Global Economics and Management

War and Relatedness

I am told that the economics commentator Noah Smith linked to a 2016 paper of mine on Twitter today. I am not on Twitter and likely will never be on Twitter, so I can't link to this thread. Yet the paper is quite relevant for the current situation between Russia and Ukraine, so I can't resist commenting on it here.

In "War and Relatedness", Enrico Spolaore and I argued that societies that are more closely related in terms of culture,  religion, ancestry, and language, are more likely to go to war with each other. This contrasts with a view that interstate wars feature a "clash of civilizations", a hypothesis articulated by political scientist Samuel Huntington in a 1996 book. This view implies that societies that differ in terms of religion, language, values, and common ancestry are more likely to fight. It is starkly at odds with the empirical evidence, which strongly supports the opposite view. Using a dataset of interstate conflict between 1816 and 2001, Enrico and I showed that a simple measure of relatedness between countries strongly predicts the likelihood of interstate conflict. This is a very robust relationship, which holds across the world, within Europe, and across the world after excluding Europe. It holds in different periods, and after controlling for an exhaustive list of geographic proximity measures. This is not about geography, but about human relatedness.

Why might there be a greater propensity to fight with culturally closer societies? Enrico and I articulated two mechanisms. First, closely related societies are likely to care about more similar resources. Many wars are over the control of good land or of natural resources such as oil. More similar societies are more likely to have preferences for the same rival goods, and to develop conflicts over goods or issues they both care about. Second, interstate wars are often about territorial disputes. When a country wishes to conquer territory from another, it cares about its ability to manage the new territory in the event of victory. It is easier to administer and integrate a more similar population after conquest, than a very different one.

The example of Russia and Ukraine (very closely related societies in terms of ancestry and culture) provides a very nice example of our theory. Moreover, Russia seems mostly interested in regions of Ukraine (Crimea, Donbas) where a strong presence of ethnic Russians will make post-conquest administration easier. In fact, in our 2016 paper, Enrico and I explicitly mentioned the case of Crimea:

"For instance, the recent conflict between Russia and Ukraine over Crimea and the Eastern region of Ukraine (not included in our sample, which stops in 2008) is consistent with our prediction that states with closely related populations are more likely to engage in conflict over control of rival goods and populations." (p. 937)

The thesis of this paper has held up quite well in light of recent events - if I may say so myself!

Niall Ferguson on Conflict and Asset Prices

Over at Bloomberg, Professor Ferguson warns us not to ignore the lessons of history when it comes to the possible conflict in Ukraine. Large-scale conflicts historically have led to higher interest rates and higher gold prices. The article draws useful parallels between the situation that we face now and the situation that prevailed both in 1815 at the end of Napoleon's run, and in the immediate period before the First World War. It is both a great lesson in history as well as a thought-provoking reflection on the current situation. Money quote: "As an investor, you may not be interested in war, but war is interested in you".

There will be important implications for investors from a Russian invasion of Ukraine. The heightened tension will lead investors to seek safe havens. This could have ambiguous effects on interest rates but my guess is that, in the context of tightening monetary policy and rampant inflation, we won't see the usual downward trend in Treasury yields that tends to accompany flights to safety. Sanctions against Russia are likely to be biting, especially when it comes to hydrocarbons, implying spikes in the prices of oil and gas. Stock markets have yet to fully price a full-fledged invasion, since there is residual uncertainty on whether one will take place - volatility is almost surely assured. How the Fed and ECB will handle this shock as they are about to raise rates to fight inflation will be very interesting to watch: in a context like this, releasing more liquidity is the usual reaction, but this may not be desirable with inflation where it is now. A combination of heightened geopolitical risk and rampant inflation looks a lot like the 1970s.

More Wisdom from Larry Summers

Larry Summers is again being the voice of reason in the context of a current economic policy discussion that is, to say things mildly, getting completely ridiculous. Here is Summers making strong statements against a gas tax holiday and against price controls as means to rein in inflation. His comments are spot on in both cases. Watch the short 3-minute video that accompanies the article.

Economics is a discipline. This means it should discipline people's thinking. Politicians can propose policies that poll well or sound good on TV, but economists have a duty to think of the broader ramifications and of the incentive effects that these policies will have. Tax holidays and price controls are not only going to be ineffective at curbing inflation - they will also backfire in ways that will hurt consumers, and won't help politicians. For example, price controls almost always result in shortages, and while people dislike inflation, they also dislike shortages. These ideas are both bad ideas and self-defeating ideas. Thankfully, Larry Summers still has enough of a platform to strongly push back against bad policy ideas.

The State of India's Reform

Over at Foreign Affairs, Arvind Subramanian and Josh Felman take us through India's tortuous history of reforms. It is a far-ranging piece that give a bird's eye view of India's reforms. The article points to the last decade as a lost decade, and identifies several factors that could lead Indians to turn against market-oriented reforms. One is the protectionist stance that the Modi government has recently adopted (import tariffs are rising steeply in India), and another is the state's explicit support of two big industrial conglomerates (the 2As - Ambani' Reliance Industry and Adani's Adani Group). 

