JEL Picks (Dec 2010 issue)

Designing Climate Mitigation Policy

Joseph E. Aldy, Alan J. Krupnick, Richard G. Newell, Ian W. H. Parry and William A. Pizer

This paper provides (for the nonspecialist) a highly streamlined discussion of the main issues, and controversies, in the design of climate mitigation policy. The first part of the paper discusses how much action to reduce greenhouse gas emissions at the global level is efficient under both the cost-effectiveness and welfare-maximizing paradigms. We then discuss various issues in the implementation of domestic emissions control policy, instrument choice, and incentives for technological innovation. Finally, we discuss alternative policy architectures at the international level. (JEL Q54, Q58)

Full-Text Access | Supplementary Materials [AEA membership required to access all links]

Efficiency and Redistribution: An Evaluative Review of Louis Kaplow's The Theory of Taxation and Public Economics

Robin Boadway

Louis Kaplow proposes a two-step methodology for normative policy analysis and illustrates it using various policy reforms. The first step is to identify efficiency gains when hypothetical lump-sum taxes can undo redistributive consequences. The second step evaluates the redistributive effects using a strictly welfaristic social welfare function. I critically review the foundations for Kaplow's procedure and its reliance on strict welfarism. I argue that basing efficiency gains on hypothetical lump-sum tax adjustment can lead to social welfare reducing policies if such tax adjustments are not carried out. I also indicate some conceptual problems with translating welfarism into policy evaluation when individuals have different utility function, and review one promising alternative approach.(JEL H20, H41, H50)

Full-Text Access | Supplementary Materials

Does Network Theory Connect to the Rest of Us? A Review of Matthew O. Jackson's Social and Economic Networks

James E. Rauch

The ubiquity of networks in our social lives has long been recognized, and their importance in our economic lives is increasingly recognized as well. Yet the literature synthesized in Matthew O. Jackson's Social and Economic Networks, which covers the theory of how networks form, decay, and shape behavior at a general level, has had little influence on either applied theory or empirical work in this area. This is partly because of limitations of network theory as it has evolved in this literature. After describing the network theory presented in the book, I discuss these limitations and make some tentative suggestions as to how they might be overcome. (JEL D85, L14, Z13)

Full-Text Access | Supplementary Materials

Why Isn't Mexico Rich? [this was linked in this blog before as an NBER working paper] Gordon H. Hanson

Over the last three decades, Mexico has aggressively reformed its economy, opening to foreign trade and investment, achieving fiscal discipline, and privatizing state owned enterprises. Despite these efforts, the country's economic growth has been lackluster, trailing that of many other developing nations. In this paper, I review arguments for why Mexico hasn't sustained higher rates of economic growth. The most prominent suggest that some combination of poorly functioning credit markets, distortions in the supply of nontraded inputs, and perverse incentives for informality creates a drag on productivity growth. These are factors internal to Mexico. One possible external factor is that the country has the bad luck of exporting goods that China sells, rather than goods that China buys. I assess evidence from recent literature on these arguments and suggest directions for future research. (JEL E23, E65, F14, O10, O20, O47)

Full-Text Access | Supplementary Materials

Why Have Economic Reforms in Mexico Not Generated Growth?

Timothy J. Kehoe and Kim J. Ruhl

Following its opening to trade and foreign investment in the mid-1980s, Mexico's economic growth has been modest at best, particularly in comparison with that of China. Comparing these countries and reviewing the literature, we conclude that the relation between openness and growth is not a simple one. Using standard trade theory, we find that Mexico has gained from trade, and by some measures, more so than China. We sketch out a theory in which developing countries can grow faster than the United States by reforming. As a country becomes richer, this sort of catch-up becomes more difficult. Absent continuing reforms, Chinese growth is likely to slow down sharply, perhaps leaving China at a level less than Mexico's real GDP per working-age person. (JEL E23, E65, F14, O10, O20, O47)

Full-Text Access | Supplementary Materials

NBER picks this week: Arrow et al and Baldwin

Sustainability and the Measurement of Wealth
by Kenneth J. Arrow, Partha Dasgupta, Lawrence H. Goulder, Kevin J. Mumford, Kirsten Oleson  -  #16599 (EEE EFG)

Abstract:

