This week from CEPR: May 27

Thursday, May 27, 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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    • New Discussion Papers

    • MIGRANTS AT SEA: How search and rescue operations cause smugglers to undertake more dangerous crossings

    MIGRANTS AT SEA: Unintended Consequences of Search and Rescue Operations
    Claudio Deiana, Vikram Maheshri, Giovanni Mastrobuoni  
    CEPR Discussion Paper No. 16173 | May 2021

    The Central Mediterranean Sea is the world's most dangerous crossing for migrants. Between 2009 and 2017, roughly 11,500 people are believed to have perished attempting the journey. In response to mounting deaths, European nations intensified search and rescue operations in 2013. However, smugglers responded by sending boats in adverse weather and shifting from seaworthy boats to flimsy rafts. In doing so, these operations induced more crossings, ultimately offsetting their intended safety benefits.

    These are the main findings of a new CEPR study by Claudio Deiana, Vikram Maheshri and Giovanni Mastrobuoni, which studies the unintended consequences of increased search and rescue operations in the Mediterranean. Among the findings:

    • While search and rescue (SAR) has no doubt saved lives directly, it may have had adverse unintended consequences that must be considered.
    • First, by reducing the risk of crossing, SAR likely induced more migrants to attempt to cross, and in doing so, exposed more people to the risk of death along the passage.
    • Second, by reducing the costs to traffickers of using unsafe boats, SAR induced a large substitution away from seaworthy wooden vessels and towards flimsy, inflatable boats.
    • Thus, the benefits of SAR have been, to some extent, captured by human smugglers.
    • By failing to act, it is likely crossings would continue and deaths would continue to mount. But by intervening along the route, it is likely that more migrants would attempt an extremely dangerous undertaking. Saving a migrant at sea seems to be an obvious decision; weighing that action against the many potential migrants who might be encouraged to undertake such a treacherous passage in the future complicates this immensely.
    • It does provide clear evidence that migration and smuggling are strategic choices that are made by thoughtful agents in a fraught environment.
    • The analysis suggests that a major policy goal of SAR operations should be to limit substitution from seaworthy boats to inflatable ones.
      • One way to do so would by interceding in the trade of such items to Libya. The EU's ban on inflatable craft exports to Libya is a step in the right direction, though most craft are produced in China and Figure 3 suggests that they may still enter Libya through Egypt and Turkey.

    Ultimately, addressing this issue will require interventions that reduce demand for irregular migration. There are two clear margins on which policymakers could act. First, the EU could reduce demand for immigration out of migrants home countries. This would require not only encouraging economic activity in these countries, but also improving their security and political environments. Second the EU could facilitate safe, legal migration from home countries to the EU so such a vital activity would be taken away from the hands of smugglers and into a rules-based order.

    Notes: Data provided by the European Border and Coast Guard Agency known as Frontex. The information is disclosed by Frontex for the period from 1 January 2013 to 31 December 2017. Vertical dotted lines display the start of SAR Operations: Hermes, Mare Nostrum, Triton I and II.

    • WORSE THAN YOU THINK: Public Debt Forecast Errors in Advanced and Developing Economies  

    WORSE THAN YOU THINK: Public Debt Forecast Errors in Advanced and Developing Economies
    Julia Estefania Flores, Davide Furceri, Siddharth Kothari, Jonathan D. Ostry     
    CEPR Discussion Paper No. 16108 | May 2021

    Do forecasters project public debt accurately? New evidence, based on a unique and comprehensive dataset of debt forecasts made by the IMF and the EIU suggests that the answer is No. The data suggests that projections tend to under-estimate actual debt ratios, with the forecast error increasing over the forecast horizon. The error in five-year ahead projections is close to 10% of GDP, on average.

    These are the main findings of a new CEPR study by Julia Estefania Flores, Davide Furceri, Siddharth Kothari and Jonathan D. Ostry, which compiles a unique dataset of medium-term public debt forecasts for an unbalanced panel of 174 countries, based on IMF (for the period 1995-2020) and Economist Intelligence Unit (2007-20) projections.

