This week from CEPR: December 23

Thursday, December 23, 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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    THE DYNAMIC CONSEQUENCES OF STATE-BUILDING: Evidence from the French Revolution
    Cédric Chambru, Emeric Henry, Benjamin Marx
    CEPR DP No. 16815 | December 2021

    In 1790, France introduced a series of radical reforms to revamp the organisation of the kingdom and to design a new administrative map reflecting modern principles of efficient government. This process involved choosing between century-old local centres and reallocating administrative functions to some cities at the expense of others. Anticipating that this reform would have major impacts on subsequent economic growth, the local elites put tremendous pressure on the Constituent Assembly to ensure that their own cities would be chosen as the new local capitals. This lobbying effort was such that the Assembly, unable to adjudicate between rival urban centers, invented a rotation design where administrative functions would alternate across different cities.

    A new CEPR study by Cédric Chambru, Emeric Henry and Benjamin Marx shows that the revolutionaries’ expectations about the long-term impacts of the reform were correct: differential investments in state capacity profoundly shaped patterns of economic development in the ensuing decades, and eventually contributed to the rise of the modern state. Among the findings:

    • In the long run, the cities chosen as the new local capitals ended up outgrowing other cities, and these capitals also drove faster growth in their periphery. 
    • However, this long-term divergence only materialised in the medium and the long run. In the immediate aftermath of the reform, citizens residing in or near the new capitals were more exposed to investments made to build the coercive capacity of the state, including its ability to extract fiscal and physical resources in the form of higher taxation and military conscription. 
    • Given the turmoil associated with Napoleonic wars until 1815, France’s new local capitals paid a hefty price in exchange for becoming focal points of administrative presence.
    • In the long run, the new local capitals and their periphery obtain more public goods and experience faster economic development. One hundred years after the reform, capitals are 40% more populated than comparable cities in 1790.

    These results shed new light on the intertemporal and redistributive impacts of state-building in the context of one of the most ambitious administrative reforms ever implemented.

    Figure: Departments with a Rotation of Administrative Functions in 1790

    Notes: This map shows the departments (colored in grey) with a rotation or a division of administrative functions in our baseline sample (18 departments). Black lines indicate the boundaries of French departments created in February 1790. Capital cities after 1800 are indicated with a square. Other candidate cities are indicated with a circle.


    • THE COVID-19 PANDEMIC IS AN OPPORTUNITY FOR A CLEANER ENERGY MIX: The power of creative destruction

    CREATIVE DESTRUCTION DURING CRISES: An Opportunity for a Cleaner Energy Mix
    Pragyan Deb, Davide Furceri, Jonathan D. Ostry, Nour Tawk        
    CEPR DP No. 16819 | December 2021

    Lockdowns resulting from the COVID-19 pandemic have reduced overall energy demand but electricity generation from renewable sources has been resilient. While this partly reflects the trend increase in renewables, a new CEPR study by Pragyan Deb, Davide Furceri, Jonathan Ostry and Nour Tawk highlights that recessions result in a permanent, albeit small, increase in energy efficiency and in the share of renewables in total electricity. 

    The authors show that these effects are stronger in the case of advanced economies, and in the presence of stronger environmental policies that incentivise the shift towards renewable energy. The research finds that both non-market-based policies in the form of emission and fuel standards, R&D incentives and subsidies and public investments, as well as market-based measures such as trading schemes for carbon, renewable energy certificates and energy saving certificates, can be effective in boosting the transition towards renewables.

    Although climate change and clean energy policies can entail political costs in the form of opposition from both energy-using industries as well as the public at large, the authors show how these costs can be avoided if the design of mitigation policies takes into account political economy dimensions and if complementary policies are deployed to protect vulnerable households. Although the migration to renewables might be socially less costly during times of booms—easier for obsolete power plant workers and coal miners to find new jobs during a boom—it still requires strong and politically costly policy actions in the form of standards or taxes to close down a power plant during a boom when energy demand is high. Recessions, such as the current one, and the associated “creative destruction”, provides a window opportunity to foster reforms to achieve a more resilient and greener recovery.

    Figure: Estimated energy demand, 2020 relative to 2019 (%) 

    Source: International Energy Agency. World Energy Outlook 2020


    • RAISING CHILDREN IN THE TRUMP ERA: Political partisanship and fertility choices   

    PARTISAN FERTILITY AND PRESIDENTAL ELECTIONS
    Gordon Dahl, Runjing Lu, William Mullins
    CEPR DP16821 | December 2021

    A new CEPR study by Gordon Dahl, Runjing Lu and William Mullins shows how changes in political leadership drive sharp changes in public policy and partisan beliefs about the future. Exploiting the surprise 2016 election of Trump, the authors identify the effects of a shift in political power on one of the most consequential household decisions: whether to have a child. 

    The research shows that Republican-leaning counties experience a sharp and persistent increase in fertility relative to Democratic counties, a shift amounting to 1.2 to 2.2% of the national fertility rate. In addition, Hispanics see fertility fall relative to non-Hispanics, especially compared to rural or evangelical whites.



    AUTOCRATIC AI DYSTOPIAS: Use of facial recognition AI in China

    Martin Beraja, Andrew Kao, David Yang, Noam Yuchtman            
    17 December 2021

    Using data on facial recognition AI in China, a study by Martin Beraja, Andrew Kao, David Yang and Noam Yuchtman shows that episodes of local political unrest lead to higher public procurement of AI technologies. These technologies are shown to mitigate the potential for exogenous shocks to trigger unrest, while also boosting broader software innovation in affected regions. The research demonstrates a mutually reinforcing relationship between AI innovation and the political control objectives of autocrats.