We develop a consistent and comprehensive theoretical framework for assessing whether economic growth is compatible with sustaining well-being over time.  The framework focuses on whether a comprehensive measure of wealth - one that accounts for natural
capital and human capital as well as reproducible capital - is maintained through time.  Our framework also integrates population
growth, technological change, and changes in health.  We apply the framework to five countries that differ significantly in stages of
development and resource bases:  the United States, China, Brazil, India, and Venezuela.  With the exception of Venezuela, significant
increases in human capital enable comprehensive wealth to be maintained (and sustainability to be achieved) despite significant
reductions in the natural resource base.  We find that the value of "health capital" is very large relative to other forms of capital.
As a result, its growth rate critically influences the growth rate of per-capita comprehensive wealth.

http://papers.nber.org/papers/W16599


Unilateral Tariff Liberalisation
by Richard Baldwin  -  #16600 (ITI)

Abstract:

Unilateral tariff liberalisation by developing nations is pervasive but our understanding of it is shallow.  This paper strives to partly
redress this lacuna on the theory side by introducing three novel political economy mechanisms with particular emphasis is on the role
of production unbundling.  One mechanism studies how lowering frictional barriers to imported parts can destroy the correlation of
interests between parts producers and their downstream customers.  A second mechanism studies how Kojima's pro-trade FDI raises the political economy cost of maintaining high upstream barriers.  The third works via a general equilibrium channel whereby developing
country's participation in the supply chains of advanced-nation industries undermines their own competitiveness in final goods, thus
making final good protection more politically costly.  In essence, developing nations' pursuit of the export-processing industrialisation undermines their infant-industry industrialisation strategies.

http://papers.nber.org/papers/W16600

McCulloch on Deaton

Interesting read:

Angus Deaton's paper is fascinating – and depressing in almost equal measure. Deaton is the nearest thing to God in the field of measuring development. He is perhaps the single most respected economist working in this field having built a reputation over decades for his meticulous unpicking of all manner of development data – when Deaton says something, you listen.

That is from my colleague Neil McCulloch. Read here

Terms of endearment?

From NBER Research.

Terms of Endearment: An Equilibrium Model of Sex and Matching
by Peter Arcidiacono, Andrew W. Beauchamp, Marjorie B. McElroy  -  #16517

Abstract:

We develop a directed search model of relationship formation which
can disentangle male and female preferences for types of partners and
for different relationship terms using only a cross-section of
observed matches.  Individuals direct their search to a particular
type of match on the basis of (i) the terms of the relationship, (ii)
the type of partner, and (iii) the endogenously determined
probability of matching.  If men outnumber women, they tend to trade
a low probability of a preferred match for a high probability of a
less-preferred match; the analogous statement holds for women.  Using
data from National Longitudinal Study of Adolescent Health we
estimate the equilibrium matching model with high school
relationships.  Variation in gender ratios is used to uncover male
and female preferences.  Estimates from the structural model match
subjective data on whether sex would occur in one's ideal
relationship.  The equilibrium result shows that some women would
ideally not have sex, but do so out of matching concerns; the reverse
is true for men.

http://papers.nber.org/papers/W16517

Most recent thorough overview on Indonesia's growth dynamics

From the inbox:

Indonesia's Growth Dynamics

M. Chatib Basri and Hal Hill

Working Paper in Trade and Development No. 2010/10, Australian National University

This paper provides an analytical narrative of Indonesian economic growth over the past two decades. Particular attention is paid to the key economic crisis events of 1997-98 and 2008-09, and how and why Indonesia's response to them was completely different. We emphasize and illustrate how the years 1997-98 were a watershed in the country's economic history and political economy. We underline the country's generally good economic performance, especially the rapid recovery over the past decade, while also highlighting the fact that its economic growth has never quite matched that of the very high growth East Asian economies. The final section analyzes some key policy challenges, including embedding reforms in a highly fluid political environment, maintaining a broadly open commercial policy regime, the regional and international architecture, macroeconomic management, and 'connectivity' and regional (sub- national) development.

The paper is forthcoming in Asian Economic Policy Review

Decentralization: friend or not-yet?

