Showing papers in "Oxford Review of Economic Policy in 2008"

Climate change and Africa

Abstract: The impact of climate change on Africa is likely to be severe because of adverse direct effects, high agricultural dependence, and limited capacity to adapt. Direct effects vary widely across the continent, with some areas (e.g. eastern Africa) predicted to get wetter, but much of southern Africa getting drier and hotter. Crop yields will be adversely affected and the frequency of extreme weather events will increase. Adaptation to climate change is primarily a private-sector response and should involve relocation of people, changes in the sectoral structure of production, and changes in crop patterns. The role of government is primarily to provide the information, incentives, and economic environment to facilitate such changes. Adaptation will be impeded by Africa's fragmentation into small countries and ethnic groups, and by poor business environments. On the mitigation side, there is a need to design emissions-trading frameworks that support greater African participation than at present, and that include land-use change. Mitigation undertaken elsewhere will have a major impact on Africa, both positive (e.g. new technologies) and negative (e.g. commodity price changes arising from biofuel policies).

House prices, money, credit, and the macroeconomy

Abstract: This paper assesses the links between money, credit, house prices, and economic activity in industrialized countries over the last three decades. The analysis is based on a fixed-effects panel vector autoregression, estimated using quarterly data for 17 industrialized countries spanning the period 1970-2006. The main results of the analysis are the following. (i) There is evidence of a significant multidirectional link between house prices, monetary variables, and the macroeconomy. (ii) The link between house prices and monetary variables is found to be stronger over a more recent sub-sample from 1985 to 2006. (iii) The effects of shocks to money and credit are found to be stronger when house prices are booming.

Valuing school quality, better transport, and lower crime: evidence from house prices

Abstract: Housing prices within urban areas exhibit highly localized variation that cannot be explained solely by differences in the physical attributes of dwellings. We consider the role of local amenities and disamenities in generating price variation within urban areas, focusing on three highly policy-relevant urban issues-transport accessibility, school quality, and crime. Our survey of the recent empirical literature highlights what is known and what is not known on these issues, and considers the relevance and reliability of this evidence for policy design and evaluation. Although there are serious empirical challenges, we argue that research on housing values based on careful research designs can offer credible estimates of the social value of place-specific attributes and amenities.

Corporate tax elasticities: a reader's guide to empirical findings

Abstract: Corporate taxes exert a variety of effects on business behaviour. A wealth of empirical evidence assesses the magnitude of these behavioural margins of taxation. This article offers an up-to-date review and aims to provide common ground by computing for each distortion the semi-elasticity of the corporate tax base. We pay particular attention to international investment where it is not a priory clear whether marginal investment decisions or discrete locations are most important. Using anextension of the meta analysis of De Mooij and Ederveen (2003), we explore the extent to which existing studies reveal differences in effect size between the intensive and extensive margins of international investment.

The determinants of migrant remittances

Abstract: This article explores the factors that account for variation in remittance flows. Why do some immigrants send much more money to their country of origin than others? This is a question that, in the aggregate, has implications for national economies and migration-related policy. The analysis departs from the classic studies of remittances and considers how the context of contemporary migration in Europe is likely to affect remittance patterns. Possible influences on remittance-sending are disaggregated into nine domains, and each is discussed with reference to theoretical arguments and empirical findings. The temporal aspects of remittance-sending are discussed separately. The final section of the article considers implications of the micro-level analysis for aggregate remittance flows and policy. It is argued that the focus on altruism versus self-interest in the literature has partly diverted attention from explaining the actual variation that is important in a policy perspective.

Housing markets and the economy: the assessment

Abstract: Housing markets have multiple interactions with the rest of the economy and these are surveyed in this paper. The drivers of house prices include income, the housing stock, demography, credit availability, interest rates, and lagged appreciation, the latter a potential mechanism for overshooting. There is rather less agreement on the determinants of new construction, though planning constraints are widely seen as a major issue and one of the causes of the UK housing affordability problem. The paper argues that housing collateral and downpayment constraints are the key to understanding the role of house-price variations in explaining medium-term consumption fluctuations. Institutional variations between countries and over time account for major differences in linkages between house prices and economic activity. This illuminates debates about how monetary and other policy should react to house-price variations. The paper also discusses the role of housing markets in explaining regional migration and location decisions, intergenerational inequality, and restricting access of the less affluent to public goods, such as good schools, which are capitalized in local house prices.

