Category Archives: General

Professor Miguel Leon-Ledesma

Miguel appointed Fellow of CEPR

Congratulations to Professor Miguel León-Ledesma on his appointment as Fellow of the Centre for Economic Policy Research (CEPR). The prestigious CEPR is a research network of economists established in 1983 to enhance economic policy making in Europe. Based in London, CEPR’s network of Research Fellows and Affiliates includes over 1,000 of the top economists in the world conducting research on issues affecting the European economy. Miguel has been appointed Fellow of the Macroeconomics and Growth programme area.

University of Kent campus

Still chance to apply for new degree-level apprenticeship in economics

The deadline for applications to the UK’s first degree-level apprenticeship in economics, provided by the University’s School of Economics, is 20 January.

The partnership between the University and the Government Economic Service (GES) will see Kent’s School of Economics deliver the apprenticeship in conjunction with its Centre for Higher and Degree Apprenticeships.

The Government Economic Service Degree Level Apprenticeship programme will create new routes to careers in the Civil Service for young people who would prefer to study for a degree whilst working at the heart of government.

The apprenticeship standard on which the programme is based was developed by a group of economist employers. These included HM Treasury and the Bank of England as well as a range of consultancies and third sector organisations.

A range of central government departments and agencies will provide placements through the new programme, including: HM TreasuryDepartment for Work and PensionsDepartment for Education and the Department for Environment, Food & Rural Affairs.

The apprenticeship is available in locations across the UK: Manchester, Bristol, Leeds, Sheffield, Newcastle, London and York. Apprentices will receive a starting salary of about £22k in London and in excess of £20k nationally.

The apprenticeship is fully funded therefore there are no tuition fees, and apprentices are guaranteed that 20% of work time will be spent on university-based education, which will be closely related to the job.

The programme is open to candidates with GCSE maths at grade B (6) or above and 96 UCAS points – equivalent to CCC at A-level, MMM for a BTEC Diploma, DD for a BTEC Certificate.

There are no age limitations, and enthusiastic applicants with other relevant qualifications or previous experience are welcomed. Once the apprenticeship has been successfully completed, apprentices will have four years work experience, an economics degree and the offer of a permanent job in the Government Economic Service.

Original article by Martin Herrema, University of Kent News Centre

Professor Iain Fraser

De-linking final Basic Payments from farming: hardly ‘public money for public goods’

An interesting piece by Professor Iain Fraser in the Food Research Collaboration blog Food Voices on 12 December 2018 on ‘De-linking final Basic Payments from Farming’:

‘In September 2018 the Government published a new Agriculture Bill. It marks a profound change in the design, delivery and rationale of agricultural policy in the UK. It is proposed that farming can only expect to obtain public financial support for the production of public goods, such as the provision of biodiversity, improving soil management and quality, and planting of trees. There is a great deal of emphasis on the environment and the delivery of the promises that have recently been made in the 25 Year Environment Plan. As a result, the most striking aspect of the Bill is the minimal amount of actual agriculture policy in any traditional sense.

What this means for agricultural and rural policy in the UK is that the support payments currently made to farmers under Pillar I of the Common Agricultural Policy (CAP) in the form of the Basic Payment Scheme (BPS) will be removed. These payments are substantial – significantly greater than £200 per hectare in 2017. Although these payments are “decoupled” from historical levels of agricultural production it is difficult to defend them as anything other than a subsidy to farming.’ …

…Read the complete article here.

Keynes College

The Effects of Risk and Ambiguity Aversion on Technology Adoption: Evidence from Aquaculture in Ghana

by Dr Christian Crentsil, Dr Adelina Gschwandtner and Dr Zaki Wahhaj, University of Kent. Discussion paper KDPE 1814, December 2018.

Non-technical summary:

Small-scale farmers in developing countries frequently make production decisions in a situation of uncertainty because of the prospect of weather-related shocks, crop failure, price fluctuations, etc. They are often compelled to make choices that reduce consumption risk at the cost of future expected profits. The adoption of productivity-enhancing technologies is a domain where these trade-offs can become particularly important. New technologies may be inherently more risky, or require additional investments that increase the risk exposure of farmers.

In this paper, we study how aversion to risk and ambiguity affects the adoption of new technologies by smallholder aquafarmers in Ghana where, over the years, the government and other development agencies have introduced improved technologies to enhance productivity and profitability in fish production.

In the present study we consider the adoption of three distinct technologies: (i) Akosombo strain of Tilapia (AST), a fast-growing breed of tilapia fish that offers farmers the potential to harvest twice a year compared to once only for the existing local breed; and the use of (ii) floating cages; and (iii) extruded feed for the fish under cultivation.

