This week from CEPR: February 20

Thursday, February 20, 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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    PRIVATE CREDIT UNDER POLITICAL INFLUENCE: Evidence from France
    Anne-Laure Delatte, Adrien Matray, Noémie Pinardon-Touati     
    CEPR DP No. 14409  14 February 2020 

    A new CEPR study by Anne-Laure Delatte, Adrien Matray and Noémie Pinardon-Touati finds that elected officials in France intercede with banks to increase credit to businesses in difficulty in their area. The researchers find that formally independent private banks change their supply of credit to the corporate sector for the constituencies of contested political incumbents in order to improve their re-election prospects. In return, politicians grant such banks access to the profitable market for loans to local public entities in their constituencies. 

    The authors examine French credit registry data for 2007-2017 and find that credit granted to the private sector increases by 9%-14% in the year during which a powerful incumbent faces a contested election. In line with politicians returning the favour, banks that grant more credit to private firms in election years gain market share in the local public entity debt market after the election. If politicians can control the allocation of rents, then formal independence does not ensure the private sector's effective independence from politically motivated distortions.

    This study provides evidence that even with low levels of corruption, a limited need for (or possibility of) government bailouts, and full formal separation between politicians and bank-governing institution private banks may be motivated by the possibility of future benefits, to distort their supply of credit to the local economy so as to curry favour with powerful politicians in election years.

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    • EMERGING AND DEVELOPING ECONOMIES: Ten years after the global recession   

    EMERGING AND DEVELOPING ECONOMIES: Ten Years After the Global Recession
    Ayhan Kose, Franziska Ohnsorge   
    CEPR DP No. 14405 |  12 February 2020

    Although emerging market and developing economies (EMDEs) weathered the global recession a decade ago relatively well, they now appear less well placed to cope with the substantial downside risks facing the global economy. In many EMDEs, the room for monetary and fiscal policies to respond to shocks has eroded; underlying growth potential has slowed; and the momentum for improving policy frameworks, institutions, and business climates seems to have slackened.    

    These are the central conclusions of a new CEPR study by World Bank economists Ayhan Kose and Franziska Ohnsorge, who find that the experience of the 2009 global recession highlights once again the critical role of policy room in supporting economic activity during adverse shocks. Among the findings: 

    • Perhaps for the first time, many EMDEs were able to implement large-scale countercyclical fiscal and monetary policy during the global recession.
    • EMDEs were able to stimulate activity because they could draw on sizeable policy buffers accumulated during the pre-recession period of strong growth: government debt had fallen, current account and fiscal deficits narrowed, and inflation had moderated.
    • EMDEs with more resilient economies and with more forceful stimulus experienced milder growth slowdowns during the global recession.
    • Were a sharp global downturn to happen now, the average EMDE would be less prepared to address it than before the 2009 recession.
    • EMDEs generally are more vulnerable to external shocks, in part because of mounting debt, weakening demand for commodity exports, and slower underlying domestic growth.
    • Trade disputes among major economies are chipping away at an important engine of EMDE growth. At the same time, weaker fiscal positions would make it more difficult for EMDEs to support activity with expansionary fiscal policy.
    • Since the 1997-98 Asian crisis and the 2001 US recession – the two global downturns that preceded the 2009 global recession – policy frameworks in EMDEs have become more resilient.

    Figure 1: A decade since the 2009 global recession: Growth around global recessions

      

    Note: Grey bars indicate global recessions and slowdowns. 


    • USE OF PRESCRIPTION OPIOIDS: Evidence from France of the impact of economic hardship  

    PRESCRIPTION OPIOIDS AND ECONOMIC HARDSHIP IN FRANCE
    Mathias Dewatripont, Victor Ginsburgh, Michel Goldman, Patrick Legros, Ilaria Natali    
    CEPR DP No. 14403 | 11 February 2020

    Use of opioids in France is higher in parts of the country where the poverty rate is rising, where there is a bigger share of middle-aged people and people with only a basic education in the local population, and where population density is relatively low.