The labour market impact of immigration

Abstract: In the first part of this paper, we present a stylized model of the labour market impact of immigra- tion. We then discuss mechanisms through which an economy can adjust to immigration: changes in factor prices, output mix, and production technology. In the second part, we explain the problems of empirically estimating how immigration affects labour market outcomes of the resident population and review some strategies to address these. We then summarize some recent empirical studies for the UK and other countries. We conclude with an outlook on what we believe are important avenues for future research.

China's balance of emissions embodied in trade: approaches to measurement and allocating international responsibility

Abstract: International trade is characterized not only by the flow of capital and goods, but also by the energy and emissions embodied in goods during their production. This paper investigates the evolving role that Chinese trade is playing in the response to climate change by estimating the scale of emissions embodied in China's current trade pattern and demonstrating the magnitude of the difference between the emissions it produces (some of which are incurred to meet the consumption demands of the rest of the world) and the emissions embodied in the goods it consumes. Estimating China's emissions on a consumption rather than a production basis both lowers its responsibility for carbon-dioxide (CO2) emissions in 2006 from 5,500 to 3,840mtCO2 and reduces the growth rate of emissions from an average of 12.5 per cent p.a. to 8.7 per cent p.a. between 2001 and 2006. The analysis indicates that a reliable consumption-based accounting methodology is feasible and could improve our understanding of which actors and states are responsible for emissions. For example, recent emissions reductions by developed countries may lack credibility if production has merely been displaced to countries such as China. Moreover, in the current institutional context, production methodologies encourage leakages through trade that may do more to displace than to reduce emissions. Both equity and efficiency concerns therefore suggest that emissions embodied in trade should receive special attention in the distribution of post-Kyoto abatement burdens.

On the regulation of geoengineering

Abstract: New evidence that the climate system may be especially sensitive to the build-up of greenhouse gases and that humans are doing a poor job of controlling their effluent has animated discussions around the possibility of offsetting the human impact on climate through 'geoengineering'. Nearly all assessments of geoengineering have concluded that the option, while ridden with flaws and unknown side effects, is intriguing because of its low cost and the ability for one or a few nations to geoengineer the planet without cooperation from others. I argue that norms to govern deployment of geoengineering systems will be needed soon. The standard instruments for establishing such norms, such as treaties, are unlikely to be effective in constraining geoengineers because the interests of key players diverge and it is relatively easy for countries to avoid incon- venient international commitments and act unilaterally. Instead, efforts to craft new norms 'bottom up' will be more effective. Such an approach, which would change the underlying interests of key countries and thus make them more willing to adopt binding norms in the future, will require active, open research programmes and assessments of geoengineering. Meaningful research may also require actual trial deployment of geo- engineering systems so that norms are informed by relevant experience and command respect through use. Standard methods for international assessment organized by the Intergovernmental Panel on Climate Change (IPCC) are unlikely to yield useful evaluations of geoengineering options because the most important areas for assessment lie in the improbable, harmful, and unexpected side effects of geoengineering, not the 'consensus science' that IPCC does well. I also suggest that real-world geoengineering will be a lot more complex and expensive than currently thought because simple interventions—such as putting reflective particles in the stratosphere—will be combined with many other costlier interventions to offset nasty side effects.

Climate-change policy: why has so little been achieved?

Abstract: While the scientific evidence for climate change grows, the policy responses have so far had little or no impact on the build-up of emissions. Current trends in emissions are adverse. The paper considers why the disconnect between science and policy exists and, in particular, why the Kyoto Protocol has achieved so little. Some contributing factors considered are: the focus on carbon production rather than consumption in the architecture of Kyoto; the flaws in the analysis presented in the Stern Report (notably on the impacts of climate change on economic growth, on the costs of mitigation, and on discounting); and the political economy of the choice of policy instruments, the politics of the rents that arise, and the technology bias. The challenges facing the Copenhagen conference are noted, and it is concluded that, with a recasting of the economics of climate change, the prospects for closing the gap between the science and policy are grim.

