This week from CEPR: February 07

Friday, February 7, 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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    • New Discussion Papers


    • INTER-ETHNIC INCOME INEQUALITY INTENSIFIES CONFLICT: Evidence from Mandate Palestine 

    INTER-ETHNIC INCOME INEQUALITY AND CONFLICT INTENSIFICATION IN MANDATE PALESTINE
    Laura Panza, Eik Swee   
    CEPR DP No. 14366  30 January 2020 

    A new study by Laura Panza and Eik Swee examines the effect of inter-ethnic income inequality on conflict intensification in Palestine during the period 1926-1945. 

    The results show a substantial effect of inequality on conflict intensification, especially during periods where the relationship between Arabs and Jews were particularly strained. The results are driven by Arab-initiated attacks, reflecting local average treatment effects of Arab farmers who move from agrarian work to violence in response to adverse rainfall shocks, suggesting that economic shocks coupled with existing economic segregation facilitate the transition into violence when opposing groups are economic substitutes. Among the findings:

    • The Mandate period was crucial in setting the foundations of the Israeli-Palestinian conflict. 
    • It was during this time that Palestine witnessed an intensification in ethnic violence, which eventually led to the first Arab-Israeli war.  
    • Jew-Arab income inequality over this period escalated inter-ethnic hostilities: the effects are especially strong when considering institutional settings where the relationship between Arabs and Jews were particularly strained, such as periods of pro-Zionist British rule or high Jewish immigration.
    • A 10% increase in Jew-Arab income inequality led to twice as many conflict events and three times more casualties. 
    • While Jew-Arab income inequality induced more violence on average, when identifying the ethnic identity of victims and aggressors, the effect was driven by Arab-initiated events which correspondingly resulted in more Arab casualties.
    • Inequality-driven violence, especially Arab-initiated violence, was not the result of opportunity costs or appropriation, but rather an expression of resentment.

    While the case of Mandate Palestine is of course distinct, the overlap of existing inter-ethnic hatred with economic inequality is certainly not unique to Palestinian Jews and Arabs. 

    Figure 5: Map of Palestine, 1937


    • GLOBALISATION CYCLES: A new depiction of shifts in the world economy  

    GLOBALISATION CYCLES
    Maurice Obstfeld  
    CEPR DP No. 14378  02 February 2020

    A new study by Maurice Obstfeld, former chief economist at the International Monetary Fund (IMF), explores the concept of ‘globalisation cycles’ in the wake of the failure of the global economy to return to pre-trauma normalcy, followed by a process of international economic disintegration in the face of changed geopolitical realities.  

    He summarises that globalisation can elevate the need for state action, but also may limit state action. Thus, globalisation may be subject to cycles, expanding when economic conditions are more vibrant and accommodative, but then contracting when adverse shocks motivate countries to deploy economic tools that are inconsistent with free and open markets.

    Because globalisation can foster economic convergence among countries, but also sharpen political and economic competition, it may also eventually upset the geopolitical equilibrium that nurtured convergence, and perhaps especially, equilibria characterized by a hegemonic leader.

    Figure 1: Ratio of Global Exports to GDP (percent)

      

    Source: Catão and Obstfeld


    • MICROENTREPRENEURSHIP IN DEVELOPING COUNTRIES: The research evidence 

    MICROENTREPRENEURSHIP IN DEVELOPING COUNTRIES
    Seema Jayachandran  
    CEPR DP No. 14368 30 January 2020

    A new report by Seema Jayachandran reviews the latest evidence from economic research on small-scale entrepreneurship (‘microentrepreneurship’) in low-income countries. Major themes include the determinants and consequences of joining the formal sector; the impacts of access to credit and other financial services; the impacts of business training; barriers to hiring; and the distinction between self-employment by necessity and self-employment as a calling. The study devotes special attention to unique issues that arise with female entrepreneurship.



    SURPRISING INFLATION DEVELOPMENTS SINCE THE GLOBAL FINANCIAL CRISIS: Insights from a conference at the European Central Bank

    Michael Ehrmann, Marek Jarociński, Christiane Nickel, Chiara Osbat, Andrej Sokol  
    05 February 2020

    Inflation in advanced economies fell by less than expected in the wake of the financial crisis, while more recently, measures of slack and underlying inflation in the euro area have seen a disconnect. These and other inflation developments since the Global Crisis have surprised policy-makers, practitioners and academics alike. 

    Writing at VoxEU, economists at the European Central Bank (ECB) outline the evidence presented at a recent ECB conference on the drivers and dynamics of inflation.  


