While cases of state failure have risen in the last decade, most notably in the Middle East and sub-Saharan Africa, they are not a new phenomenon. Historical evidence from the early modern period, and even the Bronze Age, shows that the majority of formed states have failed rather than thrived. This column introduces the ‘paradox of civilisation’ to characterise the obstacles settlements face in establishing civilisations. The paradox defines the success of a civilisation as a trade-off between the ability to produce economic surplus and to protect it. It is therefore important to correctly balance military and economic support when providing aid.
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The 23 June 2016 Brexit vote saw British voters reject membership in the European Union. This column introduces a new VoxEU eBook containing 19 essays written by leading economists on a wide array of topics and from a broad range of perspectives.
After the Brexit vote, it is obvious to many that globalisation in general, and European integration in particular, can leave people behind – and that ignoring this for long enough can have severe political consequences. This column argues that this fact has long been obvious. As the historical record demonstrates plainly and repeatedly, too much market and too little state invites a backlash. Markets and states are political complements, not substitutes
The Greek crisis is one of the worst in history, even in the context of recorded ‘trifecta’ crises – the combination of a sudden stop with output collapse, a sovereign debt crisis, and a lending boom/bust. This column quantifies the role of each of these factors to better understand the crisis and formulate appropriate policy responses. While fiscal consolidation was important in driving the drop in output, it accounted for only for half of that drop. Much of the remainder can be explained by the higher funding costs of the government and private sectors due to the sudden stop.
The labour market recovery in OECD countries has been steady but slow since the Great Recession. More worrying is the fate of wage growth over the same period. This column assesses the implications of stagnation in the labour market for growth, wages, and inequality. It finds that structural weaknesses in labour market performance have become more visible as markets recover from the Great Recession. The policy response must include macroeconomic policies aimed at strengthening investment, and structural policies to support growth while nudging workers towards higher-skilled jobs.
Helicopter money is not just another version of unconventional monetary policy. Using simple central bank and government balance sheets, this column explains how helicopter money today is different from what Milton Friedman imagined back in 1969 – it is expansionary fiscal policy financed by central bank money.
After decades of oil price rises, new extraction techniques for shale and conventional deposits mean that recent dramatic price falls will be here to stay. This column argues that, even with oil at $50 a barrel, global producers will invest to catch up with US-led technological innovation and so add 40 million barrels a day to production by 2035. This will revolutionise domestic energy policymaking, environmental commitments and global geopolitics.
Fiscal multipliers tend to be larger when the fiscal position of governments is stronger. This column argues that the link between fiscal multipliers and fiscal positions is independent of the business cycle. Although multipliers are generally larger in recessions, they are smaller during times of high debt, even during recessions, relative to what they would be if government debt were lower.
Policymakers use a well established traditional accounting method to analyse past paths and predict future paths of debt ratios. But the traditional accounting exercises underemphasise the role of economic growth. This column proposes a simple, extended accounting framework to recognise the importance of growth more fully and explicitly. It quantifies the role of economic growth in debt-to-GDP measurement for Ireland and Italy, who were similarly placed in 2012 but whose paths diverged significantly in subsequent years.
The positive relationship between wages and firm performance is well established in the literature, but much less is known about the relationship in the university context. This column addresses this gap by matching professors' wages with departmental performance measures from the UK’s Research Excellence Framework. Across the full range of academic disciplines, departments that pay their professors more do appear to perform better. This is driven primarily by the relationship between salary and publications output, with no evidence of a positive relationship between salary and research impact.
Increased hostility to immigration has been a key driver of the rise of right-wing populist movements across the world. At the same time, local governments – notably in the US – have designed work programmes to attract immigrant entrepreneurs to their areas. This column explores the types of businesses founded by immigrants and their growth patterns, and examines how these outcomes relate to immigrants’ age at arrival to the US. Immigrant entrepreneurs experience greater volatility – they fail more frequently, but those that persist experience greater employment growth than their native counterparts.
It has been widely demonstrated that parental divorce is associated with negative outcomes for affected children. However, the degree of causality in this relationship is not as clear. This column tackles this problem by using the level of gender integration in fathers’ workplaces as an instrument for divorce. The results suggest a causal link between divorce and worse economic outcomes that persists into early adulthood.
Trade ministries, just as other parts of government, need to respond to calls from the public and from global leaders for action on major issues. This column argues that armed with potential policy options identified through the E15Initiative, the WTO is equipped to contribute to solutions in many areas. Purposeful efforts over the coming months and years could help to boost the WTO’s essential and valuable place in ensuring a responsive and inclusive furtherance of globalisation and trade and investment integration that delivers sustainable development outcomes for all.
