Author Archives: Javier Aparicio

About Javier Aparicio

Profesor de la División de Estudios Políticos del CIDE, en México. (Assistant professor in the Political Studies Division at CIDE).

The Improving State of the World

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• The rates at which hunger and malnutrition have been decreasing in India since 1950 and in China since 1961 are striking. By 2002 China’s food supply had gone up 80%, and India’s increased by 50%. Overall, these types of increases in the food supply have reduced chronic undernourishment in developing countries from 37% in 1970 to 17% in 2001, despite an overall 83% growth in their populations.
• Economic freedom has increased in 102 of the 113 countries for which data is available for both 1990 and 2000.
• Between 1970 and the early 2000s, the global illiteracy rated dropped from 46 to 18 percent.
• Between 1897-1902 and 2001-2003, the U.S. retail prices of flour, bacon and potatoes relative to per capita income, dropped by 92, 85, and 82 percent respectively. And, the real global price of food commodities has declined 75% since 1950.

And these tables and charts are much more telling:

The Changing Face of Economics

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This is David Colander in his intro to The Making of an Economist, Redux:

“(…) looking at the profession today, I am convinced that it is quite different than it was in the mid-1980s, when Arjo and I first sat over drinks and lamented the state of the profession. The commitment to theorems and proofs has declined, and there is a much stronger empirical branch of economics. Natural experiments and instrumental variables are now central to an economist’s training. Behavioral economics has advanced enormously, and the macro that is done is fundamentally different from the macro that was done in the 1980s; advanced time-series statistics, such as cointegrated structural VARs and calibration, are commonplace, where they were hardly known before. What were taken as requirements of research in the 1980s are no longer requirements in the 2000s; the holy trinity of greed, equilibrium, and rationality has been replaced by a looser trilogy of purposeful behavior, sustainability, and enlightened self-interest. I could extend the list enormously, but there is no need to do that here. My point is simply that economics has changed and will continue to change, making it impossible to call the existing profession neoclassical any longer.“

Acemoglu vs. Glaeser on WSJ

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Political economy economy heavy-weights Daron Acemoglu (MIT) and Ed Glaeser (Harvard) go at it on the issue of education, democracy and growth…  It’s a nice debate with lots of links to recent papers–very helpful for students, I think.
 
Is Democracy the Best Setting
For Strong Economic Growth?
March 13, 2007

Ed Glaeser writes: Rich countries are stable democracies. Poor countries tend to be political basket cases, careening between brutal dictatorships and unstable semi-republics. The relationship between democracy and wealth might suggest democracy naturally leads to prosperity. This view is comforting and also gives us another reason to enthusiastically try to export democracy globally.

While I yield to no one in my passion for liberty, the view that democracy is a critical ingredient for economic growth is untenable. There is no robust statistical relationship to back it up, and Robert Barro actually found2 democracy reduces growth, once he statistically controls for the rule of law.

It is, however, true that growth rates vary much more under dictatorships3 than under democracies. Anti-development autocrats, such as Mobutu Sese Seko4 or Kim Jong Il5, are about the worst thing for economic growth, other than civil war. But many of the best growth experiences have been in less-than-democratic regimes that invest in physical and human capital such as Lee Kwan Yew’s Singapore6 or post-Mao China. Some dictators are even better than democrats at restraining the growth-killing practice of expropriating private wealth. I think the relationship between democracy and wealth reflects the power of human capital — education — to make countries both rich and democratic. If you put enough smart people together, they’ll figure out how to govern themselves and gravitate towards democracy7.

* * *

Daron Acemoglu writes: I agree with Ed on many points. In the postwar era, it’s true that democracies haven’t grown faster than autocratic regimes. Plus, there are clear examples of fast growth under dictatorships; see South Korea under Gen. Park Chung Hee8. So, why haven’t democracies been more successful? I believe the answer lies in recognizing two things. First, there are different kinds of democracies. And second, it’s important to consider that economic growth and democracy have a very different relationship over the long term — that is for periods as long as 100 years — than over the short or medium term.

