This week from CEPR: November 12

Wednesday, November 11, 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


    • WEIGHING THE TRUE COST OF COLONIALISM: The East India Company's Rule and the Drain of Wealth (1757-1858)     

    MEASURING COLONIAL EXTRACTION: The East India Company's Rule and the Drain of Wealth (1757-1858)
    Pilar Nogues-Marco        
    CEPR DP No. 15431 | November 2020

    A new CEPR paper by Pilar Nogues-Marco revisits the relationship between capitalism and colonialism by examining the case of British India under East India Company (EIC) rule (1757-1858). The study uses the East India Company budgets to measure the extent of the wealth that was drained through three direct channels: oppressive land taxes, unproductive expenditures on the imperial army and civil administration, and the unrequited export of commodities from India to Britain. Among the findings: 

    • The land tax levied by the EIC was excessive and paid by poor peasants, which caused huge inequality, extreme poverty, and agricultural stagnation.
    • Land revenue (the most important source of territorial revenue) was an extractive tax, amounting to around half of gross production.
    • The EIC charged extractive land taxes in a society whose GDP per capita fell close to bare-bones subsistence in the early nineteenth century. Because land taxes primarily affected agricultural laborers, they lived below subsistence levels.
    • Taxation based mainly on land revenues intensified poverty and probably made agriculture less productive.
    • Military expenditures, civil charges, and interest on debt consumed the vast majority of the fiscal budget. As a consequence, productive expenses were tiny. Especially important is the case of irrigation systems. 
    • Contrary to Mughal practice, the EIC neither invested in nor repaired irrigation systems, which reduced agricultural productivity and intensified famines during the recurrent episodes of drought.
    • The unrequited export of goods from India to Britain was used as a mechanism whereby trade could become a form of exploitation - probably the least understood and most controversial channel of the drain of wealth.  
    • Commercial debt was discharged with the fiscal surpluses, which could have been used instead to fund productive expenditures for Indian development. Additionally, the EIC accumulated debt that was transferred by the British government from the EIC liability to Public Indian debt - the amount of unrequited exports charged to Indian public debt represented 13% of Indian GDP.

    The study supports the Marxist interpretation that there was a drain of wealth, and its effect on the underdevelopment of former European colonies deserves further research.

    Figure 1:  UNREQUITED EXPORTS FROM INDIA TO BRITAIN, 1798-1858 (selected years, quinquennial frequency), million pounds sterling


    • CHILD LABOUR AND GLOBAL VALUE CHAINS

    CHILD LABOUR AND GLOBAL VALUE CHAINS
    Cristian Ugarte, Marcelo Olarreaga, Gady Saiovici        
    CEPR DP No. 15426 | October 2020

    Sustainable Development Goal Target 8.7 aims at eliminating child labour by 2025, yet progress so far has been slow. As firms in developing countries integrate in Global Value Chains (GVCs), the requirements for socially sustainable practices increase. However, this can have unintended consequences. As  firms integrating into GVCs reduce their demand for child labour, their wages decline, which can lead to an increase in child labour supply as households struggle to maintain a subsistence level of income.

    These are among the key findings of a new CEPR study by Cristian Ugarte, Marcelo Olarreaga and Gady Saiovici, which explores the impact the internationalisation of production is having on child labour at the sector level, using data for 26 low- and middle-income countries. Among the Findings: 

    • As exports grow, the share of child labour declines.
    • This is at odds with the existing literature at the aggregate level, which finds no impact of international trade on child labour beyond its impact through income.
    • Sectors with stronger participation in foreign markets exhibit less child labour. 
    • Sectors that participate in global value chains by providing inputs to exporting firms in third countries (forward linkages) have fewer cases of child labour. 
    • This suggests that encouraging domestic firms to participate in downstream GVCs rather than to simply export would lead to a larger decline in child labour.
    • On the other hand, sectors in which a large share of exports have foreign imported inputs embedded in them (backward linkages) experience higher incidences of child labour. 
    • Thus, encouraging domestic exporters to source from third countries, while it may lead to increases in economic efficiency, does not seem to translate into reductions in child labour.

    • THE GIG-ECONOMY DOES NOT HELP MINORITY WORKERS ENTER THE TRADITIONAL LABOUR MARKET: Evidence from Sweden  

    GIG-JOBS: Stepping stones or dead ends?
    Marcella Alsan, Luca Braghieri, Sarah Eichmeyer, Joyce Kim, Stefanie Stantcheva, David Yang       
    CEPR DP No. 15420 | October 2020

    Easily accessible – but low-paying – gig-jobs provide labour market experience that is useful for marginal groups on the traditional labour market. But how useful is work experience from the gig economy for labour market entrants searching for traditional wage jobs? 