    • There is a significant positive forecast error in debt-to-GDP ratio projections, with the magnitude increasing with the forecast horizon. At the five-year horizon, realized debt ratios are, on average, about 10% of GDP higher than forecast.
    • The magnitude is similar between advanced (AEs) and emerging markets and developing economies (EMDEs), and in EMDEs is present irrespective of recessions while for AEs is associated with surprise recessions in the forecast horizon;
    • The magnitude of forecast errors is similar between countries with IMF programs and countries without, as well as across AEs and EMDEs. While positive errors in AEs are typically associated with unforeseen recessions in the forecast horizon, those in EMDEs are systematic, irrespective of the occurrence of recessions.
    • The positive forecast error in the debt ratio is only partly driven by negative forecast errors in GDP growth. Controlling for forecast errors in GDP growth reduces the error in the debt ratio at the five-year horizon to about 4 percent of GDP.
    • The forecast error is significantly larger when the projection is for debt ratios to decline than when increasing debt is projected. This is consistent with previous empirical  evidence in the literature on the tendency of governments to run procyclical policies in good times and may suggest that announced consolidation plans were, on average, less effective than anticipated.
    • Oil-exporters and more volatile countries tend to have larger forecast errors, as positive errors following adverse shocks do not get offset by negative errors after favourable shocks. Errors are also larger in countries with higher debt ratios.

    The IMF and other commentators have rightly called attention to debt vulnerabilities in EMDEs in the aftermath of the COVID-19 crisis. These results underscore the salience of calls by the international community to accelerate efforts to tackle debt vulnerabilities in many low-income economies that have been hit particularly hard by the COVID-19 crisis, have little policy space to respond, and will require financial assistance for the foreseeable future. The study also highlights the importance of continuous efforts to improve the realism of debt projections.


    MOVING BEYOND THE EUROCENTRIC BIAS: Fiscal development under colonial and sovereign rule
    Ewout Frankema, Marlous Van Waijenburg     
    CEPR Discussion Paper No. 16176 | May 2021

    While the introduction of 'modern' taxes was part of an imperial diffusion process of fiscal reforms, these new taxes were embedded in a distinctly colonial political, social and economic logic. In contrast to the imperial metropoles, where 'modern' taxes built on organically grown tax bases, fiscal 'modernity' and 'tradition' co-existed in a dualistic system in the colonies. The comparison of fiscal development under colonial and sovereign rule helps to move beyond the Eurocentric bias in the historical tax literature and develop a more global theory of fiscal modernization.

    These are among the findings of a new CEPR paper by Ewout Frankema and Marlous Van Waijenburg, which explores differences in the making of a 'modern' fiscal state under colonial and sovereign rule. Focusing on African and Asian colonies (1820-1970) and their respective European metropoles. Among the findings:  

    • Existing theories of long-term fiscal development suffer from Eurocentric bias and are especially problematic to understand fiscal development in colonial settings. This is an important issue, as most present-day countries have a colonial history in which the basis of the fiscal state was (partly) laid.
    • Two main contextual differences that shaped fiscal development in colonial versus sovereign states: the political economic conditions of colonial governance and the socioeconomic structures underpinning imperial relations. Colonial tax-payers were in myriad ways tied to metropolitan tax-payers, as both groups could in principle be forced to pay for the costs of imperial domains.
    • Regarding the introduction of ‘modern’ taxes, income taxes were not adopted (much) later in the colonial states of Africa and Asia than they were in sovereign states, and especially not in comparison to sovereign states in the global ‘periphery’. The critical difference is that these ‘modern’ taxes co-existed for extended periods of time in virtual disconnect from parallel colonial taxes that tapped into local resources controlled by indigenous populations.
    • The separation of both fiscal spheres was of course a matter of degree, as these spheres overlapped when indigenous elites and enterprises established links between local markets and export markets, as well as between local customers and state investments in the domestic economy. But in the majority of cases the contribution of ‘modern’ taxes to the state revenue occurred in a dualistic fiscal system.
    • In post-colonial times, fiscal systems were reformed and became more ‘inclusive’, but this did not result in higher fiscal capacity everywhere.
    • The key distinction between former colonial states in Asia and Africa seems to be that, ultimately, Asian states could turn back to more fine-grained systems of taxation that were more deeply rooted in their rural economies. That said, natural resource revenues offered easy corridors to circumvent the administrative complexity of income taxation, and political and economic instability set the process of fiscal ‘modernization’ in many newly independent states in Asia and Africa back for considerable periods of time.