Our results show that, for all three technologies, risk aversion accelerates their adoption. This is in contrast with most of the literature which finds that risk aversion delays the adoption of new technologies. We explain this result by arguing that all three technologies under consideration are risk reducing. On the other hand, we find differential effects of ambiguity aversion on the adoption of the three technologies: ambiguity aversion among farmers slows down the adoption of floating cages but has no effect on the rate of adoption of the two other technologies. We attribute this finding to the significantly higher cost of adopting floating cages, which prevents farmers from small-scale experimentation with the technology. Additionally, we find that the presence of other adopters in the locality attenuates the negative effect of ambiguity aversion on the adoption of floating cages.

The results suggest that the implementation of these technologies might provide fish farmers in Ghana with limited access to credit and insurance a means to negotiate an uncertain environment. Moreover, providing practical information about new agricultural technologies with the help of extension agents and existing farmers in neighbouring villages may mitigate the effects of ambiguity and ambiguity aversion on technology adoption. Our findings also suggest that informing farmers about technologies that mitigate the effects of adverse shocks may accelerate the adoption of new agricultural technologies.

You can download the complete paper here.

Dr Katsuyuki Shibayama

A Simple Model of Growth Slowdown

by Dr Katsuyuki Shibayama, University of Kent. Discussion paper KDPE 1813, October 2018.

Non-technical summary:

After the Great Recession around 2007-8, the U.K. has experienced the slowdown of the labour productivity; known as ’productivity puzzle’. Although it is widely recognized as the stagnation of the labour productivity, not surprisingly, it coincides with the flattening of the total factor productivity (TFP). Japan also has experienced a similar but much longer and deeper phenomenon after the bubble burst at the beginning of 1990s. Interestingly, both countries have experienced the growth slowdown after some financial turmoil. This paper aims to explain these growth slowdowns quantitatively in a reasonably realistic economic growth model.

A growth slowdown is a long-lasting, significant decline of growth rate. It is not specific to high-income countries. The economic model developed in this paper also encompasses the “middle income trap”; typical examples include Latin American countries. The standard economic growth theory tells us that low-income countries should grow faster because they tend to accumulate production capital at a faster rate (Solow effect). Actually, many countries has successfully escaped from low income levels, but, out of 101 middle income countries in 1960, only 13 of them is classified as high income countries in 2008; see Larson, Loayza and Woolcock (2016, World Bank).

Extending Romer’s (1990) seminal paper, our model has an additional state variable, which we call the R&D environment, to capture social culture (scientists ’attitudes toward business, etc.), legal system (including patent laws and property rights), R&D infrastructure (such as innovators’ networks and education systems), and so on. We can regard the R&D environment as an intangible social capital, which has the following two properties; (a) society accumulates the R&D environment as an (intangible) asset by conducting R&D; and (b) the R&D activities are more productive when the R&D environment takes a higher value. For (a), an important assumption is such an accumulation of social asset is a positive externality of the R&D activities; i.e., the researchers do not intend to improve the R&D environment, when they engage in R&D. For (b), we want to capture, for example, higher education institutions are better prepared for the commercialization of academic findings when business innovations and inventions are more active.

In our model, there are two stable balanced growth paths (BGPs, long-run equilibria); one with positive R&D activities and the other without them. This is intuitively because of vicious and virtuous cycles. Around the BGP with no R&D, there is a vicious cycle; once R&D becomes inactive, it deteriorates the R&D environment, which itself discourages the R&D activities. Similarly, there is a virtuous cycle in the good BGP.

If there are no shocks (or only small shocks) in the model, then the fate of an economy depends on its initial condition. In our model, depending on the initial state, its final destiny – good BGP or bad BGP – is predetermined. Note importantly that in our model, even an economy moves toward the bad BGP, still it grows at a faster rate in early periods through the capital accumulation (Solow effect); it fails to switch from the capital accumulation as a growth engine to the R&D driven growth. We argue that countries that successfully transited from the middle-income level have had a R&D environment good enough to attain this transition; such as Japan and West Germany after the WWII. This is the explanation of the middle-income trap in our model.

If there are some shocks in the model, even if they are temporary, still they can have long-run effects. We assume that after a successful innovation, innovators can set up a firm, meaning that the firm value is the reward to innovations. Like Comin and Gertler (2003, AER), because the firm value is the present value of the current and future profits, R&D is more active in booms. Unlike Comin and Gertler’s ’medium cycle’ effects, however, business cycle fluctuations can have very persistent effects in our model; this is because a shock may push out an economy from one BGP to the other. For example, if an economy experiences a bad external shock, output, firm profit and firm value decline, which in turn discourages innovations. If such a bad shock is large enough and lasts long enough, the dormant R&D activities during the recession may deteriorate significantly, which hampers R&D even after the end of the negative external shock. In our model, this is the mechanism behind the growth slowdown in Japan and the U.K.