    A new CEPR study by Adrian Adermon and Lena Hensvik conducts a correspondence study, submitting fictitious applications to entry-level vacancies in Sweden, and compares callback rates for recent high school graduates with (i) gig-experience, (ii) traditional experience, and (iii) unemployment history, and also study heterogeneous responses with respect to perceived foreign background. Among the findings: 

    • Gig-experience is more valuable than unemployment, but less useful than traditional experience for majority applicants. 
    • Strikingly however, no form of labor market experience increases the callback rate for minority workers.
    • One potential reason for this result is that employers have such strong negative priors against this group that higher qualifications in terms of more experience do not improve the callback rate for minority workers.
    • These results do not support the hypothesis that participation in the gig-economy helps minority workers enter the traditional labour market.


    WOMEN ARE TAKING THE PANDEMIC MORE SERIOUSLY AND ARE MORE LIKELY TO FOLLOW PUBLIC HEALTH INSTRUCTIONS: Survey results from eight OECD countries 

    Vincenzo Galasso, Vincent Pons, Paola Profeta        
    07 November 2020

    A survey of over 21,000 respondents across eight OECD countries in March/April 2020 finds that women are more likely to take the pandemic seriously and more likely to follow public health instructions and recommendations. 

    Writing at Vox, Vincenzo Galasso, Vincent Pons and Paola Profeta show that men and women differ strikingly in both beliefs and behaviours, with women are more likely to take the pandemic seriously and more compliant than men. The findings suggest that public health communication should target men and women differently.

      

    ECONOMIC REBOUND INTERRUPTED: Key findings of the EU Commission’s Autumn 2020 forecast

    Maarten Verwey, Reinhard Felke, Laura Bardone       
    06 November 2020

    The European economy remains firmly in the grip of the Covid-19 pandemic. The Autumn 2020 European Economic Forecast shows that the exceptionally strong rebound experienced in the third quarter is being put on hold as national authorities introduce new public health measures to stem the resurgence of the virus.

    The projected return to the recovery in 2021 and its speed are subject to extremely high uncertainty. The economic impact of the pandemic is set to continue differing widely across the EU. In these circumstances, a rapid approval and speedy implementation of Next Generation EU is crucial.   


    LEARNING LOSSES DRIVEN BY COVID-19 SCHOOL CLOSURES ESPECIALLY PRONOUNCED FOR DISADVANTAGED CHILDREN

    Per Engzell, Arun Frey, Mark Verhagen      
    09 November 2020

    A new study by economists at the University of Oxford estimates the ‘learning loss’ for children during school closures during Covid-19, using data Dutch schools. Key findings: 

    • On average, students lost out on a fifth of a year’s worth of learning.
    • Losses were especially marked among those from disadvantaged homes.
    • Even in the ‘best-case’ scenario of a short lockdown and good infrastructure for remote learning, students learned little or nothing from home.
    • Exposure to stress and anxiety also increased during the lockdown, while children’s parents were more likely to face job loss and sudden economic hardship.

    THE DRAMATIC IMPACT OF THE COVID-19 CRISIS ON MENTAL HEALTH: Evidence from the UK 

    David Johnston, Claryn Kung, Michael A Shields     
    05 November 2020

    A study by economists at Monash University documents the dramatic impact of the Covid-19 crisis on psychological distress in the United Kingdom. The results show that neither financial resources nor religiosity, neighbourhood social capital, or cognitive skills were associated with a more resilient response to the crisis. In contrast, it finds that the non-cognitive skill ‘self-efficacy’ has been a strong predictor of resilience during the pandemic. 


    HOW TO ENSURE THE WORLD’S POOR ARE NOT DEPRIVED OF ACCESS TO COVID-19 VACCINES

    Pascal Lamy       
    06 November 2020

    The Access to COVID-19 Tools Accelerator – a collaboration between WHO, the French president, the European Commission, the Gates Foundation and other countries – was launched in April 2020 to accelerate the development and production of, and equitable access to, COVID-19 tests, treatments, and vaccines.

