Global Economics and Management

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.

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.

China's Falling Birth Rate

Some of the trends we study in class are very much at the forefront of public discourse: the rise of populism, the increase in inequality, the emergence of new technologies. Some trends, however, are more hidden. Nonetheless, they are often no less important than the visible ones. The example of China's falling birth rates is a case in point. Indeed, the situation with birth rates in China is a huge source of concern for the future of that country. As we will study in more detail in Module 9, the rapid ageing of the Chinese population and the eventual decline of its working-age population will put a lid on long-run growth there. A recent article over at Bloomberg contains details and numbers. This chart says it all:

The situation is so dire that population growth in China in 2021 was basically zero.

Why did this happen? Here is my quick take. Explosive birth rates in China following the Second World War led to the imposition of the One-Child Policy in 1980. The policy was enforced very stringently, and so, with a small lag, it led to a dramatic decline in births as seen in the chart above. In 2015 the policy was relaxed, but that did not lead to more births. On the contrary, the downward trend continued. It did so in part for cultural reasons: the one-child policy had lasting effects on family's fertility norms. The socially acceptable norm became to have fewer children. This was likely the result of social contagion and imitation. Growing levels of per capita income and education in China also contributed: birth rates tend to fall across the board when countries rise up in the income and education ladder. Then the COVID pandemic did not help: China is not the only example of plummeting birth rates as a result of the pandemic.

We will have a chance to discuss this issue in much more detail later in the class, of course. There are many interesting nuances that I am sure you will be eager to discuss. For instance, might these falling birth rates help the environment? To every coin there are two sides!

Automation, Robotization, and Labor

I came across two items of note on the topic of automation, which will occupy a good portion of Part II of Global Trends, devoted to the rise of new technologies.

The first is a Forbes article by my fellow economist Effi Benmelech, from Kellogg. In this article Professor Benmelech takes a contrarian view on the rise of robots, arguing that expenditures on robots make up a tiny fraction of overall investment, and that these expenditures tend to be confined to the manufacturing sector (itself a modest share of GDP and overall employment). This leads him to conclude that the disruptive effects of automation might not be as severe as is often anticipated (displacement of labor, rising income inequality). However, as he recognizes at the end of the article, robotization is not the only manifestation of automation. And the other manifestations of automation (AI, cloud computing, etc.) may indeed have disruptive effects, replacing workers and leading to more inequality. Broadly speaking, I agree that robotization is unlikely to be the major issue. Automation more broadly, however, has the potential to really affect productivity (positively) and employment (negatively, at least for low-skilled labor). (For a full-blown academic study of this issue, I direct you to this link, where the ideas in the Forbes article are much more fleshed-out).

The second is an intriguing article from the Wall Street Journal on the growing use of automation and AI for job applicant screening and recruitment activities. Such technologies, in my view, have the potential to greatly improve the allocation of workers to jobs, resulting in efficiency gains. What gets programmed in the algorithms, however, raises very deep and interesting ethical questions, and it it not obvious that the resulting matching process will result in more equity and inclusion (a WSJ article from September 2021 goes into these issues in more detail). To be pondered...

The Return of Industrial Policy?

Over at the Wall Street Journal, Greg Ip has written a fantastic article analyzing the return of industrial policy in many Western countries. Prompted by the economic success of China, governments are increasingly directing resources to favored industries. The WSJ article does a great job at outlining the costs and benefits of such an industrial policy.

My general view is that these efforts rarely deliver the promised results. The success of China is not primarily due to industrial policy but to the set of market-opening policies that China put in place starting in the 1980s. In fact, a good argument could be made that China's efforts to direct resources to certain industries or activities has resulted in huge amounts of waste. The reason is that, as Greg Ip outlines, industrial policy allocates resources on the basis of politicians' perceived "strategic priorities" rather than on the basis of market signals. And politicians are not very good at picking the next big thing. Instead, they subsidize certain industries largely out of political expediency - things like "how many jobs will I get in my district". This can be a recipe for short-run electoral success, but it is rarely a recipe for long-run economic growth.

With that on the table, and with a presumption that many of you will disagree with the preceding paragraph, I am sure we can have a healthy debate in the comments section!

The Coming Structural Disruption from Electric Cars

A very large number of people are employed in the automotive sector in the US. The Center for Automotive Research, an industry group with an apt acronym, says there are 1.7 million jobs in the sector, "engaged in designing, engineering, manufacturing, and supplying parts and components to assemble, sell and service new motor vehicles". Statista says there are about 900,000 people employed in auto manufacturing. The BLS, from which these numbers probably originate, is the most authoritative source, and its numbers are here.  Whatever the correct number, lots of jobs are at stake.