Wage inequality was partly behind the vote for Brexit. This column shows how areas with relatively low median wages were substantially more likely to vote ‘Leave’, and discusses the likely implications of Brexit for wage inequality in the future. Increased likelihood of a recession, a negative shock to trade, reduced migration flows, and the possible loss of passporting rights for the City will all alter the structure of wages in ways that will need to be carefully monitored and studied in due course.
One-dimensional indicators such as GNI per capita are known to be flawed measures of wellbeing. The Human Development Index (HDI) introduced dimensions of health and education alongside income. This column argues that an HDI adjusted for inequality and hours worked gives deeper insight into a country's economic standing. Using this composite measure, the US falls from first to seventh among G8 countries.
The UK’s membership of the EU has been a key factor behind the City of London’s emergence as a leading global financial centre. This column looks at the implications of Brexit for the City. While it is unlikely that many banks or other financial institutions will simply up and leave in the coming months, their expansion and hiring decisions may lean toward the remaining EU member states for some of their operations. And unless the politicians conducting the Brexit negotiations do their utmost to limit the damage, the loss of passporting rights is likely to have a significant negative impact on the UK financial sector.
The current refugee crisis has highlighted the importance of understanding how ethnic and cultural differences affect social cohesion. This column investigates the links between ethnicity and culture, and the relationship between diversity and civil conflict. It finds that globally, there appears to be little overlap between ethnic identity and cultural identity. Also, ethnic diversity per se has no effect on civil conflict. It is when differences in culture coincide with differences in ethnicity that conflict becomes more likely.
The German Council of Economic Advisors recently proposed a mechanism for the orderly restructuring of sovereign debt in the Eurozone. This column argues that the proposal suffers from some inherent weaknesses. The proposal builds on logical errors and embeds well-established ideas in a setup that suffers from serious limitations. It also neglects alternative strategies that favour targeting large debts as soon as possible.
The Global Crisis has renewed debate about the relationship between short-term interest rates and bank risk taking. Theory offers ambiguous and conflicting predictions. This column explores the relationship using confidential bank-level data from the US. Bank risk taking is found to be negatively associated with short-term interest rates, and this is more pronounced for highly capitalised banks. These findings can help inform the design of monetary policy.
The dramatic and largely unexpected collapse in oil prices has sparked intense debate over the causes and consequences. This column argues that a broader energy perspective is now needed to comprehend oil’s long-term outlook, and provides answers to several questions about the oil market in the global economy.
In recent years, the life insurance sector has become more systemically important across advanced economies. This increase is largely due to growing common exposures and to insurers’ rising interest rate sensitivity. This column analyses the evolution of the insurance sector’s contribution to systemic risk. Overall, life insurers do not seem to have markedly changed their asset portfolios toward riskier assets, although smaller and weaker insurers in some countries have taken on more risk. The findings suggest that supervisors and regulators should take a more macroprudential approach to the sector.
Recent research into how monetary policy frameworks incorporate risks to financial stability has shown that policy affects both financial conditions and financial vulnerabilities that amplify negative shocks. This column argues that looser monetary policy improves financial conditions, but can in some situations worsen vulnerabilities through incentives for financial sector risk-taking and non-financial sector borrowing. Policymakers face an intertemporal trade-off between financial conditions and vulnerabilities which may impact a cost-benefit analysis of monetary policy.
Joining the EU raised the level of UK real GDP significantly. This column suggests that leaving the EU will very probably have a negative effect on UK GDP, but history does not tell us how strong this effect will be. However, history does suggest that the notion that there will be a faster rate of long-run trend growth facilitated by Brexit is not persuasive. The obstacles to better supply-side policy are, as ever, to be found in Westminster not in Brussels.
The UK must now formulate and execute an independent trade policy for the first time in over 40 years. This column summarises the catalogue of failure that has been the governance of the world trading system in the 21st century, and proposes Ten Commandments to guide UK trade ministers in the forthcoming negotiations.
Immigration was a major factor – perhaps the major factor – in the Brexit vote. This column asks what the result of the referendum means for the UK’s immigration policy. It looks likely that the UK’s negotiating position may coalesce around an ‘EEA minus’ arrangement. While free movement would not continue as now, this would not imply moving to a system that gives effectively equal treatment to EU and non-EU nationals; there would still be a considerable degree of preference for the former. The negotiations would likely be legally, economically, and politically complex, but this does not mean that it is not worth trying.
Student debt has been rapidly rising in the US over the last 20 years. This column explores how this rise is affecting borrowers and the economy today. With the college earnings premium near historical levels, student loans facilitate excellent investments on average, and most borrowers are paying down their debt with little risk to the overall economy. However, borrowers who attend low quality schools or fail to complete a degree face real challenges with repayment.
