This week from CEPR: December 03

Thursday, December 3, 2020

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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    THE POLITICAL EFFECTS OF IMMIGRATION: Culture or Economics?
    Alberto F Alesina, Marco Tabellini      
    CEPR DP No. 15486 | November 2020

    Immigration causes economic consequences for native workers and elicits cultural changes. ‘Cultural’ factors, broadly defined, have a stronger political and social impact than the purely economic ones, arising from potential labour market competition. In other words, while the economic effects of immigration are likely to be positive, large inflows of immigrants, especially when concentrated within short periods of time, can undermine social and political cohesion, for reasons that go above and beyond strictly economic ones.

    These are among the central conclusions of a new CEPR study by Marco Tabellini and the late Alberto F Alesina, which reviews the growing literature on the political effects of immigration and examines how both cultural and economic forces influence electoral outcomes in receiving countries, and why. Among the findings: 

    • Both forces can contribute to determine the political effects of immigration, such as rising support for anti-immigrant parties, changes in demand for welfare policies, and shifts in voters' perceptions. 
    • The ‘standard’ finding is that immigration, by increasing diversity, triggers natives' backlash, and typically favors right-wing, conservative parties. However, recent research provides a more nuanced picture of the effects of immigration, which, in some cases, may move natives' preferences to the left, increasing their openness to diversity. 
    • This is more likely to happen when natives and immigrants interact for a prolonged period of time, and may be accompanied by a process of mutual cultural transmission between groups.
    • Natives’ backlash against immigration is more likely to emerge when immigrants are ‘different’ (ethnically, racially, culturally) from natives. 
    • Natives' opposition to immigration is largely influenced by stereotypes and misperceptions. Misperceptions are often fuelled by the rhetoric of political entrepreneurs, who depict the foreign-born as a threat to the values and norms of receiving countries.  
    • Natives greatly over-estimate the size of the immigrant population, and believe that immigrants are poorer, less educated, and culturally more distant than they actually are. 
    • Political backlash has emerged even when immigration was economically beneficial, and boosted natives' employment.

    Anti-immigration sentiments have been typically channelled towards higher support for right-wing parties, despite the fact that natives who may be economically harmed by immigration are unlikely to benefit from the policies advocated by right-wing parties, such as more limited redistribution and lower social welfare. Two, non-mutually exclusive, factors can explain this pattern: 

    1. First, immigration can transform the political conflict within societies from economic to cultural. If native voters identify with the nation (or, their in-group), they may attach lower weight to economic issues, valuing more cultural ones. 
    2. Second, the political effects of immigration are linked to preferences for redistribution. Since immigrants are perceived - often incorrectly - as poor and culturally far, natives likely demand lower redistribution in response. This may happen either because natives respond to economic incentives (e.g. they do not want to subsidise poorer immigrants' consumption) or because they dislike sharing public goods with strangers.

    The inflow of minorities has often triggered out-migration of majority members. While plausible, standard economic mechanisms (e.g. higher house prices or labour market competition) are unlikely to explain these trends. Instead, evidence points to the importance of racial and cultural diversity, as well as the reluctance of individuals to share public goods with non-coethnics.

    Alberto F Alesina sadly passed away this year, you can read a touching tribute to the late, great economist here: Alberto Alesina. A free-spirited economist. 

    • CONTACT TRACING WORKS AND SAVES LIVES: Evidence from England

    Does Contact Tracing Work? Quasi-Experimental Evidence from an Excel Error in England
    Thiemo Fetzer, Thomas Graeber       
    CEPR DP No. 15494 | November 2020

    Despite numerous challenges faced by a contact tracing system, such as a people’s lack of trust, non-adherence and privacy concerns, this non-pharmaceutical intervention can have a strong impact on the progression of an infectious disease such as Covid-19.

    This is the main finding of a new CEPR study by Thiemo Fetzer and Thomas Graeber, which evaluates the effectiveness of contact tracing by exploiting a quasi-random variation in Covid-19 contact tracing in England.

