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.

Grant success for Amrit and Zaki

Congratulations to Amrit Amirapu and Zaki Wahhaj who have obtained a research grant from the UK Department of International Development’s EDI research programme to study peer effects in traditional marriage customs. In developing countries, where the state often has a weak capacity to enforce laws, social pressures and expectations can play an important role in hindering or accelerating behaviour proscribed by marriage laws. The project will build on an ongoing EDI project in Bangladesh to test these ideas, using an experimental design that exploits a recent change in child marriage laws. They are partnering in this research with the University of Malaya in Kuala Lumpur and the research firm Data Analysis and Technical Assistance in Bangladesh.

The image is taken from a psychological test designed to measure the impact of the new law on attitudes towards early marriage practices among men and women in rural Bangladesh.

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.

School holds its annual ‘Working in Finance’ event

On Tuesday 16 October, the School of Economics held its annual ‘Working in Finance’ talk. Two of our alumni, Nuno Nunes and Michael Thurlow, returned to Kent to talk about their experiences of working in the financial sector.

The event was a great success, with some interesting discussion and useful advice followed by an informal networking session.

Huge thank you to Nuno and Michael for giving up their time and making the event such a success. The School would also like to thank Katie Marshall and Harriet Mowatt-Dykes for organising such a great event.

Listen to a recording of the event 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.

Templeman Library

Post-doctoral researcher vacancy

The School of Economics has a vacancy for a post-doctoral researcher to work on an ESRC-funded project `Firm Dynamics, Market Power and Productivity’. The position will provide the opportunity to work independently and in a team to explore changes in market power in the UK and its relationship to aggregate productivity.

Closing date for applications: 02 Dec 2018
Interviews are to be held: 11 Dec 2018

For full details see: https://jobs.kent.ac.uk/fe/tpl_kent01.asp?s=4A515F4E5A565B1A&jobid=42084,9312145614&key=53206829&c=959848358269&pagestamp=setzmufwgneuopgbrz

Academic Promotions 2018

The School of Economics are delighted to announce that three of our academics have received academic promotions over the summer:

  • Dr Sylvain Barde, promoted to Senior Lecturer
  • Dr Fernanda Lopez de Leon, promoted to Senior Lecturer
  • Dr Zaki Wahhaj, promoted to Reader

These are effective from 1st October 2018. Many congratulations to all for this well-deserved achievement.