Many societies counted as “democratic” using standard measures are really “dysfunctional democracies” where traditional elites dominate politics through control of the party system, political influence, vote buying, intimidation and even assassination. Colombia, which has had regular democratic elections for the past 50 years, is a typical example9. In others, democratic institutions survive, but there is significant in-fighting between ethnic groups, religious groups or social classes. The situation in Iraq would be the most extreme — but not a unique — example. Finally, many democracies suffer economically from populist and irresponsible macroeconomic policies, which are often adopted after transitions from repressive dictatorships and during periods when politics are turbulent and conflicts over wealth distribution are strong.

On the second point, it’s true that autocratic regimes can generate growth for certain periods of time by providing secure property rights and good business conditions to firms aligned with political powers. But modern capitalist growth requires not only secure property rights, but also creative destruction, that is, the entry of new firms with new ideas and technologies that replace the successful firms of the past. Creative destruction requires a level playing field, which democracies are better at providing because they have more equal distributions of political power than autocracies or monarchies.

So, if we look beyond the past 60 years, we see that it was the U.S., with its democratic institutions, that created the environment for new businesses to enter, flourish and spur the industrial growth of the 19th century. There were many rich autocracies and repressive regimes in the 18th century, including places like Cuba, Haiti and Jamaica. But it was the U.S. that grew rapidly over the next two centuries while these autocratic regimes stagnated10.The relationship between human capital and democracy that Ed raises is fascinating. But I will return to that in a little in the context of the causes of democracy.

…read the whole thing here:

Handbook of Political Economy

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Hace sólo unos meses salió el Oxford Handbook of Political Economy (Oxford Handbooks of Political Science), editado por Barry R. Weingast y Donald Wittman.
 
Son 54 capitulos y más de 1000 paginas de gloriosos surveys del field.  ¿Cómo deglutirlo en 2 semanaas? Fácil: Pones a 26 estudiantes de Economía Política a leer 2 capitulos cada uno y publicar summaries en el blog del curso, con todo y referencias a los 5 seminal papers de cada tema:
 
 
Creo que es una forma amena de llevar el Handbook a las masas… así sea de manera imperfecta.

Prosperity paradox?

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Not quite, says Daniel Ben-Ami.  Today’s world looks, on average, like an utopian dream from a mere 100 years ago.
 
There is no ‘paradox of prosperity’
So what if material progress doesn’t always make us happy? It’s still a good thing, and here’s why.
Daniel Ben-Ami
http://www.spiked-online.com/index.php?/site/printable/2678/
Contemporary critics of consumerism and popular prosperity are obsessed with what they see as a paradox. A central theme of their arguments is that economic growth does not make people happier. In their view, the pursuit of mass affluence is at best futile and is probably responsible for making humanity miserable. Often the growth sceptics argue that the pursuit of material goods is akin to a disease: they say the developed world is suffering from ‘affluenza’ or ‘luxury fever’ (1). Typically they conclude we should not attempt to become richer and often they argue for the pursuit of alternative social goals such as mental well-being.

But there is reason to question whether breaking the connection between prosperity and happiness is the killer blow that the critics assume. The growth sceptics seem to ignore the possibility that greater affluence could be immensely beneficial even if it does not necessarily make people happier. Nor do they understand that the propensity for human beings to be unhappy with their lot could have a good side. The striving for a better life is an important motor force of progress. The arguments the happiness pundits advance to show that prosperity does not lead to enhanced well-being are also dubious. And the policies they often propose to make people happier tend to be authoritarian.
(…)
Fortunately a new book by Indur Goklany, an American economist, examines the data in great detail. Its title clearly sums up the argument: The Improving State of the World: Why we’re Living Longer, Healthier More Comfortable Lives on a Cleaner Planet (Cato 2007). Goklany’s book takes a similar line to The Skeptical Environmentalist (Cambridge 2001) by Bjørn Lomborg, a Danish statistician, which infuriated environmentalists when it was first published (7).

There is an immense amount of detail in Goklany’s book but some of the key statistics are worth reiterating:

  • Life expectancy, which for much of human history was 20-30 years, increased from a worldwide average of 31 in 1900 to 66.8 in 2003. For the high income countries it has reached 78.5 years.
  • Infant mortality (death of infants before the age of one per 1,000 live births) was typically over 200 before industrialisation. That is over a fifth of babies died before reaching their first birthday. The worldwide average has fallen from 156.9 in the early 1950s to 56.8 in 2003. In the developed world the average is 7.1.
  • Improving health. The onset of chronic diseases is typically happening several years later than in the past. For example, white males aged 60-64 in America are two-and-a-half times more likely to be free of chronic disease than their counterparts a century ago.
  • Air quality. Despite the common prejudice that economic development leads to air pollution the evidence in the developed world overwhelmingly suggests that air quality is improving. For example, the traditional pollutants have declined in America for several decades.

