This week from CEPR: July18th

Thursday, July 18, 2019

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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  • EXPORTWELTMEISTER: The low returns on Germany’s capital exports 

EXPORTWELTMEISTER: The low returns on Germany’s capital exports
Franziska Hünnekes, Moritz Schularick and Christoph Trebesch  
CEPR DP No. 13863 14 July 2019

No other country invests larger amounts of savings outside its borders as Germany goes. But while Germany is world champion in exporting capital – ‘Exportweltmeister’ – it plays in the third division when it comes to investment performance, according to new CEPR research. The findings of the low returns to the country’s capital exports raise substantial doubts about whether German households, firms, and banks allocate their savings in a beneficial way.

The authors examine the returns on German foreign investments from 1950 to 2017 and find that:

  • Germany’s annual returns on foreign assets were 2 to 5 percentage points lower than those of comparable countries. Germany ranks last among the G7 countries, including in the last decade. 
  • Domestic returns on German assets have outperformed foreign returns abroad by about 3 percentage points per year.
  • Germany’s external wealth provides very little consumption insurance as foreign returns are highly correlated with domestic activity.
  • The capital exports do little to diversify demographic risks as Germany mainly invests in countries with similar demographics.

Figure 1: Culminated nominal returns, 1975-2017

Note: This graph shows culminated total returns since 1975 for a portfolio with an initial value of 1. We focus on foreign nominal returns of the US, the UK and Germany, as well as the German domestic return. 

  • BROADBAND EXPANSION IN FRANCE: The positive effects for firms and consumers

Technology-induced Trade Shocks? Evidence from Broadband Expansion in France 
Clément Malgouyres, Thierry Mayer and Clément Mazet
CEPR DP No. 13847 08 July 2019

The expansion of broadband internet in France over the decade between 1997 and 2007 had a big impact on the importing patterns of small and medium-sized firms, according to new CEPR research. The affected firms increased their imports by around 25%, which was driven by a rise in both the number of source countries and the count of products imported. 

All this was good news for French consumers. The study calculates that broadband internet reduced the consumer price index by 1.7% and that the import channel – that is, the enhanced access to foreign goods that is allowed by broadband – accounts for a quarter of that effect.

Figure 2: The progressive roll-out of the DSL technology in France

  • VOTING WITH THEIR MONEY: Brexit and outward investment by UK firms 

Voting with their Money: Brexit and Outward Investment by UK Firms 
Holger Breinlich, Elsa Leromain, Dennis Novy and Thomas Sampson 
CEPR DP No. 13850 11 July 2019

New CEPR research confirms that large numbers of UK companies have been setting up European subsidiaries to retain access to the EU market after Brexit. At the same time, the number of investment projects by EU27 companies in the UK has declined by around 9%, illustrating that being a smaller economy than the EU leaves the UK more exposed to the costs of economic disintegration.

The study examines the impact of the 2016 Brexit referendum on UK foreign direct investment. Using a technique known as the ‘synthetic control method’ to construct appropriate counterfactuals, the authors show that by March 2019, the vote to leave the EU had led to a 17% increase in the number of UK outward investment transactions in the remaining EU27 member states. Transactions in non-EU OECD countries have been unaffected.

Figure 2: BUK-EU27 FDI counts (actual vs. synthetic control)


Note: This figure plots the actual count of FDI transactions form the UK to the EU27 (solid line) and the corresponding synthetic control series (dashed line). The vertical line after 2016Q2 indicates the beginning of the post-referendum period. 


Nauro Campos, Fabrizio Coricelli
08 July 2019

It is 20 years since the euro was launched, but to date we have not seen many articles that take stock of the accomplishments and disillusionments of the single currency – and how to improve it. Writing at Vox, Nauro Campos and Fabrizio Coricelli pick 20 papers that economists, policy-makers and commentators should reread to mark the euro’s 20th anniversary year.



Michele Cantarella, Nicolo Fraccaroli, Roberto Volpe
11 July 2019

The success of populist parties in Italy’s elections in 2018 was not the result of ‘fake news’, according to research by Michele Cantarella, Nicolò Fraccaroli and Roberto Volpe. Their study finds evidence that voters self-select into ‘misinformation bubbles’, consuming fake news because of their prior preference for populist platforms rather than the other way round.

This study discusses how fake news might have played a less than obvious role in influencing political preferences during Italy’s elections of 2018.


Paolo Acciari, Alberto Polo, Gianluca Violante
13 July 2019

A new study of intergenerational income mobility in Italy finds steep differences by region, with provinces in the north of the country being more egalitarian and more upwardly mobile than in the south.

Intergenerational mobility can be seen as a proxy for a fair and fluid society, shedding light on the extent to which individuals with different initial conditions have equal opportunities to succeed. This research by Paolo Acciari, Alberto Polo and Gianluca Violante finds income persistence in Italy to be quite linear, except at the very top of the income distribution.

TAKING MALTHUS SERIOUSLY: The historical drag of economic stagnation

Jakob Brøchner Madsen, Peter Robertson, Longfeng Ye
14 July 2019

Evidence for the Malthusian trap in pre-industrial Europe has been weak until now. Research by Jakob Brøchner Madsen, Peter Robertson and Longfeng Ye presents new historical data for 17 countries on the strength of forces keeping the continent in economic stagnation from the Dark Ages to the Industrial Revolution.

