This week from CEPR: October 15

Thursday, October 15, 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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    COLLATERAL DAMAGE: The Legacy of the Secret War in Laos
    Juan Felipe Riaño, Felipe Valencia Caicedo        
    CEPR DP No. 15349 | October 2020

    As part of its Cold War counterinsurgency operations in Southeast Asia, the United States government conducted a ‘Secret War’ in Laos from 1964-1973. This war constituted one of the most intensive bombing campaigns in human history. As a result, Laos is now severely contaminated with UXO (Unexploded Ordnance) and remains one of the poorest countries in the world. 

    A new CEPR paper by Juan Felipe Riaño, Felipe Valencia Caicedo reveals the severe negative long-term impact of conflict on economic development, using newly available data on bombing campaigns, satellite imagery and development outcomes. Among the findings: 

    • There is a strong negative, significant and economically meaningful impact of bombings on night time lights, expenditures and poverty rates. 
    • Almost 50 years after the conflict officially ended, bombed regions are poorer today and are growing at slower rates than unbombed areas. 
    • A one standard deviation increase in the total pounds of bombs dropped is associated with a 9.3% fall in GDP per capita. 
    • These results highlight the huge impact of UXOs in terms of health, as well as education, structural transformation and rural-urban migration.

    Figure 6: US Air Bases Outside Laos and the Ho Chi Minh Trail


    • A HIGH SUPPLY OF ENVIRONMENTALISM DOES NOT GIVE RISE TO A BETTER ENVIRONMENTAL OUTCOMES   

    IS ENVIRONMENTALISM THE RIGHT STRATEGY TO DECARBONIZE THE WORLD?
    Marco Marini, Ornella Tarola, Jacques-François Thisse        
    CEPR DP No. 15355 | October 2020

    Environmentalism (also called green consumerism or environmental ideology) is often presented as one of the main backbones of new environmental policies. However, very little is known about its impact on firms decisions. 

    Deeply embedded in most debates is the view that changes in consumers behaviour are a necessary condition for a transition to a cleaner society. By inciting consumers to shift from polluting to less-polluting products, a more deeply rooted environmental consciousness would spark a major drop in the mass of pollutants through modified individual consumption choices.

    A new CEPR study by Marco Marini, Ornella Tarola and Jacques-François Thisse studies how environmentalism affect the way firms choose their products and the ensuing consequences for the global level of pollution. The study develops a simple and intuitive model that takes into account the psychic costs and benefits associated with the consumption of goods that generate different amounts of emissions.

    The study finds that contrary to general belief, a high supply of environmentalism does not give rise to a better environmental outcome because it endows firms with more market power which they use to maximize profits. By contrast, standard policy instruments such as a minimum quality standard or the use of greener technologies leads to a better ecological footprint.


    • FINANCE AND TECHNOLOGY: What is changing and what is not       

    FINANCE AND TECHNOLOGY: What is changing and what is not
    Stephen G Cecchetti, Kermit Schoenholtz        
    CEPR DP No. 15352 | September 2020

    How is technology influencing the structure of the financial system? How are traditional intermediaries evolving? A new CEPR study by Stephen Cecchetti and Kermit Schoenholtz explore how financial services and the institutions or mechanisms that deliver them have both changed significantly over recent decades, and are continuing to evolve. Among the findings:

    • Financial services have seen huge changes in the range of services offered, as well as their delivery, cost, and accessibility. Yet, despite the explosion of small firms applying new technologies, very few of these new fintech companies have a broad influence on financial activity. 
    • Even in some sectors with significant entry, unit costs of financial intermediation remain stubbornly high. 
    • At the same time, there are notable fintech successes, especially in the provision of payments and credit in China. 
    • Going forward, the impact of fintech is likely to be greatest where existing suppliers lack competitive incentives or sophistication. 
    • Over the next decade, the decisions of regulators will have a profound influence on the array of financial services available, on how they are delivered and to whom. 
    • In advanced economies, regulators generally support greater fintech competition, favouring lower costs and improved access. 
    • As Big Tech firms and large incumbent financial institutions vie for dominance, their large fintech investments will make them increasingly alike. 


    COMPULSORY FACE MASKS SIGNIFICANTLY SLOW THE SPREAD OF COVID-19: Evidence from Canada

    Alexander Karaivanov, Shih En Lu, Hitoshi Shigeoka    
    09 October 2020

    A new study by Alexander Karaivanov, Shih En Lu, Hitoshi Shigeoka evaluates the impact of the compulsory wearing of masks on the spread of Covid-19 in Canada. 

