March 2011
Internal devaluations in the Eurozone: A mismeasured and misguided argument
The problem with Greece, Ireland, Italy, Portugal, and Spain is that they are uncompetitive and need to internally devalue – or so the argument goes. This column challenges this conclusion by pointing out that the measure used to back it up – unit labour costs – is flawed and misguided. Europe’s periphery lack of competitiveness is related to the types of products they export and not to the fact that their labour is expensive.
International liquidity provision during the financial crisis: A view from Switzerland
Banks across the globe have a high balance-sheet exposure to foreign currencies. During the panic of the global financial crisis, the private supply of cross-border liquidity came to a halt, requiring government action. This column documents the unmet demand for cross-border liquidity for the case of the Swiss Franc and describes the countermeasures that were adopted by the Swiss authorities.
A prudential regulatory issue at the heart of Solvency II
A delicate regulatory question is under consideration on the capital (reserve) requirements at the heart of Solvency II (the insurance industry equivalent of Basel III), which is scheduled to come into effect by 2013. This decision will have implications for both regulation of insurers and for macroprudential stability. The six authors of this article were invited to discuss the issues and concluded that more public scrutiny over this important question is urgently needed.
Crisis management and resolution policies: Early lessons from the financial crisis
The comparisons between the global financial crisis and past episodes have been many, but this column argues that policymakers should look again, and closer. It says that without restructuring financial institutions’ balance sheets and their operations, as well as their assets, the economic recovery will suffer – and the seeds will be sown for the next crisis.
How did London get away with it?
When the global crisis hit, many predicted that London would suffer more than other parts of the UK, given the city’s reliance on the financial services industry. This column explores how the UK capital’s economy suffered far less than the rest of the country.
Employment protection and technological choices
Why is the US more productive than the EU? Many studies have shown that the wider use of information and communication technologies in the US explains much of the difference. Why does the US use these technologies more? This column provides new evidence suggesting the answer may lie in differences in employment protection legislation.
Oil-spill economics: How Ghana can succeed
Ghana is about to become a major oil producer. The country’s newfound oil is expected to bring in many billions of dollars, changing the face of its economy. Ghana is the first African country where a major oil discovery is greeted by a well-functioning, albeit young, democracy. This column outlines how it can avoid the resource curse and take full advantage of this historic opportunity.
Does studying abroad increase international labour mobility?
Is the ERASMUS scheme – where European students study for a year in a foreign country – just an excuse for a holiday or does it have some economic value? This column analyses how studying abroad affects labour-market mobility using the exposure to ERASMUS as an exogenous source of variation in studying abroad. It finds that studying abroad increases an individual's probability of working in a foreign country by about 15 percentage points.
Arab awakening, violence, and future prospects: Some historical lessons
The mass movement for democracy that has led to the exile of Ben Ali in Tunisia paved the way to a new awakening and raised many hopes in North Africa and the Middle East. This column reports on recent research on the historical experiences of countries that democratised during the “third wave”, to shed some light on the prospects for the future of the Arab region.
Why do African banks lend so little?
International donors provide large amounts of financial capital to Africa in the form of aid and grants, but there are also large financial flows in the opposite direction. Many African banks invest large sums abroad and lend relatively little to local businesses. This column explains that this is because many banks suffer from a shortage of information about the creditworthiness of some of their customers.
How preferential is world trade?
How much of world trade is preferential? This column uses tariff data covering around 90% of world trade in 2008 to show that only 16.3% of world trade is eligible for preferences. It shows that preferences reduce the global trade-weighted tariff from 3% to 2%.
Basel III: ‘The only game in town’
Hyun Song Shin of Princeton University talks to Viv Davies about his current work on global liquidity and highlights the paradox of how the US, while being the largest net debtor in the world, is also a substantial net creditor in the global banking system. They also discuss the Basel III requirements, bank capital ratios and the lending capacity of bank equity. Shin stresses the importance of international coordination to the success of financial and regulatory reform. The interview was recorded in Washington DC in March 2011 at the IMF conference, ‘Macro and Growth Policies in the Wake of the Crisis’. [Also read the transcript]
Capital controls: A meta-analysis approach
Capital controls are back on the table. But the existing literature offers conflicting and sometimes confusing insights. This column provides a meta-analysis of 37 empirical studies with the aim of exposing some common ground. It finds that capital controls on inflows make monetary policy more independent, alter the composition of capital flows, reduce real-exchange-rate pressures, but they do not reduce the volume of net flows.