The fact that the trend is improving does not mean that everything is perfect. There are many instances, particularly in the developing world, where things could be far better. But to the extent there are still problems they constitute an argument for more development rather than less. If the developing world could reach the current living standards of the developed world, that would be a start. Billions of people would be much better off.

New books for a new year

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I spent the holidays in the U.S. so I had time to update my bookshelves with some volumes I wanted to get for a while…
 
POLITICAL ECONOMY
 
 
I will be using the Oxford Handbook as one of the main sources for my political economy class this spring term–taking the place of Mueller’s previous compilation: its several chapters provide an up to date survey on what has become a quite large literature.  Besley and Acemoglu/Robinson will only be suggested readings–these two volumes comprise something like the most current theoretical framework for political/institutional economics.
 
ECONOMETRICS
 
Microeconometrics: Methods and Applications By: A. Colin Cameron, Pravin K. Trivedi
 
Quoting from the authors’ website:
“Distinguishing features include emphasis on nonlinear models and robust inference, as well as chapter-length treatments of GMM estimation, nonparametric regression, simulation-based estimation, bootstrap methods, Bayesian methods, stratified and clustered samples, treatment evaluation, measurement error, and missing data.”
 
This volume has very nice supplement materials available on the web:
 
GENERAL INTEREST
 
Stumbling on Happiness By: Daniel Gilbert
 
ECONOMIC THOUGHT
 
 
 

Do Economists Agree on Anything? Yes

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This is from Mankiws’s blog:
 
Robert Whaples surveys PhD members of the American Economic Association and finds substantial agreement on a wide range of policy issues. For example:
  • 87.5 percent agree that “the U.S. should eliminate remaining tariffs and other barriers to trade.”
  • 85.2 percent agree that “the U.S. should eliminate agricultural subsidies.”
  • 85.3 percent agree that “the gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged.”
  • 77.2 percent agree that “the best way to deal with Social Security’s long-term funding gap is to increase the normal retirement age.”
  • 67.1 percent agree that “parents should be given educational vouchers which can be used at government-run or privately-run schools.”
  • 65.0 percent agree that “the U.S. should increase energy taxes.”

And, finally, the topic that generates the most consensus:

  • 90.1 percent disagree with the position that “the U.S. should restrict employers from outsourcing work to foreign countries.”

One issue that fails to generate consensus is the minimum wage: 37.7 percent want it increased, while 46.8 percent want it eliminated.

Econometrics: A Bird’s Eye View

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This is a survey on economtrics for the New Palgrave Dictionary of Economics and Law, 2nd ed. (forthcoming).
 
Econometrics: A Bird’s Eye View
by John F. Geweke, Joel L. Horowitz, Hashem Pesaran (November 2006)

Abstract:
As a unified discipline, econometrics is still relatively young and has been transforming and expanding very rapidly over the past few decades. Major advances have taken place in the analysis of cross sectional data by means of semi-parametric and non-parametric techniques. Heterogeneity of economic relations across individuals, firms and industries is increasingly acknowledged and attempts have been made to take them into account either by integrating out their effects or by modeling the sources of heterogeneity when suitable panel data exists. The counterfactual considerations that underlie policy analysis and treatment evaluation have been given a more satisfactory foundation. New time series econometric techniques have been developed and employed extensively in the areas of macroeconometrics and finance. Non-linear econometric techniques are used increasingly in the analysis of cross section and time series observations. Applications of Bayesian techniques to econometric problems have been given new impetus largely thanks to advances in computer power and computational techniques. The use of Bayesian techniques have in turn provided the investigators with a unifying framework where the tasks of forecasting, decision making, model evaluation and learning can be considered as parts of the same interactive and iterative process; thus paving the way for establishing the foundation of “real time econometrics”. This paper attempts to provide an overview of some of these developments. 
PDF: Discussion Paper No. 2458

 
 

The Impact Evaluation Gap

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Policy evaluation is the kind of stuff we rarely address properly in universities. If nothing else, this is an area were the dismal science can really shed light and prove to be useful.