From the inbox: 

Decentralization and Economic Performance in Indonesia

Thomas B Pepinsky and Maria M Wihardja (2010)

Indonesia's 1999 decentralization law gave local governments in Indonesia an unprecedented opportunity to adopt pro-development policies. We estimate the effect of decentralization (enacted in 2001) on national economic performance using a synthetic case control methodology. Our results indicate that decentralization has had no discernable effect on Indonesia's economic output as measured by gross domestic product. To explain this finding, we use subnational data to probe two mechanisms—interjurisdictional competition and democratic accountability—that underlie all theories linking decentralization to better economic outcomes. Our findings suggest that extreme heterogeneity in endowments, factor immobility, and the endogenous deterioration of local institutions can each undermine the supposed development-enhancing promises of decentralized government in developing countries.

Another call for more case studies, I suppose.

From Yokohama for Doha

Excerpt from APEC Economic Leaders' Declaration as a result of the Yokohama meeting in November 13-14, 2010:

We reaffirm our strong commitment to bring the Doha Development Agenda to a prompt and successful conclusion.  Bearing in mind that 2011 will be a critically important "window of opportunity," we direct our Ministers to empower our representatives to engage in comprehensive negotiations with a sense of urgency in the end game, built on the progress achieved, including with regard to modalities, consistent with the Doha mandate.  We affirm our commitment to win domestic support in our respective systems for a strong agreement.  In our continued efforts to resist protectionism, we agree to extend our commitment on standstill made in 2008 to the end of 2013 to refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization inconsistent measures in all areas, including those that stimulate exports.  We commit to take steps to rollback trade distorting measures introduced during the crisis.  Furthermore, we will continue to exercise maximum restraint in implementing measures that may be considered to be consistent with WTO provisions if they have a significant protectionist effect and promptly rectify such measures where implemented.

Good. 

Is being formal good?

New in inbox:

In this paper we analyze the decision of small and micro firms to formalize, i.e. to obtain business and other licenses in rural Indonesia. We use the rural investment climate survey (RICS) that consists of non-farm rural enterprises, most of them microenterprises, and analyze the effect of formalization on tax payments, corruption, access to credit and revenue, taking into account the endogeneity of the formalization decision to such benefits and costs. We show, contrary to most of the literature, that formalization reduces tax and corruption payments. The benefits of formalization, and therefore the likelihood of being formal, also depend on characteristics such as firm size, as well as the education and ethnicity of the owner.

That is the abstract of a new paper by Neil McCulloch, Günther G. Schulze, and Janina Voss, "What Determines Firms' Decision to Formalize? Evidence from Rural Indonesia" (2010), Discussion Paper Series Nr. 13, Department of International Economic Policy, University of Freiburg, Germany.

China facts 10/23

Chinese Academy of Social Sciences reports that the number of people above 60 years of age would cross 200 million sometime between 2011 and 2015, while those between 15 and 64 years old drop 23%. China's "baby boomers" generation will start retiring by 2015. Demographic bonus will expire in 2025. The working age population will peak in 2020, totaling 940 million. Population may reach 1.46 billion in 2035 (via China Daily)

Papers to read

Bend It Like Beckham: Ethnic Identity and Integration
by Alberto Bisin, Eleonora Patacchini, Thierry Verdier, Yves Zenou  -  #16465 (POL)

Abstract:

We propose a theoretical framework to study the determinants of ethnic and religious identity along two distinct motivational processes which have been proposed in the social sciences:  cultural conformity and cultural distinction.  Under cultural conformity, ethnic identity is reduced by neighborhood integration, which weakens group loyalties and prejudices.  On the contrary, under cultural distinction, ethnic minorities are more motivated in retaining their own distinctive cultural heritage the more integrated are the neighborhoods where they reside and work.  Data on ethnic preferences and attitudes provided by the Fourth National Survey of Ethnic Minorities in the UK enables us to test the relative significance of these two identity processes.  We find evidence consistent with intense ethnic and religious identity mostly formed as a cultural distinction mechanism.  Consistently, we document that ethnic identities are more intense in mixed than in segregated neighborhoods.

http://papers.nber.org/papers/W16465



Why Isn't Mexico Rich?
by Gordon H. Hanson  -  #16470 (ITI)

Abstract:

Over the last three decades, Mexico has aggressively reformed its economy, opening to foreign trade and investment, achieving fiscal discipline, and privatizing state owned enterprises.  Despite these efforts, the country's economic growth has been lackluster, trailing that of many other developing nations.  In this paper, I review arguments for why Mexico hasn't sustained higher rates of economic growth.  The most prominent suggest that some combination of poorly functioning credit markets, distortions in the supply of non traded inputs, and perverse incentives for informality creates a drag on productivity growth.  These are factors internal to Mexico.  One possible external factor is that the country has the bad luck of exporting goods that China sells, rather than goods that China buys. I assess evidence from recent literature on these arguments and suggest directions for future research.

http://papers.nber.org/papers/W16470

2020

According to The Economist, in 2020 the (median) age on an Indian is 28, Chinese 37, American 38, European 45, and Japan 49.

Paper to read

Does Culture Matter?
by Raquel Fernandez - #16277 (EFG LE LS PE POL)

Abstract:

This paper reviews the literature on culture and economics, focusing primarily on the epidemiological approach. The epidemiological approach studies the variation in outcomes across different immigrant groups residing in the same country. Immigrants presumably differ in their cultures but share a common institutional and economic environment. This allows one to separate the effect of culture from
the original economic and institutional environment. This approach has been used to study a variety of issues, including female labor force participaiton, fertility, labor market regulation, redistribution, growth, and financial development among others.

http://papers.nber.org/papers/W16277

The Duck, The City, and The Chairman

The Duck, The City, and The Chairman

Posted in Facebook by Arianto A. Patunru on Sunday, October 25, 2009 at 5:11pm

“What’s up, Mister Chairman? Long time no see!”
“Ni-ho-ma? How’re you doing?”
“Great, Chairman. Just finished with a conference on…”
“Crisis? I bet you did! Seriously, don’t you people have anything else to do? This crisis is peanuts! It’s a small, tiny hiccup for China!”
“I reckoned that, Sir. I can’t believe you rebounded that quickly! Approaching two digits again next year? Impressive!”
“That’s okay. Singapore would impress you, too. And look at your own country; it’s also doing very well. So what crisis are you guys talking about? C’mon, we’ve seen harder times, have we not? Don’t be sissy…”
“Yes, Sir…”
“So now, how do you like your visit?”
“Well, it’s fantastic! I didn’t get the chance to see the Great Wall, nor could I go to the Forbidden City – conference was tight. But I sneaked out to Tiananmen Square and …”
“Ah, those stuff. Standard! You can visit them anytime. They’re eternal. But how about food? Now, that is important…”
“Sure thing, Chairman. This great conference organizer took us to Duck King…”
“Wait! Did you just say Duck King? The one in Beijing? The original, authentic, first-timer Duck King? No kidding!”
“You heard me, Chairman. Duck King. The original Peking Duck, Beijing’s most precious gift to the entire civilization!”
“Ah, that is an understatement, my friend. We believe God has created only ten sets of masterpiece in the history of universe. Two of them are Peking ducks and Chinese cooks. They are so good I don’t really care about the remaining eight…”
“Well, that sounds a bit of an exaggeration, Sir. But I won’t argue you on that. As a matter of fact, we have this best restaurant in Jakarta serving Peking duck. Now I feel like I have been cheated the entire time. Why can’t they make it like this here?”
“Hahaha… that’s true. We can make iPhones better than Americans and send them out to the world. We make Lenovos, send them out. We even created the ugly looking Crocs and made you East Asians love ‘em. But listen, dude. You want Pecking duck, you come eat it here. Right in Beijing! Because Beijing, the duck, and the cook are one package, my friend! They’re perfect complements as you economists would call ‘em”
“I guess you’re right, Mr. Mao”
…
“Now what else have you seen?”
“Oh, I have this friend from newspaper. She took us to … let me remember the name … ah, Shichahai! It’s a really cool place, they have…”
“Oh, that! Of course. I love that place too. Where else can you relax, sipping Chinese tea, and listening to Santana? And they’ve got Starbucks, too, you noticed?”
“Yup. Your country is so globalized…”
“Excuse me? Watch your words, young man. You are in the most capitalistic country in the world! Did I say we invented … well, we made iPhone? Do you know we have our own state in US called Walmart? And by the way, that Blackberry you Indonesians are so crazy about? Man, that thing’s ridiculously expensive! Them Canadians are ripping you off. What are they, bloodsuckers? Just be patient, we’ll make it cheaper very soon!”
“Err, I’m sure you will, Sir”
“Trust me. We’re the most efficient neoliberal in the world”
“You think so?”
“Hell yes! Not only that. We have produced all market icons fancied even by them socialist street activists. Did you see those t-shirts with my picture or Che’s on them? They’re bestsellers! Everybody from London to Buenos Aires, from Jakarta to Caracas buy them. Hail capitalism! Now you tell this to Chavez or that guy Morales”
“I’ll do. And ugh, speaking about t-shirt, I saw one with your trade mark logo – except that they replaced your face with Obama’s…”
“Hahaha! Is that right? Well, I don’t mind. I like this dude Obama. I heard he just won an, what, Oscar?”
“No, it’s the Nobel, Sir”
“Whatever. But see? This guy, I knew he’s got talent. Unlike Bush…”
“Alrite, Chairman. I think I should be boarding now”
“OK. Have a safe flight. Say hi to Soesilo”
“Bye”
“Cai jian!” 

