lunes, 16 de octubre de 2017

Universal Basic Income, Inequality and Fiscal Policies

Inequality: Fiscal Policy Can Make the Difference
A more comprehensive approach to Fiscal policies

October 11, 2017

Income inequality among people around the world has been declining in recent decades. This is due to countries like China and India’s incomes catching-up to advanced economies. But the news is not all good. Inequality within countries has increased, particularly in advanced economies. Since the global economic recovery has gained pace and is now widespread, policymakers have a window of opportunity to respond with reforms that tackle inequality, and our new Fiscal Monitor shows how the right mix of fiscal policies can make the difference.

Fiscal policy is powerful

Fiscal policy accounts for a large share of differences in inequality across countries. advanced economies, fiscal policy offsets about a third of income inequality before taxes and transfers—commonly known as market income inequality—with 75 percent coming from transfers. Spending on education and health also affects market income inequality over time by promoting social mobility, including across generations. In developing economies, fiscal redistribution is much weaker, given lower and less progressive taxes and spending.

Design of redistribution matters

There is no one-size-fits-all strategy. Redistribution should reflect a country’s specific circumstances, including underlying fiscal pressures, social preferences, and the government’s administrative and tax capacity. Also, taxes and transfers cannot be considered in isolation. Countries need to finance transfers, and the combination of alternative tax and transfer instruments that countries chose can have very different implications for equity.

While some policies may have conflicting effects on growth and distribution, our empirical evidence shows it is possible to achieve inclusive, sustainable growth with the right mix of policies. Efficiency and equity can and must go hand-in-hand.

Tackling inequality

Policymakers have many choices to achieve efficient and equitable results. The Fiscal Monitor focuses on three policy debates: progressive taxation, universal basic income (UBI), and public spending on education and health.

  • Progressive income taxes. Personal income tax progressivity has declined steeply in the 1980s and 1990s, and has remained broadly stable since then. The average top income tax rate for OECD member countries fell from 62 percent in 1981 to 35 percent in 2015. In addition, tax systems are less progressive than indicated by the statutory rates, because wealthy individuals have more access to tax relief. Importantly, we find that some advanced economies can increase progressivity without hampering growth, as long as progressivity is not excessive.
  • Universal basic income (UBI). A UBI—defined as a cash transfer of an equal amount to all individuals in a country—has been widely debated by economists for decades. There is now renewed interest, associated with perceptions of the effects of technology and artificial intelligence on the future of work. The Fiscal Monitor does not advocate for or against UBI, but contributes to the policy debate by presenting facts and arguments relevant for evaluating a UBI. A UBI has potential for having a significant impact on inequality and poverty as it covers all individuals at the bottom of the income distribution. But, being universal means it is costly. The Fiscal Monitor estimates that it would cost the average advanced economy 6½ percent of GDP to provide a UBI set at 25 percent of median per capita income, and the estimates vary considerably across countries. Thus, the discussion of a UBI cannot be disentangled from a discussion of its financing to make it budget neutral. Key considerations for its introduction are its consistency with other fiscal priorities—to avoid crowding out investments in infrastructure, education and health, for instance—and the method of financing, which needs to be efficient and equitable. A UBI could be an option where it substitutes for inequitable and inefficient social spending.
  • Spending on education and health. Despite progress, gaps in access to quality education and health care services between different income groups in the population remain in many countries. For example, in advanced economies, males with tertiary education live up to 14 years longer than those with secondary education or less. Better public spending can help, for instance, by reallocating education or health spending from the rich to the poor while keeping total public education or health spending unchanged. The Fiscal Monitor finds that closing the inequality gap in basic health coverage could raise life expectancy, on average, by 1.3 years in emerging and developing countries.

We hope to have persuaded you of two things: that fiscal policy can make the difference in tackling inequality; and that efficiency and equity must go hand-in-hand.

jueves, 12 de octubre de 2017

Universal Free Movement of Workers: A world of free movement would be $78 trillion richer

A world of free movement would be $78 trillion richer
Yes, it would be disruptive. But the potential gains are so vast that objectors could be bribed to let it happen

A HUNDRED-DOLLAR BILL is lying on the ground. An economist walks past it. A friend asks the economist: “Didn’t you see the money there?” The economist replies: “I thought I saw something, but I must have imagined it. If there had been $100 on the ground, someone would have picked it up.”
If something seems too good to be true, it probably is not actually true. But occasionally it is. Michael Clemens, an economist at the Centre for Global Development, an anti-poverty think-tank in Washington, DC, argues that there are “trillion-dollar bills on the sidewalk”. One seemingly simple policy could make the world twice as rich as it is: open borders.