    These are among the findings of new CEPR study by Mathias Dewatripont and colleagues, the first study to investigate the link between socioeconomic hardship and prescription opioids in a European context. Among the findings: 

    • Increases in the poverty rate induce more sales: a one percentage point increase in poverty produces, approximately, a 10% increase in opioid sales. 
    • Information sharing in social groups significantly affects citizens' protest decisions and as a consequence mitigates the effects of high conflict, leading to greater efficiency in policy-makers' choices. 
    • Opioid sales are positively related to the share of middle-aged people and the share of individuals with only a basic education, while they are negatively related to population density. 
    • Middle-aged individuals and people with lower education levels are mostly at risk and should be carefully screened before and monitored after being treated. 
    • Unemployment is not significantly related to opioid consumption. Unemployment does not necessarily represent a good proxy of economic disruption, especially in France, where considerable monetary support is offered to the unemployed.  
    • Pharmacovigilance, also known as drug safety, should be more intensively addressed towards poor and rural areas. A combination of policies aimed at improving economic prospects and strictly monitoring access to opioid medications would be beneficial for reducing opioid-related harm.
    • Discrepancies in mortality rates between France and the United States may largely be attributed to deeply different regulatory systems and medical cultures. In Europe, it is strictly forbidden to advertise prescription only medicines, companies are not allowed to provide free samples and European doctors are more reluctant to use opioids.

    The authors conclude that both socio-economic factors and regulatory frameworks are crucial for explaining the opioid crisis. They represent two important facets of the same coin and policies aimed at fighting the epidemic should not translate into an 'either-or' between improving socioeconomic status or enhancing the regulatory environment but should rather view these as complementary aspects of the same crisis.

    Figure 4: Opioid-related Hospitalisations in France between 2000 and 2017

    Source: ScanSanté database; authors’ calculations. 



    WOMEN MAKE A DIFFERENCE AS POLICYMAKERS: Evidence from Germany

    Thushyanthan Baskaran, Zohal Hessami    
    18 February 2020

    When too few women hold political office, political decisions may not adequately reflect women’s needs and preferences. For example, in Germany, municipalities with a higher share of female councillors expand public childcare more quickly. That is one of the findings of research by Thushyanthan Baskaran and Zohal Hessami. The researchers conclude that the fact that the presence of women has substantive effects on policies should be taken into account in current debates around the introduction of gender quotas in politics.  


     

    WORLD TRADE IN WINE LIKELY TO BE HIT BY BREXIT AND UNITED STATES TARIFFS: Analysis of disruptions to the global alcohol market 

    Kym Anderson    
    16 February 2020

    A new CEPR study by Kym Anderson provides an overview of the major trends and projects the possible effects of Brexit and the US tariffs on the global alcohol market. The study finds that both shocks would reduce world trade in wine. Even countries not targeted by US tariffs can be worse off if those tariffs sufficiently reduce global consumption. 


     

    BILATERAL TRADE IMBALANCES: Hidden causes and hidden effects  

    Alejandro Cuñat, Robert Zymek    
    17 February 2020

    Tariffs imposed during the US-China trade war will reduce the trade deficit between the two countries in the long run, but only by worsening the United States trade balance with other trade partners almost one-for-one. This is a central finding of a study by Alejandro Cuñat and Robert Zymek, which examines why countries exhibit large variation in their bilateral balances across trade partners. 


     

    TERROR AND TOURISM: How bad news can harm economic development

    Tim Besley, Thiemo Fetzer, Hannes Mueller    
    14 February 2020

    For countries that rarely feature in the international news cycle, a violent event can have a disproportionate effect on the tourism industry. This infrequent coverage leads to a ‘bad news’ bias, which can affect not only how people view these countries, but whether they choose to visit. In turn, this can have serious economic consequences for the countries involved. 

    These are the central findings of a study by Tim Besley and colleagues, which documents a robust relationship between the intensity of reporting on violence and subsequent drops in tourist spending in Egypt, Israel, Morocco, Tunisia, and Turkey during the 21st century. 


     

    THE POTENTIAL IMPACT OF PLACE-BASED PAYROLL TAXES ON JOBS: Evidence from Norway 

    Hyejin Ku, Uta Schӧnberg, Ragnhild C. Schreiner    
    15 February 2020

    Place-based payroll tax incentives can be effective in stimulating local employment in settings with some degree of wage rigidity, according to a new study of Norway.

    Previous research has told us little about whether place-based payroll tax incentives successfully boost employment. Writing at Vox, Hyejin Ku and colleagues estimate their effect using a natural experiment in Norway, which was temporarily forced to abolish its place-based incentives. The study finds that a rise in payroll taxes reduced employment. Downward wage rigidity meant that employers could not simply pass the tax increase on to workers.


     

    THE EURO: A transfer union from the start

    Enrico Perotti, Oscar Soons     
    18 February 2020


     

    The history of the euro shows that a common currency between strong and weak members has structural consequences: market prices and flow will adjust more quickly than national institutions. Writing at Vox, Enrico Perotti and Oscar Soons argue that the euro led to implicit devaluations and revaluations, boosting the productive incentives and fiscal capacity of strong members at the cost of others. The euro was thus a transfer union from the start, with implicit flows from the periphery to the core.