INDIA’S RIGHT TO EDUCATION ACT: The impact on enrolment, test scores and school quality

Manisha Shah
10 July 2019

A decade ago, India joined a range of countries that mandate free, compulsory education for school-aged children. Passed in August 2009, India’s Right to Education Act was potentially transformative legislation, yet detailed analysis of its impact on the country’s educational outcomes has been slow to emerge. New research by Manisha Shah uses three national datasets to consider whether the Act is associated with changes in student enrolment, test scores, student-teacher ratios, school infrastructure, and other indicators of educational health and standing.

PREFERENTIAL TRADE AGREEMENTS: A persistent struggle against protection

Alvaro Espitia, Aaditya Mattoo, Mondher Mimouni, Xavier Pichot, Nadia Rocha
10 July 2019


Preferential trade agreements cover more than half of world trade. But while the 280 in force have substantially widened the scope of free trade and reduced average applied tariffs, they have struggled against traditional bastions of protection in poorer countries. That is the conclusion of a study by Alvaro Espitia, Aaditya Mattoo, Mondher Mimouni, Xavier Pichot and Nadia Rocha.


Jason Garred
09 July 2019

While China agreed to limit its use of import tariffs on joining the World Trade Organization (WTO), it continued to use other trade policies, including new restrictions on exports. According to research by Jason Garred, this partly restored the asymmetric treatment of Chinese industries embodied in pre-WTO import tariffs. His study concludes that today’s tariff wars are just the latest example of a battle whose skirmishes have taken many forms.


Xuepeng Liu, Huimin Shi
11 July 2019

The US-China trade war has continued for almost a year, but its effectiveness in preventing some Chinese origin products reaching the United States may not be as great as it seems. Research by Xuepeng Liu and Huimin Shi shows how trade re-routing has been used in the past to circumvent antidumping duties in the context of trade tariffs. Firms may be able to avoid tariffs by sending their products to a third country, where the goods are reissued certificates of origin and then sent to the final destination country without being subject to the same tariffs.


CHINA’S BELT AND ROAD TRANSPORT INFRASTRUCTURE PROJECTS: World Bank analysis of the likely economic impact on participating countries

Francois de Soyres, Alen Mulabdic, Michele Ruta
12 July 2019

Common transport infrastructure can improve welfare for participating countries, but they are costly undertakings with potentially asymmetric effects on trade and income of individual countries. World Bank research by Francois de Soyres, Alen Mulabdic and Michele Ruta uses new data on China’s Belt and Road transport projects to quantify the economic impact of the initiative. Welfare in participating countries could increase by 2.8% if all projects are implemented, but some countries have a negative welfare effect because of the high cost of the infrastructure. 

HOW INFRASTRUCTURE CAN HELP TO CLOSE GENDER GAPS IN DEVELOPING COUNTRIES: Evidence from highway investment programmes in South Asia

Martin Melecky
12 July 2019

There has been increasing interest in how infrastructure can help close gender gaps in developing countries. Based on studies of various highway investment programmes in Asia, research by Martin Melecky at the World Bank reveals how highways can help women can seize better jobs if they are already employed. Compared with men, however, women have some distinct demands from road corridor programmes and could face gender-specific risks, notably during the construction of the highways. 


Toshimori Otazawa, Yuki Ohira, Jos van Ommeren
09 July 2019

Young firms in knowledge-intensive industries, such as ICT, scientific research, and professional and technical services, locate geographically closer to other firms in cities. That is the central finding of research by Toshimori Otazawa, Yuki Ohira and Jos van Ommeren on inter-firm transaction networks and economic geography in Japan.

Relationship-based distance has become as important a determinant of firm interactions as physical distance in recent years. This study presents evidence to support the claim that firms physically locate closer to others that proximate in their transaction networks, although this effect varies across industries and by age of firms.

MEASURING GLOBAL ECONOMIC ACTIVITY: World industrial production is a much better measure than shipping costs

James Hamilton
08 July 2019

Shipping costs offer a potentially attractive measure of world real economic activity. But comparing alternative monthly measures based on shipping costs with direct estimates of world industrial production (in terms of coherence with world GDP and usefulness for forecasting commodity prices), research by James Hamilton concludes that the latter is a much better measure. If shipping costs are to be used, the cyclical component should not be calculated using residuals from a linear trend.

BANK CAPITAL REQUIREMENTS: An expanded conservation buffer would operate as an automatic stabiliser

Charles Goodhart, Dirk Schoenmaker
11 July 2019

While banking is pro-cyclical, the capital framework is largely static. The countercyclical capital buffer is discretionary, with potential danger of inaction, and is also limited in scale. Writing at Vox, Charles Goodhart and Dirk Schoenmaker propose an expanded capital conservation buffer, which would act as an automatic stabiliser. This could be incorporated into the next Basel review and the upcoming Solvency II review.



Thomas Cornelissen interviewed by Tim Phillips, 12 July 2019

Children in different countries start school at very different ages. Thomas Cornelissen tells Tim Phillips about new research that suggests an early start may help their development. 

BREXIT: The impact on wages and training

Swati Dhingra, 10 July 2019

Following the Brexit vote, sterling suffered the biggest depreciation ever experienced by the four biggest currencies. With companies finding that products they bought from outside the UK increased in price sometimes by as much as 8% overnight, those industries most reliant on inputs from abroad saw the biggest cuts in wages and also reductions in job-related training and education for their workers.

CEPR Fellow Swati Dhingra looks at what Brexit tells us about the contribution of globalisation to the productivity and wage stagnation we see across the developed world.