Workers become far more productive when they move from a poor country to a rich one. Suddenly, they can join a labour market with ample capital, efficient firms and a predictable legal system. Those who used to scrape a living from the soil with a wooden hoe start driving tractors. Those who once made mud bricks by hand start working with cranes and mechanical diggers. Those who cut hair find richer clients who tip better.
“Labour is the world’s most valuable commodity—yet thanks to strict immigration regulation, most of it goes to waste,” argue Bryan Caplan and Vipul Naik in “A radical case for open borders”. Mexican labourers who migrate to the United States can expect to earn 150% more. Unskilled Nigerians make 1,000% more.
“Making Nigerians stay in Nigeria is as economically senseless as making farmers plant in Antarctica,” argue Mr Caplan and Mr Naik. And the non-economic benefits are hardly trivial, either. A Nigerian in the United States cannot be enslaved by the Islamists of Boko Haram.
The potential gains from open borders dwarf those of, say, completely free trade, let alone foreign aid. Yet the idea is everywhere treated as a fantasy. In most countries fewer than 10% of people favour it. In the era of Brexit and Donald Trump, it is a political non-starter. Nonetheless, it is worth asking what might happen if borders were, indeed, open.
To clarify, “open borders” means that people are free to move to find work. It does not mean “no borders” or “the abolition of the nation-state”. On the contrary, the reason why migration is so attractive is that some countries are well-run and others, abysmally so.
Workers in rich countries earn more than those in poor countries partly because they are better educated but mostly because they live in societies that have, over many years, developed institutions that foster prosperity and peace. It is very hard to transfer Canadian institutions to Cambodia, but quite straightforward for a Cambodian family to fly to Canada. The quickest way to eliminate absolute poverty would be to allow people to leave the places where it persists. Their poverty would thus become more visible to citizens of the rich world—who would see many more Liberians and Bangladeshis waiting tables and stacking shelves—but much less severe.
If borders were open, how many people would up sticks? Gallup, a pollster, estimated in 2013 that 630m people—about 13% of the world’s population—would migrate permanently if they could, and even more would move temporarily. Some 138m would settle in the United States, 42m in Britain and 29m in Saudi Arabia.
Gallup’s numbers could be an overestimate. People do not always do what they say they will. Leaving one’s homeland requires courage and resilience. Migrants must wave goodbye to familiar people, familiar customs and grandma’s cooking. Many people would rather not make that sacrifice, even for the prospect of large material rewards.
Wages are twice as high in Germany as in Greece, and under European Union rules Greeks are free to move to Germany, but only 150,000 have done so since the beginning of the economic crisis in 2010, out of a population of 11m. The weather is awful in Frankfurt, and hardly anyone speaks Greek. Even very large disparities combined with open borders do not necessarily lead to a mass exodus. Since 1986 the citizens of Micronesia have been allowed to live and work without a visa in the United States, where income per person is roughly 20 times higher. Yet two-thirds remain in Micronesia.
Despite these caveats, it is a fair bet that open borders would lead to very large flows of people. The gap between rich and poor countries globally is much wider than the gap between the richest and less-rich countries within Europe, and most poor countries are not Pacific-island paradises. Many are violent as well as poor, or have oppressive governments.
Also, migration is, in the jargon, “path-dependent”. It starts with a trickle: the first person to move from country A to country B typically arrives in a place where no one speaks his language or knows the right way to cook noodles. But the second migrant—who may be his brother or cousin—has someone to show him around. As word spreads on the diaspora grapevine that country B is a good place to live, more people set off from country A. When the 1,000th migrant arrives, he finds a whole neighbourhood of his compatriots.
So the Gallup numbers could just as well be too low. Today there are 1.4bn people in rich countries and 6bn in not-so-rich ones. It is hardly far-fetched to imagine that, over a few decades, a billion or more of those people might emigrate if there were no legal obstacle to doing so. Clearly, this would transform rich countries in unpredictable ways.
Voters in destination states typically do not mind a bit of immigration, but fret that truly open borders would lead to them being “swamped” by foreigners. This, they fear, would make life worse, and perhaps threaten the political system that made their country worth moving to in the first place. Mass migration, they worry, would bring more crime and terrorism, lower wages for locals, an impossible strain on welfare states, horrific overcrowding and traumatic cultural disruption.
Open questions
If lots of people migrated from war-torn Syria, gangster-plagued Guatemala or chaotic Congo, would they bring mayhem with them? It is an understandable fear (and one that anti-immigrant politicians play on), but there is little besides conjecture and anecdotal evidence to support it. Granted, some immigrants commit crimes, or even headline-grabbing acts of terrorism. But in America the foreign-born are only a fifth as likely to be incarcerated as the native-born. In some European countries, such as Sweden, migrants are more likely to get into trouble than locals, but this is mostly because they are more likely to be young and male. A study of migration flows among 145 countries between 1970 and 2000 by researchers at the University of Warwick found that migration was more likely to reduce terrorism than increase it, largely because migration fosters economic growth.
Would large-scale immigration make locals worse off economically? So far, it has not. Immigrants are more likely than the native-born to bring new ideas and start their own businesses, many of which hire locals. Overall, migrants are less likely than the native-born to be a drain on public finances, unless local laws make it impossible for them to work, as is the case for asylum-seekers in Britain. A large influx of foreign workers may slightly depress the wages of locals with similar skills. But most immigrants have different skills. Foreign doctors and engineers ease skills shortages. Unskilled migrants care for babies or the elderly, thus freeing the native-born to do more lucrative work.