Phantomizing Keynes

Phantomizing Keynes

Posted in Facebook by Arianto A. Patunru on Saturday, May 2, 2009 at 1:26pm

17:00 - 18:30

"Maynard, very nice to meet you"
"Same here. What brings you to London?"
"Some conference. How's life?"
"You mean death? Either way I'm good. What conference are you having?"
"Was. Finished yesterday, that's why I'm here now. It was some kind of reassessment of orthodox and heterodox approaches to investment and growth. Great debate there"
"Ah, that. Boring"
"We talked about you a bit"
"That's not surprising. But rather unfortunate. People remember me only when the economy is in crisis"
"Oh don't be too sentimental, Maynard. Take it as a complement: yes there's a lack of demand and yes monetary policy is rather impotent. A vindication to partof your General Theory, I suppose"
"You have problem with my book?"
"Yes, I do, a bit. Wanna discuss this now?"
"Of course not. We're sipping coffee in Trafalgar Square and you want to talk about liquidity trap? No way"
"Right, Maynard. Let's talk about something more fun then. What are you up to?"
"I'm setting up a school. Call it 'I-Told-You-So-School-of-Economics'. Wanna join?"
"Sounds fun"
"Indeed. I'm hiring Krugman as the department head"
"Not Stiglitz?"
"No, I don't really like that guy"
"And what do you do apart from economics?"
"I'm writing a book about my wife Lydia. Just started it. Hey, what about you. What have you been doing. Apart from economics, I suppose"
"I'm rereading Dostoevsky's Notes from Underground and I just finished Gordimer's Beethoven was One Sixteenth Black"
"Great picks. Underground is different from Dostoevsky's other works. You know me, I like everything different. That's actually the strength of my works: different from mainstream"
"I see..."
"But I haven't read Nadine Gordimer. Is she good? Tell me about thisBeethoven..."
"Sure. Here goes..."

***

18:30 - 19.15

"It's getting colder. What's your plan?"
"Nothing in particular. I'm thinking of some play, Maynard. Any suggestion?"
"Play. Good idea. Anything you fancy?"
"Well I guess I'll go see Phantom of the Opera again. What about you? I heard Ian McKellen is playing Waiting for Godot"
"Yeah, but I've seen it. I'll go see Billy Elliot. Elton John does the scores"
"Now that I have seen twice. So I guess we'll go separate ways?"
"Yes. Shall we meet again afterward?"
"Yes, let's say 23:00?"
"OK. Let's do this. Since Billy is shorter than Phantom and the theater is two stations away from here, I'll come back again to this place..."
"Great. Let's meet up in front of Her Majesty's theater"
"OK, enjoy"
"You too, Maynard"

***

23:00 - 23:15

"Sorry for waiting"
"No, you're alright. Just got here. How's the play?"
"Terrific. How's Billy?"
"Not bad at all. Better than the movie. Tell me about Phantom. Who played Christine?"
"Gina Beck"
"Is she good?"
"Very good. She's amazing"
"Really? Better than Sarah Brightman?"
"Better than Sarah Brightman"
"Glad you enjoyed it. Hey let's go to this new cafe over at Piccadilly. I heard it's great"

***

23:15 - 02:05

"Alright. I'm tired. You're staying in London?"
"No, I'm going back to Brighton. Will fly back to Jakarta tomorrow"
"I'll see. OK then. I'm going back to Bloomsbury. Nice meeting you"
"Same here, Maynard. Keep in contact"

AP to PLN, eh?