    Arun Advani, Elliott Ash, David Cai, Imran Rasul                  
    25 May 2021

    Race-related research in economic journals constitutes a far lower share than in comparable publications in sociology and political science. What’s more, economists over-estimate the extent of race-related research done by the profession.

    Understanding why economists produce so little race-related research is essential if the discipline is going to be able to reform, argue Arun Advani, Elliott Ash, David Cai and Imran Rasul.


    VACCINES FOR DEVELOPING COUNTRIES: Views of leading economists on patent waivers and vaccinating the world

    Romesh Vaitilingam                            
    22 May 2021

    There is much debate about whether the patents on Covid-19 vaccines should be waived to allow low-income countries to produce doses for themselves. The IGM Forum at Chicago Booth invited its panels of leading European and US economists to express their views on this issue and the broader challenges of vaccinating the world.

    As this column by Romesh Vaitilingam reports, a strong majority (87% of the panellists) agree that rather than waiving intellectual property protection, the rich countries should pay the pharmaceutical companies to manufacture and distribute the vaccines (or to license production and support licensees). A similarly strong majority (89%) considers that the benefits to the rich countries of paying for 12 billion doses and providing them to the rest of the world exceed the costs.


    Philippe Martin, Jean Pisani-Ferry, Xavier Ragot                        
    26 May 2021

    The temporary suspension of the European fiscal rules to enable member states to take emergency measures against the Covid crisis offers an opportunity for an ambitious reform of a now clearly outdated fiscal framework.

    A study by Philippe Martin, Jean Pisani-Ferry and Xavier Ragot, part of the Vox debate on euro area reform, argues that the reactivation of the rules, now foreseen in 2023, should be made contingent on a political agreement on reforming the fiscal framework, and proposes a comprehensive reform in which the new European fiscal framework would prioritise externalities arising from debt sustainability risks and demand spillovers. Fiscal targets should be differentiated depending on country vulnerabilities and implemented in a more decentralised way.


    Patrick Bolton, Harrison Hong, Marcin Kacperczyk, Xavier Vives                         
    25 May 2021

    The Covid-19 pandemic and recession have reinforced the need to evaluate the economic and financial impact of natural disasters, providing a pointer to the damaging effects that climate change may induce.

    Writing at Vox, Patrick Bolton, Harrison Hong, Marcin Kacperczyk and Xavier Vives introduce the third report in the Future of Banking series from the IESE Business School and CEPR, which explores the ways in which natural disaster risks are different from more familiar forms of financial risk – and how banks, asset managers and central banks are beginning to grapple with these risks. The authors call for a combination of public interventions and private sector mitigation strategies to reduce the long-term implications of climate-related events.

    Download the report here:

    THE NATIONALISATION OF POLITICS: Implications for the modern media landscape of the death of local news

    Charles Angelucci, Julia Cagé, Michael Sinkinson                            
    21 May 2021

    Local journalism is disappearing in the US, with a quarter of all newspapers shut down in the past 15 years. Using the case of television expansion in the mid-20th century US, a study by Charles Angelucci, Julia Cagé and Michael Sinkinson investigates how a more competitive national news market affects local news provision and, in turn, voting behaviour.