Would open borders cause overcrowding? Perhaps, in popular cities like London. But most Western cities could build much higher than they do, creating more space. And mass migration would make the world as a whole less crowded, since fertility among migrants quickly plunges until it is much closer to the norm of their host country than their country of origin.
Would mass immigration change the culture and politics of rich countries? Undoubtedly. Look at the way America has changed, mostly for the better, as its population soared from 5m mainly white folks in 1800 to 320m many-hued ones today. Still, that does not prove that future waves of immigration will be benign. Newcomers from illiberal lands might bring unwelcome customs, such as political corruption or intolerance for gay people. If enough of them came, they might vote for an Islamist government, or one that raises taxes on the native-born to pamper the newcomers.
Eyes on the prize
There are certainly risks if borders are opened suddenly and without the right policies to help absorb the inflow. But nearly all these risks could be mitigated, and many of the most common objections overcome, with a bit of creative thinking.
If the worry is that immigrants will outvote the locals and impose an uncongenial government on them, one solution would be not to let immigrants vote—for five years, ten years or even a lifetime. This may seem harsh, but it is far kinder than not letting them in. If the worry is that future migrants might not pay their way, why not charge them more for visas, or make them pay extra taxes, or restrict their access to welfare benefits? Such levies could also be used to regulate the flow of migrants, thus avoiding big, sudden surges.
This sounds horribly discriminatory, and it is. But it is better for the migrants than the status quo, in which they are excluded from rich-world labour markets unless they pay tens of thousands of dollars to people-smugglers—and even then they must work in the shadows and are subject to sudden deportation. Today, millions of migrants work in the Gulf, where they have no political rights at all. Despite this, they keep coming. No one is forcing them to.
“Open borders would make foreigners trillions of dollars richer,” observes Mr Caplan. A thoughtful voter, even if he does not care about the welfare of foreigners, “should not say...‘So what?’ Instead, he should say, ‘Trillions of dollars of wealth are on the table. How can my countrymen get a hefty piece of the action?’ Modern governments routinely use taxes and transfers to redistribute from young to old and rich to poor. Why not use the same policy tools to redistribute from foreign to native?” If a world of free movement would be $78trn richer, should not liberals be prepared to make big political compromises to bring it about?
This article appeared in the The World If section of the print edition under the headline "The $78 trillion free lunch"

