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China’s State-Owned Enterprises and Competitive Neutrality
Alicia García Herrero & Gary Ng, World Economics, March 2021
The growing size of Chinese state-owned enterprises (SOEs) and closer global linkages mean whether China can achieve competitive neutrality in creating a level-playing field is key for the world. Our results support the view that China’s competitive environment is poor with conditions tending to favour SOEs with lower interest burden and tax rates in most sectors. The lack of competitive neutrality in China has significant consequences for global firms at home, especially as Chinese firms operating in the ICT, industrial and auto sectors earn a relatively high proportion of their revenue overseas but operate in a subsidised environment in their domestic market. A working measure of competitive neutrality applied in China could help level the playing field for foreign companies in China and even be introduced in a potential reform of the World Trade Organization.
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Modern Monetary Theory and the Policy Response to COVID-19
Graham Bird, Eric Pentecost & Thomas D. Willett, World Economics, March 2021
The COVID-19 pandemic has raised questions about the design of fiscal and monetary policy to assist economic recovery. Modern monetary theory (MMT) strongly argues in favour of substantial and fairly persistent fiscal expansion, claiming that there is neither a near-term capacity constraint, nor a financial one. MMT is, however, not particularly ‘modern’. Many of the basic ideas that it promulgates can be found in fairly standard neo-Keynesian analysis. Advocates of MMT unwisely downplay the potential problems associated with inflation, financial instability and the balance of payments. They also are too dismissive of central bank independence, which has played an important role in anchoring inflationary expectations. To argue in favour of fiscal and monetary expansion in the particular circumstances of the COVID-19 pandemic does not involve endorsing the full MMT approach to macroeconomic policy.
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Is Monetary Policy Aging?
Azhar Iqbal, World Economics, March 2021
This article proposes a framework to quantify the magnitude of monetary stimulus offered during a recession. We estimate that, over the past 30 years, the Federal Open Market Committee (FOMC) offered larger incentives and for a longer duration during a recession than in the past cycle. Furthermore, each recession drained the FOMC’s resources and left the Committee with ‘less ammunition’ to fight the next recession. Therefore, our work suggests that monetary policy is aging. To de-age monetary policy, we propose 4% as a long-term target for the nominal FFR. Some of the major benefits of our proposed framework include: helping market participants gauge magnitude of accommodation; anchoring market participants’ expectations; reduce time spent at the zero lower bound; lessen dependence on balance sheet expansion; ensure that the real federal funds target rate will be positive when the FOMC meets its interest rate and inflation targets.
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Bitcoin, Tesla and GameStop Bubbles as a Flight to Focal Points
Jan Libich & Liam Lenten, World Economics, March 2021
This article discusses the current bull runs in many assets such as Bitcoin, Big Tech and the meme stocks, concluding that they are very likely bubbles (well above their fundamental value). We then highlight a unique set of circumstances due to which the duration, magnitude, and subsequent correction of this market exuberance may be very different from previous bubble episodes. These circumstances have led to an ever-growing amount of global liquidity chasing a small number of widely-known assets that have played the role of Schelling’s ‘focal points’. In combination with extremely low (even negative) returns on conventional safe assets, the usual ‘flight to safety’ has been (partly) superseded by a ‘flight to focal points’.
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Estimating the Effects of some Uncommon Free Trade Agreements on India’s Exports, Imports and Trade Volume
Suadat Hussain Wani, World Economics, March 2021
This study endeavours to examine the impact of Free Trade Agreements on the trade volume of India with Japan, Sri Lanka, Nepal and ASEAN countries. These countries were selected given their level of development and importance in total trade of India. The study evaluates three FTA's which involve developing-developed, developing-developing and developing-least developed countries. The time-series data has been used, and variables are in log-linear form. To achieve the objectives of the study, Threshold Autoregressive model (TAR) has been applied for pre-post agreement analysis. The study finds after the agreement's trade has enhanced between participating countries.
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Bank Resolution and Crisis Preparedness in Unprecedented Times
Demet Çanakçı, World Economics, March 2021
This article looks into the challenges ahead for deposit insurers and underscores the urgency of testing contingency planning and crisis management frameworks at national and system-wide levels, and the importance of communication, cooperation and coordination at home and abroad. Financial safety-net authorities should put the necessary crisis management frameworks in place to maximise the benefits of the international standards developed in response to the global financial crisis. Deposit insurers and resolution authorities should plan for dealing with an orderly resolution of failing banks before the pandemic measures are lifted. Deposit insurers and other safety-net participants need to strengthen their supervisory and crisis management frameworks and address any weaknesses identified. Developing a communications strategy should be an essential part of crisis management frameworks. Cooperation and coordination at home and abroad remains the key issue to be addressed for many jurisdictions.