     

    THE VALUE OF POLLUTION INFORMATION: Evidence from China

    Panle Jia Barwick, Shanjun Li, Liguo Lin, Eric Zou     
    12 February 2020

    China’s national air quality monitoring and disclosure programme (2013–2014), which substantially expanded public access to pollution information, triggered a cascade of changes in household behaviour, prompting people to find out more online about pollution-related topics, adjust their day-to-day consumption to avoid exposure to pollution, and exhibit a higher willingness to pay for housing in less-polluted areas.

    These are the central findings of a study by Shanjun Li and colleagues, who find that the programme’s estimated annual health benefits far outweigh the combined costs of the programme and associated pollution-avoidance behaviours.


     

    POLITICAL RISK AND EXCHANGE RATES: Lessons of Brexit

    Paolo Manasse, Graziano Moramarco, Giulio Trigilia    
    17 February 2020

    The pound depreciated overnight by about 7% against the euro and other main currencies following the Leave victory in the UK’s EU referendum in 2016, suggesting that the markets expected Brexit to harm the economy. Yet currency markets hailed the overwhelming victory of Brexiteer Boris Johnson’s Conservative Party in the 2019 general election with a 2% appreciation of the pound. 

    Writing at Vox, Paolo Manasse and colleagues argue that this apparent contradiction can be explained by disentangling the effects that politics has on exchange rate expectations and a political risk premium.


     

    THE WAGE–EMPLOYMENT NEXUS: A tale of persistence

    Antonio Conti, Elisa Guglielminetti, Marianna Riggi     
    13 February 2020

    The weak relationship between wage dynamics and unemployment in the euro area since the Global Crisis is widely perceived as one of the main causes of the ‘twin puzzle’ of missing disinflation between 2009 and 2011, and missing inflation thereafter. 

    Writing at Vox, Bank of Italy economists attribute the weak response of nominal wage growth to employment dynamics since 2008 to the countercyclical behaviour of labour productivity, which is driven, in turn, by the exceptionally high persistence of the downturn and the subsequent recovery.


     

    CASCADING TRADE PROTECTION: Evidence from the United States

    Aksel Erbahar, Yuan Zi    
    12 February 2020

    US steel and aluminium tariffs lead to increased demands for protection by manufacturers of downstream products such as car bumpers and steel nails, who were hurt by the original tariffs. Writing at Vox, Aksel Erbahar and Yuan Zi present new evidence for such ‘cascading protection’, showing how US protection of inputs increases the probability of petitions for protection by their downstream users.


    FOREIGN EXCHANGE SWAPS: Hidden debt, lurking vulnerability

    Claudio Borio, Patrick McGuire, Robert McCauley    
    13 February 2020

    A study by Claudio Borio and colleagues at the Bank for International Settlements examines the geography of foreign exchange swaps, a key instrument in the global financial system for hedging, position-taking and short-term funding, and draws implications for policy. 

    The study finds that non-US residents’ US dollar forward payment obligations arising from foreign exchange swaps and forwards are likely to be even larger than the corresponding on-balance sheet US dollar debt. It also highlights the favourable regulatory treatment that these instruments receive, and argues that they represent a critical pressure point in international financial markets.



    EDUCATION CREATES PEACE: Evidence from Indonesia 

    Dominic Rohner interviewed by Tim Phillips, 14 February 2019

    New research shows how a school-building programme in Indonesia successfully reduced conflict. Dominic Rohner tells Tim Phillips about this unanticipated peace dividend, and how the CEPR's Research and Policy Network on conflict reduction will help policymakers.



    ‘DEATHS OF DESPAIR’ IN THE UNITED STATES: The role of stagnating wages and contracting out of low-skill jobs

    Anne Case    

    Mortality rates for Americans who don't have a college education have risen considerably since the 1990s, driven in large part by deaths from alcohol, suicide or drug overdose and the underlying mental health issues. Anne Case traces the rise of these 'deaths of despair' in the United States back to stagnating wages and the contracting out by firms of low-skilled jobs to avoid high health insurance costs.


    WHAT CAUSED THE U.S. HOUSING CRISIS?

    Antoinette Schoar    

    Understanding the origins of the American housing crisis of 2007 has been a challenge for economists and policy-makers. Antoinette Schoar and her co-researchers reveal that the tale of a 'subprime mortgage crisis' is not based on what actually happened. As she explains, it was the middle- and upper-middle classes defaulting in unprecedented large numbers that predominantly caused the crash. Better understanding of the false narrative could have led to the introduction of better policies.