India's growth rate since 1991 has closely tracked the intensity of the reforms pursued by its government. There are still many areas for improvements - labor markets, agricultural markets, retail, and many aspects of foreign trade and investment policies are all ripe for some reforms. Many of these initiatives are stalled, slowing down India's progress toward modernity. Despite this, the progress is real, as the natural momentum of this dynamic country supports relatively high average growth rates. As my friend Gurcharan Das is fond of saying "India grows at night" (he even wrote a book with that title!). Some transformations are organic, and happen in spite of the government rather than because of it. This causes me to be overall very optimistic about the Indian economy over the medium run.

Guest Blogging: Our Own Misha Galashin on Russia and Integration

Misha reacts to my earlier post on Russia's attitude toward the West, in very thoughtful ways - so, with his permission, I am sharing his email with the class:

"Your post raises a good question and of course one very important to me. I haven't studied it rigorously myself, but I'd share a few materials with you and throw in a few more explanations to your list: cultural anti-Americanism, Soviet nostalgia, autocratic media policies.

Of course, most Russians are culturally Western and European. However, the ~40 years of antagonism, high power soviet propaganda, and closure created a persistent anti-American and anti-Western sentiment (for example here is wiki article with polls). Sergei Guriev points out that there was an opportunity to mend it by helping Russia during the crises of the 1990s, but the end of the Cold War was not handled well. All this means that "standing up to the US" sells even better In Russia then "being tough on China" does in the US.

Similarly, the 1990s left many people very nostalgic of the Soviet past due to economic decline and the sharp increase in inequality — think the Rust belt magnified by orders of magnitude. I am pretty sure one could instrument economic decline by Soviet industry composition and get effects on Communist party support and later Putinism similar to what Autor, Dorn and Hanson find for Trumpism (which ties the issue to past course materials). The demand for returning to the USSR has obvious consequences for relationships with the US as well as Ukraine and Belarus.

As for autocracy, there are a bunch of mechanisms. Sergei Guriev and Daniel Treisman call regimes such as Putin's "informational autocracies": they survive by using the control of the media and information flows (they have a new general-audience book about that coming out in a month). I guess one could make a theoretical argument that if you control the media, you would take riskier projects (wars, annexations), since you can show only the good stuff and censor the bad. Then, you also try to prevent democratic neighbor "role models". There was a paper on that a few years ago and, for example, anecdotally some anti-Putin politicians would not mention the success story of Georgia's war on corruption since mentioning Georgia positively was toxic after 2008. Of course, Ukraine is similar to Georgia in this way. Finally, wars create a blanket rationale for prosecuting dissent and creates a "rally to the flag" effect. Putin's ratings skyrocketed after the Crimean affair and the anti-opposition rhetoric has become way more combative."

The Strategic Situation in Ukraine

A great article in the Wall Street Journal describes the military situation on the ground in Ukraine. The maps are particularly telling. The bottom line is that Russia has an overwhelming military advantage, as it surrounds Ukraine on three sides with massive superiority in terms of numbers and equipment. As the article describes, the issue is not whether Russia can take Ukraine, but whether, once taken, it can bear the cost of a lengthy occupation in the face of continued resistance. Another issue is whether Russia is willing to bear the cost of the massive sanctions that will come its way if it invades Ukraine.

Some point out that the likely increase in the price of hydrocarbons in the event of an invasion could benefit rather than hurt Russia, so that the sanctions may be ineffective. I am not so sure. It depends on whether Russia can find alternative destinations for its production, because the price increase will come from Russia being shut out from some very lucrative markets (a contraction in  the aggregate supply of oil). One obvious destination would be China, but Russian oil is already the leading source of China's imports, ahead of Saudi Arabia and Angola, so it is not clear that China will want to depend even more on Russian oil. Well-designed sanctions could cripple Russia's already fragile economy, but Putin may not see that as a major drawback. Tough times that can be blamed on foreign actions have a way of strengthening populist and autocratic leaders.

And by the way, the US really thinks an invasion is imminent. Here is a report that the US embassy in Kiev is being shut down. On the other hand, here is a more optimistic take. I suppose one should prepare for the worst and hope for the best. At any rate, what a week to be discussing this case in class!

Russia and Integration

As I prepare for our discussion of the Russia-Ukraine situation in class on Monday, I am struck with the ups and downs of Russia's relationship with the West. Russia fought with the Allies in WWI, then Stalin made a pact with Hitler which Hitler broke in 1941, so the Soviet Union fought the remainder of WWII alongside the Allies. Afterward, the Iron Curtain fell on Europe and the Cold War with the West ensued. Even during the Cold War, there were periods of détente, most notably between 1969 and 1974. After the collapse of the Soviet Union, there was a period of greater engagement with the West under Boris Yeltsin. But this gradually disintegrated under the rule of Vladimir Putin. The relationship moved from active engagement to relative ambiguity and in more recent years to outright antagonism. Russia's aggressive stance against Ukraine represents the latest episode in this gradual deterioration of relations between Russia and the West. To me, this is a sort of mystery.