    Between September 25 and October 2, 2020, a total of 15,841 Covid-19 cases in England (around 15 to 20% of all cases) were not immediately referred to the contact tracing system due to a data processing error. Case information was truncated from an Excel spreadsheet after the row limit had been reached, which was discovered on October 3. There is substantial variation in the degree to which different parts of England areas were exposed -- by chance -- to delayed referrals of Covid-19 cases to the contact tracing system. The findings reveal: 

    • More affected areas subsequently experienced a drastic rise in new Covid-19 infections and deaths alongside an increase in the positivity rate and the number of tests performed, as well as a decline in the performance of the contact tracing system. 
    • Conservative estimates suggest that the failure of timely contact tracing due to the data glitch is associated with more than 125,000 additional infections and over 1,500 additional Covid-19-related deaths. 
    • These novel findings provide strong quasi-experimental evidence for the effectiveness of contact tracing, at a time when evidence about their effectiveness remains scarce.

    Panel D: % cases not contact traced

    Notes: The geographic distribution of the fraction of cases tested from Sept 20 to Sept 27 that were not referred to contact tracing until Oct 3 or Oct 4.

    • SLAVERY SLOWED BRAZIL’S INDUSTRIALISATION AND WAS NOT BENEFICIAL TO LONG-TERM ECONOMIC DEVELOPMENT  

    SLAVERY AND DEVELOPMENT IN NINETEENTH CENTURY BRAZIL
    Nuno Pedro G. Palma, Andrea Papadia, Thales Pereira, Leonardo Weller       
    CEPR DP No. 15495 | November 2020

    Brazil imported more slaves than any other country in the world and slavery lasted longer and was more widespread than in the US south. Rather than promoting economic growth and development, the evidence shows that slavery held back industrialisation in Brazil. Not only was slavery abhorrent from a modern normative perspective, but it also had negative development consequences: while slave-owners and a few narrow sectors benefited, overall society lost out.

    These are the central findings of a new CEPR study by Nuno Palma, Andrea Papadia, Thales Pereira and Leonardo Weller, which brings new evidence on the legacy of slavery to economic development through the case study of Brazil during the nineteenth century. Among the findings: 

    • In Brazil – like in the US, the parts of the country where slavery was less pervasive performed better economically
    • There is no evidence that this was due to profits coming from the areas where slavery was more intensive
    • Plantation systems based on slave labour witnessed a lack of industrialisation, limited urbanisation, and low investment in human capital.
    • The Brazilian economy stagnated during the nineteenth century, and  only started to grow persistently by the turn of the century, in the years which followed the 1888 emancipation.
    • The most dynamic regions, the south and southeast, received the bulk of the five million European migrants who entered the country in the age of mass migration from the 1880s to the 1930s. 
    • Most significantly, when the state of São Paulo subsidized Italian immigration to replace slave labour in coffee groves, it became the country’s industrial centre.

    The conclusions contribute to the debate brought by the New History of Capitalism (NHC) about the role of slavery and industrialisation in the United States. This study reinforces the interpretation that slavery was not the main cause of modern economic growth in the United States.

    Figure A1: Disembarked slaves in Brazil by regions.

    Source: Eltis (2018).

    INCREASING REGULAR MASK USAGE BY 1% REDUCES COVID-19 DEATHS BY 10.5%: Evidence from the United States 

    David Welsch          
    01 December 2020

    A study by David Welsch shows that increasing the amount of individuals who frequently or always wear a mask when within six feet of people by 1% could reduce Covid-19 deaths by 10.5%, which translates into approximately six deaths in the average US county.

    The study examines the effect of mask usage using county-level data from the United States, employing an instrumental variable approach. The science behind mask usage and its ability to reduce airborne particles seems clear. Despite this, many individuals are sceptical that wearing masks can reduce the spread of Covid-19 and many refuse to wear one even when required. 

    		  

    BLUE COLLAR UK WORKERS ARE MOST EXPOSED TO NEW POST-BREXIT TRADE BARRIERS

    Rachel Griffith, Peter Levell, Agnes Norris Keiller         
    01 December 2020

    Blue collar UK workers in the middle of the earnings distribution are most exposed to new post-Brexit trade barriers, partly because they're in jobs where there are fewer alternative less-exposed jobs in their local labour market.

