Showing papers in "Economic Policy in 2018"

The Walking Dead?: Zombie Firms and Productivity Performance in OECD Countries

Abstract: This paper explores the extent to which “zombie” firms – defined as old firms that have persistent problems meeting their interest payments – are stifling labour productivity performance. The results show that the prevalence of and resources sunk in zombie firms have risen since the mid-2000s and that the increasing survival of these low productivity firms at the margins of exit congests markets and constrains the growth of more productive firms. Controlling for cyclical effects, cross-country analysis shows that within-industries over the period 2003-2013, a higher share of industry capital sunk in zombie firms is associated with lower investment and employment growth of the typical non-zombie firm and less productivity-enhancing capital reallocation. Besides limiting the expansion possibilities of healthy incumbent firms, market congestion generated by zombie firms can also create barriers to entry and constrain the post-entry growth of young firms. Finally, we link the rise of zombie firms to the decline in OECD potential output growth through two key channels: business investment and multi-factor productivity growth

Monetary policy and bank profitability in a low interest rate environment

Abstract: L.P. acknowledges the financial support from the Spanish Ministry of Economy, Industry and Competitiveness [Grant ECO2015-68136-P] and FEDER, UE and from the European Research Council Grant [project 648398].

The productivity puzzle and misallocation: an Italian perspective

Abstract: Productivity has recently slowed down in many economies around the world. A crucial challenge in understanding what lies behind this “productivity puzzle” is the still short time span for which data can be analysed. An exception is Italy where productivity growth started to stagnate 25 years ago. Italy therefore offers an interesting case to investigate in search of broader lessons that may hold beyond local specific cities. We find that resource misallocation has played a sizeable role in slowing down Italian productivity growth. If misallocation had remained at its 1995 level, in 2013 Italy's aggregate productivity would have been 18% higher than its actual level. Misallocation has mainly risen within sectors than between them, increasing more in sectors where the world technological frontier has expanded faster. Relative specialization in those sectors explains the patterns of misallocation across geographical areas and firm size classes. The broader message is that an important part of the explanation of the productivity puzzle may lie in the rising difficulty of reallocating resources between firms in sectors where technology is changing faster rather than between sectors with different speeds of technological change

Evaluating market consolidation in mobile communications

Abstract: We study the dual relationship between market structure and prices and between market structure and investment in mobile telecommunications. Using a uniquely constructed panel of mobile operators’ prices and accounting information across 33 OECD countries between 2002 and 2014, we document that more concentrated markets lead to higher end user prices. Furthermore, they also lead to higher investment per mobile operator, though the impact on total investment is not conclusive. Our findings are not only relevant for the current consolidation wave in the telecommunications industry. More generally, they stress that competition and regulatory authorities should take seriously the potential trade-off between market power effects and efficiency gains stemming from agreements between firms.

Patent Boxes Design, Patents Location and Local R&D

Abstract: Patent boxes have been heavily debated for their role in corporate tax competition. This paper uses firm-level data for the period 2000-2011 for the top 2,000 corporate research and development (R&D) investors worldwide to consider the determinants of patent registration across a large sample of countries. Importantly, we disentangle the effects of corporate income taxation from the tax advantage of patent boxes. We also exploit a new and original dataset on patent box features such as the conditionality on performing research in the country, and their scope. We find that patent boxes have a considerable effect on attracting patents, mostly because of their favourable tax treatment, especially for high-quality patents. Patent boxes with a large scope in terms of tax base definition also have stronger effects on the location of patents. The size of the tax advantage offered through patent box regimes is found to deter local innovative activities, whereas R&D development conditions tend to attenuate this adverse effect. Our simulations show that, on average, countries imposing such development conditions tend to grant a tax advantage that is slightly greater than optimal from a local R&D impact perspective.

Firing costs and firm hiring: evidence from an Italian reform

Abstract: Aimed at reducing labour market dualism and favouring job creation, in 2015 the Italian government issued new regulations lowering firing costs for newly signed open-ended job contracts. To foster the adoption of the new rules the government introduced also a generous subsidy for firms hiring workers with an open-ended contract. Using microdata on hiring and firing for one Italian region, Veneto, we exploit some differences in the design of the two policies to separately identify the effects of new firing costs on firm hiring. We find that around 8% of gross permanent hires occurred because of the reduction of firing costs (in addition to the positive and large effect of the hiring subsidies). The reform of firing costs contributed also to increase the monthly rate of conversion of fixed-term jobs into permanent positions. As suggested by the theory, we also find that the new firing rules made firms slightly less reluctant to offer permanent job positions to yet untested workers.