    Writing at Vox, Pascal Lamy argues that while efforts are underway to mobilise public and private grant contributions to fund the initiative, it is unlikely that they will raise the amounts required to deal with the most urgent needs. Innovative ways of financing, which are already available for other aid programmes, will also be needed to ensure that the populations of the world’s poorer countries are not deprived of access to vaccines within a few months. 


    UNIONS RAISE WORKER WELLBEING: Evidence from the United Kingdom

    Richard Freeman, David Blanchflower, Alex Bryson        
    11 November 2020


     

    While in the past union workers used to have lower job satisfaction than their non-union counterparts, union membership now raises wellbeing at work. A new study by Richard Freeman, David Blanchflower and Alex Bryson revisits the association between unionisation and job satisfaction, and finds that unions do the same as they always did – it is the non-union world that has changed for the worse.  There is evidence of this sparking a growth in unionisation in the UK over the last three years.   


    RESOLVING MORTGAGE DISTRESS AFTER COVID-19: Lessons from the 2008 financial crisis

    Fergal McCann, Terry O'Malley       
    11 November 2020

    Through an analysis of detailed micro data in the last great economic crisis, a study by Fergal McCann and Terry O'Malley derives lessons for policymakers dealing with expiring payment moratoria after the initial stage of the pandemic. Among the findings: 

    • Early engagement on behalf of both borrowers and lenders is crucial for successful resolution of loan arrears. 
    • Both short-term and long-term solutions play a role in restoring the stability of household finances, but long-term solutions are essential to avoid drift into difficult-to-resolve, long-term arrears cases. 
    • Many households engaging in arrears resolution have severely damaged finances and without adequate policies, many may drift into long-term arrears. 
    • Deeper cuts to payment burdens lead to a higher probability of loan payment.  


    REVITALISING MULTILATERALISM: A new eBook

    Simon Evenett, Richard Baldwin       
    10 November 2020

    While the trade system as a whole has proved more resilient than many feared during the Covid-19 pandemic, the crisis has placed new stresses on multilateral cooperation. This has come at a time when the standing of the WTO has fallen in some of its largest members and its rules have been ignored by many. Writing at Vox, editors Richard Baldwin and Simon J. Evenett argue that with the election of a new US government and the concurrent selection of a new WTO Director-General, there is new hope for a revitalisation of multilateral cooperation on trade. A new eBook presents analyses and ideas of how this could be done.


    COVID-19 WAS ANOTHER FAILED TEST OF THE US HEALTHCARE SYSTEM'S CAPACITY TO EQUALISE INEQUALITIES IN SOCIETY

    Johannes Kunz, Carol Propper        
    05 November 2020

    The Covid-19 pandemic has spread quickly and extensively around the globe and left behind many fatalities. Writing at Vox, Johannes Kunz and Carol Propper report on research which examines the association between county-level death rates and the quality of hospital care residents of those counties had access to in the first five months of the pandemic in the US. 

    It finds that death rates were lower in counties where quality of hospital care, particularly for respiratory disease, was higher. But counties with high shares of minority populations did not appear to benefit from higher hospital quality.


    DO EARLY SUBJECT FIELD CHOICES MADE AS A TEENAGER HAVE LONG-RUN CONSEQUENCES FOR FUTURE EARNINGS? Evidence from Sweden 

    Gordon Dahl, Dan-Olof Rooth, Anders Stenberg    
    10 November 2020

    Secondary school students often have to choose between academic fields without knowing what impact their choice will have on future earnings. A study by Gordon Dahl, Dan-Olof Rooth and Anders Stenberg shows that information on field-specific earnings premiums could not only help students to plan for their future, but could also help policymakers to allocate education resources. 

    Taking advantage of the distinctive admissions system in Sweden’s secondary schools, the authors find that earnings payoffs for engineering, natural science, and business are generally positive, while the returns to social science and humanities are mostly negative.


    THE POLITICAL CONSEQUENCES OF THE COVID PANDEMIC: Accelerating infections lead to declining approval rates

    Helios Herrera, Max Konradt, Guillermo Ordoñez, Christoph Trebesch        
    06 November 2020

    Writing at Vox, Helios Herrera, Max Konradt, Guillermo Ordoñez and Christoph Trebesch explore the political costs of (mis-)managing the pandemic. The study shows that in the initial stages of the pandemic, leaders benefit from a ‘rally around the flag’ effect, but trust fades quickly.