When Will We Ever Learn? Improving Lives Through Impact Evaluation

Download (PDF, 536 KB) 05/31/2006

Each year billions of dollars are spent on thousands of programs to improve health, education and other social sector outcomes in the developing world. But very few programs benefit from studies that could determine whether or not they actually made a difference. This absence of evidence is an urgent problem: it not only wastes money but denies poor people crucial support to improve their lives.

This report by the Evaluation Gap Working Group provides a strategic solution to this problem addressing this gap, and systematically building evidence about what works in social development, proving it is possible to improve the effectiveness of domestic spending and development assistance by bringing vital knowledge into the service of policymaking and program design.

In 2004 the Center for Global Development, with support from the Bill & Melinda Gates Foundation and The William and Flora Hewlett Foundation, convened the Evaluation Gap Working Group. The group was asked to investigate why rigorous impact evaluations of social development programs, whether financed directly by developing country governments or supported by international aid, are relatively rare. The Working Group was charged with developing proposals to stimulate more and better impact evaluations. This report, the final report of the working group, contains specific recommendations for addressing this urgent problem.

Read more here: http://www.cgdev.org/

Casillas rurales vs. urbanas en el PREP

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La semana pasada estuve en un seminario sobre el PREP en el IFE.  En una de las mesas en las que participé surgió la pregunta: “¿Cómo sabemos si la demora de las casillas rurales en verdad tuvo un impacto significativo en el flujo de datos del PREP?”

 

En el análisis de estadística descriptiva que hice meses antes era obvio que las casillas urbanas llegaron antes, en promedio, que las rurales… y que este sesgo ayudaba a explicar la ventaja inicial (y decreciente) de Calderón sobre AMLO durante la duración del PREP. 

 

¿Cómo podemos verificar esto estadísticamente, más allá de las gráficas?  Comparemos el tiempo promedio de cada tipo de casillas en ingresar al PREP:

 

. by casilla: summ horasdec  (# horas que tardó cada casilla en ingresar al PREP)

———————————————————————-

-> casilla_rural = 0   (casillas urbanas)

    Variable |       Obs        Mean    Std. Dev.       Min        Max

————-+——————————————————–

    horasdec |     85221    5.115121    2.764698          0      24.87

-> casilla_rural = 1   (casillas rurales)

    horasdec |     32066    7.436029    3.501121          0       24.9

 

Como vemos las casillas urbanas llegaron 7.43 – 5.11 = 2.32 horas antes que las rurales.   La varianza de las casillas rurales es mayor, además. ¿Será una diferencia significativa? Podemos hacer un t-test de medias o bien una regresión: 

 

Dep Var: num. de horas que tarda casilla en aparecer en el PREP…

IndepVar: Dummy  casilla_rural/urbana  

 

. regress  horasdec casilla_rural  

      Source |       SS       df       MS              Number of obs =  117287

————-+——————————           F(  1,117285) =14093.54

       Model |  125504.017     1  125504.017           Prob > F      =  0.0000

    Residual |   1044431.6117285  8.90507397           R-squared     =  0.1073

————-+——————————           Adj R-squared =  0.1073

       Total |  1169935.62117286  9.97506622           Root MSE      =  2.9841

——————————————————————————

    horasdec |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]

————-+—————————————————————-

casilla_ru~l |   2.320909   .0195501   118.72   0.000     2.282591    2.359226

       _cons |   5.115121   .0102222   500.39   0.000     5.095085    5.135156

——————————————————————————

 

 

Como se aprecia, las casillas rurales “nada más” están a 118 errores estándar de distancia de las urbanas…  Pero seamos más rigurosos: Veamos si la dummy rural sobrevive al controlar por 32 dummies estatales–a la mejor la heterogeneidad estatal elimina la dicotomía rural/urbano:

 

. areg horasdec casilla, abs(edo)

                                                       Number of obs =  117287

                                                       F(  1,117254) =12373.15

                                                       Prob > F      =  0.0000

                                                       R-squared     =  0.1945

                                                       Adj R-squared =  0.1942

                                                       Root MSE      =   2.835

 

——————————————————————————

    horasdec |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]

