin documents the persistence of extreme wealth inequalities in South Africa since the end of the apartheid regime. The results show that today, the top 10% own about 85% of total wealth and the top 0.1% own close to one third. A progressive wealth tax targeted at the richest 1% could collect the equivalent of between 1.5% and 3.5% of South Africa’s GDP, both tackling this legacy of extreme inequality and bringing additional government revenue in the wake of the COVID-19 crisis. 


    ADDRESSING IMPEDIMENTS TO DIGITAL TRADE: A new eBook

    Ingo Borchert, L Alan Winters                      
    27 April 2021

    In a world in which the Covid-19 pandemic has severely affected conventional trade and economic activity, digital trade and digitally enabled services can be a source of future growth and prosperity.  Yet, these new opportunities come with unique challenges for trade policymaking, not least because digital trade is inseparable from a data governance framework.

     In March 2021 the UK Department for Digital, Culture, Media and Sport and the UK Trade Policy Observatory organised a conference, hosted by CEPR, to discuss new directions for digital trade policy.  A new eBook, edited by Ingo Borchert and L Alan Winters presents the conference proceedings, which identify current and future impediments and discuss policy options to tackle them. You can download the eBook for free, here
     


    LOCKDOWNS WIDEN THE GENDER GAP IN MENTAL HEALTH

    Abigail Adams-Prassl, Teodora Boneva, Marta Golin, Christopher Rauh                      
    27 April 2021

    Writing at Vox, Abigail Adams-Prassl, Teodora Boneva, Marta Golin and Christopher Rauh show how women have suffered far more from social distancing measures than men in terms of their mental health. Evidence from the United States indicates that this widening gender gap in mental health cannot be explained by respondents earning less than usual, working less than usual, losing their job, struggling to pay their bills, or changing their work patterns or number of hours spent on childcare. 


    UNEQUAL JURY REPRESENTATION HAS SEVERE CONSEQUENCES FOR RACIAL MINORITIES IN THE UNITED STATES: Evidence from Texas

    Shamena Anwar, Patrick Bayer, Randi Hjalmarsson                         
    23 April 2021

    Juries across the United States are often highly unrepresentative of their communities, especially for racial minority populations. Using data from Harris County, Texas, a study by Shamena Anwar, Patrick Bayer and Randi Hjalmarsson shows how unequal representation impacts verdicts and sentences. Among the findings: 

    • Many zip codes with the highest proportion of white residents are overrepresented on juries. 
    • Black defendants are more likely to be convicted and receive longer sentences from juries with more residents from these over-represented neighbourhoods. 
    • If the jury pool were more reflective of the county, the average sentence would fall by almost 15 years for Black defendants and the likelihood of a life sentence by more than 50%. 
    • Policy responses could include expanding the jury source list and oversampling residents from underrepresented neighbourhoods in calls for jury duty.

    FRENCH FIRMS THROUGH THE COVID STORM: Number of newly insolvent firms doubled during 2020

    Agnès Bénassy-Quéré, Benjamin Hadjibeyli, Guillaume Roulleau                   
    27 April 2021


     

    New evidence suggests that the Covid crisis almost doubled the share of newly insolvent French firms from March to December 2020 from 3.6% to 6.6%. However, without public support this number may have reached 11.9%. The findings, from a study by Agnès Bénassy-Quéré, Benjamin Hadjibeyli and Guillaume Roulleau also indicate that the cleansing effect of firm exit is still there, but it is less effective than in normal times. 


    CHINA AND THE WTO: Two systems meet

    Petros C. Mavroidis, André Sapir                   
    28 April 2021

    China’s ascension to the WTO followed years of negotiations with the incumbent members and was hailed at the time as a victory for the liberal paradigm – part of the ‘end of history’. But today frictions remain.

    This first in a series of three columns presents the build-up to China joining the multilateral trade agreement, arguing that expectations for its subsequent behaviour were misguided from the off.


    The social cost of carbon and inequality

    David Klenert, Marc Fleurbaey                         
    28 April 2021

    The social cost of carbon is a monetary metric for the damage caused by the emission of an additional tonne of CO2. Previous literature has shown that accounting for inequality between countries significantly influences the social cost of carbon, but mostly omits heterogeneity below the national level.

    Using a model that features heterogeneity both between and within countries, this column demonstrates that climate and distributional policy can generally not be separated. In particular, it shows that a higher social cost of carbon may be called for globally under realistic expectations of existing inequality.


    COMMODITY PRICES AND BANKING CRISES

    Markus Eberhardt, Andrea Presbitero                           
    26 April 2021

    A study by Markus Eberhardt and Andrea Presbitero shows that a major channel through which commodity price movements can affect the real economy is their effect on financial stability.

    Commodity price volatility is likely to trigger financial instability and banking crises through a reduction in government revenues and a shortening of sovereign debt maturity, which in turn are likely to weaken banks’ balance sheets. 