The economist

martes, 26 de septiembre de 2017

European Union and Solidarity

For the European Union to work, its strong members must be prepared to show solidarity with its weak members. And as long as Germany, the strongest of them all, opposes creating some mechanism to realize this imperative, the EU will limp from crisis to crisis – probably shedding members along the way.
LONDON – Who runs the European Union? On the eve of Germany’s general election, that is a very timely question.
Germany is the EU’s most populous state and its economic powerhouse, accounting for over 20% of the bloc’s GDP. Determining why Germany has been so economically successful appears to be elusive. But three unique features of its so-called Rhineland model stand out.
First, Germany has preserved its manufacturing capacity much better than other advanced economies have. Manufacturing still accounts for 23% of the German economy, compared to 12% in the United States and 10% in the United Kingdom. And manufacturing employs 19% of the German workforce, as opposed to 10% in the US and 9% in the UK.
Germany’s success in retaining its industrial base contradicts rich countries’ standard practice of outsourcing manufacturing to locations with lower labor costs. But Germany has never accepted the static theory of comparative advantage on which this practice is based. True to the legacy of Friedrich List, the father of German economics, who wrote in 1841, “the power of producing wealth is therefore infinitely more important than wealth itself,” Germany has retained its manufacturing edge through a relentless commitment to process innovation, backed by a network of research institutes. Its export-led growth has given it the benefit of increasing returns to scale.
The second feature of the German model is its “social market economy,” best reflected in its unique system of industrial “co-determination.” Alone among the major advanced economies, Germany practices “stakeholder capitalism.” All companies are required by law to have works councils. Indeed, large companies are run by two boards: a management board and a supervisory board, divided equally between shareholders and employee representatives, which take strategic decisions. The resistance to offshoring is therefore much stronger than elsewhere, as is a willingness to restrain wage costs.
Finally, there is Germany’s firm commitment to price stability. Germany needed no lessons from Milton Friedman on the evils of inflation. They were already hard-wired into its most famous post-war institution, the Bundesbank.
Lever suggests that it was as much the memory of the currency collapse of 1945-1948 as of the hyperinflation of the 1920s that drove home this lesson. Likewise, an aversion to public deficits mirrors the population’s resistance to private indebtedness.
Institutionally, the EU has become Germany writ large. The Commission, the European Parliament, European Council, and the European Court of Justice mirror the decentralized structure of Germany itself. The EU’s gospel of “subsidiarity” reflects the division of powers between Germany’s federal government and states (Länder). Germany ensures that Germans fill the leading positions in EU bodies. The EU rules through its institutions, but the German government rules those institutions.
Yet talk of “hegemony,” or even “leadership,” is taboo in Germany – a reticence that stems from Germans’ determination not to remind people of their country’s dark past. But denying leadership while exercising it means that no discussion of Germany’s responsibilities is possible. And this inflicts costs – especially economic costs – on other EU member states.
Germany has created a system of rules that entrenches its competitive advantage. The single currency rules out devaluation within the eurozone. It also ensures that the euro is worth less than a purely German currency would be.
The EU’s recent Treaty on Fiscal Union – the successor to the Growth and Stability Pact – prescribes binding legal commitments to balanced budgets and modest national debt, backed by supervision and sanctions. This precludes deficit finance to boost growth. And Germany’s insistence that non-wage costs be equivalent throughout the EU is less a device for enhancing Germany’s competitiveness than for reducing others’.
The EU, especially the 19-member eurozone, thus functions as a vast home base for Germany, from which it can launch its assault on foreign markets. And that base is strong. Germany exports to the EU 30% more than it imports from it, and runs one of the world’s largest current-account surpluses.
This is a benign rather than a brutal hegemony. But at its heart lies a massive contradiction. National accounts must balance. A surplus in one part of Europe means a deficit in another. The eurozone was established without a fiscal transfer mechanism to succor members of the family who get into trouble; the European Central Bank is prohibited from acting as lender of last resort to the banking system; and the Commission’s proposal for Eurobonds – collectively guaranteed national bond issues – has foundered on Germany’s objection that it would bear most of the liability.
Germany has been willing to provide emergency finance to debt-strapped eurozone members like Greece on the condition that they “put their houses in order” – cut social spending, sell off state assets, and take other steps to make themselves more competitive. The Germans see no reason to take measures to reduce their own super-competitiveness.
What can be done to achieve a more symmetric adjustment between Europe’s creditors and debtors? Barring a fiscal transfer mechanism, John Maynard Keynes’s 1941 plan for an International Clearing Union might be adapted for the eurozone. Member countries’ central banks would hold their residual euro balances in accounts with a European Clearing Bank. Pressure would be simultaneously placed on creditor and debtor countries to balance their accounts, by charging rising interest rates on persistent imbalances.
An EU clearing union would be a less visible intrusion on German national interests than a fiscal transfer union would be. The essential point, though, is that for the eurozone to work, the strong must be prepared to show solidarity with the weak. Without some mechanism to realize that, the EU will limp from crisis to crisis – probably shedding members along the way.