Is regulation to blame for the decline in American entrepreneurship

Abstract: Mounting evidence suggests that economic dynamism and entrepreneurial activity are declining in the United States. Over the past 30 years, the annual number of new business startups and the pace of job reallocation have declined significantly. We ask whether this decline in dynamism can be explained by federal regulation. We combine measures of dynamism with RegData, a novel dataset leveraging the text of the Code of Federal Regulations to create annual measures of the total quantity of regulation by industry. We find that rising federal regulation cannot explain secular trends in economic dynamism.

Trading for peace

Abstract: I examine the conditions under which trade can support peaceful coexistence and prosperity when particular social and ethnic groups are cheap targets of violence. A simple theoretical framework reveals that for a broad set of cases, while inter-group competition generates incentives for violence, the presence of non-replicable, non-expropriable inter-group complementarities becomes necessary to sustain peaceful coexistence over long time horizons. In addition to complementarity, two further conditions are important for deterring violence over time. When relatively mobile groups (e.g. immigrants) are vulnerable, a credible threat to leave can deter violence. When less mobile (indigenous) groups are vulnerable, high-monitoring costs that allow them to withhold production can improve their gains from trade. I describe the implications for indigenous entrepreneurship and cultural assimilation, the development of local institutions supporting inter-ethnic trust and immigration policies and policies aimed at mitigating conflict through financial innovations. I illustrate these implications using contemporary evidence and historical cases of organizations and institutions created to engender trade and support peace drawn from Africa, Asia, Europe and Latin America.

Dangerous flexibility - retirement reforms reconsidered

Abstract: Flexible retirement is supposed to increase labor supply of older workers without touching the third rail of pension politics, the highly unpopular increase of the retirement age While this may have intuitive appeal, this paper shows that it might be wishful thinking Economic theory tells us that flexible retirement policies can have a zero or positive effect on labor force participation while the effect on hours worked can be positive or negative depending on the distribution of leisure preferences Thus, the overall effect is ex ante unclear Empirical results from nine OECD countries show that the effect on labor force participation is ex post small and positive while the effect on hours worked is negative Overall, there is no evidence of the desired positive effect on total labor supply, rather, we see evidence of a dangerous decline in total labor supply We conclude that the flexibility reforms enacted so far have failed to increase old-age labor supply and delineate several alternative options to achieve this aim

Can appreciation be expansionary? Evidence from the euro area

Abstract: SUMMARYWe identify exogenous effects of shifts in effective exchange rates for euro area (EA) countries between 1999 and 2016. The identification strategy is based on an external instrument built on the assumption that movements in the euro nominal effective exchange rate are largely exogenous for individual EA countries once we control for EA aggregates. We find that a real appreciation creates a trade-off between expenditure switching (contractionary) and terms of trade (expansionary) effects, with the latter prevailing in most countries. We also find some heterogeneity in the way movements in the euro exchange rate are transmitted within the EA, in particular between ‘core’ and ‘peripheral’ countries, although differences are mostly not statistically significant.

Interest rate changes, mortgages and consumption: evidence from Italy

Abstract: SUMMARYUsing the Italian Survey of Household Income and Wealth, we study whether the drop in interest rates following the Great Recession was associated with an increase in consumption for households with Adjustable Rate Mortgages (ARM) relative to those with Fixed Rate Mortgages (FRM). After the reduction in mortgage payments, consumption of ARM holders increases relative to FRM but the implied marginal propensity to consume is not statistically different from zero. We suggest three explanations for the weak consumption response to the income shock. First, cash-on-hand and debt heterogeneity may attenuate the consumption response. Second, borrowers believe that the income shock was short-lasting, and that interest rates would likely increase in the future, implying a small effect on consumption. Third, the shock is offset partly by a reduction in income from financial assets owned by mortgagors. The findings have implications for the conduct of monetary policy interventions and the credibility of the future path of interest rates, pass-through of monetary policy, and design of the mortgage market.

Can power-sharing foster peace? Evidence from Northern Ireland*

Abstract: In the absence of power-sharing, minority groups in opposition have powerful incentives to substitute the ballot with the bullet. In contrast, when power is shared among all major groups in society, the relative gains of sticking to electoral politics are larger for minority groups. After making the theoretical argument, we provide in the current paper an empirical analysis of the impact of power-sharing at the local level, making use of fine-grained data from Northern Ireland’s 26 local district councils over the 1973–2001 period. We find that power-sharing has a sizable and robust conflict-reducing impact.