    NEW GLOBAL ESTIMATES OF HOMEWORKING POTENTIAL DURING COVID 

    Sergei Soares, Florence Bonnet, Janine Berg               
    25 April 2021

    A study by Sergei Soares, Florence Bonnet and Janine Berg uses survey data for 31 countries across the income scale to update previous estimates of working from home during the pandemic. Among the findings: 

    • The higher the income of the country, the higher the percentage of workers carrying out their work from home. 
    • For the United States, the figure was 35.4%, and for other high-income countries it was 25.4%. 
    • For upper-middle-income countries, the figure was 17.1%.
    • For the lower-middle and low-income country group, it was 13.6%. 
    • The global number of workers working from home was estimated at 558 million, which corresponds to 17.4% of global employment.

    THE GROWING CONCENTRATION OF WEALTH IN ITALY: The rich get richer and the poor get poorer

    Paolo Acciari, Facundo Alvaredo, Salvatore Morelli                  
    24 April 2021

    A study by Paolo Acciari, Facundo Alvaredo and Salvatore Morelli uses newly sourced inheritance tax data from Italy to show that: 

    • The wealth share of the top 1% (half a million individuals) increased from 16% in 1995 to 22% in 2016. 
    • The top 0.01% (the richest 5,000 adults) almost tripled from 1.8% to 5%.  
    • In contrast, the poorest 50% saw an 80% drop in their average net wealth over the same period. 
    • The data also reveal the growing role of inheritance and gifts inter vivos as a share of national income, as well as their increasing concentration at the top.

    RESHAPING EUROPEAN ECONOMIC INTEGRATION IN THE POST-COVID WORLD

    Marco Buti, George Papaconstantinou                    
    23 April 2021

    Most of the discussion on the economic policy response to the pandemic in Europe has centred on its ambition, tools, and institutional characteristics. Less discussion has taken place on the factors shaping EU integration and economic policy priorities after the pandemic.

    In a new CEPR Policy Insight, Marco Buti and George Papaconstantinou argue that four sets of issues will be important in shaping the legacy of the pandemic for European integration: 

    1. Redefining the new boundaries between state and market. 
    2. Revisiting the nature of subsidiarity. 
    3. Reconnecting the EU domestic with the global agenda. 
    4. Learning to respond to longer term structural shifts.

    THREE 'LATENT ASSETS' IN AFRICA SUGGESTING FUTURE ECONOMIC GROWTH

    Soeren J. Henn, James Robinson                  
    26 April 2021

    Is Africa’s potential for sustained economic growth really as bad as social science research makes it out to be? Writing at Vox, Soeren Henn & James Robinson argue that growth, such as that which happened in China after 1978, can be surprising and can tap into ‘latent assets’ in a society that might have not been previously evident. The authors identify three latent assets in Africa which are highly propitious for its long run trajectory: 

    1. High social mobility. 
    2. Scepticism of authority. 
    3. Cosmopolitanism and acceptance of difference.

    GLOBALISATION AND GLOBAL CRISES

    Assaf Razin                     
    23 April 2021

    Concerns associated with the Covid-19 pandemic have led to new rationales of protectionism, with renewed emphasis on domestic production and sourcing. Assaf Razin compares the current economic crisis brought on by the pandemic to previous major economic crises and examines what this could mean for the future of various aspects of globalisation.


    MIGRATION CAN PLAY A ROLE IN THE POST-PANDEMIC REBOOT OF GLOBAL TRADE

    Magnus Lodefalk, Andreas Hatzigeorgiou, Carl Alm                   
    27 April 2021

    Writing at Vox, Magnus Lodefalk, Andreas Hatzigeorgiou and Carl Alm argue that migration has the potential to substantially aid post-Covid economic recovery through facilitating foreign trade, investment, and offshoring. The findin gs carry implications not only for physical migration, but also for whether or not recent technological advances may enable foreign-based online workers to promote globalisation.



    COVID-19 IS RESHAPING EUROPEAN ECONOMIC POLICY

    George Papaconstantinou interviewed by Tim Phillips, 23 April 2021

    Europe has struggled through two crises in the last decade, but this time its response has been much more decisive and ambitious. George Papaconstantinou tells Tim Phillips why Covid-19 may be the catalyst for deeper EU integration.

    You can download CEPR Policy Insight 109: Reshaping economic policy in the EU in the post-Covid world, by Marco Buti and George Papaconstantinou, here.


    THE PROBLEMS OF DIGITAL TRADE

    Ingo Borchert, L Alan Winters interviewed by Tim Phillips, 28 April 2021

    An increasing amount of trade is digital, but trade negotiations are bogged down by arguments over how to regulate it. A new CEPR eBook investigates what gets in the way of digital trade, and editors Ingo Borchert and Alan Winters tell Tim Phillips what we can do to make it work better.

    You can download the eBook, free of charge, here.