————-+—————————————————————-

casilla_ru~l |   2.228325   .0200327   111.23   0.000     2.189061    2.267589

       _cons |   5.140433    .009926   517.88   0.000     5.120978    5.159888

————-+—————————————————————-

         edo |     F(31, 117254) =    409.380   0.000          (32 categories)

 

El coeficiente de diferencia entre casillas rurales y urbanas baja de 2.3 a 2.2 horas.   Pero si esto aún no nos convence, podemos controlar por 300 dummies distritales–quizá la heterogeneidad distrital elimina o absorbe la dicotomía rural/urbano:

 

. areg horasdec casilla, abs(edodist)

                                                       Number of obs =  117287

                                                       F(  1,116986) = 4269.59

                                                       Prob > F      =  0.0000

                                                       R-squared     =  0.3432

                                                       Adj R-squared =  0.3415

                                                       Root MSE      =  2.5629

——————————————————————————

    horasdec |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]

————-+—————————————————————-

casilla_ru~l |   1.373901   .0210263    65.34   0.000      1.33269    1.415112

       _cons |    5.37403   .0094366   569.49   0.000     5.355535    5.392526

————-+—————————————————————-

     edodist |    F(299, 116986) =    140.532   0.000         (300 categories)

 

 

Como vemos, resulta que aún controlando por heterogeneidad distrital, el factor rural añade 1.37 horas de demora promedio frente a las casillas urbanas. Es decir, al interior de cada distrito, las casillas rurales demoraron 1.37 horas más en ser procesadas que las urbanas.  En los tres casos analizados arriba, este impacto es estadísticamente significativo a niveles (muy) inferiores al 1%.

 

Sobra decir que este no es el análisis más exahustivo posible, pero sí es el análisis más básico y sencillo que podemos hacer con los datos del IFE disponibles a la fecha.  Con más datos, podría estimarse un modelo mucho mejor especificado.

World economic history in a snapshot

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In case you have not been paying attention lately, this is the economic history of the world over the last 3000 years:

This is from Gregory Clark’s A Farewell to Alms: A Brief Economic History of the World (forthcoming in 2007 from Princeton). You can find some sample chapters, and lots of related papers, in his website at the Institute of Governmental Affairs at UC-Davis. Here’s an excerpt from the book’s intro:

The basic outline of world economic history is surprisingly
simple. Indeed it can be summarized in one diagram: figure 1.1 (see above).
Before 1800 income per person – the food, clothing, heat, light,
housing, and furnishings available per head – varied across societies
and epochs. But there was no upward trend. A simple but
powerful mechanism explained in this book, the Malthusian Trap,
kept incomes within a range narrow by modern standards.
Thus the average inhabitant in the world of 1800 was no better
off than the average person of 100,000 BC. Indeed, most
likely, consumption per person declined as we approached 1800.
The lucky denizens of wealthy societies such as eighteenth century
England or the Netherlands managed a material life style equivalent
to the Neolithic. But the vast swath of humanity in East and
South Asia, particularly in Japan and in China, eked out a living in
conditions that seem to have been significantly poorer than those
of cavemen.

(…)

The Industrial Revolution, a mere 200 years ago, changed
forever the possibilities for material comfort. Incomes per person
began a sustained growth in a favored group of countries around
1820. Now in the richest of the modern economies living standards
are 10-20 times better than was average in the world of
1800. Further the biggest beneficiary of the Industrial Revolution
has so far been the poor and the unskilled, not the typically
wealthy owners of land or capital, or the educated. Within the
rich economies of our world there is not only more for everyone,
but lots more for the bottom strata.

US 2006 Election Results–Democrats strike back

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These are results from CNN as of this evening.
 
33 at stake, 1 undecided
51 Dem, 50 GOP needed for majority
PARTY NOT UP TOTAL GAIN/LOSS

GOP

40 seats 49 -5

DEM

27 seats 50 5

IND

0 seats 0 0
Updated: 1:18 p.m. ET
 
435 at stake, 10 undecided (yielding Republican) 
218 needed for majority
PARTY TOTAL GAIN/LOSS

GOP

196 -28

DEM

229 29

IND

0 -1
Updated: 4:21 p.m. ET
 
36 states at stake, MI undecided (yielding Republican)
PARTY NOT UP TOTAL GAIN/LOSS

GOP

6 states 21 -6

DEM

8 states 28 6

IND

0 seats 0 0
Updated: 1:19 p.m. ET
 
This graph on recent US election history is from the Washington Post:

Republicans have controlled both chambers since 1994, except during a brief period when the Democrats held the Senate.