The behavioural economics of climate change

Abstract: This paper attempts to bring some central insights from behavioural economics into the economics of climate change. In particular, it discusses (i) implications of prospect theory, the equity premium puzzle, and time-inconsistent preferences in the choice of discount rate used in climate-change cost assessments, and (ii) the implications of various kinds of social preferences for the outcome of climate negotiations. Several reasons are presented for why it appears advisable to choose a substantially lower social discount rate than the average return on investments. It also seems likely that taking social preferences into account increases the possibilities of obtaining international agreements, compared to the standard model. However, there are also effects going in the opposite direction, and the importance of sanctions is emphasized.

The fiscal impact of immigration on the advanced economies

Abstract: This paper is concerned with the advanced economies. It begins with a discussion of the demo- graphic issues that have played such a large role in the debate on immigration. This is followed by a section on the main problems involved in estimating the fiscal impact of immigration and then a summary of the international evidence on this topic, mostly from Europe and America. Separate sections on the UK and on low-fertility countries follow. The main conclusions are as follows. Highly skilled migrants normally make a large fiscal contribution, whereas unskilled migrants are likely to impose a net cost on native taxpayers if they settle in the receiving country. However, even unskilled migrants may be net contributors if they eventually depart and make few claims on government expenditure while in the country. Most empirical studies find that the fiscal contribution of the immigrant population as a whole is quite small. The positive contribution of some migrants is largely or wholly offset by the negative contribution of others. This finding holds across a variety of countries and methodologies. Estimates of the net fiscal contribution of immigration normally lie within the range ±1 per cent of GDP. There are a few exceptions, but these refer to countries experiencing demographic collapse and they are based on unrealistic assumptions about the inter-generational allocation of future taxes and government expenditure. With more realistic assumptions, the overall fiscal benefit of immigration is quite small, even in these countries. These findings suggest that, in general, there is no strong fiscal case for or against sustained large-scale immigration. The desirability or otherwise of large-scale immigration should be decided on other grounds.

The labour-market performance of recent migrants

Abstract: Migrant workers constitute a vital component of many Western labour markets. Although migrants can benefit greatly by moving to higher-wage economies, it is important to compare their labour-market outcomes with those of native-born workers. In this paper, we discuss factors that have been found to influence labour-market success in the receiving country and examine the actual performance of recent migrants to the UK. The UK provides a good case study for conducting such an exercise because of the very large increases in immigration that have been seen over the past decade. We find that labour-market performance varies greatly between migrant groups and that outcomes have changed noticeably following the UK government's decision to allow migrants from Poland and other Central and Eastern European countries more or less free access to the labour market after EU enlargement in 2004.

Scale, diversity, and determinants of labour migration in Europe

Abstract: While global migration is increasing, internal EU migration flows have only increased slowly. This paper contributes to a better understanding of the determinants and scale of European migration. It surveys previous historical experiences and empirical findings including the recent Eastern enlargements. The determinants of migration before and after the 2004 enlargement and in the EU15 and EU10 countries are analysed using individual data on migration intentions. In addition, perceptions about the size of migration after the enlargement are studied. The potential emigrant from both old and new EU member states tends to be young, better educated and to live in larger cities. People from the EU10 with children are less likely to move after enlargement in comparison to those without family. There exists a correlation between individual perceptions about the scale of migration and actual flows. Better-educated and left-oriented individuals in the EU15 are less likely to perceive these flows as important.

Climate treaties and the imperative of enforcement

Abstract: The emission limits in the Kyoto Protocol are too generous. Simply tightening these limits, however, will not make a new climate treaty any more effective at addressing climate change unless the other problems with Kyoto are also addressed. A new climate treaty arrangement must enforce both participation and compliance. This might be done by applying an enforcement mechanism, such as a trade restriction, to a new treaty styled after Kyoto. Potent trade restrictions, however, may lack credibility and legitimacy. An alternative approach recommended here is to break the problem up, with separate (but linked) agreements addressing individual gases and sectors, using the most appropriate means to enforce each component of the system. In bundling together all sectors and greenhouse gases in a single agreement, Kyoto has aimed to achieve cost-effectiveness at the expense of enforcement, which depends on the treaty's weakest enforcement link. The imperative must be to ensure that any future treaty arrangement can be enforced.