    Growing case numbers increasingly hurt political approval, especially if no stringent policies are in place. 
    Governments are punished in terms of political approval when Covid-19 infections accelerate, especially in the absence of effective lockdown measures; economic indicators do not seem to be strong predictor of political approval rates in this crisis.


    BOOSTING THE IT SECTOR VIA A PERSONAL INCOME TAX BREAK FOR PROGRAMMERS: Evidence of an effective industrial policy in Romania

    Isabela Manelici, Smaranda Pantea         
    08 November 2020

    Industrial policies can be an effective tool for governments to shape the development of different sectors to achieve productivity growth. But there is little evidence of their effectiveness or efficiency. Writing at Vox, Isabela Manelici and Smaranda Pantea examine the impact of an income tax break for IT workers in Romania. The findings suggest that targeted policies of this kind can boost key sectors. This finding is encouraging in terms of the ability of governments to design and implement effective industrial policies. 


    ESTIMATING HYSTERESIS EFFECTS

    Francesco Furlanetto, Ørjan Robstad, Pål Ulvedal, Antoine Lepetit       
    09 November 2020

    Demand-driven recessions (large recessions in particular) have long-lasting effects, are associated with prolonged declines in investment and employment, but do not materially affect labour productivity finds a study by economists at the Norges Bank. 

    By extending the econometric framework proposed by Blanchard and Quah, the study enables fluctuations in aggregate demand to have a long-run impact on the productive capacity through hysteresis effects. 

     


    IMPROVED TRANSPORT INFRASTRUCTURE INCREASES BOARD QUALITY OF FIRMS: Evidence from Italy

    Audinga Baltrunaite, Egle Karmaziene       
    10 November 2020

    Does access to a larger pool of talent improve the match between a firm and its directors? A study by Audinga Baltrunaite and Egle Karmaziene exploits the gradual introduction of high-speed and high-comfort train services in Italy to show that easier access to non-local directors increases positive assortative matching between directors and firms – high-quality firms improve their boards’ quality, while low-quality firms reduce the quality. Moreover, director quality is positively associated with firm growth and productivity, and negatively associated with the probability of default.


    ECONOMIC EXPECTED LOSSES AND DOWNSIDE RISKS DUE TO THE SPANISH FLU

    Roberto De Santis, Wouter Van der Veken        
    11 November 2020

    Writing at Vox, Roberto De Santis and Wouter Van der Veken analyse the 1918-1920 Spanish flu to gain insights about the expected output losses and downside risks from such an event. It estimates an average output drop of 7% across the globe over the years 1918-1920, increased macroeconomic risks, and an increase in income inequality across countries. The expected real income loss is nearly twice as large for lower-income countries. As for the United States, the estimated output fall due to the Spanish flu is small, but the macroeconomic risks are not negligible.

    SCHOOL AND CHILDCARE CLOSURES HAVE SIGNIFICANT NEGATIVE LONG-TERM CONSEQUENCES ON CHILDREN, ESPECIALLY THOSE FROM DISADVANTAGED SOCIOECONOMIC BACKGROUNDS

    Nicola Fuchs-Schündeln, Dirk Krueger, Alexander Ludwig, Irina Popova      
    12 November 2020

    School and childcare closures have significant negative long-term consequences on the human capital and welfare of the affected children, especially those from disadvantaged socioeconomic backgrounds. This reduction in human capital accumulation is likely slowing the long-run growth prospects of countries, especially those whose economies are relatively human capital intensive, such as the US and Europe. Thus, school and childcare closures are potentially very costly measures to avoid the spread of the Covid-19 virus. This point was initially largely lost in the political debate. 

    These are the central findings of a new study by Nicola Fuchs-Schündeln, Dirk Krueger and colleagues uses a model that features public schooling as an input into the human capital production of children, as well as the monetary and time investment of parents into their children.



    EUROPE SHOULD THROW OUT ITS FISCAL RULEBOOK: A discussion with Olivier Blanchard

    Olivier Blanchard interviewed by Tim Phillips, 06 November 2020

    The EU's increasingly complex system of fiscal rules should be replaced by a system of fiscal standards instead, Olivier Blanchard tells Tim Phillips.

    You can watch the recording of Olivier presenting his paper on Fiscal Standards for Europe at the 72nd Economic Policy Journal Panel Meeting here.

    The full paper, Redesigning the EU Fiscal Rules: From Rules to Standards by Olivier Blanchard, Alvaro Leandro and Jeromin Zettelmeyer, can be downloaded here.