     

    A PHILLIPS CURVE FOR THE EURO AREA

    Laurence Ball, Sandeep Mazumder   
    04 February 2020

    Focusing on a measure of core inflation that strips out transitory shocks to headline inflation, the simple Phillips Curve captures most of the movement in inflation in the two decades of the euro area, according to research by Laurence Ball and Sandeep Mazumder.

    They note that inflation did not fall as much as the textbook Phillips curve would predict during Europe’s recessions of 2008 and 2011, and it has not risen as much as the theory would predict during recovery. They argue that adapting the Phillips curve to use a weighted median of industry inflation rates results in a much better fit with observed inflation. Adding the effect of headline inflation shocks improves the fit further.


     

    REGIONAL REDISTRIBUTION AND POPULIST VOTING: Evidence from Italy

    Giuseppe Albanese, Guglielmo Barone, Guido de Blasio  
    03 February 2020

    New research by Giuseppe Albanese and colleagues shows that in parts of Italy facing similarly adverse economic shocks, those that have benefited from EU regional redistribution policy have seen lower support for populist parties. This suggests that, at least in the short term, fiscal policy can be an effective tool against the populist backlash.

    This is a lead commentary in the VoxEU debate on Populism>>>  


     

    DIGITAL MONEY AND CENTRAL BANK DIGITAL CURRENCY: An executive summary for policymakers

    Dirk Niepelt   
    03 February 2020

    Central banks already issue digital money, but only to a select group of financial institutions; central bank digital currency would extend this to households and firms. A study by Dirk Niepelt examines assesses the opportunities and risks of proposals for such a currenct. He argues that while preparations for the launch of Libra have not proceeded according to plan, it has become clear that for central banks, maintaining the status quo is not an option.


     

    THE EFFECT OF TAXES ON FIRM-TO-FIRM TRADE IN DEVELOPING COUNTRIES: Evidence from India

    Lucie Gadenne, Roland Rathelot   
    03 February 2020

    VAT in developing countries distorts firms’ decisions about whether to trade with other firms and which ones to trade with. A new study by Lucie Gadenne and Roland Rathelot uses evidence from India to demonstrate that a VAT-paying firm buys a higher share of its inputs from VAT-paying suppliers than a non-VAT-paying one does and the resulting segmentation of supplier networks decreases the output of non-VAT-paying firms by between 7% and 10%.


     

    LEARNING ABOUT DEMAND ABROAD FROM WHOLESALERS

    William Connell, Emmanuel Dhyne, Hylke Vandenbussche   
    30 January 2020


     

    How do firms become exporters? Examining the role of intermediary firms in the internationalisation process, a study by William Connell and colleagues finds that a manufacturing firm that exports indirectly to a particular destination via a wholesaler is more likely to go on to become a direct exporter to that destination at a later point. This effect is driven by the spillovers of knowledge on foreign demand from the wholesaler to the manufacturer. The role of intermediaries is particularly important for destination markets that are further afield, where firms face greater uncertainty. 


     

    THE WHEELS OF CHANGE: Human capital, millwrights, and industrialisation in 18th-century England

    Joel Mokyr, Assaf Sarid, Karine van der Beek   
    30 January 2020

    A study by Joel Mokyr and colleagues shows how millwrights – highly skilled carpenters who specialised in constructing and repairing watermills – had a persistent effect on the mechanisation of textile- and iron-making and on the economic expansion that was taking place on the eve of the Industrial Revolution. These results shed new light on the role of human capital and the school system in England becoming an industrial nation. 


     

    DATA ARE A DEVELOPMENT ISSUE

    Susan Ariel Aaronson  
    30 January 2020

    While data are cheap and plentiful in many developing countries, data analysis, with its dependence on infrastructure and highly skilled labour, is expensive. Are developing countries ready for the new data-driven economy and can development organisations help them?

    A new study by Susan Aaronson finds that developing countries should be encouraged to develop plans for data governance and to experiment through technical assistance, regulatory sandboxes and collaboration. At the same time, development agencies and advocates need to wrestle with important questions about data-driven growth.


     

    THE SHARE OF WOMEN IN TOP INCOMES IS INCREASING BUT THEY REMAIN A MINORITY: Evidence from Sweden

    Anne Boschini, Jesper Roine   
    29 January 2020

    Using evidence from Sweden, a new study by Anne Boschini and Jesper Roine finds that while the share of women among the wealthiest groups has steadily increased over time, women remain a clear minority, especially at the very top. Unlike top-income men, top-income women are much more likely to have partners who are also in the top of the income distribution.