The UK’s Brexit referendum is providing us with the first significant test of the new regulatory system. This column asks whether banks have sufficient capital and liquidity to withstand the ‘shock’. Unless the global financial system as a whole is well capitalised, it remains only as strong as its weakest link. And while the UK authorities have done a reasonable job of strengthening their banks and financial system, a number of large European banks are seriously undercapitalised.
For over four decades, the EU has managed most international trade policy on behalf of the UK. After Brexit, the UK government will have to reconstitute trade links with EU, with third nations while disentangling the UK from the commitments that the EU made on its behalf in the WTO. This chapter suggests some strategies for the UK government to follow in reconstituting its trade policy. The watch words should be simplicity and cooperation. Maintaining the goodwill of trading partners will be a very high diplomatic priority.
Several models exist for the UK's relationship with the EU following Brexit. This column argues that from an economic perspective, joining the European Economic Area and retaining access to the Single Market is the best available option. However, given the importance the new UK government – and at least part of the UK public – attaches to imposing controls on immigration from the EU, this option may not be politically viable. The question the UK must address as it debates the aftermath of Brexit is whether the costs of the alternative are a price worth paying.
The Brexit vote has created particular uncertainty for London, the EU’s largest financial centre. This column looks at the issues facing the UK’s banking sector in the wake of the referendum: the right to conduct cross-border activity in the EU in future, the impact on flexible recruitment in London, the possibility of diverging UK and EU regulation, and the effect on bank profitability more widely across Europe.
On 23 June 2016, 52% of British voters decided the UK should leave the European Union, in a decision that went against the advice of most economists. This column assesses the quality of that advice, and argues that while gaps in knowledge may have hindered forecasts, Brexit can essentially be put down to three things: an unnecessary manifesto pledge by David Cameron, a lack of engagement by the City in the Remain campaign, and the pro-Brexit stance of some of the UK's major newspapers.
There are three trade policy challenges facing the UK outside the EU: it must negotiate a new relationship with the EU, disentangle itself from WTO Agreements it entered into as an EU member, and restore preferential trade with the many dozens of trade partners that are now covered by EU trade agreements. As difficult trade-offs are inevitable in all of these, politicians should decide how the preferences of UK citizens might best map onto these alternative arrangements. This column argues that the optimal solution is to combine future trade arrangements with domestic policies that compensate UK citizens who face the costs of trade agreements.
The UK's "Leave" vote could be seen as a vote against globalisation and its uneven impact on different parts of the country, rather than a vote specifically against the EU. The proportions voting for Leave were higher in the Midlands and North of England, where deindustrialisation struck hardest and where average incomes have stagnated. London, the UK's only truly global city, saw growth and a high share of Remain voters. This column argues that the new Conservative administration, swept in by the Brexit vote, should reinforce the very recent policy emphasis on economic growth outside global London and its hinterland.
Lacklustre growth seems to be the new normal almost everywhere in the world except for one area – CEO pay. This column uses data on UK publicly listed firms to examine whether weak governance leads to pay rises for CEOs that are not justified by performance. CEO pay asymmetry – pay responding more to increases in firm performance than to decreases – appears to occur mainly in firms with a low share of institutional owners able to exert external control. CEOs at such firms are also more likely to be paid for ‘luck’, with pay rises rewarding random positive shocks unrelated to performance.
Some economists are approaching a consensus that the Eurozone’s financial architecture is now resilient enough to withstand another shock similar to that of 2010-11. This column argues that such a view may be overly optimistic. Economic and financial instability persists in member states and the banking sector, and institutions to tackle a shock remain incomplete. While the Eurozone remains vulnerable to a bad shock, the blanket application of burden sharing without consideration of current economic and financial conditions is unwise.
Open competition is regarded as a crucial ‘preventative tool’ that limits government discretion and abuse of power when awarding procurement contracts. However, various studies have identified numerous drawbacks to using open auctions when contracting is imperfect. This column discusses the effects of increased buyer discretion on public procurement in Italy. Increased discretion raises the number of repeated wins by contractors, suggesting long-term relationships between buyers and sellers. Furthermore, productive buyer-seller relationships appear to outnumber corrupt ones.
Today, VoxEU.org introduces a new feature – “VoxAccounts” – which is the first step towards building a more interactive community of economists interested in research-based policy analysis and commentary. The aim is to allow Vox community members to customise their interactions with the site. You join by creating a VoxAccount. Creating a VoxAccount is free, and indeed all content on VoxEU.org will remain free of charge, but we will gradually introduce features that require readers to be logged in to their VoxAccounts.
Citizens of the UK voted to leave the EU, but voters in Scotland and Northern Ireland expressed a strong wish to remain. Taking a trade perspective, this chapter argues that resolving border issues will be central to finding a Brexit outcome that preserves the UK in its present form. Continued membership of the EEA – with Scotland either a part of the same country or a fellow, independent member – would be the best outcome for the UK.