    The study shows that after the entry of television, circulation for local newspapers and the total number of original local news stories published decreased. Because of television’s more national focus, this points to a strong shift towards more national news diets. Crowding out of local information led to less split-ticket voting, implying the nationalisation of local politics.


    Yener Altunbaş, David Marques-Ibanez, Alessio Reghezza, Costanza Rodriguez d'Acri, Martina Spaggiari                      
    21 May 2021


    A study by Martina Spaggiari and colleagues finds that following the Paris agreement, European banks reallocated credit away from polluting firms. In the aftermath of President Trump’s 2017 announcement of a US withdrawal from the agreement, lending by European banks to polluting firms in the US decreased even further. These findings suggest that the announcement of green policy initiatives can have a significant impact combating climate change via the banking sector.  


    Simeon Djankov, Pinelopi Goldberg                      
    24 May 2021

    Despite a significant history of scepticism about the relevance of gendered laws, a new study by Simeon Djankov and Pinelopi Goldberg uses global data to reveal that legal equality does improve opportunities and outcomes for women.

    Greater legal equality between men and women is associated with a narrower gender gap in opportunities and outcomes, fewer female workers in positions of vulnerable employment, and greater political representation for women. Country attributes that are significant predictors of legal gender equality (including religion, legal origin, and geography) evolve slowly, if at all. Nonetheless, considerable progress in legal gender equality took place in some parts of the world over the past five decades.


    Elena Esposito, Tiziano Rotesi, Alessandro Saia, Mathias Thoenig                           
    23 May 2021

    To secure peace in the aftermath of violent civil conflict requires working through legacies of difference, even hate. But narratives forged for the purpose of peacebuilding often present a distorted retelling of events.

    Using as its example the cultural impact of a film released decades after the end of the American Civil War – The Birth of a Nation – a study by Elena Esposito, Tiziano Rotesi, Alessandro Saia and Mathias Thoenig illustrates how a version of the past that promotes unity or agreement at the expense of truth may foster new divisions, hindering the reconciliation process over the long term.

    The cost of the non-inclusive reconciliation narrative conveyed by the movie, rooted in a common enemy argument, was dramatic. About half of the total effect of the movie on reconciliation was indirectly mediated through a rise in the alienation of African Americans. Reconciliation was fostered by reshuffling anger and animosity from the North-South to the Black-White cleavage. Specifically, the Lost Cause narrative forged the myth of a common threat to all white Americans from North and South: Black Americans and their fight for enfranchisement.


    Scott Baker, Nicholas Bloom, Steven Davis, Marco Sammon                              
    21 May 2021

    When the stock market moves in a big way, journalists try to explain why. A study by Scott Baker, Nicholas Bloom, Steven Davis and Marco Sammon uses next-day newspaper accounts to characterise the drivers of more than 6,000 big daily moves (‘jumps’) across 16 national stock markets. It finds that:

    • Policy-driven jumps account for a greater share of upward than downward jumps in all countries.
    • Jumps attributed to monetary policy foreshadow much lower levels of future stock market volatility than other jumps.
    • In another striking pattern, US-related news drives one-third of national stock market jumps in other countries, emphasising the role of the US in the international monetary and financial system.


    Michele Ca' Zorzi, Luca Dedola, Georgios Georgiadis, Marek Jarociński, Livio Stracca, Georg Strasser                  
    25 May 2021

    Writing at Vox, European Central Bank economists argue that the ECB and Federal Reserve monetary policy decisions spill over to other countries asymmetrically.

    • At the bilateral level, the Fed’s impact on the euro area is material to firms’ financial conditions and economic activity.
    • Conversely, the impact of the ECB’s actions on the US economy is minimal.
    • On a global scale, both central banks’ monetary policies matter for other countries, but the Fed’s monetary policy has a more sizeable impact, particularly on foreign financial variables, such as corporate bond spreads.