What explains the antagonism between the West and Russia? Wouldn't both sides, and especially Russia, be better off interacting and cooperating? There are no massive cultural or geographic barriers that explain the cleavage. There is a long history of conflict, but there is also a long history of conflict with Germany and that country is, so far, firmly part of the Western Alliance. Moreover, Russia's historical allies (France) are among the most aggressive in trying to contain its ambitions, and its historical enemies (Germany) are not. I don't understand what Russia fears about the expansion of NATO. Why doesn't Russia aspire itself to be a part of NATO? Or of the European Union, for that matter? Differences in political regime types have something to do with the answer, as does a long tradition of nationalism. Perhaps things would have played out very differently if Russia had remained a democracy instead of gradually sliding into autocracy - or if someone besides Putin had been at the helm. Perhaps Russia's ancestral and remarkable culture, its large landmass and its sizeable population (144 million) give it a sense of special purpose. 

It is in this broad context that I invite you to read this excellent WSJ article by Greg Ip (always an astute observer of international affairs). The article quotes my dear friends Sergei Guriev and Ruben Enikolopov on some of the issues above. Russia was much better off in the era of its integration with the West. Perhaps things will get worse before they get better, but I for one look forward to the day when this great country - the country of Pushkin, Tolstoy, Tchaikovsky and Prokofiev - rejoins the concert of nations.

My Talk on the Fertility Transition

Yesterday, I had the privilege to give a talk to UCLA retirees and emeriti professors about my ongoing research program on the historical fertility transition. I drew links to contemporary issues surrounding lower fertility and ageing in many countries around the world, themes that we will discuss in Module 9 of Global Trends.

Protests in Ottawa

One does not usually associate Canada with raucous street protests yet this is what we are witnessing in Ottawa, with truckers and their supporters blocking the capital city and loudly protesting vaccine mandates and other COVID-related policies. The Wall Street Journal has good coverage.

Popular protests are not new and have been ubiquitous in numerous countries for decades if not centuries. What is newer however is the populist flavor of the wave of protests that seems to have hit the Western world in the last few years. In 2020, with some Anderson colleagues, we had a public discussion on this wave of protests. You can watch it here. The specifics of various protests differ - what people are protesting about, whether they are mostly left-winged or right-winged, etc. One common thread is a strong popular expression of discontent with ruling elites. 

The Ottawa protests strike me as closest in nature to the Yellow Vest protests that started in France in 2018 and are ongoing. It would be easy to dismiss these protests as manifestations of a small fringe of disgruntled people, but I think that would be a mistake. In concurrence with the tide of populist sentiments sweeping the world, I would be inclined to see them more as a manifestation of an incipient popular uprising against the elites. This uprising is not about the ostensible reasons for the protests (high gasoline prices in France, COVID restrictions in Canada), but rather more generally about "sticking it to the ruling class". In that sense, they reflect all the popular frustrations that we have discussed in Module 3 of the class - resentment over the decline of working class jobs, growing inequality, cultural grievances associated with modernity, etc.

How should governments respond to these protests? Again, dismissing them, sending the army to disband the protests (as is suggested in Canada), stigmatizing the protesters as extremists, etc., runs the risk of backfiring. The ruling elites should instead understand that, however repugnant some of the symbols and tactics used by the protesters, their actions are the reflection of broader, deep-seated discontent. Addressing the roots of this discontent with long run policies and attitudes that address the problem of inequality and lack of opportunity is a much better response than dismissing their concerns and forcibly curtailing their actions. Easier said than done, I know.

Update (2/9/2022): Politico reports on the possible contagion of this movement to the US. The Hill adds more on this issue and on how it could impact US politics.

Good News on US Inequality Trends?

The World Inequality Database (WID), the brainchild of Thomas Piketty, contains a wealth of data on inequality around the world. Piketty and his team of researchers have made extensive use of this database to document a pretty general trend toward greater inequality in many countries around the world over the last 40 years or so. Specifics differ, and some countries like France have escaped the trend to some degree. But one salient feature of the data is that English-speaking countries, chief among them the US, have experienced pronounced increases in income inequality since 1980.

New updates to that database suggest the trend has been interrupted since 2015, and may even have started to reverse itself. The graph below, from WID, illustrates this for the US (you can look at the UK also, which displays a similar trend). The share of income going to the top 1% has stopped growing, while the share of income going to the bottom 50% has stopped declining (these data are for pre-tax income but the same picture emerges for post-tax income). One possible reason has been the tightness of labor markets which (with a short interruption in the early months of the pandemic) may have given workers more bargaining power. We may be seeing one effect of the ageing of the population, which is a structural factor making the demand for labor (including unskilled labor) so resilient. During the pandemic, income support from massive government spending may have staved off increases in inequality that might have otherwise occurred.

I still think that the underlying force of skill-biased technological change will tend to lead to more inequality over the long run. But recent developments suggest that a dwindling working-age population and the continued need for unskilled workers in many parts of the service economy could help mitigate this factor.