To some, the Brexit referendum was a failure by economists to persuade UK voters that leaving the EU would entail major economic costs. This column argues for a more nuanced view by making two points. First, it questions whether there really is a consensus about the costs. While all the mainstream estimates were negative, they ranged from rather small to nearly 10% - a range that hardly sounds like a consensus. Moreover, the key mechanism - Brexit's impact on productivity growth - is not something economists really understand. Second, a rational voter could accept the cost as a tolerable price for having greater independence from EU decisions. Economics does not tell us that a voter who makes such a choice is ignorant, irrational, or economically illiterate.
Progress in adopting smoking bans across the US has been slow, despite a majority of Americans supporting a ban in public places. This column uses aggregate and establishment-level data from Texas to examine the economic effects of smoking bans on bars and restaurants. The results suggest that bars and restaurants are not adversely affected by the adoption of a ban.
The recession has left a legacy of non-performing loans on Italian banks’ balance sheets. Policymakers in Italy understand well the importance of correcting their banks’ problems to foster a healthy economic recovery. This column argues that reforming the judicial and extra judicial processes for recovering collateral offers the potential of improving banks’ balance sheets and enhancing financial stability, not only by increasing loan collections directly, but also by improving borrowers’ incentive to service their existing debt.
The outcome of the UK’s referendum on EU membership has prompted much soul-searching in the economics profession, which was nearly unanimous in anticipating negative economic consequences from a vote for Brexit. This column presents the July 2016 Centre for Macroeconomics survey of experts, which asked for views on the role played by economic arguments in the referendum outcome, and whether institutional change is needed in the way that the findings of academic economic research – and the views of the profession as a whole – are communicated. While opinions are divided, many of the respondents who do not advocate institutional change still see considerable problems in the relationship of the academic macroeconomic community with policymakers and the public at large.
Household income surveys underestimate income inequality because they fail to capture top incomes. A popular solution is to combine the household survey with data from income tax records, though for countries like Egypt these records are not available, leading to an underestimate of inequality. This column argues that data on house prices can instead be used to estimate the top tail of the income distribution. Using this method the Gini index for urban Egypt increases from a survey-based figure of 0.36, which suggests that it is one of the world’s most equal countries, to 0.47.
As the Irish economy is deeply integrated with the UK’s economy, Brexit poses especially severe challenges for Ireland. This column considers a future in which the legal basis for the UK’s economic relations with the EU, and hence with Ireland, is thrown into doubt. A UK withdrawal from the Single Market would raise questions relating to trade ‘re-diversion’, foreign direct investment, the Irish peace agreement, and assured access to British natural gas supplies.
The presence of multiple national authorities in the EU poses substantial coordination problems for the supervision of multinational banks. The Single Supervisory Mechanism aims to solve the resulting coordination failures. This column explores how banks could strategically react to the introduction of a supranational supervisor. The banking system is likely to endogenously react by reverting to an organisational form for which supranational supervision is actually less essential.
In theory, a poor country with a low saving rate but good growth prospects can build up its capital stock by running a large and sustained current account deficit. This column asks whether this is feasible and productive in practice. A substantial number of countries in recent decades have been able to run large current account deficits for as long as ten years, but such episodes typically do not end happily. Foreign finance does not appear to be the cure for countries with low domestic savings.
Experiments have revealed that humans often suffer from overconfidence in the accuracy of their information, or ‘miscalibration’. This column uses data from surveys of CFOs to assess their ability to make financial predictions. The results suggest not only that CFOs are miscalibrated, but also that firms with miscalibrated executives appear to be more aggressive in their corporate policies. In other words, the overconfidence of the executive shows up in the company’s policies.
The Latin American and Caribbean region is trapped in a vicious cycle of low savings and poor use of these savings. This column describes how this problem is reinforced by the current financial system, and prescribes three remedies to policymakers and households to break the cycle. The government should create a better environment for saving and develop a better financial system, but it should also tackle investment distortions and fix broken pension systems. Meanwhile, a change in saving culture should be encouraged from the ground up, with financial education offered to citizens early on in their lives.
Today’s labour market in the US has much in common with that of the late 19th and early 20th centuries. Then, as now, there were few government protections for workers, fears over cheap immigrant labour, rapid technological change, and increasing market concentration. This column explores the lessons that can be drawn from the earlier ‘Gilded Age’. The findings suggests that even as markets play a greater role in allocating labour, legal and political institutions will continue to shape bargaining power between firms and workers.
Positive assortative matching between college graduates has been well documented in marriage markets. Using European survey data, this column explores whether graduates form couples within their field of study. A third of married or cohabiting graduate couples both studied within the same field. These results are driven in part by assortative matching, and there are notable differences across fields of study as well as across countries.