De Long on NAFTA and Mexico

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De Long is not alone in wondering about the so-called Mexican puzzle (neoliberal reforms without large enough growth). Also, Tyler Cowen offers some possibilities here. Both are missing the big omitted variable here: Rule of law. Two more: we are a rather young democracy and interest groups are stronger than we think.

Has Neo-Liberalism Failed Mexico? / J. Bradford DeLong

Six years ago, I was ready to conclude that the North American Free Trade Agreement (NAFTA) was a major success. The key argument in favor of NAFTA had been that it was the most promising road the United States could take to raise the chances for Mexico to become democratic and prosperous, and that the US had both a strong selfish interest and a strong neighborly duty to try to help Mexico develop.

Since NAFTA, Mexican real GDP has grown at 3.6% per year, and exports have boomed, going from 10% of GDP in 1990 and 17% of GDP in 1999 to 28% of GDP today. Next year, Mexico’s real exports will be five times what they were in 1990.

It is here – in the rapid development of export industries and the dramatic rise in export volumes – that NAFTA made the difference. NAFTA guarantees Mexican producers tariff and quota-free access to the US market, the largest consumer market in the world.

Without this guarantee, fewer would have invested in the capacity to satisfy the US market. Increasing trade between the US and Mexico moves both countries toward a greater degree of specialization and a finer division of labor in important industries like autos, where labor-intensive portions are increasingly accomplished in Mexico, and textiles, where high-tech spinning and weaving is increasingly done in the US, while Mexico carries out lower-tech cutting and sewing.

Such efficiency gains from increasing the extent of the market and promoting specialization should have produced rapid growth in Mexican productivity. Likewise, greater efficiency should have been reinforced by a boom in capital formation, which should have accompanied the guarantee that no future wave of protectionism in the US would shut factories in Mexico.

The key word here is “should.” Today’s 100 million Mexicans have real incomes – at purchasing power parity – of roughly $10,000 per year, a quarter of the current US level. They are investing perhaps a fifth of GDP in gross fixed capital formation – a healthy amount – and have greatly expanded their integration into the world (i.e., the North American) economy since NAFTA.

But the 3.6% rate of growth of GDP, coupled with a 2.5% per year rate of population and increase, means that Mexicans’ mean income is barely 15% above that of the pre-NAFTA days, and that the gap between their mean income and that of the US has widened. Because of rising inequality, the overwhelming majority of Mexicans live no better off than they did 15 years ago. (Indeed, the only part of Mexican development that has been a great success has been the rise in incomes and living standards that comes from increased migration to the US, and increased remittances sent back to Mexico.)

Intellectually, this is a great puzzle: we believe in market forces, and in the benefits of trade, specialization, and the international division of labor. We see the enormous increase in Mexican exports to the US over the past decade. We see great strengths in the Mexican economy – a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on.

Yet successful neo-liberal policies have not delivered the rapid increases in productivity and working-class wages that neo-liberals like me would have confidently predicted had we been told back in 1995 that Mexican exports would multiply five-fold in the next twelve years.

To be sure, economic deficiencies still abound in Mexico. According to the OECD, these include a very low average number of years of schooling, with young workers having almost no more formal education than their older counterparts; little on-the-job training; heavy bureaucratic burdens on firms; corrupt judges and police; high crime rates; and a large, low-productivity informal sector that narrows the tax base and raises tax rates on the rest of the economy. But these deficiencies should not be enough to neutralize Mexico’s powerful geographic advantages and the potent benefits of neo-liberal policies, should they?

Apparently they are. The demographic burden of a rapidly growing labor force appears to be greatly increased when that labor force is not very literate, especially when inadequate infrastructure, crime, and official corruption also take their toll.

We neo-liberals point out that NAFTA did not cause poor infrastructure, high crime, and official corruption. We thus implicitly suggest that Mexicans would be far wose off today without NAFTA and its effects weighing in on the positive side of the scale.

That neo-liberal story may be true. But it is an excuse. It may not be true. Having witnessed Mexico’s slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one.