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COVID-19 and Adoption of Digital Payments in India
Sandeep Kaur & Nidhi Walia, World Economics, March 2021
The objective of this research is to explore the impact of COVID-19 on digital transactions in India and related research issues. From results of a paired sample t test, it has been observed that COVID-19 had significant impact on use of digital payments. Challenges such as low rate of financial inclusion, issues with network congestion and internet connectivity, and cultural preference for cash are preventing people from moving over to digital payment platform. The results of this study may help stakeholders in devising strategies that encourage wider adoption of digital payments.
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Multidimensional Deprivation in Egypt
Heba Farida Ahmed Fathy El-laithy & Noha S. Omar , World Economics, March 2021
This paper aims at constructing an MPI for Egypt tailored to its deprivation aspects, and at monitoring simultaneous deprivations that adversely affect Egyptian people and poor. It adds the employment and social insurance dimension, which is generally the sole means of production owned by poor and deprived people. Results show that multidimensional headcount ratio is 33.3 percent in 2018, which is higher in rural than urban areas, for female-headed households than male-headed households, and for households with less educated heads. Egyptians are mostly deprived in the education dimension.
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Democracy, Economy, and Politics in Latin America: Analysis, evidence, and lessons on Bolivia and Brazil
Michael Chibba, World Economics, March 2021
From economic and political perspectives, freedom is the central concept in democracy. The economic and political background, and evidence from Bolivia and Brazil, show that democracy was briefly tested in Bolivia, but in Brazil it continues to face profound challenges. The 2019 military-led coup d’état in Bolivia temporarily suspended democracy in that nation. But the 2020 elections reinstated democracy and, with it, economic and political freedoms were restored. Its economy is back on track to be robust, but currently faces limitations due to the coronavirus. In Brazil, the situation is different. While it also has a nascent democracy, its current president is mired in controversy and turmoil due to unpopular and undemocratic economic and other policies that do not tackle key weaknesses in the economy but rather promote a personal and ideological agenda. Lessons to be learned, as highlighted in the conclusion, are drawn from analysis of both recent developments and the status quo in these two Latin American countries.
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GDP Upgrade: How Can One Measure the Quality of Economic Growth?
Alexey Kuprianov, World Economics, December 2020
Sustainable per capita economic growth is possible if the quality of goods and services produced by the economy increases. US GDP growth may be underestimated by 0.4–0.6% per year because of unmeasured (undetected) improvement in the quality of goods and services. Calculation and publication of new statistical indicators such as IQI for separate product groups and the impact of quality on GDP for the whole economy will improve our understanding of the contribution of quality to economic growth.
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Statistical Data Collection Challenges amid COVID-19 Pandemic
Theodore Pelagidis & Eleftheria Kostika, World Economics, December 2020
The importance of reliable statistical data is even more urgent in the context of the coronavirus crisis, in terms of managing the risks for public health, restarting the world economy and addressing the long-term economic and social impact of the pandemic. Government lockdowns, social distancing and work from home restrictions, imposed to contain the spread of COVID-19, pose important challenges to statistical data collection and analysis. The unavailability of data sources and the pausing of face-to-face interviews and surveys has had an adverse impact on data quality and processing. Innovation and coordination between all parties involved in the process is required in order to develop new ways of conducting less complex surveys and questionnaires, while keeping a direct and interactive communication with respondents.
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Tackling the Undeclared Economy: The Effectiveness of Repressive and Trust-building Strategies
Colin C Williams & Ioana Horodnic, World Economics, December 2020
Are participants in the undeclared economy rational economic actors who can be swayed by increasing the expected penalties and likelihood of detection? Or are they social actors who participate in reaction to a lack of vertical trust (in government) and horizontal trust (in others)? Evaluating a 2019 Eurobarometer survey, participation in undeclared work is weakly associated with the level of penalties, but there is a stronger, significantly greater likelihood of participation when there is a lower risk of detection and lower vertical and horizontal trust. The outcome is a call for the conventional repressive approach to be complemented with trust-building strategies.