    The results show that mask mandates are associated with a 25% or larger weekly reduction in new Covid-19 cases in July and August, relative to the absence of mandates. Requiring indoor masks nationwide in early July could have reduced new Covid-19 cases in Canada by 25%–40% in mid-August, which translates into between 700 and 1,100 fewer cases per week.

    These results suggest that a mask mandate can be an important element of a suite of policies that keeps Covid-19 transmission at a manageable level, especially given the policy’s relatively low cost to the economy.

      

    ROBOTS ARE REPLACING WORKERS ACROSS HIGH-INCOME COUNTRIES: The decline of routine tasks 

    Elisabetta Gentile, Sébastien Miroudot, Gaaitzen De Vries, Konstantin M. Wacker    
    08 October 2020

    Rapid improvements in robot capabilities have fuelled concerns about the implications for jobs. A study by Elisabetta Gentile and colleagues examines the effect robots have had on jobs in industries across high-income and emerging countries from 2005 to 2015. Among the findings:

    • A rise in robot adoption across high income countries relates to a fall in the employment share of occupations that are intensive in routine tasks, such as sealing, assembling, and handling tools. 
    • The effect of robots on jobs appears to be largely driven by task content rather than by education level. 
    • This link is not seen in emerging market and transition economies. 

    The adoption of robots in high-income countries could bring back production tasks that had previously been offshored. For example, the new ‘Speed factories’ built by German sportswear company Adidas in Ansbach (Germany) and Atlanta (US) produce thousands of shoes per year using industrial robots and rely on just a handful of workers. Previously, such production tasks would have taken place in locations with cheaper labour, such as Southeast Asia.
     


    INTERNATIONAL DEBT RELIEF CAN HELP COUNTRIES WEATHER THE COVID-19 CRISIS

    Valentin Lang, David Mihalyi, Andrea Presbitero   
    14 October 2020

    To mitigate the effects of the Covid-19 crisis, the international community has endorsed a programme suspending debt service payments for poor countries. 

    Writing at Vox, Valentin Lang, David Mihalyi and Andrea Presbitero show that the programme has led to a substantial decrease in sovereign borrowing costs by providing liquidity. Importantly, the results do not lend support to the widespread concern that such debt relief could generate stigma and signal debt sustainability concerns.   

    The international community is currently discussing the possibility to extend the current initiative to suspend debt service in developing countries to 2021. These results suggest that this simple NPV-neutral debt moratorium—involving no haircut for creditors—can indeed help countries weather the crisis.


    IS SWITZERLAND THE LAND OF OPPORTUNITY? High intergenerational income mobility, despite low educational mobility 

    Patrick Chuard, Veronica Grassi   
    12 October 2020

    A study by Patrick Chuard and Veronica Grassi documents intergenerational income and educational mobility in Switzerland and finds that income mobility in Switzerland is high, but education depends strongly on parental income. Could the country's vocational training and education system be responsible for this ‘high income, low educational mobility’ conundrum? 


    INFLATION TARGETING IN INDIA: Signs of significant progress

    Barry Eichengreen, Poonam Gupta, Rishabh Choudhary    
    12 October 2020

    Inflation targeting in India is barely four years old, yet a study by Barry Eichengreen, Poonam Gupta and Rishabh Choudhary documents significant progress for inflation targeting in India to date. Reduced volatility of inflation-related outcomes and stronger anchoring of inflation expectations seem to have enhanced the ability of the Reserve Bank of India to respond to the Covid-19 pandemic. 

    The Bank would appear to be one of a substantial number of inflation-targeting central banks that were able to respond more forcefully than their non- inflation-targeting counterparts. 


    LOW LABOUR SHORTAGES CAN HELP EXPLAIN SLUGGISH WAGE GROWTH: Evidence from Sweden 

    Erik Frohm    
    11 October 2020


     

    Until the outbreak of the Covid-19 crisis, wage growth had remained sluggish in many advanced economies, while labour markets appear to have improved substantially. 

    Writing at Vox, Erik Frohm argues that findings to date have been painting an overly optimistic picture of labour market conditions in the aftermath of the Great Recession. Using a new establishment-level measure in Sweden, his results indicate that labour markets have typically been much weaker than initially assumed during the recovery. 

    As labour shortages are strongly correlated with wage growth at the establishment level, their lower level can help explain why wage growth in Sweden has been sluggish. 


    HOW THE US CORONAVIRUS AID PACKAGE HAS AFFECTED CONSUMER SPENDING  

    Christopher Carroll, Edmund S. Crawley, Jiri Slacalek, Matthew N. White    
    14 October 2020

    A study by Christopher Carroll and colleagues finds that in the case of a short-lived lockdown, the CARES Act should prompt a swift recovery in consumer spending. If a longer-lasting lockdown is imposed to combat a ‘second wave’ of the virus, an extension of enhanced unemployment benefits will likely be needed.