The coming transition from the internal combustion engine to the electric engine will disrupt employment in this industry. With government mandates to phase out traditional cars, these changes could be quite rapid. True, people are likely to still demand roughly the same number of cars, at least in the medium run. And these cars will need to be produced, sold and serviced. But the type of worker engaged in producing, selling and servicing electric cars are likely to be quite different from those that currently engage in these tasks for internal combustion cars. A wide range of parts, like carburetors and tailpipes, will no longer be needed. Instead, we will need more workers making batteries, and more software engineers. Moreover, gas stations, and the fleet of trucks that supply them with gasoline, will see demand decline. They will be replaced with electric charging stations, but will these involve the same number and mix of jobs? Servicing electric cars is also much simpler than servicing traditional cars - gone will be the days of the oil change and the smog check.

This is a bit like the debate over free trade. Of course it will be much better to transition to electric cars, for a wide range of reasons, starting with the effect on climate change. Free trade too yielded benefits to the average person, in the form of lower prices of imported goods and greater supply chain efficiencies. But, in the same way that we underestimated the effects of free trade on those who lost their jobs in declining sectors, we run the risk of forgetting those who will bear the costs of this transformation. We should not. Otherwise, the same causes will produce the same effects: discontent among the cost-bearers, manifested at the ballot box.

This is my somewhat long-winded introduction to a very important article in the Wall Street Journal today. The article describes, with many vivid examples, the changes that are coming to the auto industry. Recommended.

Trends in Fertility in the US

In module 9, we will study financial imbalances and aging as sources of risk for the world economy. The problem of aging populations is primarily an issue in rich industrial democracies, though it also affects China, due to reasons specific to that country's past policies (the one-child policy). This has caused policymakers to start thinking about ways to encourage families to have more children. France, for instance, has had a long-running policy of providing financial allocations to families with kids. The grants increase with the number of children that a family supports. France does have a birth rate that is higher than some other European countries like Italy or Spain, though the jury is still out as to whether the allocation system plays a major role in these differences. Personally, I think social norms are much more important than financial incentives. Nonetheless, the debate now rages in the US, and it seems like a bipartisan consensus is forming over the issue of child tax credits. This WSJ article has further details.

The Racial Gap in Socioeconomic Mobility

In Module 6 of the class we will deal with trends in local and global inequality. A recent research paper authored by scholars at both Brookings and the AEI highlights the racial gap in income mobility across generations in the United States. This Bloomberg article summarizes the results: the probability that a White person is in the bottom fifth of the income distribution and that their grandparents were as well is only 1%. For a Black person, it is 15%. In other words, poverty is much more persistent among African Americans than among Whites. I was particularly struck by this graph:

There is a lot of work to be done to address the current legacy of past injustice.

My Talk at the EGROW Foundation

On Friday morning, in the early hours of the day (due to the time difference), I was privileged to present my new paper on the global allocation of capital at the EGROW Foundation, located in Noida, near New Delhi. EGROW is one of India's up and coming policy think tanks, founded by my colleague and friend Charan Singh (a former Visiting Professor at UCLA Anderson). I had a great time talking about how developing countries can gain greatly by reducing barriers to flows of capital. Here is the talk, for those who are interested!

What Caught my Attention this Weekend?

1) The WSJ featured an article on how the COVID crisis is accelerating the decline of cash as a method of payment. It is worth clicking on the links embedded in the story. It is closely related to what we discussed last Thursday, and also very much in line with a general theme we will repeatedly see in Global Trends: the COVID crisis is most likely to accelerate trends that were already in motion before its occurrence, rather than to represent a reversal. This is the case for income inequality, social strife, political polarization, the retreat from globalization, the mounting tension with China, the trend toward automation, the generalization of easy money policies, and the decline of cash...

2) Also in the WSJ, Greg Ip opines on the role of easy money in fueling, at once, record stock valuations and mounting government debt. Both worry me greatly - more than they seem to worry other economists. That is especially the case for mounting government deficits and debt, as we will discuss in Module 9. If the massive injections of liquidity that we have witnessed ever lead to inflationary pressures, the FED may have to start raising rates. A huge stock of public debt could make this very expensive for the government. The very demand for loanable funds that emanates from the public sector may in itself put upward pressure on rates, ultimately. Remember - interest rates have nowhere to go but up. I expressed these concerns last August. My concerns have not eased since, though the scenario I described could be quite removed from us in time. 

UPDATE: People from both sides of the political spectrum seem to be voicing the same concerns as I have on the possible inflationary effects of current US macroeconomic policies: Michael Bordo and Mickey Levy do so over on the Wall Street Journal opinion page, while Larry Summers expresses similar worries in the pages of the Washington Post.