There should be more female mayors

It is well known, and I have documented it before, that women behave differently from men in politics, in particular when it comes to policy priorities. While the various examples I have discussed before are interesting, it is difficult to ascertain that they generalize. Indeed, politics is fraught with social and local norms. We need more studies.

Fernanda Brollo and Ugo Troiano look at municipal elections in Brazil and concentrate on those where the mayoral seat was hotly contested between a male and a female candidate. One can thus consider that the electorate was essentially similar whether the female or the male won. The outcomes are damning for men. Whenever a woman became the mayor, health outcomes are better, corruption is lower, and the municipality gets more federal funding. To illustrate how men are politicizing relatively more, Brollo and Troiano find that male mayors up for reelection will hire many more temporary workers, a clear sign of electoral patronage.

The Taylor Rule does not always work

The Taylor Rule is held in exceedingly high esteem in policy circles for two decades now. Initially meant to describe the actions of the Federal Reserve after it tamed the post oil-shock inflation, it has become a policy prescription that even members of the FOMC refer to when setting policy interest rates. And this almost blind following of the Taylor Rule is not limited to the United States.

Yet, it does not seem to work that well in other countries. Rodrigo De-Losso looks at Brazil and finds that while the country was experiencing hyper-inflation, the central bank was actually following a Taylor Rule. To stabilize prices, it decided to deviate significantly from it by actually reverting the Taylor principle: to maintain inflation in check, the reaction of the policy rate to inflation became smaller, In retrospect, that was a gutsy move of the central bank, but then, there was not much to lose.

How societies can collapse

Some say that the western economies are doomed and that China is taking over as the main economic power. I do not think we are quite there yet, after all China is still not the largest economy, and by far, despite its huge population. And China may itself be at risk of a financial crisis due to its very inefficient banking system. At least it could diffuse an impeding real estate bubble, but this is not the topic of this post. The worst case scenario, however unlikely it may be, is the western society would collapse. It has happened before, so it would be interesting to learn how this could happen.

Rodrigo Pacheco, Newton Paulo Bueno, Ednando Vieira and Raissa Bragança study the collapse of the Mayan civilization, which was well organized, covered a lot of territory and had a long history. Yet it appeared to collapse within a few years in the 9th century. How could this unravel to quickly?

Their point of departure is that societies are inherently resilient. They can be subject to shocks, even large shocks, and they bounce back. Yet, sometimes they do not. What makes this happen? The main point is that dynamics are important. It is believed that a severe drought was the trigger. But this civilization had such drought before and survived. The last one was different because it brought about systemic changes. There precise nature is difficult to determine, after all we do not know that much about Mayan history. One hypothesis is that the drought brought some unrest which made it worse. For example, agriculture used terraces, which are costly to maintain and rely on the good shape of the ones uphill. Under a severe drought, maintenance may have been lacking, and after some time the terracing system fell apart, and with it probably the structure of society. In short, there needs to be the dynamics of a death spiral for a collapse to happen, but it will still take some time.

Land titling and access to credit

It is widely believe that a key ingredient of economic development is the accessibility of credit. Indeed, entrepreneurs typically need credit to develop their business plans, and much of capital accumulation is performed through credit. But no one is going to grant credit on a promise, some collateral is needed. And that is a problem in many developing economies, as people hold little property and even land is communal or without clear property rights. Hence the idea that distribution of untitled land, with well-established property rights, should provide collateral to a large fraction of the population and make credit possible. How does this work in practice?

Caio Piza and Maurico Moura study the case of a major land titling initiative in Brazil. They use an interesting natural experiment. Two neighboring and very similar communities of the city of Corosco (correction: Osasco) were to get property titles for every inhabitant, but five year apart (2007 and 2012). This leads to a nice control group, which allows to overcome the problem of the endogeneity of ownership rights of a typical study by using a difference-in-difference approach. Indeed, the authors conducted a survey in 2007 before the titling, and another one in 2008. In addition, the context here is urban, which is unusual for a titling study. It appears access to credit increases by 22 percentage points, or about a half, within 18 months of titling. This is major. I do not think such large estimates have been found in rural studies. And given that developing countries become increasingly urbanized, this is very interesting.