US monetary policy and the saving glut
Is US easy monetary policy in the early 2000s to blame for the global saving glut? This column argues that the Federal Reserve’s policy triggered the refinancing boom and ensuing spending spree, which spurred economic growth and savings in China. The prolonged decline in long-term interest rates in the mid-2000s is largely to blame for the housing boom in the US.
Have Chinese innovators (and banks) finally grown-up?
A decade ago economic theory might have suggested that Chinese innovation would be “piggybacking” on the West, taking advantage of the widely available machines and equipment imported from those economies. But using data for 2001 to 2008, this column finds that while foreign investment may once have fuelled technological advancement, it has lost ground to domestic financing channelled within a stronger and ever-improving Chinese financial system.
The future of macroeconomic policy: Nine tentative conclusions
The global economic crisis has taught us to question our most cherished beliefs about the way we conduct macroeconomic policy. In this column, IMF chief economist Olivier Blanchard lays out his thoughts, arguing that we are far from a new Washington Consensus. Exploration is the order of the day.
The risk in carry trades
The carry trade – borrowing in currencies with low interest rates and investing in currencies with high interest rates – has been a surprising hit for decades. This column provides empirical evidence suggesting that the mysteriously high returns this generates can actually be explained as compensation for the volatility risk undertaken.
Murky protectionism: How big an issue?
Compared to recent headline-grabbing events, dealing with “behind-the-border barriers” and keeping protectionist tendencies at bay might seem to be small potatoes. This column argues that the “murky protectionism” that affects €100 billion of trade will have profound implications for Europe and the rest of the world, and as such is worthy of attention.
Learning vs. stealing: India’s productivity growth and market shares
It is broadly agreed that trade liberalisation can increase productivity. The question is how. Earlier literature emphasises the role of firms “learning” to be more productive, whereas recent studies suggest that more productive firms are “stealing” market share from less productive ones, thus raising overall productivity. Presenting evidence from India’s trade liberalisation since 1991, this column finds evidence for both but argues that learning outweighs stealing.
This isn't your grandfather's global trade collapse
The recent global crisis was accompanied by the Great Trade Collapse – the sharpest and deepest fall in world trade since the Second World War. While the subject has received much attention on this site, this column argues that scholars have not invested enough in comparing it to the previous world trade collapse of the 1930s. It does so, highlighting the importance of country-specific variables that have been neglected.
The benefits of being too big to fail and how to regulate them
The problem of banks being too big to fail haunts discussions of regulation. This column provides new evidence on the implicit support provided to banks deemed too-difficult-to-fail and too-difficult-to-unwind in Europe and the US. It finds that regulators could be doing a much better job.
Emerging markets: New challenges after the global crisis
Emerging market economies proved surprisingly resilient during the global crisis, but some of them weathered the crisis better than others. This column argues that there are useful lessons to be learned from their experiences, and that these lessons have implications for securing emerging markets’ long-term growth prospects and responsibilities for global economic and financial stability.
Improving skills to promote equality in the US
Disparities between Blacks and Whites are a persistent feature of American society. This column shows that problems facing African Americans are shared by many other groups and stem from shortfalls in skills. It argues that the most helpful and cost-effective policy to enhance the skills of disadvantaged children is support for parenting. The early years of a child’s life lay the foundation for all that follows.
EU corporate tax reform: Weighing the pros and cons
The European Commission has launched proposals to radically reform corporate income tax in the EU, with a system known as the Common Consolidated Corporate Tax base. This column suggests that this reform would have significant effects on individual member states, but only small effects at the aggregate level in terms of employment, GDP or efficiency. It adds that if tax rates were also harmonised and the tax base included an allowance for corporate equity, the economic benefits could be far greater.
Mapping the two-way risks in exchange-traded platforms
The exchange-traded derivatives market has been growing rapidly, particularly in the decade preceding the global crisis. This column discusses the various policies available for mitigating the downside risks and argues that the dynamic nature of the market calls for the continuous evolution of regulation and regulatory tools.