    Fozan Fareed, Bastiaan Overvest                    
    20 May 2021

    A study by Fozan Fareed and Bastiaan Overvest finds that business dynamics – in particular business entries, exits, and bankruptcies – are slowing down due to the Covid-19 pandemic, which can have adverse effects on long-term productivity.

    Over the course of 2020, fewer new businesses were established than in any ‘normal’ year and fewer closed down than during the Global Crisis in 2009. Most new entrants are self-employed and online businesses, especially in the wholesale and retail trade sector.


    Jan-Emmanuel De Neve, Clément Imbert, Johannes Spinnewijn, Teodora Tsankova, Maarten Luts                  
    20 May 2021

    Governments worldwide spend vast sums each year to enforce Tax compliance. A study by Johannes Spinnewijn and colleagues finds that simplifying communication from tax administrators can go a long way to improving tax compliance, nudge taxpayers to pay on time, and make late filers comply more swiftly. Communication – an inherent, but perhaps neglected, part of any tax administration – could save governments millions.

    JUMP-STARTING INVESTMENT FOR A STRONG AND EVEN RECOVERY: A call for more equity finance for EU firms

    Debora Revoltella, Rolf Strauch                    
    24 May 2021

    Writing at Vox, Debora Revoltella and Rolf Strauch argue that incentives to re-launch investment remain crucial for the sustainability of the recovery from the Covid-19 pandemic.

    The authors show that viable and new firms need to have access to additional new financing as we emerge from the crisis. Debt finance cannot be the only option. Incentives for recapitalisation of companies and access to equity or equity-type finance become increasingly important.

    The legacies of the pandemic in the financial sector need to be worked out quickly. European and government support complementing post-pandemic bank and capital market financing will be critical to a strong and sustained recovery.

    THE RICH, THE POOR, AND THE OTHERS: How monetary policy affects the distribution of income

    Niklas Amberg, Thomas Jansson, Mathias Klein, Anna Rogantini Picco                  
    23 May 2021

    Fully understanding the distributional consequences of monetary policy requires looking at its impact over the entire income distribution and not simply at summary inequality measures like the Gini coefficient.

    Using uncensored administrative income data for Sweden, a study by Niklas Amberg, Thomas Jansson, Mathias Klein and Anna Rogantini Picco shows that while a monetary policy loosening substantially affects incomes across the entire income distribution, it does so relatively more in the tails, providing a U-shaped response pattern. The effects in the bottom are primarily driven by changes in labour income, whereas the effects in the top are mainly due to disparities in capital income.

    GROWING LIKE GERMANY: How high local public debt and local public banks crowd out private investment – and what the debt brake has to do with it

    Mathias Hoffmann, Iryna Stewen, Michael Stiefel                    
    22 May 2021

    Why, with its booming economy of the last decade, has Germany’s private investment been so low? Writing at Vox, Mathias Hoffmann, Iryna Stewen and Michael Stiefel show that it has been low because it has been crowded out by local public bank lending to municipalities. Banks' statutory public lending requirements and the debt brake have both played a role in this, exacerbating the contractionary effect of fiscal consolidation.


    Xavier Vives interviewed by Tim Phillips, 25 May 2021

    The latest Barcelona Report from the CEPR discusses how central banks and asset managers should manage climate and natural disaster risks. Xavier Vives tells Tim Phillips what the report has to say about mandates, hedging and resilience.

    Are socially responsible banks more resilient?

    Thomas Gehrig interviewed by Tim Phillips, 21 May 2021

    ESG – Environmental, Social and Governance – measures of bank performance are getting a lot of attention from shareholders and policymakers. But might more investment in ESG make banks less resilient? Thomas Gehrig tells Tim Phillips what the first research on this topic reveals.

    Read More here: CEPR Discussion Paper, DP15816 Social Responsibility and Bank Resiliency by Thomas Gehrig, Maria Chiara Iannino, Stephan Unger