What problems and opportunities are created by tax havens

Abstract: 1) Introduction Tax havens have attracted increasing attention and scrutiny in recent years from policymakers, as exemplified by the OECD’s initiatives to combat “harmful” tax practices (OECD, 1998, 2000, 2004). The interest in tax havens reflects their disproportionate role in the world economy, and in particular their centrality to many of the important current policy debates in taxation, including international tax competition (Slemrod, 2004; Hines, 2006, 2007) and tax avoidance activity by corporations (e.g. Desai and Dharmapala, 2006, 2008). This paper provides an overview of the theoretical and empirical insights from a growing scholarly literature that analyzes the consequences and determinants of the existence of tax haven countries. The paper begins with an analysis of the characteristics of countries that tend to be classified as tax havens. It focuses in particular on recent evidence (Dharmapala and Hines, 2006) that tax havens tend to have stronger governance institutions (i.e. better political and legal systems and lower levels of corruption) than comparable nonhaven countries. The popular image of tax havens is somewhat at variance with this picture, and emphasizes their role in facilitating tax evasion by individuals. Recent estimates that have been widely influential in policy debates suggest large revenue losses from haven-related evasion activities (e.g. Guttentag and Avi-Yonah, 2006). This paper argues, however, that careful scrutiny of these estimates suggests that they imply vast amounts of “hidden” wealth, and (if true) would have wide-ranging implications (many of dubious credibility) for many economic phenomena far beyond the arena of taxation. It appears more likely that evasion by individuals plays only a secondary role in generating tax haven activity. Consistent with this view, some tentative evidence is presented in the paper suggesting that the OECD’s recent initiative (promoting international information-sharing among tax authorities) has had little impact on financial sector employment and wages in a representative tax haven (Jersey). The most important policy questions surrounding tax havens thus appear to relate to their role in enabling tax planning by multinational corporations. Multinational corporations can use tax havens to reduce or defer tax liabilities to other countries, through the strategic setting of transfer prices (especially for intellectual property) and the strategic use of debt among affiliates. It is often argued that tax havens erode the tax base of high-tax countries by attracting these

Demographic and labour-market impacts of migration on Poland

Abstract: Post-2004 labour migration from Poland turned out to be one of the most spectacular migratory movements in contemporary European history. This outflow on a massive scale is surmised to impact on demographic, economic, and social phenomena both in Poland and in the receiving countries. The aim of this paper is to assess the demographic and labour-market impacts of the recent migration of Poles. We argue that selectivity patterns in the post-accession period differ significantly from those noted in the pre-accession phase. Recently, a stronger propensity to migrate is observed among young and relatively well-educated people who, at the same time, originate from economically backward areas characterized by limited employment opportunities. This observation is consistent with our assessment of the labour-market impacts of recent migration from Poland. From the analyses presented it follows that the short- and medium-term impacts of migration on the Polish labour market are moderate. However, as we argue, recent outflow might contribute significantly to a crowding-out of the economy in the long term.

Addressing climate change with a comprehensive US cap-and-trade system

Abstract: There is growing impetus for a domestic US climate policy that can provide meaningful reductions in emissions of carbon dioxide (CO2) and other greenhouse gases. I describe and analyse an up-stream, economy-wide CO2 cap-and-trade system which implements a gradual trajectory of emissions reductions (with inclusion over time of non-CO2 greenhouse gases), and includes mechanisms to reduce cost uncertainty. Initially, half of the allowances are allocated through auction and half through free distribution, with the share being auctioned gradually increasing to 100 per cent over 25 years. The system provides for linkage with emission-reduction credit projects in other countries, harmonization over time with effective cap-and-trade systems in other countries and regions, and appropriate linkage with actions taken in other countries, in order to establish a level playing field among domestically produced and imported products.

The demographic effects of international migration in Europe

Abstract: International migration is now the dominant factor determining the size, rate of change, and composition of most European countries. Migration is driving quite rapid population growth in some north- western countries, slowing or arresting decline in the South, accelerating decline in the East. Migration is difficult to analyse: the process is complex, the data poor, and the theory unsatisfactory. Its many factors include unpredictable policy change. But some conclusions can be reached. While immigration usually reduces the average age of the recipient populations, it cannot 'solve' population ageing except through very high and exponentially increasing inflows. Already it is changing the face of European countries. According to available projections, the proportion of the population of foreign origin in some European countries will increase from 5-15 per cent of the total today, to 15-30 per cent by mid-century. Such projections depend primarily on the assumptions about the level of international migration.