Valuing insurers' liabilities during crises: What EU policymakers should not do
In crises, insurance companies' asset values may fall significantly without a corresponding drop in their liabilities. European insurers have argued that their liabilities should be discounted by a higher rate during crises, lest regulations force them to raise more capital at exactly the wrong time. This column argues that that would be the wrong approach to the problem.
Do we need big banks?
Today's big banks are enormous. By 2008, 12 banks worldwide had liabilities exceeding $1 trillion. This column, using data on banks from 80 countries over the years 1991-2009, provides new evidence on how large banks differ in terms of their risk and return outcomes and investigates how market perceptions of bank risk are affected by bank size. It concludes that policies should reward bank managers for keeping their banks safe rather than for making them big.
Can Greece pull it off?
Will the Greek rescue package be enough or is restructuring inevitable? In this column, members of the European Economic Advisory Group argue that even if the sovereign debt crisis is resolved, Greece must deal with its unsustainable current-account deficit. This requires an unenviable choice between internal and external depreciation and a government strong enough to take on the country’s rife tax evasion.
Growth-reducing structural change
Dani Rodrik of the Harvard Kennedy School talks to Viv Davies about ‘growth-reducing structural change’, the puzzling phenomenon whereby labour moves from high- to low-productivity activities. They also discuss the role of industrial policy in growth strategies, global imbalances and the use of currency policy, climate change and the importance of education and migration for growth. The interview was recorded in Washington DC in March 2011 at the IMF conference, ‘Macro and Growth Policies in the Wake of the Crisis’. [Also read the transcript.]
Curbing the credit cycle
Credit booms sow the seeds of subsequent credit crunches. This column argues that these have their source in cross-bank externalities. To internalise these cross-sectional spillovers, policy should operate “across the system”. It adds that this is the essence of macro-prudential policy, which, for the first time is about to be undertaken internationally.
Climate change and the world’s poorest
Those who rely on agriculture for their livelihoods are among the most vulnerable to climate change – they also happen to be among the world’s poorest. This column argues that policymakers have a duty to help them adapt. It adds that the near-term poverty effects of climate-mitigation policies could even be more significant than climate change itself.
A credible economic order for the Eurozone?
Europe’s history is littered with crises. This column argues that the latest Eurozone crisis is the latest in a long line out of which the region has to evolve. The problem, it says, is that the current package being discussed fails to draw a line under this crisis. While the proposal is reasonable, it is not credible.
Systemic risk regulation: Pigouvian taxes or quantity regulation?
How to regulate systemic risk? This column presents a new CEPR discussion paper assessing the performance of Pigouvian taxes and quantity-based regulations in containing the social costs of high-risk banking. It finds that, depending on how banks differ, the socially efficient solution may be attained with Pigouvian taxes, quantity regulations, or a combination of both.
A licence to text money: New insights on mobile money in Kenya
The success of the mobile money programme in Kenya – where money is exchanged via mobile phone – has been phenomenal. In four years, a country with only 850 bank branches has seen the number of outlets providing the service grow from 4,000 to 25,000. People have access to formal finance as never before. This column studies 3,000 households between 2008 and 2010, tracking this social and economic transformation.
Intellectual property rights and FDI knowledge diffusion
Proponents of strong intellectual property rights protection argue that it enhances incentives for innovation and knowledge transfer. Opponents, on the other hand, stress the reduction in knowledge spillovers. Using a sample of large, publicly traded firms from 22 developed countries, this column finds that stronger intellectual property rights have a positive and robust effect on backward knowledge diffusion from multinational firms.
Why worry about real exchange rates? The missing link between Dutch disease and growth
In the 1960s, the Netherlands discovered natural gas in the North Sea. Yet as its wealth increased, so did the value of its currency. Exports fell and the phrase “Dutch disease” was born. This column reviews the literature and finds no evidence that the Dutch disease actually reduces overall economic growth.
On the tasks of the European Stability Mechanism
In the run up to next week’s meeting of the European Council, confusion remains on how to tackle the Eurozone debt crisis and ensure stability in the currency area. This column argues that it is high time for the European Council to stop ducking the issues and provide a credible framework to tackle the sovereign debt crisis on its doorstep.