There are several policy implications. First, to help escape from the middle-income trap and the long-lasting growth slowdown, we need a ’big push’. For example, a large scale ODA as a positive external shock may be required. Second, however, the type of ODA matters. In our model, improving production efficiency and increasing final goods demand do not help escape from the low BGP, because there are two effects that offset each other. On the one hand, these shocks increase the firm profit and firm value, which stimulates the R&D activities. However, on the other hand, the production sector and the R&D sector compete each other in the factor market (labour market in our model). Hence, in our model, if the production efficiency improves, the production sector absorbs more labour, squeezing out the R&D sector from the labour market. There is anecdotal evidence of type of phenomenon; e.g., Wall Street and City have taken many scientists from universities and other research institutes such as NASA. In addition, this story is in parallel with the leading exposition about the natural resource curse; if the extraction of natural resources are very profitable, the natural resource sectors absorb too much production factors such as labour, squeezing out high productivity growth sectors such as manufacturing. Hence, if they only improves production efficiency, building bridges, roads and power plants, for example, has little effect in total. Third, our numerical experiments suggest that the financial sector efficiency has a strong effect. If the financial market is malfunctioning, the firm value may be discounted unduly. In our model, because the firm value is the reward to successful R&D, such a mispricing of the firm value discourages the R&D efforts. This is reminiscent of the fact that the U.K. and Japan have experienced the growth slowdown after the financial market turmoil.

In conclusion, this paper asserts that a sort of intangible social assets such as culture, legal system, etc. are important for R&D. Our model has multiple BGPs. Even though an economy has experienced a rapid growth via capital accumulation (Solow effect), it may fail to switch to the R&D driven growth (middle-income trap). In addition, even though a country successfully achieved a high-income level, it could slip down from the good BGP, particularly if it suffers from deep and long financial turmoil (like Japan and the U.K.). To regain the sustainable R&D environment, the model suggests the following policy prescriptions; (i) policy measures that directly affect the R&D productivity such as the subsidy to higher education and R&D tax credit and (ii) policies to improve the efficiency in the financial market.

You can download the complete paper here.

Prof Denise Osborn leads talk on Women in Economics

On Tuesday 13 November, we had the pleasure of welcoming Professor Denise Osborn to the School of Economics. Both Secretary General for the Royal Economics Society and Emeritus Professor at the University of Manchester, Denise delivered an inspirational talk on the role of women in Economics, focusing on research and her own personal experience.

Looking back on her career, she examined the perception of women in the field of Economics over time, comparing and contrasting the start of her career in 70s, where she was very much a minority, to now where more and more women are joining the field. Denise compared the gender distribution of researchers within Economics and looked into why Economics is still one of the lowest STEM subjects for its percentage of women. Denise concluded her talk by looking at the actions that are being taken to challenge gender norms and encourage more women to consider a career in Economics. The session finished with a lively Q&A session with the audience.

Measured Productivity with Endogenous Markups and Economic Profits

by Dr Anthony Savagar, University of Kent. Discussion paper KDPE 1812, October 2018.

Non-technical summary:

A standard way to measure productivity is to take output growth and subtract input growth. Typically input growth is growth in capital and growth in labor weighted by their share in production. Whatever remains after subtracting is known as total factor productivity (TFP).

Under specific circumstances, this productivity measure also reflects underlying technology growth. This is important for economists because they struggle to measure underlying technology at an aggregate level, but it is a key variable to understand the behaviour of the economy.

However when we diverge from some basic assumptions, such as perfect competition, the TFP measure no longer reflects underlying technology. Therefore using our TFP measure to represent technology could lead to incorrect conclusions.

In this paper I show that when we recognize the slow adjustment of firms to arbitrage profits and the effect that slowly entering firms have on competition, the relationship between our measure of TFP and technology becomes much more complex. In fact, when we observe changing TFP, it will compose changing technology, changing profits and changing markups. This decomposition allows us to understand how we can get a true measure of underlying technology from our calculated TFP measure. It emphasizes that the composition of profits and markups vary in importance as firm entry takes place.

You can download the complete paper here.

Jan-Philipp Dueber

Endogenous Time-Varying Volatility and Emerging Market Business Cycles

by Jan-Philipp Dueber, University of Kent. Discussion paper KDPE 1811, August 2018.

Non-technical summary:

Time-varying volatility plays a crucial role in understanding business cycles in emerging market economies. There is now plentiful empirical evidence that volatility as measured by the standard deviation in macroeconomic data is time-varying and strongly countercyclical. Volatility increases during an economic recession and becomes lower during an economic boom.