Fiscal policy as insurance

The goal of fiscal policy is at the macroeconomic level to steer the economy towards efficiency and, depending on the country, to smooth somewhat economic fluctuations. It has long been debated whether this is desirable or possible at all, given the large delays in implementing public expenses. But changes to tax policies are quicker to put in place and implement. At the microeconomic level, the focus is more on the long term, again try to attain better efficiency as well to optimize some definition of fairness across economic agents, however this may be defined in the respective countries. These micro and macro aspects have largely been regarded as separate. This does need to be so.

Eduardo Engel, Christopher Neilson and Rodrigo Valdés look at the particular fiscal policy of Chile. This country is characterized, like many emerging economies, by wild fluctuations in economic activity. In this case this is triggered by changes in commodity prices, in particular for copper. The most important implication is that government revenue varies wildly (a macroeconomic impact) between 1 and 8% of GDP, which changes Chile's ability to redistributes across heterogeneous households (a microeconomic impact). Adhering to a balanced budget rule would have a dramatic effect, in terms of aggregate welfare it would be like renouncing to half of the copper revenue. The reason is that households' incomes is also correlated with copper revenue, and a countercyclical policy is then optimal. And to be the most effective, the poorest households are helped in hard times, both because they have the highest marginal utility from consumption and because they have the highest propensity to consume.

Chile has been pursuing so far something that is close to a balanced budget rule: expenses are related to a permanent income measure of income. This means expenses are relatively constant, except for the last years, where expenses grew significantly despite a reduction in copper prices. This appears to have worked well, in particular because the poor have been the target of this largesse, not the rich. That was stimulus spending done right. This paper shows how this can be done even better.

Venezuela's downfall

Venezuela was once the poster child in Latin America on how to do well (the opposite being Argentina), growing richer than European economies in the 1950's from quite modest means in less than two generations. And then all went downhill, and the country continues to slide into poverty. While many like to put blame on Chavez and his "revolution," the trend started long before he came to power.

Omar Bello, Juan Blyde and Diego Restuccia, instead of going through the usual case study that just rehashes anecdotal evidence, perform a growth accounting exercise to give the start of an answer. They find that the exceptional growth episode was due to a combination of plain old capital accumulation along with total factor productivity growth originating in the booming oil industry and its foreign direct investment transferring know-how to locals. The following collapse shows the undoing of this but with a very different origin. A severe misallocation of resources lead to a drop in total factor productivity, which then triggered capital loss. And how did the government manage ti create the mess? First, it steered the economy away from oil, which may be a good idea for diversification. But the second error was to favor heavy industries, a common development mistake. And third, general government meddling in affairs it should not be looking at. Chavez has just continued a long tradition in this regard.

Latin American home owners are happier, unlike US ones

There is a myth saying that owning a home makes people happier and leads them to contribute more to their community. In an earlier report, I pointed out that this idea is a myth for the US homeowner. What about elsewhere?

Inder Ruprah finds that Latin American house owners are indeed happier. This is obtained from a survey where people declare how happy they are, the reliance of which many researchers have called into question. But happiness studies slowly get more acceptance, especially when results are clear cut, like here. Of course, homeownership could be correlated with some unobservables that matter a lot for happiness, for example economic and social standing. There is a variable that could capture this in the regression, "Interviewer assessment of economic situation of the household," but I have no idea how reliable it is.

PS: The pdf file is 7.3MB large. It took me five attempts to download it. There are a few very simple graphs and histograms in the paper, in other words no reason to have such a large file, but for unnecessary front and back covers. But if the IADB is willing to waste bandwidth that way, especially as its target audience in Latin America may not necessarily enjoy fast internet.

An unexpected consequence of crises: birth weight loss

Periods of crisis generate hardship, in particular if people do not have good ways to insure against these kind of shocks. In theory, temporary losses in income should not have much of a permanent impact, but in practices they may. For example, losing a job entails a wage loss in the next job, because one may have lost human capital, firm specific skills or good outside options. And those wage losses are quite persistent.

Carlos Bozzoli and Climent Quintana-Domeque identify a different persistent effect of a crisis by looking at Argentina. They notice that babies born around 2002 have had a birth weight 30 grams lower than usual, a non-trivial difference that corresponds to a difference between the US and Pakistan. Now, birth weight has been identified to be a remarkably good predictor of future outcomes for a population in terms of health, education and income. Thus, the effects of the 2002 crisis could linger in Argentina for decades.