Corporate taxation in the OECD in a wider context

Abstract: Against the background of increased globalisation statutory corporate tax rates have shown a clear downward trend over the last two decades. The sharp decline in these rates was accompanied by substantial tax base broadening and a comparable reduction in personal income tax rates only until the early 1990s. This suggests that corporate tax competition is of increasing importance. So far corporate tax revenues remain fairly stable. But an analysis of corporate taxation in the context of the overall tax systems shows that a substantial shift towards value added taxes has taken place. While the trends so far have been driven by smaller European countries, recent tax reforms indicate that increasing tax competition is inducing a shift towards consumption even for larger economies.

Immigrants and welfare programmes: exploring the interactions between immigrant characteristics, immigrant welfare dependence, and welfare policy

Abstract: The primary purpose of this paper is to provide a review of the papers within the economics literature that have examined the questions of immigrant welfare use and the responsiveness of immigrants to the incentives created by welfare systems. While our focus is largely on papers looking at the European case, we also draw on studies from the United States, in particular on issues where the European literature is thin. One set of papers asks whether immigrants who are more likely to use welfare are attracted to more generous welfare states. The results from these papers are not clear-cut. Another set of papers asks if immigrants use welfare more intensively than natives and if they assimilate out of or into welfare participation. In most cases, the unadjusted data show higher use of welfare by immigrants, although for some countries, for example Germany, this can be explained by differences in immigrants’ characteristics. Yet another set of papers finds that the rate of welfare use by existing migrants can influence the welfare use of newly arrived co-nationals. We illustrate some of these issues by looking at immigrant welfare use in Ireland and the UK. Immigrants in the UK appear to use welfare more intensively than natives, but the opposite appears to be the case in Ireland.

Financial innovation and European housing and mortgage markets

Abstract: In this paper we assess the recent history of house prices and of mortgage lending across Europe. We develop a simple economic framework to estimate the likely contributions of fundamental factors, such as changes in real incomes and population growth, to house price appreciation. We also try to quantify how much of price rises might have been driven by rising expectations of future capital gains. We estimate that this might have played a significant role in several countries, including Spain, Sweden, Belgium, and the UK. We then consider what different types of mortgage arrangement might become attractive in a world of higher house prices, analysing types of indexed mortgage that have advantages where prices are higher relative to incomes and where house prices may be volatile and cannot be assumed to carry on rising.

Labour-market assimilation of foreign workers in Italy

Abstract: This is the first paper to analyse the labour-market assimilation of foreign (i.e. non-citizen) workers in Italy. It considers the daily wages and the days of employment of male workers in WHIP, a matched employer-employee panel dataset, from 1990 to 2003. The traditional human-capital approach is augmented by a control for the probability of staying abroad, modelled by aggregate variables of the origin country. The human-capital variables considered are age and experience, both in and out of employment. What emerges from the empirical analysis is discouraging. Foreigners who are able to get higher wages are the least likely to stay, but assimilation profiles do not change when return migration is taken into account. Foreigners employed in the private sector earn the same wages as natives upon entry into employment, but the two wage profiles diverge with on-the-job experience. Neither do foreigners assimilate from an employment perspective: a differential in employment between foreign and native workers is found even upon entry, which increases over time. In the construction sector the wage and employment differential is even larger, while manufacturing and services follow the aggregate trend. Africans immigrants have the fewest career prospects while Eastern European and Asian workers are less far behind. The general pattern for foreign workers appears to be a fragmented career, either restricted to seasonal or temporary jobs or alternating between legal and illegal employment.

A new global deal on climate change

Abstract: A global target of stabilizing greenhouse-gas concentrations at between 450 and 550 parts per million carbon-dioxide equivalent (ppm CO2e) has proven robust to recent developments in the science and economics of climate change. Retrospective analysis of the Stern Review (2007) suggests that the risks were underestimated, indicating a stabilization target closer to 450 ppm CO2e. Climate policy at the international level is now moving rapidly towards agreeing an emissions pathway, and distributing responsibilities between countries. A feasible framework can be constructed in which each country takes on its own responsibilities and targets, based on a shared understanding of the risks and the need for action and collaboration on climate change. The global deal should contain six key features: (i) a pathway to achieve the world target of 50 per cent reductions by 2050, where rich countries contribute at least 75 per cent of the reductions; (ii) global emissions trading to reduce costs; (iii) reform of the clean development mechanism to scale up emission reductions on a sectoral or benchmark level; (iv) scaling up of RD (v) an agreement on deforestation; and (vi) adaptation finance.