In addition, we observe that standard open-economy macroeconomic models widely used for business cycle analysis fail to address the specific characteristics of many emerging market economies. In emerging market economies the net export to output ratio is typically negatively correlated with output i.e. it is countercyclical. However, standard models predict a near perfect positive correlation between the two. Besides that, emerging market economies show a higher fluctuation in consumption data than in data on output. Standard models, however, predict a higher fluctuation in output than consumption. These models are therefore overemphasizing the role of consumption smoothing.

This work is motivated by the above empirical observations. We augment a standard small-open economy model and introduce time-varying volatility to the interest rate and total factor productivity. In our model the interest rate and total factor productivity automatically turn more volatile when the economy becomes more indebted or when output declines in response to a negative total factor productivity shock. Once we introduce time-varying volatility into a standard open-economy model, the model becomes able to significantly better match emerging market economy data. After the introduction of a time-varying interest rate and total factor productivity we are able to present a model where net exports are strongly negatively correlated with output and consumption shows a higher variation than output as observed in the data. By choosing different parameter values for the time-varying volatility the model is able to characterize both, emerging market and developed economies, or an economy that is in transition to a developed economy.

Although we are not the first to address the problems of macroeconomic models for emerging market economies, our approach is especially simple and does not rely on shocks to the permanent component of total factor productivity or to shocks in the level of the interest rate. Compared to other research in this area our approach only requires one source of external variation, the widely used shock to total factor productivity. From a policy point of view our model can be especially useful for economists and policy makers in emerging market economies as our model now better fits the economic cycle in those countries.

You can download the complete paper here.

School holds workshop on Networks in Economics

On Friday 12 October 2018, The School of Economics hosted the second Kent Workshop on Networks in Economics. Organised by Nizar Allouch and Bansi Malde, it featured leading researchers from across the UK and Europe, including Francis Bloch (Paris School of Economics), Christian Ghiglino (Essex), Mich Tvede (UEA), Pau Milan (UAB, MOVE and Barcelona GSE), Anja Prummer (Queen Mary) and Luis Candelaria (Warwick). The workshop program can be found here.

Keynes College

Marriage, Work and Migration: The Role of Infrastructure Development and Gender Norms

by Amrit Amirapu, University of Kent; M Niaz Asadullah, University of Malaya; and Zaki Wahhaj, University of Kent. Discussion paper KDPE 1810, September 2018.

Non-technical summary:

Large-scale rural-urban migration and a concurrent shift in employment from agriculture to manufacturing are two common features of countries in the process of economic development. Most of the past theoretical and empirical work in this area has focussed exclusively on understanding the migration and work patterns of men, so that relatively little is known about the potential for and drivers of female migration in developing economies. In traditional societies, prevailing gender norms can restrict female work participation and independent (i.e. without a family) migration, which suggests that women may be more limited than men in their ability to take advantage of economic opportunities in urban non-agricultural industries. On the other hand, it is well-documented that marriage is an important vehicle for female long-distance migration in traditional patriarchal societies, which suggests that the marriage market can provide – and itself be shaped by – growing economic opportunities for women in urban areas.

In this paper, we explore these issues in two steps. First, we construct a model in which women make marriage and migration decisions jointly – and under the constraints imposed by social norms. Then, we test the hypotheses of the model using the event of the construction of a major bridge in Bangladesh – which dramatically reduced travel time between the economically deprived northwestern region and the industrial belt located around the capital city Dhaka – as a source of plausibly exogenous variation in migration costs. Using this natural experiment along with data from a purposefully designed nationally representative survey of women covering 20 age cohorts (the 2014 Women’s Life Choices and Attitudes Survey or WiLCAS) we estimate the effects of a drop in the cost of migration to the industrial belt on (i) female migration; (ii) marriage patterns; (iii) female labour force participation; (iv) male and female educational attainment.

In accordance with our model’s predictions, we find that the bridge construction induced changes in a range of outcomes, but only for those women whose families own more than half an acre of land (a commonly used poverty threshold). In particular, we find that such women are more likely to migrate towards Dhaka (by 5 percentage points), work in the urban manufacturing sector, pay a higher dowry and obtain more years of schooling. Importantly, there is a statistically significant effect on marriage-related migration but not on economic migration. The effect sizes – especially on migration – are very large in comparison to baseline levels of the outcomes.

These empirical findings shed light on both the constraints to and the linkages between the marriage, work and migration decisions of women in developing countries. In particular, the findings are consistent with the hypothesis that social norms restricting female mobility prevented women from rural parts of Bangladesh from taking direct advantage of the reduction in migration costs produced by the bridge construction. Nevertheless, a subset of women were able to migrate to the industrial belt and thus take up employment in the manufacturing sector, by paying a higher dowry and marrying male migrants from the local marriage market.

You can download the complete paper here.