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Analysing Data Issues in Measuring Inequality in UK Regions
Julian Gough, World Economics, December 2020
Converting official nominal regional GDP data for 2017 to real values, using an approximate deflator for regional price levels, reduced the size of the London economy by 12% or £51 billion. Using real GDP per head as an indicator of prosperity revealed London to be the most prosperous region and Wales the poorest. Real data reduced the inequality between regions by 26% compared to the nominal data. Using real household income per head as an alternative indicator showed London to be the most prosperous region and the North East of England to be the poorest. Real data reduced the inequality between regions by 16% compared to the nominal data. Using the regional unemployment rate as a proxy inverse measure of prosperity produced markedly different results to the financial data. London had high prosperity in financial terms co-existing with a comparatively high unemployment rate. A composite index of prosperity, combining all three indicators with selected weights, revealed London to be the most prosperous region at 33% above the national average and the North East of England to be the poorest at 23% below the national average.
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Bringing Global Finance into Macro-Policy Analysis
Biagio Bossone, World Economics, December 2020
The Portfolio Theory of Inflation (PTI) brings global finance into macroeconomic policy analysis, and addresses Obstfeld and Taylor’s (2017) remark that standard models of macroeconomic stabilization do not pay sufficient attention to finance. In particular, the PTI approach shows that: (1) in an open and globally financially integrated national economy the effectiveness of macroeconomic policies depends on the level of credibility that financial markets attribute to the economy, in particular its policy authorities and policy stance (2) whereas the monetary policy trilemma constrains countries to enjoy at most only two of the three possible states (i.e. exchange-rate stability, freedom of cross-border payments, and economic policy autonomy), the trilemma does not constrain all countries equally if they operate in a context of high international financial integration: credible countries enjoy greater space for effective policies than less credible countries (3) not all countries benefit equally from a floating exchange rate regime, either; the latter offers credible countries greater space for policy effectiveness and protection against external shocks, while such space gets progressively thinner as country credibility weakens (4) an open economy that is fully financially integrated, internationally, with large public debt and poor policy credibility does not stand to gain much in terms of shock insulation and policy autonomy from either issuing liabilities in its own (rather than a foreign) currency or adopting a flexible (rather than a fixed) exchange rate regime (5) however, all else being equal, the benefits from a floating exchange rate regime increase with the degree of the economy’s policy credibility.
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Measuring the Efficacy of Financial Intermediation: A Transaction Costs Approach
Vighneswara Swamy, World Economics, December 2020
This study focuses on the transaction costs of borrowing by the poor and provides an empirical assessment. In doing so, this study addresses two salient questions: (a) what are the transaction costs for borrowing poor? and (b) how significant are these transaction costs for the poor in deciding whether to borrow from an institutional or an informal source? The study area includes southern, western, northern, eastern, and central regions of India. Using a stratified random sampling approach this study captures comprehensively all the forms and variants of microfinance intermediation in India. The sample also covers three broad social categories—scheduled castes and scheduled tribes, other backward classes, and other social groups—and studies three major approaches to financial intermediation: the direct lending model, self-help groups (SHG) and microfinance institutions (MFI). The results indicate that borrower transaction costs in the direct lending model are 9.06% in rural areas, 9.57% in semi-urban areas and 10.93% in urban areas, with an overall average of 9.85%. Under the SHG lending model borrower transaction costs range between 3.62% in rural areas, 3.70% in semi-urban areas and 3.93% in urban areas, with an overall average of 3.75%. Similarly, the MFI lending model has borrower transaction costs of 7.70% in rural areas, 7.91% in semi-urban areas, 8.43% in urban areas, and the average is 8.02%. The findings provide the required insights for policy support needed to lessen the burden on the beneficiaries of microfinance. Accordingly, the SHG lending model, with the lowest borrower transaction costs, is suitable for microfinance intermediation in rural areas.
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Financial Inclusion Index: A Comprehensive Measure
Mughees Tahir Bhalli & Mala Raghavan, World Economics, December 2020
Existing indices that are used to measure financial inclusion are not comprehensive. This study reports on the development and testing of a comprehensive measure of financial inclusion. The measure was applied to 189 countries from 2010 to 2015. Among the top 50 highly financially inclusive countries 34% are from Europe and Central Asia. In contrast, only 4% of the countries are from South Asia. The resulting index is multidimensional, uses the maximum available information, satisfies important mathematical properties and can be used to compare the level of financial inclusion over time and across economies.