Can education compensate the effect of population ageing on macroeconomic performance

Abstract: This paper investigates the consequences of population ageing and of changes in the education composition of the population for macroeconomic performance. Estimation results from a theoretically founded empirical framework show that ageing as well as the education composition of the population influence economic performance. The estimates and simulations based on population projections and different counterfactual scenarios show that population ageing will have a substantial negative consequence for macroeconomic performance in many countries in the years to come. The results also suggest that education expansions tend to offset the negative effects, but that the extent to which they compensate the ageing effects differs vastly across countries. The simulations illustrate the heterogeneity in the effects of population ageing on economic performance across countries, depending on their current age and education composition. The estimates provide a method to quantify the increase in education that is required to offset the negative consequences of population ageing. Counterfactual changes in labour force participation and productivity required to neutralise ageing are found to be substantial.

Modern Approaches to Measuring the State Sector: Methodology and Empirics

Abstract: This article attempts to estimate the scale of state participation in the Russian economy in temporal dynamics and in comparison with other countries. Our unique methodology suggests a set of alternative approaches to measuring 3 independent components: stateowned enterprises (SOEs), state unitary enterprises and the public administration sector. Our results reveal growth of state involvement in the economy up to 46% of GDP in 2016. The share of SOEs and public administration in GDP rose from 20.2% and 16.9% in 2006 to 25.3% and 19.2% in 2016, respectively, by conservative estimates. A crosscountry comparison suggests that market capitalization, employment and SOEs’ share in GDP are significant and increasing. The share of public administration corresponds to the same estimate for OECD countries, but it is also increasing. The total state share and its growth can be evidence of an alarming trend for the Russian economy. It is 6%-12% higher than the estimate for most developing countries and, unlike in China or India, it keeps growing. This leads to state expansion in the economy, growth of state influence on SOEs and a transfer of noneconomic risks to SOEs. Apart from increasing state involvement in added value creation, the state plays an active role in reallocation of financial resources, and there is some evidence that it is even more significant than the state share in creating added value measured by GDP.

Long-term exposure to malaria and violence in Africa

Abstract: This paper explores the existence of a link between the long-term exposure to malaria and the, frequency of civil conflicts in Africa. Using geographically disaggregated data at the level of grid cells the analysis provides empirical evidence for a hump-shaped relationship between the long run stability and force malaria transmission and the incidence of civil violence. In line with epidemiological predictions about the acquired immunity to malaria, cells that are characterized by intermediate malaria exposure exhibit higher conflict incidence than cells with very low or very high malaria exposure. We explore the role of the expansion of anti-malaria policies after 2005 in the context of the Roll Back Malaria programme. The results provide suggestive evidence that anti-malaria interventions reduced the incidence of civil violence, but only in areas where adults lack acquired immunity to malaria.

Повышение пенсионного возраста: позитивные эффекты и вероятные риски

Abstract: In this paper, we explain why it is necessary to reform the pension system in Russia and, in particular, to increase the pension age. Moreover, we emphasize the positive consequences of such a reform, focus on potential risks and analyze measures for their prevention, as well as state counter-arguments to the most common objections. It is shown that due to demographic processes, the growth of informal employment and the reduction of average tenure, the number of pensioners is increasing while the population of donors of the pension system is declining. Under such conditions, the maintenance of the existing level of pensions will require significant additional costs. Raising the general retirement age as one of the measures for optimization of the pension system will help not only to maintain the level of pensions, but also to prevent the expansion of transfer payments from the federal budget and the increase of tax burden on the population and business. The reform will improve the situation on the labor market and stimulate the process of active longevity. It is also shown that the arguments against the increase of the retirement age are not well-founded. Several scenarios of the retirement age increase are considered, and the choice of the most favorable way for the Russian economy is made: up to 63 years for men and 60 years for women at the pace of 3 months per year in the first four years of the reform, then 6 months per year. The most crucial tasks which should be solved in order to maximize the social and economic output of the reform are also considered in the paper.