Evidence on Flat Taxes

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This is from London’s New Economist blog:

IMF: Flat taxes have no Laffer curve effect
http://neweconomist.blogs.com/new_economist/2006/10/imf_flat_tax.html

Flat taxes are associated with a reduction in personal income tax, and “in no case does there ..appear to have been a Laffer effect”. That is the most striking conclusion from a new study by IMF economists Michael Keen, Kevin Kim and Ricardo Varsano in The “Flat Tax(es)”: Principles and Evidence (Working Paper No 06/218). The authors summarise the paper thus:

Discussion of these quite radical reforms has been marked, however, more by assertion and rhetoric than by analysis and evidence. This paper reviews experience with the flat tax, seeking to redress the balance. It stresses that the flat taxes that have been adopted differ fundamentally, and that empirical evidence on their effects is very limited.

This precludes simple generalization, but several lessons emerge: there is no sign of Laffer-type behavioral responses generating revenue increases from the tax cut elements of these reforms; their impact on compliance is theoretically ambiguous, but there is evidence for Russia that compliance did improve; the distributional effects of the flat taxes are not unambiguously regressive, and in some cases they may have increased progressivity, including through the impact on compliance; adoption of the flat tax has not resolved common challenges in taxing capital income; and it may have strengthened, not weakened, the automatic stabilizers. Looking forward, the question is not so much whether more countries will adopt a flat tax as whether those that have will move away from it.

The impact of a flat tax on work incentives “is not clear cut in principle, and there is no evidence that it has been strong in practice.” Likewise, the distributional effects of movement towards a flat tax “are potentially complex”, especially for reforms that involve an increase in the basic tax-free amount.

Keen, Kim and Varsano argue that although “the question has received little attention in the debate, ..movement to a flat tax may plausibly strengthen the automatic stabilizers, not weaken them.” They also find the introduction of a flat tax has been a useful signal of reform:

The flat tax has commonly—almost universally—been adopted by new governments anxious to signal a fundamental regime shift, towards more market-oriented policies. In several cases, the signal appears to have been well-received. Where no such reputation needs to be acquired, the appeal of the flat tax is consequently less.

The authors conclude by questioning the political sustainability of the move towards flat taxes:

What remains unclear is the sustainability of the flat tax. Structurally, the flat taxes that have been adopted do not provide a coherent framework for dealing with the difficulties that almost all countries now perceive in taxing internationally mobile capital income.

…Political economy considerations point towards the adoption of rate schedules that tend to benefit middle income earners: exactly the group that tends to lose most from the adoption of a second wave flat tax. Moreover, the very spread of the flat tax in itself undermines its value as a signal: it may prove too easy to mimic. While there will no doubt be new members of the flat tax community, in some respects the more interesting question is whether there will be any defections.

Most flat tax structures benefit lower and/or upper income earners at the expense of those on middle incomes – a point I have made before. Such tax structures are hard to ‘sell’ to predominanatly middle class swinging voters in marginal electorates. In the end it is likely to be the median voter that stops the flat tax movement advancing.

 

Welfare states and economic performance

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Two recent papers.  One stresses the very commonly misunderstood relationship between welfare states and economic performance.  The other reviews the changing trends in economics research.

Explaining Welfare State Survival: The Role of Economic Freedom and Globalization      

ANDREAS BERGH
Ratio; Lund University – Department of Economics
http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=463877

Abstract:     
Using the economic freedom index and the newly developed KOF-index of globalization, it is shown that the Scandinavian welfare states have experienced faster, bigger and more consistent increases in these areas, compared to the smaller Central-European and the Anglo-Saxon welfare states. The market economy and globalization hence do not pose threats to these welfare states, but are instead neglected factors in explaining their survival and good economic performance. Big government decreases the economic freedom index by definition, but the welfare states compensate in other areas, such as legal structure and secure property rights.

What Has Mattered to Economics Since 1970

E. Han Kim, Adair Morse, Luigi Zingales
http://www.nber.org/papers/w12526

—- Abstract —–
We compile the list of articles published in major refereed economics journals during the last 35 years that have received more than 500 citations. We document major shifts in the mode of contribution and in the importance of different sub-fields: Theory loses out to empirical work, and micro and macro give way to growth and development in the 1990s. While we do not witness any decline in the primacy of production in the United States over the period, the concentration of institutions within the U.S. hosting and training authors of the highly-cited articles has declined substantially.