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Relationship of Economic Freedom to Economic Performance, Gender Equality, and Social Progress
Hannah Michelle Russell, Wayne Tervo , Donald L. Ariail & Lawrence Murphy Smith, World Economics, December 2020
This study examines the relationship of economic freedom, as measured by the Economic Freedom Index, to economic performance (GDP), gender equality, and social progress. Prior research suggests that business activity is more robust in societies that are more economically free with lower government involvement. Modern business firms must do more than just make a financial profit; firms must also be good corporate citizens and demonstrate corporate social responsibility, such as by advancing gender equality and general social progress. Business managers play key roles in their firms’ advancing corporate social responsibility. Findings of this study indicate that higher levels of economic freedom are significantly positively related to the social factors of gender equality and social progress, important issues to socially responsible business firms.
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Measuring Prosperity in Regions of the UK
Julian Gough, World Economics, September 2020
This article provides updated estimates of prosperity in regions of the United Kingdom using two measures - GDP per head and Gross Disposable Household Income per head in 2017. Official nominal data on these two measures is deflated by two approximate regional price indices to yield "real" estimates, allowing for differences in price levels between the regions. In "real" terms, on both measures, London is the most prosperous region by a considerable margin, while Wales and the North East of England are the poorest regions. These "real" estimates give a clear picture of the challenge facing the Government in "levelling up" the performance of the UK regions and the locations where government assistance is most needed.
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Enterprise Size Classification in Africa: A Tale of Two Definitions
Eugene Bempong Nyantakyi, World Economics, September 2020
Comparing enterprise size across countries is a key challenge in international development—SME definitions used in international development are often criticised as ineffective and a source of mistargeting of international development resources in the private sector. This study applies the International Finance Corporation definition of small and medium-sized enterprises (SME), commonly used in international development, and that proposed by Gibson and Van der Vaart (GV) (2008) to a set of enterprises in Africa to determine whether the two definitions capture similar underlying firms and enterprise attributes that practitioners would like to think of as worthy of international development support. The article finds a significant overlap: enterprises classified as SMEs simultaneously by both definitions. Indeed, 57% of firms in the sample qualify as SMEs under the two definitions. SMEs under the GV definition (but not the other) appear to face significant constraints in obtaining access to finance compared to those under the IFC definition (but not the other), and perform poorly in creating jobs relative to those under the IFC definition.
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What Shipping Can Tell Us About Europe’s Efforts to Face the Risk of COVID-19-Induced ‘Japanification’
Theodore Pelagidis & Hercules Haralambides, World Economics, September 2020
Shipping leads the ‘dance’ on the way up and if this is indeed true, the post-COVID-19 economic recovery should not be long, if one is to judge from the relative prosperity of containerised shipping as of Q2, 2020. Most EU member states may face a new risk ahead: ‘Japanification’, an unwillingness to increase household spending and often business expenditure/demand, along with the inability of monetary policy to balance savings and investments. When things get better, and the COVID-19 infection curve flattens close to zero, European leaders will have to come up with new ideas on the rebirth of the European dream, if they want to prevent a new round of authoritarianism and populism throughout Europe.
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The Impact of the Bonus Culture on the UK Economy
Andrew Smithers, World Economics, September 2020
The decline in UK tangible investment since 2000 has led to a sharp decline in labour productivity and the trend growth rate of the UK economy. A similar decline in the USA was caused by the perverse incentives of the bonus culture, but due to poorer statistics the connection between the bonus culture and investment is less easy to demonstrate for the UK than for the USA. More than 100% of the fall in UK investment is attributable to private non-financial companies (PNFCs). The factors that could possibly explain this weakness are: (i) low return on equity (RoE), (ii) weak labour supply, (iii) a perceived need to reduce leverage, (iv) a rise in monopoly power, (v) low expectations and (vi) a rise in the hurdle rate due to the bonus culture. I show that while other explanations are not necessarily impossible they are highly unlikely; a rise in the hurdle rate, i.e. the required return on equity, is thus the only credible one. Even before the COVID-19 crisis raising the trend growth rate of the UK was by far its most important economic issue. The policy challenge is therefore to reverse the damage done by the bonus culture. I suggest that the most likely way to achieve this is through introducing a tax credit for tangible investment.