Getting the right tax policy: Aiding recovery and boosting growth
Have governments been cutting the right taxes? And are they choosing the best taxes to increase now that they need to balance the books? Using data from 21 OECD countries, this column argues that the best taxes to cut early on are income taxes for low earners, while the best taxes to increase – later on – are property taxes and consumption taxes.
Pact for the euro: Tough talk, soft conditions?
This weekend, EU leaders agreed to the outlines of a new mechanism to deal with Eurozone debt problems after the current mechanism expires in 2013. The mechanism is a continuation in the leaders’ preference for “tough talk and soft conditions”. This column argues that the package is merely the next step down the slippery slope of EU taxpayers sharing the burden with Greek taxpayers.
Is growth incomplete without social progress? India’s development paradox
The Indian economy, along with others in South Asia, is among the fastest growing in the world. But what about social progress? This column reviews World Bank data suggesting that while income growth is helping to reduce poverty, the number of poor people is actually rising and there remains huge room for improvement in education, health, and women’s economic participation.
Are the world’s megacities too big?
Are the world’s megacities becoming a sprawling, overfed, and uncontrollable mass that needs to be restrained for the good of society and the environment? This column suggests that policies aimed at reducing the dispersion in city sizes will hardly improve the wellbeing of the people who live there. If anything, in some developing countries, such as China, large cities may actually be too small.
Competition and cash crops in sub-Saharan Africa
Millions of people in sub-Saharan Africa rely on cash crops for their livelihoods . This column presents a new CEPR/World Bank book exploring the effects of increasing competition in these markets. It finds that while competition improves welfare for farmers on the whole, policymakers should still consider the potential winners and losers in each case.
A crisis mechanism for the euro: The European Stability Mechanism
The EU’s Stability and Growth Pact stipulates that no member country can have a budget deficit exceeding 3% of GDP nor can it have public debt above 60% of GDP. In this column, authors from the European Economic Advisory Group ask what went wrong, denounce suggestions of Eurobonds, and propose a new three-stage crisis mechanism: the European Stability Mechanism.
Low-wage East meets high-quality West: New firm-level evidence from France
With exports from low-wage countries like China on the rise, the question of what this means for trade and jobs in developed countries is a furious war of words. This column, using firm-level data for France between 1995 and 2005, shows that competition from low-wage markets actually boosts the sales of high-quality goods – but it concedes the benefits are not universal.
Migration and the welfare state
Assaf Razin of Cornell University and Tel Aviv University talks to Romesh Vaitilingam about his book, ‘Migration and the Welfare State: Political-Economic Policy Formation’, which explores implications of the observation that open immigration cannot co-exist with a strong safety net, and policies to resolve intra- and intergenerational conflicts over immigration policies and the generosity of the welfare state. The interview was recorded at the annual congress of the European Economic Association in Glasgow in August 2010. [Also read the transcript]
Systemic risk after the global crisis
Just how much systemic risk remains in the advanced economies? This column uses Markov-switching techniques to examine volatility in equity, interbank, sovereign credit-default swaps, and foreign-exchange markets. It finds that while overall systemic stress emanating from interbank spreads and foreign-exchange volatility has subsided, there are still pockets of systemic risk, particularly in sovereign credit default swaps and equity markets – and this is especially the case for Europe’s periphery.
Measuring anti-trafficking policies
According to the US Department of State, there are more than 12 million victims of human trafficking worldwide. This column presents a new index to measure the spread of anti-trafficking policies. It suggests they mainly diffuse across contiguous countries and main trading partners, due to externality effects, and also via political and cultural similarities, due to learning and emulation.
Housing booms, capital inflows, and low interest rates
In much of the Western world, the decade prior to the global crisis witnessed soaring house prices. While the debate on its causes continues, this column finds that the property booms owed a significant part of their ferocity to large capital inflows and low interest rates.
Welcome to Vox.LACEA – our new consortium member in Latin America and the Caribbean
VoxEU welcomes the latest member of the Vox consortium – Vox.LACEA – that provides policy relevant research and commentary on Latin America and the Caribbean. Launched in January, it hopes to become a major resource for economists, policymakers, and journalists with an interest in the economies of the region.