sábado, 6 de mayo de 2017

Governance and Economic Development: Institutions are a must for economic development

When Government Capacity Creates Economic Options

Government capacity is in part the ability to hit the long ball, to have long-term policies that look beyond the next election and the next change in administration. In economic policy, as in social policy and so many other areas, it can make all the difference.
Unfortunately, in too many countries of Latin America and the Caribbean winning the next election and installing one’s own people in civil service and judicial posts trumps building government capabilities and establishing long-term effective policies. There is a lack of common national purpose, and it severely limits countries’ options both in their development and in their ability to confront crises.
Political parties in many countries, for example, serve only as conduits for charismatic leaders rising to power. As a result, they are short-lived and lack well-developed platforms that last beyond the individuals who make up their memberships. A similar instability tends to plague the region’s congresses, which are crowded with legislators who spend only a few years in office and have little interest in building their careers, gathering expertise, and strengthening the role of committees and commissions that usually make policy. These characteristics do not provide strength, a platform for long-term growth or the ability to maneuver in difficult situations.
The way out of this stalemate is to invest in institutions. As revealed in many studies done by the Research Department of the IDB since its landmark 2005 study, the Politics of Policies, the way out includes building long-standing programmatic political parties with the ability to discipline their members and forge consensus; congresses with legislators possessing long-term interests, legislative experience and capable staffs; technically-capable, meritocratic civil services and independent judiciaries. These features all give countries greater government capacity. They give them the ability to design stable long-term policies, implement them, and make necessary adjustments through many election cycles and changes in president.
To date, most Latin American and Caribbean countries lack these abilities. While a few countries in the region including Chile, Costa Rica, and Uruguay, rank among the countries with the greatest government capabilities in the world, many others are of middling quality, according to an IDBanalysis, and eight countries rank alongside Sub-Saharan Africa in the lowest category.
Various IDB studies show that countries with high government capabilities are associated with higher rates of GDP per capita growth and improvements in the Human Development Index. They have less distortive tax systems, higher quality infrastructure and labor market flexibility.
A recent study by Mariano Tommasi, María Franco Chuaire and I reveals another area where countries with low government capacity, including many in the region, face handicaps compared to countries that have developed their institutions: the ability to respond to economic shocks. Our study looks at the quality of civil services. We find that countries with a strong and stable civil service have a much bigger toolkit of monetary, fiscal, welfare, trade and productivity policies at their disposal to respond to external shocks than countries that don’t.
Consider the case of two open economies that both export large quantities of soybeans and now confront a difficult situation as soybean prices crash. Country A, the country with an effective civil service, is likely to have an independent and credible central bank and a flexible exchange rate that allows it to adjust to changing circumstances. Probably, it has a tradition of counter-cyclical fiscal policies that involve saving in good times so that money can be injected into the economy in bad times as well as access to credit on international markets. And it is likely to have labor market flexibility ―with fewer restrictions and costs in hiring workers― that allow it to more easily move people from underperforming to more promising sectors of the economy. All these elements will give Country A an ability to compensate at least in part to the negative .
Country, B, by contrast, is limited in what it can do. It’s ever changing and poorly-trained bureaucracy has left it ill-prepared to handle highly complex matters or develop long-term economic policies. This may be expressed in a fixed exchange rate, a tradition of pro-cyclical fiscal policies, limited access to international financial markets, and a more rigid employment structure. Its bureaucrats may have tried to protect the economy even before the shock by isolating sectors vulnerable to trade with an expansion of the public sector. But if they didn’t, they may confront the downturn by boosting spending with little room to maneuver. These are poor options. They come down to expanding government size and other less efficient responses in an effort to reduce the exposure of the economy.
Solutions lie not in new laws to reform the civil service. Copying supposedly ideal laws and regulations from other countries makes little sense in contexts in which political actors have the incentives to ignore them. They lie instead in strengthening institutions (congress, political parties, the judiciary, and the civil service) and working to increase their capacity and transparency. In the case of the civil service, this may require protecting bureaucrats from the influence of election cycles, political meddling, and patronage and forging an understanding among key actors that capable and enduring civil servants make for better policy formulation and implementation.