So the embarassing blackouts in CGK is solved: the government orders PLN to takeover the power management in CGK from Angkasa Pura.

As if PLN is good.

On redenomination

We've got too many zeros on our currency vis-a-vis US dollar. Getting rid of some of them wouldn't hurt. In fact it simplifies our life.

This thought has been around for awhile. The recent brouhaha was just another example of government's bad PR.

2010H2

Growth data for second quarter is out. It's 6.2% yoy. With 5.7% in Q1, the growth of H1 is therefore 5.9%. GOI's target for 2010 ia 5.8% (BI's is 6.0%). Most likely, it's the latter that holds, if not surpassed.

Inflation in June and July has been higher than expected. As August/Sept will observe fasting month and eid days festivities, yearly inflation might also hit the upper bound (set at 6% by BI), hence a need for some tightening up.

As for employment, GOI expects unemployment to drop to 7.6%. With a growth target of 5.8%, that implies an assumption of 400,000 absorbtion per 1% growth. I guess we're not there yet.

Assignment for the upcoming semester

S1: Introduction to Microeconomics, co-teach with M. Pangestu (Main text: Mankiw)

S3: Advance Microeconomics (Main text: Mas-Colell)

New paper in BIES

Survey of Recent Developments

Bulletin of Indonesian Economic Studies 46(1):7-31, 2010

Arianto A. Patunru (University of Indonesia)

Christian von Luebke (Stanford University)

Abstract

Recent political developments are slowing reforms. The Corruption Eradication Commission (KPK) and the finance ministry find themselves entrapped in legal inquiries and political wrangling that seem intended to weaken their reforming zeal. KPK's effectiveness has been undermined by legislative changes and the arrests of three of its commissioners. Meanwhile, the costly bail-out of a small bank has provided an opportunity for attacks on leading reformers - Vice President Boediono and the Minister of Finance, Sri Mulyani Indrawati. The president's diffident stance in both instances has played into the hands of the opposition and, although key reformers are likely to remain in office, the political imbroglio has nonetheless eroded confidence in the government. 

Year-on-year GDP growth recovered strongly to 5.4% in the fourth quarter of 2009. Government spending has been the key driver, while household spending slowed and investment remained low. Both exports and imports have returned to modest growth. Although 2009 ended with low inflation, Bank Indonesia (BI) has set its target inflation rate for 2010 at double the rate it achieved in November. BI is likely to bow to populist demands to lower nominal interest rates rather than raising them somewhat to prevent inflation accelerating, even though its real policy rate has been consistent with significant acceleration of GDP growth. The 2009 budget outcomes confirm that the fiscal stimulus in response to the global financial crisis has been less than hoped for. As for 2010, high world oil prices will imply huge subsidies, given that the government is unwilling to increase domestic fuel and electricity prices commensurately. 

The president announced that virtually all the government's 'first 100 days' program targets have been met. However, half of the 'action plans' amounted to nothing more than issuing or announcing new regulations, plans, blueprints, guidelines, recommendations or policies, or simply preparing drafts of these. No real progress has been made in relation to the most urgent reforms, particularly on energy subsidies and labour market regulation. Realising that the whole population would benefit in net terms, the previous government signed the ASEAN-China Free Trade Agreement (ACFTA) in November 2004. But just when the agreement was to take effect, strong resistance from business and parliamentarians emerged, leading to the government's decision to re-negotiate many tariffs with China. This is disappointing: failing to uphold its commitments under this long-standing agreement makes Indonesia appear unreliable as an economic partner.

Upcoming gig: Asian Economic Panel

Seoul, Korea next week:

...

3:30 - 5:00 pm

Yung Chul Park, Korea Univ., "RMB Internationalization: Its implications for 
Financial and Monetary Cooperation in East Asia"

 

Discussant
- Arianto A. Patunru, Univ. of Indonesia

- Georges de Menil, Paris School of Economics

- Vu Quoc Huy, Institute of Economics/National Economics Univ.

Details here.