The roots of the German miracle
Policymakers the world over are staring at the strength of the German economy with envious eyes. This column argues that the root of Germany’s miracle lies in its “wage moderation” that was the result of labour-market policies in the years preceding the global crisis – a point that is often ignored in the public debate.
Do civil conflicts cost firms? Evidence from post-election Kenya
As unrest continues in the Arab countries, many are asking about the economic costs. While the macro effect of civil conflicts is widely studied, little is known of the micro effects. This column presents evidence from the short-term violence following the 2007 election in Kenya. It finds that firms providing cut flowers to Western markets saw a significant rise in costs, largely due to the displacement of workers.
Running out of room: Fiscal space in advanced countries
The fiscal challenges facing advanced economies today are unprecedented. In this column, the authors re-examine the issue of debt sustainability in a large group of advanced economies, pinning down the concepts of “debt limit” and “fiscal space”. They find that – based on the historical track record of adjustment – a number of countries have either very little or no additional fiscal space.
From Plan B to Plan V: What the UK economy needs to reboot and rebalance growth
The recent announcement that Pfizer will close its main UK research lab (where Viagra was created) is the latest bit of bad news to bite the British economy. This column argues that the UK government’s austerity programme is only making growth prospects worse. Instead of Plan B, it says that the government needs the economic equivalent of Pfizer’s little blue pill – a “Plan V”.
Stop obsessing about global imbalances
Global imbalances and their effects on the global economy are much discussed. This column says that discussing global imbalances is popular because it is the easy way out. It says that policymakers should target the illness rather than the symptoms by reforming their domestic economies and focusing on sustainable growth.
Are buybacks an efficient way to reduce sovereign debt?
Commentators have recently floated the possibility of debt buybacks as a way of reducing a country's debt, particularly in the crisis-ridden Eurozone. Are buybacks a good idea? This column argues that, while there could be some circumstances in which debt buybacks are efficient, theory and experiences suggest that buybacks are generally costly and inefficient, and in practice (concerted) debt exchanges have been preferred.
Immigration and the welfare state: New evidence from the EU
Do immigrants just move for the benefit systems? This column argues that the effect of the welfare state on immigration and its composition depends on whether the destination country's migration policy is “free” or “managed”, and on whether the source country is developed or developing.
Reasons to be bullish about Spain
Albert Marcet of the London School of Economics explains to Viv Davies why predictions of potential Spanish sovereign default are misguided. Marcet presents his views on Spain’s fiscal sustainability, its unemployment and housing problems, the autonomous regions and the recapitalisation of the cajas. He also discusses debt and fiscal coordination in the eurozone and comments on his new role as scientific chair of the Euro Area Business Cycle Network (EABCN). The interview was recorded in London in February 2011. [Also read the transcript]
Deflation, debt, and economic stimulus
The US, Japan, and Ireland are threatened by the spectres of deficient private demand, rising debt, and a tendency to deflation. This column questions current monetary policy directions, i.e. quantitative easing, and argues that printing money to directly finance fiscal stimulus may be a better option.
Do currency appreciations reduce imbalances? Half a century of evidence
If China only allowed its currency to appreciate, the global economy would rebalance and stabilise – or so the argument goes. This column studies the historical record of large exchange-rate revaluations. It supports the idea that currency appreciations have an impact on the current account but argues that this can come at a cost – the reduction in exports risks putting the brakes on global growth.
Revolution in the Arab world: Is it time for a pan-Arab trade deal?
Political turmoil has swept across the Arab world. This column argues that the movement towards more open and representative societies could create the conditions for a big push toward greater trade integration within the region – and the rest of the world. A good place to start would be to complete the Pan-Arab Free Trade Agreement.
Regional integration in sub-Saharan Africa: Rethinking the foundations
Regional integration in Africa is seen as a priority by many of the continent’s policymakers. This column argues against a formal EU-like structure and instead proposes an African model that is responsive to the economic and political reality of the region. It says that the model should be underpinned by a security regime and should prioritise trade and regulatory cooperation.
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