    In the shorter pandemic scenario, consumption returns to the baseline path after roughly two years without the CARES stimulus in place; the CARES stimulus shortens this recovery to roughly one year. In the longer lockdown, the recovery takes around three years and the CARES stimulus shortens this recovery to about two years. In this more pessimistic lockdown scenario, we find that an extension of enhanced unemployment benefits is likely to be necessary for consumption spending to recover more quickly. 
    & an even sharper collapse in real economic activity.


    THE INTERNATIONAL DIMENSION OF A CENTRAL BANK DIGITAL CURRENCY

    Massimo Minesso Ferrari, Arnaud Mehl, Livio Stracca   
    12 October 2020

    Writing at Vox, Massimo Minesso Ferrari, Arnaud Mehl and Livio Stracca argue that central bank digital currencies would not only have domestic macroeconomic and financial implications for the issuing economy, they would also have implications for the rest of the world. 

    The study finds that in particular, the unique characteristics of a central bank digital currency, if used internationally, would create a new ‘super charged’ uncovered interest parity condition which would induce stronger international linkages in a quantitatively relevant way. 


    LEGAL AIR COVER

    Patrick Bolton, Mitu Gulati, Ugo Panizza     
    13 October 2020

    Covid-19 may soon result in multiple sovereign debtors moving into default territory – a situation that the global financial architecture is not built to tackle. A study by Patrick Bolton, Mitu Gulati and Ugo Panizza state intervention in debt contracts is needed to provide temporary legal protection to these countries while they divert resources to deal with the Covid-19 crisis.

    It shows that in the case of Greece, when such intervention was necessary, there were no negative spillovers on periphery euro area debt markets associated with the Greek ex post modification of contract terms.


    BRINGING NEW DIGITALLY ENABLED PRODUCTS AND SERVICES TO MARKET: Sandboxes and the role of policy experimentation

    Molly Lesher    
    13 October 2020

    Digital technologies and data have brought incredible convenience and spurred many innovations, but they also pose great challenges for regulators. One way policymakers can define new regulatory frontiers for such technologies is to implement ‘sandboxes’ – frameworks that provide participant companies with some regulatory flexibility while insulating the impact on consumers. 

    Writing at Vox, Molly Lesher argues that while sandboxes can bring benefits, they are not always the best approach and policy experimentation can – and should – take many forms.


    GLOBAL CONNECTEDNESS AND MARKET POWER MAKE FIRMS MORE RESILIENT TO DOMESTIC COVID-19 SHOCKS

    Jay Hyun, Daisoon Kim, Seung-Ryong Shin     
    10 October 2020

    Writing at Vox, Jay Hyun, Daisoon Kim and Seung-Ryong Shin present evidence that firms with higher global connectedness and market power are more resilient to domestic pandemic shocks. 

    While global production and export networks expose firms to foreign pandemic shocks, they potentially make firms less susceptible to domestic pandemic shocks through diversification of suppliers and markets. In addition, higher market power could provide buffers by allowing bigger margins of adjustment. 
     


    TAPPING INTO TALENT: Coupling education and innovation policies for economic growth

    Ufuk Akcigit, Jeremy Pearce, Marta Prato     
    10 October 2020

    How might policy tools in education and R&D be complementary in developing talent? Writing at Vox, Ufuk Akcigit, Jeremy Pearce and Marta Prato suggest the best mix of policies depends on how unequal society is and how urgently innovation is needed.

    For economies to innovate and grow past the COVID-19 crisis, policymakers have to understand the implications of various policies for innovation and economic growth, and take into account how people sort into professions and how potential scientists and innovators respond to policy. 


    RELATIVE PERFORMANCE EVALUATION, SABOTAGE, AND COLLUSION

    Matthew Bloomfield, Catarina Marvão, Giancarlo Spagnolo    
    09 October 2020

    Theory suggests that the use of relative performance evaluation in managerial compensation should be widespread, but the evidence shows that this is not the case. 

    A study by Matthew Bloomfield, Catarina Marvão and Giancarlo Spagnolo argues that the potential for executives to seek to improve their relative standing by employing costly sabotage – for example, in the form of overly aggressive product market strategies – is an important deterrent to firms' use of relative performance evaluation. Explicit collusion mitigates this possibility, thereby facilitating more efficient risk-sharing between shareholders and executives.



    POLITICS AND ETHNICITY IN AFRICA

    Valeria Rueda interviewed by Tim Phillips, 09 October 2020

    Some ethnic groups are active in African politics, and some are not. Valeria Rueda tells Tim Phillips the fascinating story of how two socioeconomic revolutions more than a century ago shaped post-colonial political power.