Why is Argentina poorer than Canada?

Up to the 1930's, Argentina and Canada were very similar countries: rich, sparsely populated, income mostly from natural resources and agriculture, lots of immigrants, similar GDP per capita. Then after World War II, the economic fortunes of those two countries drifted apart. What happened?

Germán González and Valentina Viego think that Canada benefited from a rich and large neighbor that was a nice complement to Canada. Argentina, however, did not have this advantage and fell into a trap that made it more and more reliant on its core products and prevented it for following a "normal" development path towards industrialization. This conclusion comes from a fairly standard growth accounting exercise that highlights how Argentinian economic efficiency did not keep up with Canada's starting in the 1930's, primarily due to higher technology adoption in Canada. The latter is clearly helped by the vicinity of the US, while Argentina compounded things by adopting an ill-advised import substitution policy.

Public pensions vs. public investment

While being civil servant does not pay much in current wages (usually), it typically pays off handsomely in other benefits: stabily of job and pay, health care benefits and especially retirement benefits. This can be viewed as a long-term contract, where the state gives less now for the the peace of mind and future incomes. Few private firms offer this kind of benefit, one likely reason is that they do not have the power to tax in the future to meet such obligations. One can thus ask whether it is a good thing for governments to offer such generous pensions. Could they do better with that money, say, invest in public infrastructure or education?

This is precisely what Gerhard Glomm, Juergen Jung, Changmin Lee and Chung Tran address in the context of emerging economies. That context tilts obviously the answer, given that these economies precisely lack in public infrastructure and education. In addition, public service wages are quite high in those countries, making generous benefits even less appropriate. Thus, there is no doubt on the result, and the interest is in the size of the effects. The authors calibrate their model to Brazil and find indeed that public investment or simple reductions in taxes would be very beneficial (on average, of course some have reasons to complain). Indeed, cutting public pensions makes civil servants save more, and this increases GDP by 4% through added capital accumulation. The rest is just gravy: reducing distorting labor income taxes increases GDP by a total of 15% or increasing public infrastructure bring it to 10%. It is, however, highly unlikely that those numbers would apply to developed economies.

Where are the Brazilian economists?

It has always struck me how large the diaspora of Argentinian economists is, especially in Macroeconomics. Speaking to them, I learned that a lot of them where motivated to study Economics by observing and living the chronic problems of Argentina. But then, why do they not return to fix this country? The typical answer is that the economy is beyond repair, and thus they stay in North America or Europe.

What about the Brazilians, then? Brazil also suffers from chronic problems, it is even larger, so it has the potential to provide many motivated economists. Yet, I rarely meet one, and it is not becasue they would all return home after graduation: there are very few Brazilian students in graduate programs.

So, where are they?

Argentina: How not to handle food price increases

Argentina is blessed with a very rich agriculture. A century ago, its standard of living was among the highest of the world thanks to this sector. Nowadays, the fiscal health of the country relies crucially on export taxes levied on agricultural products, and we all know how the fiscal health of this country is important. All of this is getting undone right now, with a poor handling by the government of food price increases.

First some context. Soya prices have, much like other food prices, increased significantly over the last years, in a large part due large demand for cattle feed in Europe and Asia. What would any sane grower do in such a situation? Grow more soya. Within a few years, the land dedicated to soya in Argentina went fron 5 million to 15 million acres, bringing a lot of income to growers and to the state, which levies a 35% export tax. The substitution means, however, that other food staples are now much less grown, and the price of, say, tomatoes and potatoes has significantly increased.

Consumers obviously complain when prices go up, so the government tries to find a way to increase the supply of food for local consumption. How? By increasing the export tax to 44%. As everything is already planted, this changes nothing to production, increases further world soya prices, leads growers to demonstrate and shut down roads, to the point of generating serious supply problems across Argentina and increasing prices further.

If the price of tomatoes is high, let the market do its job and adjust the production for next season. Fluctuations in prices may be higher than optimal (à la cobweb model), but with good information, growers can predict them and plan accordingly (that is what agricultural economics departments are for, right?).