    Rachel Griffith, Peter Levell and Agnes Norris Keiller discuss potential consequences for the labour market – and earnings inequality – in the UK after the transition period will come to an end on 31 December. Overcoming frictions to these workers shifting across industries, regions and occupations will therefore be key to managing the impacts of Brexit.

    THE DANGER OF BRINGING FANS BACK TO FOOTBALL MATCHES: A stadium being 20% full could have the same impact as if it were 90% full

    James Reade, Matthew Olczak, Matthew Yeo        
    30 November 2020

    Should fans should be allowed to attend football matches in the UK? A study by James Reade, Matthew Olczak and Matthew Yeo finds that attendance at matches held in England across February and March helped to spread Covid-19 and resulted in an increase in cases and deaths: 

    • An extra football match resulted in an additional six Covid-19 cases and three excess deaths per 100,000 people. 
    • Once controls were added, the impact on cases and deaths did not vary by stadium capacity utilisation – a stadium being 20% full had the same impact as if it were 90% full.

    The results suggest extreme caution should be applied to reopening football to spectators and that there should be close monitoring of any gradual re-opening of stadiums.

    THE GENDER GAP IS EXPANDING DUE TO COVID-19: Evidence from the United States

    Simeon Djankov, Eva (Yiwen) Zhang       
    26 November 2020

    The rebound in jobs for men in the United States was swift after the initial weeks of the Covid pandemic, but not so for women. A study by Simeon Djankov and Eva Zhang highlights three areas for change to alleviate the burden on working women in the United States. 

    1. First, legal changes are needed to both federal and state-level regulation, with a particular focus on parental leave and pension rules. 
    2. Second, vocational training incentives with a particular focus on women are needed. 
    3. Third, future recovery programmes may do well to take the actual gender pay gap – factoring in unpaid work that women do in the household – into consideration.

     

    MACHINES CAN BE USED IN THE FIGHT AGAINST CORRUPTION: Evidence from Italy 

    Guido de Blasio, Alessio D'Ignazio, Marco Letta          
    27 November 2020

    Can machine learning can be leveraged to predict local corruption? A study by Guido de Blasio, Alessio D'Ignazio and Marco Letta uses data from Italy to highlight how such algorithmic predictions could be employed in the service of anti-corruption efforts, while preserving transparency and accountability of the decisions taken by the policymaker.

    APOCALYPSE LAOS: The devastating legacy of the ‘Secret War’

    Juan Felipe Riaño, Felipe Valencia Caicedo          
    29 November 2020


     

    Writing at Vox, Juan Felipe Riaño and Felipe Valencia Caicedo describe how the United States government’s ‘Secret War’ in Laos, waged from 1964 to 1975, left an enduring negative legacy for long-term economic development in the country. As a result of the intense bombing campaign, Laos is now severely contaminated with unexploded ordnance, which has impaired Laotians’ health, education, and migration choices. These factors have in turn hindered the structural transformation and economic growth of the country, which remains one of the world’s poorest.

    ANTITRUST IN THE DIGITAL ECONOMY: Views of leading economists on the market dominance of technology giants

    Romesh Vaitilingam          
    30 November 2020

    In October 2020, the US Department of Justice launched a federal antitrust lawsuit against Google, accusing the firm of abusing its dominance in the market for internet search. The IGM Forum at Chicago Booth invited its panels of leading US and European economists to express their views on the nature of the market dominance of Google and other technology giants in the digital economy, and what the appropriate policy response might be.

    Writing at Vox, Romesh Vaitilingam summarises the findings, which reveal, among other results, that when asked whether the imposition of some kind of regulation or a fundamental change in antitrust policy is warranted, a larger proportion of experts on the European panel agreed than of those on the US panel.