The Economics of Financing Higher Education

Abstract: Different arguments exist pro and contra tax-financed subsidies in higher education. It has been argued that private incentives to study are sufficiently high, while the financing of those subsidies can be deemed regressive as they are co-financed by relatively poorer non-students. Alternatively, several arguments have been put forward why (higher) tax-financed subsidies are desirable, such as externalities and credit constraints. This study scrutinizes these different arguments and discusses the implications for the different ways in which higher education can be financed. Calculations of private returns across the OECD confirm that private incentives to invest in higher education are high. However, economic theory poses that it is the marginal social return that must guide policy, which will reflect both equity and efficiency considerations. We assess the potential regressivity of higher education subsidies using different perspectives, and assess the different efficiency arguments for government intervention in higher education. Tax-financed subsidies turn out to be regressive in most cases, but depending on the perspective and the country under examination. Discussion of the efficiency arguments is focused on those that are most relevant in light of the empirical evidence and their relevance for the different financing modes: externalities, uninsurable risk, credit constraints, and misprediction. We conclude that, to deal with the more credible failures in higher education, tax-financed subsidies are blunt instruments. For a large share of the countries under consideration, shifting towards income-contingent loans or graduate taxes appears more appropriate when taking into account both efficiency and equity considerations.

Prospects of Economic Policy

Abstract: This article discusses the current challenges facing the Russian economy and the main tasks that have to be accomplished in order to achieve the goals set by the May Decrees of the President of the Russian Federation. The author emphasizes that ensuring the rates of Russia’s economic growth above the world average rates within the next six years is possible provided that a whole set of interrelated measures is developed and implemented. These measures include, most importantly, mitigation of unfavorable demographic conditions through reducing structural unemployment, increasing life expectancy, and migration policy. At the same time, the article notes that an increase in labor supply implies improving the living standards of the Russian population as well as favorable conditions for development and realization of human potential. These conditions include developed modern infrastructure, education and healthcare system, raising ecological standards etc. Achieving a high level of development and sustainable long-term growth rates is impossible without increasing the volume and quality of investments (primarily in the non-petroleum sector of the economy). In turn, attracting investments presupposes the formation of a diversified economy with predominance of high-tech industries in its structure, which would allow Russia to accumulate know-how and export complex products requiring high level of human capital in the future, thereby improving the country’s competitiveness in global markets. A qualitative change in the investment structure requires favorable investment climate and conditions for competition, effective state management etc. Thus, the implementation of the entire set of measures mentioned above will ensure a dynamic and balanced development of the Russian economy and, therefore, sustainable long-term growth.

Subnational Budget Rules: Foreign and Russian Experience

Abstract: The article discusses the rules and restrictions for subnational budgets in Russia and some federative countries, as well as the current level of debt burden of the respective public authority. According to the authors, in the world practice, modern budget rules for the regions are characterized by flexible built-in mechanisms that allow them to adapt quickly to external and internal shocks without making changes in their basic design. This ensures not only fiscal sustainability of public finances at the regional level, but also stability of budget legislation and its law enforcement practice. The authors analyze the arguments pro and contra the application of conditional budget rules, that is, the features of binding certain restrictions of budget parameters (volume of expenditures, regional budget deficit, public debt) to such criteria as the level of transfer dependence, the amount of accumulated debt level, the dynamics of GRP growth rates etc. The analysis of international and Russian practice has led to the conclusion that budgetary rules should not be differentiated based on the level of transfer dependence, that there is a need for tighter restrictions for regions with high debt burden, and that budget rules should be given sufficient flexibility. In order to ensure effective application of new budget rules, the authors propose limiting the practice of making decisions at the federal level that directly affect the expenditure obligations of the regions, and introducing a system of built-in mechanisms to increase fiscal discipline, including encouraging regions that implement responsible fiscal policies and applying sanctions for violating budget rules.

Subnational Budget Rules: Foreign and Russian Experience [Субнациональные Бюджетные Правила: Зарубежный И Российский Опыт]

Abstract: The article discusses the rules and restrictions for subnational budgets in Russia and some federative countries, as well as the current level of debt burden of the respective public authority. According to the authors, in the world practice, modern budget rules for the regions are characterized by flexible built-in mechanisms that allow them to adapt quickly to external and internal shocks without making changes in their basic design. This ensures not only fiscal sustainability of public finances at the regional level, but also stability of budget legislation and its law enforcement practice. The authors analyze the arguments pro and contra the application of conditional budget rules, that is, the features of binding certain restrictions of budget parameters (volume of expenditures, regional budget deficit, public debt) to such criteria as the level of transfer dependence, the amount of accumulated debt level, the dynamics of GRP growth rates etc. The analysis of international and Russian practice has led to the conclusion that budgetary rules should not be differentiated based on the level of transfer dependence, that there is a need for tighter restrictions for regions with high debt burden, and that budget rules should be given sufficient flexibility. In order to ensure effective application of new budget rules, the authors propose limiting the practice of making decisions at the federal level that directly affect the expenditure obligations of the regions, and introducing a system of built-in mechanisms to increase fiscal discipline, including encouraging regions that implement responsible fiscal policies and applying sanctions for violating budget rules.

