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Corporation Tax
Andrew Smithers, World Economics, June 2021
Corporation tax is a tax on investment. Current plans to increase the rate in the UK and the USA will, if implemented, severely damage their economies. That such self-destructive folly has met little opposition and is seldom even debated results from the weakness of current consensus economic theory—the neoclassical synthesis. The impact of corporation tax cannot be assessed without a command of financial economics. Except in the form of a few aprioristic and demonstrably false assumptions, finance is absent from the consensus model and this is widely accepted as its major fault. If implemented without offsetting policy measures, a rise in corporation tax will exacerbate two major economic problems. It will retard the already poor rate at which labour productivity and output grow and it will amplify the structural ex ante net investment deficit of the private sector. In the UK tax credits for tangible investment are planned for the next two years. The damage from a rise in corporation tax could be more than offset if these were made permanent and, in the USA, if similar credits were introduced.
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Neutral Interest Rate: A Statistical Estimation
Alfredo Coutiño, World Economics, June 2021
Monetary space is a measure of how close or far away current monetary policy is from the level of neutrality, the condition at which policy is neither restrictive nor expansive. The estimate of monetary space provides a useful metric for policymakers to calibrate monetary conditions at any time and throughout the business cycle, since it shows the degree of restriction or stimulation present in current monetary conditions. Since monetary stance depends on both the price and the quantity of money, the monetary space is more limited in countries with single mandate than in those with dual mandate. In this article we present a statistical approach to estimating the stance and space of monetary policy based on the price of money. Mexico is presented as a study case.
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The Euro as a Dysfunctional Marriage
Jan Libich, World Economics, June 2021
This article examines the functioning of the euro area with emphasis on the desirability of its further enlargement. This is based on theoretic research regarding optimal currency areas, empirical studies on the euro area in the past 20+ years, as well as historical experiences of two monetary unions in Europe in the late nineteenth and early twentieth centuries. The discussion highlights a number of problems in the euro area’s design and documents the damage caused—especially in the periphery (southern) countries. Consequently, the analysis implies that it would be too risky for the seven countries on the accession list (Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania and Sweden) to adopt the euro at this point. It is also argued that in most of these countries voters do not seem to be sufficiently informed to adequately assess all the pros and cons of euro accession. The article concludes by outlining structural reforms that could in principle alleviate the euro area’s key problems, and potentially make its enlargement desirable in the future.
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The Emerging Dynamics of Informal Employment
Bino Paul & Krishna Muniyoor, World Economics, June 2021
Informal employment accounts for a significant proportion of the workforce in less-developed economies, particularly India, and has grown steadily in the past two decades. Using unit-level data from three consecutive employment and unemployment surveys conducted by the National Sample Survey Office (NSSO) in 2004–5, 2011–12 and 2018–19 (PLFS), we investigate the emerging dynamics of formal and informal employment in Maharashtra, India. This article highlights: a significant increase in the share of women performing unpaid domestic work; uneven distribution of the status of employment in rural and urban Maharashtra; the burgeoning size of the working poor, who earn barely enough wages to obtain a decent living; and inadequate coverage of formal employment in the economy. From a policy perspective, we argue that the state should aim at restructuring employment status and labour laws by infusing more skill to trigger an upward spiral of higher productivity, which will catapult the economy to a desirable trajectory, as well as facilitate and foster inclusive growth.
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Impact of Lockdown on Informal Workers
Karuturi Preethi Niharika, World Economics, June 2021
The recent pandemic, COVID-19, is not merely a health crisis. It has had a devasting impact on the economy and society as a whole. Lockdowns imposed as a result have temporarily ceased economic activities. It has severely disrupted supply and demand chains in the economy, resulting in unemployment and per capita income loss. Informal workers are the people most vulnerable to these economic disruptions, due to the nature of their work. This article aims at understanding the impact of lockdown on informal workers, in terms of their income, working hours, demand for their goods and services and consumption patterns. Finally, it gives necessary policy recommendations.
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The Empirics of Borrower Transaction Costs in Models of Financial Intermediation for the Poor
Vighneswara Swamy, World Economics, June 2021
This study explores the determinants of borrower transaction costs of the models of financial intermediation for the poor while they avail of finance from the institutional and informal sources in India. The loan size is an essential determinant of borrower transaction costs of the bank lending model. Though the loan size and age of the borrower are key determinants in the SHG lending model, the relationship is direct and not inverse as in the case of the bank lending model. The study shows that the distance from the borrower's household to the financial intermediary (spatial element) exerts a significant effect on the borrower transaction costs. This underscores the importance of the expansion of the networks of the financial institutions as well as imbibing modern information technology for reducing such distance between the borrower and the financial intermediary for lowering transaction costs. The borrowers with a higher level of education and being of an older age are found to experience reduced transaction costs. Though the age of the borrower is one of the determinants of the borrower transaction costs in the SHG lending model, the relationship is direct and not inverse as in the case of the bank lending model.
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Is Industrial Structure Moving from Manufacturing towards the Service Sector?: Cross-country Evidence
Sarbapriya Ray & Abhijeet Bag, World Economics, June 2021
Research findings suggest that the service sector’s growth, exports and gross fixed capital formation are having statistically significant favourable impact on GDP growth in six selected economies—India, China, the Republic of Korea, Japan, the USA, the United Kingdom—and in the world as a whole. The results obtained indicate that if the service and manufacturing sectors, exports and GFCF grow by 1%, growth of economies via GDP growth is accelerated by 0.6806% and 0.006461%, 0.0819% and 0.0245%, on average, respectively among the six selected economies (and the world as a whole), signifying that, although the contribution of the manufacturing sector is minimal, this sector is still essential. The estimates show increasingly robust impacts of exports, net investment in fixed assets and equipment and dominance of the service sectors to the GDP growth rates in the six economies examined. A cross-country analysis of panel data over a period of 29 years, from 1990 to 2018, for the same six countries and the world as a whole, using a random-effects model, finds that the stimulating force of economic growth has moved undeniably and steadily from the manufacturing sector towards the service sector due to the growing importance of the service sector observed in each of the six countries under our consideration over the period surveyed.
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Robert Mundell, 1932–2021: Ahead of His Time
Miranda Xafa, World Economics, June 2021
Mundell pioneered the theory that serves as the basis for the design and implementation of economic policies in open economies. The launch of the euro was based on his work on “optimum currency areas”, and the late-twentieth century US economic boom was based on his theories about the optimum policy mix and the supply-side economics adopted by the Reagan administration. He always advocated fixed exchange rates and, by extension, the common European currency, believing that monetary independence is both unnecessary and undesirable. In a debate with Milton Friedman, he argued that exchange rate flexibility is no substitute for price flexibility: Even in the best circumstances, the adjustment process works by raising prices and undermining monetary stability. Mundell argued that monetary and fiscal policies should not target the same objective (full employment): one should target price stability (tight monetary policy) and the other growth (expansionary fiscal policy). Mundell’s theories are included in all economics textbooks. His colleagues have described him as “the brightest mind in our profession.” His contribution to economic theory and policymaking was recognized with the award of the Nobel Prize in economics in 1999.
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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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