    POPULIST LEADERS THIVE OFF CAMPAIGN RALLIES 

    James Snyder, Hasin Yousaf          
    28 November 2020

    A study by James Snyder and Hasin Yousef explores the effect of rallies on citizens’ preferences over candidates, policy issues, and their intention to vote. The results show that populist leaders may be particularly effective in gaining support via their campaign rallies, at least temporarily. Populist leaders’ success may depend on connecting with voters via rallies. Could this have affected Donald Trump’s performance in the 2020 election? 

    HOW THE PROTESTANT REFORMATION SUCCEEDED: Luther’s network and the Holy Roman roads 

    Sascha O. Becker, Yuan Hsiao, Steven Pfaff, Jared Rubin          
    27 November 2020

    Martin Luther’s network alone does not explain the success of the Protestant Reformation - but his network combined with pre-existing ties created by trade routes of the Holy Roman Empire explains much of its success.

    Writing at Vox, Sascha O. Becker, Yuan Hsiao, Steven Pfaff and Jared Rubin offer a theory of how the Protestant Reformation succeeded, that combines relational diffusion (via Luther’s network ties) with spatial diffusion (via trade routes in the Holy Roman Empire), and substantiates this theory using data on Luther’s letters, travels, and students. 

    TECHNOLOGY WITHIN AND ACROSS FIRMS: A new approach from World Bank economists 

    Xavi Cirera, Diego Comin, Marcio Cruz, Kyung Min Lee      
    29 November 2020

    Writing at Vox, World Bank economists introduce a new approach to measure technology adoption at the business function level – the Firm-level Adoption of Technology survey. Using representative data from three countries, the study finds a larger variance in technology sophistication within firms compared with across firms, and greater variance across firms than across countries or regions. Furthermore, cross-firm technology differences account for one-third of the cross-firm productivity gap. This could be interpreted as evidence of the value of devoting more sophisticated technologies in more relevant business functions. 

    HOW MONETARY POLICY AFFECTS INVESTMENT IN THE EURO AREA

    Elena Durante, Annalisa Ferrando, Philip Vermeulen           
    30 November 2020

    A study by European Central Bank economists uses investment data from over one million firms in Germany, Spain, France, and Italy to analyse the transmission of monetary policy shocks across Europe.

    The study finds heterogeneity in the effects depending on firm size and industry – young firms and those producing durable goods react more strongly than the average firm. The differences in the way firms’ investment reacts can be used to gauge the importance of the interest rate and the balance sheet channels of monetary policy. Embedding these findings into macroeconomic models used in policymaking would enhance the information available to decision makers. 

    THE LASTING EFFECTS OF TERMS-OF-TRADE SHOCKS ON BUSINESS CYCLES

    Federico Di Pace, Luciana Juvenal, Ivan Petrella            
    28 November 2020

    The abrupt movements in commodity prices at the onset of the Covid-19 crisis have reignited policymakers’ concerns over movements in the terms of trade. The shock has certainly confirmed that terms of trade are very volatile and extremely sensitive to changes in global economic activity.

    Writing at Vox, Federico Di Pace, Luciana Juvenal and Ivan Petrella argue that these terms of trade shocks are likely to have a persistent impact on the business cycle of developing economies, which are particularly vulnerable to fluctuations in the price of their exports.  

    STICKY EXPECTATIONS: A unified explanation for bond and currency puzzles

    Eleonora Granziera, Markus Sihvonen          
    26 November 2020

    High short-term interest rates predict domestic currency appreciation and low excess returns for long-term bonds. These facts are at odds with two textbook conditions describing the relationship between different maturity interest rates and exchange rates: uncovered interest parity (UIP) and the expectations hypothesis.

    Writing at Vox, Eleonora Granziera and Markus Sihvonen explain that both conditions can be reconciled with the data if agents are assumed to have sticky rather than perfectly rational expectations concerning short rates. It also demonstrates how this empirically motivated change in model assumptions has broad implications for interpreting the effects of monetary policy on exchange rates and yield curves.  

    AFRICA'S ROADS MAKE THE RICH RICHER 

    Steven Poelhekke interviewed by Tim Phillips, 27 November 2020

    Africa's roads were originally built so that colonial powers could extract its natural wealth. What has happened since then? Steven Poelhekke of the University of Auckland examines the maps with Tim Phillips.