Emissions in the Platinum Age: the implications of rapid development for climate-change mitigation

Abstract: Rapid global economic growth, centred in Asia but now spread across the world, is driving rapid greenhouse-gas emissions growth, making earlier projections unrealistic. This paper develops new, illustrative business-as-usual projections for carbon dioxide (CO2) from fossil fuels and other sources and for non-CO2 greenhouse gases. Making adjustments to 2007 World Energy Outlook projections to reflect more fully recent trends, we project annual emissions by 2030 to be almost double current volumes, 11 per cent higher than in the most pessimistic scenario developed by the Intergovernmental Panel on Climate Change (IPCC), and at a level reached only in 2050 in the business-as-usual scenario used by the Stern Review. This has major implications for the global approach to climate-change mitigation. The required effort is much larger than implicit in the IPCC data informing the current international climate negotiations. Large cuts in developed country emissions will be required, and significant deviations from baselines will be required in developing countries by 2020. It is hard to see how the required cuts could be achieved without all major developing as well as developed countries adopting economy-wide policies.

The European Commission's proposal for a common consolidated corporate tax base

Abstract: The European Commission is currently preparing a proposal for a directive on the introduction of a common consolidated corporate tax base (CCCTB). This paper reviews the current state of the European Commission's preparation of the CCCTB proposal and discusses the implications for efficiency and fairness of the tax system. The analysis concludes that more evidence of significant economic benefits from introducing a CCCTB would be required to generate widespread support for the project.

Planning policy, planning practice, and housing supply

Abstract: This paper outlines a brief history of planning policy in England as it relates to housing. It discusses briefly the issues raised by a plan-led system, and the uncertainties of household projections. Evidence on the relationship between house prices and housing supply, and on house-builders’ landbanks, suggests that planning constraints are a key factor behind the long-term upward trend in house prices (though over shorter periods other factors, such as long-term real interest rates, will be more important). It concludes that the environmental constraints on additional housing supply, albeit important, can be overstated. While there are serious adverse social consequences of the way in which the English housing market works today, it is not yet clear that the (largely welcome) policy steps taken over the past 3 years will prove sufficient to resolve this problem.

Taxation of outbound direct investment: economic principles and tax policy considerations

Abstract: This paper reviews economic principles for optimality of the taxation of international profit, from both a global and national perspective. It argues that for traditional systems based on the residence of the investor or the source of the income, nothing less than full harmonisation across countries can achieve global optimality. The conditions for national optimality are more difficult to identify, but are most likely to imply source-based taxation. However, source-based taxation requires an allocation of the profits of multinational companies to individual jurisdictions; this is not only very difficult in practice, but in some cases is without any conceptual foundation. The taxation of interest income on a residence basis is also hard to justify if the aim of the tax system is to tax only the income arising from economic activity in a given country.

Planning for housing in the post-Barker era: affordability, household formation, and tenure choice

Abstract: The Barker Review of Housing Supply recommended the greater use of market indicators as the basis for providing sufficient land for future housing requirements. Worsening affordability would be a sign that more land is required. However, the traditional approach to land release used by planners is based on trend household projections. The paper shows that this will typically lead to worsening affordability over time. The paper, therefore, develops an alternative economic model more suitable to the post-Barker era, covering both household formation and tenure choice. The model is used to analyse a range of policy issues, including raising home-ownership rates and home-ownership sustainability.

Economic research and labour immigration policy

Abstract: The design of labour immigration policy requires nation states to make fundamental decisions on how to regulate: (i) the number of migrants to be admitted; (ii) the selection of migrants; and, (iii) the rights of migrants after admission. In practice, the debate over these three elements of immigration policy involves a wide range of economic, social, legal, moral, and political considerations. Recognizing the inherent inter-disciplinarity of the subject, this paper focuses on the implications of economic theories and research for regulating the number, selection, and rights of migrant workers in high-income countries. It examines the asymmetric economic interests of migrant-receiving and migrant-sending countries in the debate over the ‘optimal’ design of labour immigration policy and, in light of this analysis, provides a brief economic assessment of the core components of labour immigration policy in the UK.