     

    THE EPIDEMIC OF SOLITUDE IN EUROPE HAS SIGNIFICANT ECONOMIC EFFECTS

    Chiara Burlina, Andrés Rodríguez-Pose               
    19 December 2021

    A study by Chiara Burlina and Andrés Rodríguez-Pose shows that solitude, a rising phenomenon in western countries has significant influence on the economic performance of European regions at the local level. 

    Distinguishing between two forms of solitude – loneliness and living alone – the authors show that greater shares of people living alone drive economic growth, whereas an increase in loneliness has damaging economic consequences. Though the relationship is complex and non-linear, a region with more lonely people will experience lower aggregate economic growth.


    THE LATIN AMERICAN PANDEMIC 

    Ilan Goldfajn, Eduardo Levy Yeyati              
    16 December 2021

    The impact of the Covid-19 pandemic in Latin America highlighted the challenge of long-standing fiscal and social deficits in a context of overstretched public sector resources. And it deepened a growing discontent with the economic status quo and the political system. 

    A new CEPR eBook, edited by Ilan Goldfajn and Eduardo Levy Yeyati collects a series of conversations with distinguished Latin American researchers and policymakers aimed at trying to map a possible future for Latin America, with a focus on avoiding the next crisis, policies for sustainable growth, social challenges, and the future of democracy.


    IMPACTS OF NATURAL DISASTERS ON PERCEPTIONS OF OTHERS: Evidence from Indonesia

    Yasuyuki Todo, Yuzuka Kashiwagi             
    21 December 2021

    How do natural disasters affect residents’ perceptions of each other in a region long divided by religious conflict? Using household survey data from Central Sulawesi, Indonesia, before and after the 2018 Sulawesi earthquake, a study by Yasuyuki Todo and Yuzuka Kashiwagi finds that victims expressed higher expectations for support from other religious groups going forward, suggesting that the experience of intergroup cooperation during the 2018 disaster raised expectations for cooperation during future emergencies.


    THE 1965 US IMMIGRATION ACT: Congressional voting was consistent with public opinion

    Giovanni Facchini, Timothy Hatton, Max Steinhardt              
    13 December 2021

    The 1965 Immigration Act represented a radical shift in US policy, dramatically expanding the volume and changing the composition of immigration. Its approval has often been described as the result of political machinations negotiated within Congress, without regard to public opinion. 

    Writing at Vox, Giovanni Facchini, Timothy Hatton and Max Steinhardt argue instead that congressional voting was consistent with public opinion on abolishing the country-of-origin quotas but not with the desire to limit the volume of immigration.   


    HIGHER PROFIT TAXES REDUCE FIRMS’ R&D ACTIVITIES: Evidence from Germany

    Andreas Lichter, Max Löffler, Ingo E. Isphording, Thu-Van Nguyen, Felix Poege, Sebastian Siegloch            
    21 December 2021


     

    A new study by Andreas Lichter, Max Löffler, Ingo E. Isphording, Thu-Van Nguyen, Felix Poege and Sebastian Siegloch  presents evidence from Germany that points to sizeable negative effects of increasing profit taxes on firms’ R&D spending and patents. However, slashing business tax rates may not be the most efficient policy instrument to spur innovation altogether. 


    DOES TRADE INSURANCE MATTER? Evidence from the Covid-19 pandemic

    Matthieu Crozet, Banu Demir, Beata Javorcik            
    20 December 2021

    A study by Matthieu Crozet, Banu Demir and Beata Javorcik shows that trade flows insured by letters of credit were more resilient than other flows during the Covid-19 pandemic. The research finds that in general, the impact of letters of credit are stronger for exports to countries with a high number of Covid-19 cases. The significant effects of trade insurance thus suggest that uncertainty played an important role in driving the trade collapse in 2020.


    SPREAD TOO THIN: The impact of lean inventories

    Julio Ortiz                
    17 December 2021

    Just-in-time production has contributed to the decline in inventory holdings over the last several decades. Using US firm-level data, a study by Julio Ortiz argues that just-in-time production creates a trade-off between firm profitability and vulnerability to large unexpected shocks. The theoretical analysis indicates that just-in-time production raises firm value by 1.3%. At the same time, amid a widespread supply disruption, a leaner economy experiences a deeper output contraction.   



    EUROPE'S ASYLUM LOTTERY

    Timothy Hatton interviewed by Tim Phillips, 17 December 2021

    Refugees from conflicts in Yemen, Syria, Iraq, and many other countries travel thousands of miles seeking a new life in Europe. But how likely are these refugees to be recognised as asylum seekers, and does it matter in which country they apply? Tim Hatton tells Tim Phillips that, despite efforts to standardise the process of granting asylum, there are still big differences in recognition rates across Europe. Download the free DP: Hatton, T. 2021. 'Asylum Recognition Rates in Europe: Persecution, Policies and Performance'. CEPR



    POPULIST LEADERS AND THE ECONOMY: Counting the cost

    Manthos Delis interviewed by Tim Phillips, 15 December 2021

    Today, one in four nations is governed by a populist. What will this mean for their economies? Moritz Schularick explains that a century of data suggests that the economic and institutional cost of populism is high and long-lasting.