     

    HOW EUROPEAN CENTRAL BANK PURCHASES OF CORPORATE BONDS HELPED REDUCE FIRMS’ BORROWING COSTS

    Andrea Zaghini  
    30 January 2020

    In June 2016, the European Central Bank (ECB) launched its corporate sector purchase programme, through which it purchased corporate bonds in an effort to improve the financing conditions of euro area firms. 

    Writing at Vox, Andrea Zaghini argues that the programme was successful. In particular, by increasing prices and reducing yields in the targeted bond market segment, it encouraged investors to shift their investments towards similar but somewhat riskier bonds. This reduced borrowing costs for many firms, including those whose bonds were not eligible for direct purchase by the ECB. 


    RACIAL DIVERSITY, ELECTORAL PREFERENCES AND THE SUPPLY OF POLICY: The Great Migration and civil rights

    Alvaro Calderon, Vasiliki Fouka, Marco Tabellini   
    01 February 2020

    How did the changes in the racial composition of local constituencies affect voters’ preferences and politicians’ behaviour after the 1940-1970 Great Migration of African Americans within the United States?

    A study by Alvaro Calderon and colleagues finds that Democrats and union members supported blacks’ struggle for racial equality, but that backlash against civil rights erupted among Republicans and among whites who more exposed to racial mixing of their neighbourhoods. It also shows that politicians largely responded to demands of their constituencies. The findings suggest that under certain conditions, cross-race coalitions can emerge, but they also indicate that changes in the composition of the electorate can polarise both voters and politicians. 


    IMPERIAL ROOTS OF GLOBAL TRADE: Evidence from a new database

    Gunes Gokmen, Wessel Vermeulen, Pierre-Louis Vézina    
    01 February 2020

    A new CEPR study by Gunes Gokmen, Wessel Vermeulen and Pierre-Louis Vézina uses novel data on the rise and fall of empires over the last 5,000 years, to show that imperial capital has an effect on current trade beyond historical legacies such as sharing a language or a religion. This suggests a persistent and previously unexplored influence of long-gone empires on current trade.


    REGULATING UNDER THE RADAR: European Union official export credit support

    Kamala Dawar   
    31 January 2020

    There are now over 100 national export credit agencies, delivering approximately $215 billion in official export support to domestic firms’ exports of goods, services and investments. 

    Writing at Vox, Kamal Dawar argues that governments have a collective interest in revamping the rules to prevent an export credit subsidy war and a race to the bottom in terms and conditions. This could be done through the International Working Group on Export Credits and also by the European Commission setting a gold standard by more rigorously evaluating longer-term export credit activity.


    INNOVATION SPILLOVERS AND MARKET STRUCTURE: Evidence from the interwar aircraft industry

    Walker Hanlon, Taylor Jaworski    
    31 January 2020

    The slowing pace of economic growth in the United States and Europe have rekindled fears of reduced innovation and prompted calls for institutional changes meant to increase returns on spending for research and development. 

    A study by Walker Hanlon and Taylor Jaworski uses the case of the US interwar aircraft industry to suggest some unforeseen hazards of such change. It recommends considering the design of innovation and antitrust policy in tandem, especially where attempts to provide incentives for innovation may alter the extent of competition and endogenously reconfigure market structure. 


    GLOBAL TRANSPARENCY ON BANK DEPOSITS IN INTERNATIONAL FINANCIAL CENTRES: An example of multilateral cooperation at work

    Pierce O’Reilly, Kevin Parra Ramirez, Michael A. Stemmer    
    31 January 2020

    Wrtiing at Vox, Pierce O’Reilly and colleagues present the results of a recent study of the impact of exchange of information on foreign-owned bank deposits in international financial centres. Their findings highlight the effectiveness of the expansion of automatic exchange of information and provide evidence of the success of a comprehensive multilateral approach towards tax transparency. 



    THE ORIGINS OF TECH CLUSTERS

    William Kerr interviewed by Tim Phillips, 31 January 2019

    Why are cities so keen to create their own technology clusters, and why is it so difficult? Bill Kerr of Harvard Business School tells Tim Phillips what economists know (and don't know) about where tech clusters come from.



    Trade and the Single Market after Brexit

    Angus Armstrong  

    The EU is the UK’s biggest trade partner; in this video Angus Armstrong discusses the impact of Brexit on the UK’s trade patterns.