Strategic Instruments of State Support Distribution in the Agrarian Sector [Стратегические Инструменты Распределения Господдержки Аграрного Сектора]

Abstract: This work raises the problem of subsidy distribution to Russian regions for agrarian sector support. Having synthesized legal acts, the authors generated data on the state of support tools in the form of allocations from the federal budget to budgets of Russia’s territorial subjects. It is shown that the new budgetary transfer procedures do not correlate with the efficiency of their use, which contradicts the principles of laws on strategic planning and the use of budgetary funds. On the basis of a methodological review, the main tools for subsidy efficiency analysis are generalized and their applicability in Russian practice is revealed. These methods are largely directed towards the description of efficiency assessment processes and diagnose the result of the use of budgetary funds insufficiently. The authors have improved VNIOPTUSH’s method through adding a number of tools, which ensure the assessment of returns from state support use, taking into account the regions’ natural and economic capacity. New communications are revealed, and the functional dependence of support results on natural and economic conditions of reproduction is examined. These tools increase the objectivity of analytical procedures and the effectiveness of the mechanism of fund distribution between regions. Research based on the advanced method provides new data on the efficiency of budgetary funds use, which considerably depends on the extent to which the agrarian capacity of territorial subjects of the Russian Federation is used. Regions with difficult natural and economic conditions have the best efficiency indicators, whereas regions with favorable conditions for agricultural activities have essential reserves to increase the efficiency of subsidy use, which needs to be considered in future state support distribution.

Intervention and peace

Abstract: Intervention often does not lead to peace, but rather to prolonged conflict. Indeed, we document that it is an important source of prolonged conflicts. We introduce a theoretical model of the balance of power to explain why this should be the case and to analyse how peace can be achieved: either a hot peace between hostile neighbours or the peace of the strong dominating the weak. Non-intervention generally leads to peace after defeat of the weak. Hot peace can be achieved with sufficiently strong outside intervention. The latter is thus optimal if the goal of policy is to prevent the strong from dominating the weak.

Measuring Regional Development with the Network Theory Approach

Abstract: In this paper, we make a detailed description of a network method which we then use to calculate a new ranking that measures the export complexity of Russian regions. Even though this ranking directly measures the complexity of regional export baskets, indirectly it also reflects other features of regional economies, as the ability to supply goods to international markets results from the availability of different capabilities in a particular region, such as know-how, equipment, infrastructure etc. At the same time, the calculation of the ranking does not require a lot of various data, as well as constructing numerous variables characterizing different aspects of regional development. The method which is discussed in this paper has several important advantages over a number of alternative regional rankings. In particular, the latter employ the assumption of substitutability among various factors that are taken into account when these rankings are calculated. However, this assumption is often too strong. Moreover, these rankings are not based on any well-defined theoretical structure, and the choice of variables which are used to calculate these rankings is not explicitly explained. In contrast, the method which is discussed in this paper has a well-defined theoretical structure and uses no strong assumptions. At the same time, the resulting ranking is strongly correlated with other regional rankings, which indicates that the former also contains a significant share of information present in the latter, which emphasizes again the ability of the new ranking to capture different important features of regional development.

Welfare systems and their complexity

Abstract: In different periods, economists and policy-makers have focused their attention on various aspects of fiscal policies, such as the accumulation of public debt and the impact of taxes on growth, the impact of fiscal policies on aggregate demand and the ability to reduce the severity of recessions, as well as the effect that they might have on the incentives of economic operators and on economic efficiency This paper considers another aspect, which has attracted relatively little attention so far – namely the impact that they may have on the complexity of government operations The approach proposed in the article would elevate simplicity, on both the spending and the revenue side, to a major criterion that should drive economic policy The benchmark cases of relatively simple policies are universal healthcare and education programs in Scandinavian and some other European countries The representative examples of relatively complex arrangement provide numerous means-tested social programs such as the Medicaid in the USA Tax expenditures are another case of relatively complex policies Programs like these inevitably become more expensive with the passing of time Problems of horizontal and vertical equity increase, and they may give rise to growing antagonism to the programs To deal with these problems, new rules are often created, making the programs progressively more complex The need for and the importance of simplicity has been largely ignored by economists and by most governments It deserves a far more prominent place among the criteria that should guide the choice of policies