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Modern Political Economy and Colonialism: The Case of Bolivia
Michael Chibba, World Economics, September 2020
The November 2019 coup d’état in Bolivia, orchestrated by the armed forces, brought an abrupt end to President Evo Morales’s modern approach to governance and development. The coup also brought a return to colonialism or neo-colonialism. However, the elections slated for October 18, 2020, may very well restore democracy in Bolivia. In political economy, only under conditions of convergence are politics and economics fundamentally inseparable, mutually interdependent and not dichotomous. Divergence means that the opposite of convergence holds true. Colonialism had been both the dominant ideology and the governing development paradigm in Bolivia for most of the last two centuries. The long-standing status quo changed in 2005 when Morales came to power and introduced a modern (plurinational) perspective to political economy and development. His governing development paradigm included, inter alia, indigenous rights, which were thrust to prominence, to make up for years of neglect of indigenous populations. And along with this, initiatives that advanced progress, development (economic, social and political) and equality, became the new norm. While the past year saw a deterioration of democracy in Bolivia, the upcoming elections hold promise of returning Morales’s party into power and the restoration of his true legacy, which is otherwise disparaged and misrepresented by the interim government. In this article, economic and political data and analysis – especially in tabular or narrative form – provide a powerful medium to make my case.
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Evaluating Demographic Paths in the Long Run: Output per Capita and Intergenerational Income Distribution
Ross Guest, World Economics, September 2020
This article is motivated by potential changes to fertility and migration patterns that may result from major global economic and/or health crises such as the COVID-19 global pandemic. The focus is on the long-term effects of changes to fertility and migration on both discounted national output per capita and intergenerational income distribution. Simulations are based on United Nations population projections, applied to 15 countries. Lower fertility and lower immigration are generally positive for discounted output per capita and raise the lifetime incomes of smaller cohorts. While lower immigration also raises the lifetime incomes of smaller cohorts, it has a lower impact on discounted output per capita.
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Mitigating Economic Losses of Fraud: Data Analytics Perspective
Nitin Singh, World Economics, September 2020
Economic loss caused by fraud has become a subject of concern for countries globally. Digital world also provides data and these can be leveraged to detect and prevent fraud while also applying forensic analytics to recover the loss. Although gathering and collating data from various sources poses a challenge, the benefits outweigh the costs. Data analytics, if implemented correctly, may detect fraud and prevent a potential economic loss. The article discusses challenges, solutions and technologies for implementing a data-driven approach.
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Funding Economic Development and the Role of National Development Banks: The Case of Cyprus
Helen Kavvadia & Savvakis C. Savvides, World Economics, September 2020
Prior to its privatisation in 2008, the Cyprus Development Bank played an important role in the economic development of Cyprus, intermediating international finance from multilateral development banks. This function was subsequently undertaken by commercial banks, which are currently limited by balance-sheet fatigue, however, and lack necessary elements for successfully executing this role. Our analysis shows a current void of institutional capacity in funding growth-bearing projects. Proceeding in a normative way, we recommend reinstalling a development finance agency that will tackle the issues by swapping equity for debt relief.
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Structural Reform, IMF Conditionality and the ‘Goldilocks Problem’
Graham Bird, World Economics, September 2020
Recent empirical research suggests that structural reform has a significant positive effect on future economic growth. Following the proliferation of structural conditionality in IMF programmes in the 1980s and 1990s, the ‘streamlining’ initiative begun in the early 2000s envisaged a more parsimonious approach designed to increase ‘ownership’ and improve programme implementation. However, there is a potential ‘Goldilocks problem’. While structural conditionality can be too ‘hard’, it can also be too ‘soft’. When is it just right? Empirical evidence on the political economy of structural reform may provide clues to how IMF conditionality could be designed to strengthen its impact on economic growth.
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Monetary and Fiscal Policy Coordination During Fiscal Dominance Regimes
Vighneswara Swamy, World Economics, September 2020
This study empirically examines the interaction between monetary and fiscal policy by using vector auto regressions (VAR) and a vector error-correction model (VECM) and explores the need for coordination. • We also analyse a Stackelberg interaction model with government leadership to know the strategic interaction between monetary and fiscal policy. The findings show that an unexpected increase in the monetary policy effect: (i) has a contractionary impact on economic growth; (ii) leads to a gradual decline in inflation; (iii) tightens liquidity conditions; and (iv) leads to a rise in bond yields. On the other hand, an unexpected increase in the fiscal policy effect: (i) has a positive effect on GDP growth; (ii) prompts an initial decline, then a gradual rise in inflation levels; (iii) leads to falling bond yields. Monetary policy is found to be more responsive to fiscal policy effects. The results imply that there is a greater need for effective coordination between monetary and fiscal policy as a sufficient condition to achieve economic stability.
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