The World Our Grandchildren Will Inherit

A superb research note from Daron Acemoglu. Well it is amazing to see him churn one paper after the other.

He talks about ten trends which have happened in the last 100 years.

• The rights revolution
• The sweep of technology
• Unrelenting growth
• Uneven growth
• The transformation of work and wages
• The health revolution
• Technology without borders
• Century of war, century of peace
• Counter-Enlightenment in politics
• The population explosion, resources and the environment

Out of the ten, it was rights revolution which was most important. But then all are linked:

The last century has been the age of political rights. Never in our history have so many people taken part in choosing their leaders and having a say in how their societies are governed. To be sure, this unparalleled expansion of civil and political rights remains incomplete. Yet it is profoundly significant, not only due to its transformative impact on the lives of billions, but also because so many other phenomena in recent history are connected to it. The rights revolution is intertwined with diverse trends such as the development of technology; sustained yet uneven economic growth; a general decline in war within recent decades; and a population explosion placing new pressures on our resources and environment.

These trends do not exist independently of one another. Understanding how they interrelate is an important step in any attempt to assess how they will continue. The framework I will use to interpret these trends borrows heavily from my work with James A. Robinson, but also augments it in a number of  important respects.  At the center of my interpretation is the idea that technological change is at the root of economic growth — but that political institutions shape the nature, pace, and spread of technological change. From ancient Rome to the Industrial Revolution and the dramatic economic transformations of the last century, history is littered with examples showing how the development, spread, and use of technology depend on institutions.

In this, I depart from the conventional wisdom in much of social science, which maintains a causal link running from technologies to institutions — and not the other way around, as I am arguing. A popular variant of this conventional wisdom is modernization theory, which posits an inexorable link from prosperity to democracy and political rights. Yet there is no more support for modernization theory in the data than there is for any other form of technological determinism. Globally, countries that have grown more rapidly since World War II, or since the beginning of the 20th century, are no more likely to become more democratic than those growing more slowly, for example.18 I will instead argue that institutional developments, caused by and causing the rights revolution, are the main drivers of the technological and economic changes we have experienced over the last century.

And now most would know hos the story unfolds. Whether you have inclusive or extractive political instis, you create a framework for all the other ten trends.

He then goes onto reflect whether the 10 trends will continue..

He reflects on how China manages to grow despite having extractive political instis:

The expansion of China’s economy over the last three decades is another example of growth produced by extractive institutions, but with a major difference. The onset of technology without borders has meant that the extent and pace of growth under extractive institutions can be greater today than it was in the 19th century, when Germany and Russia went through a process of catch-up. Though the two countries reached higher growth rates than the leading economies of the time, the U.S. and the U.K., their expansions ended quickly, and had been only made possible by deep-rooted changes in the structure of society — changes that ultimately destabilized and upended the regimes in those nations.

By contrast, China has been able to achieve rapid catch-up growth for over three decades, with much more limited threats to its extractive institutions, partly because the nature of technology has changed. In Germany and Russia at the end of the 19th century (or in Japan and South Korea during the second half of the 20th century) catch-up growth involved developing industries, building a domestic market,and undergoing a process of structural, social, and institutional changes — including rapid urbanization and the social and political demands coming with industrialization.

But unlike China, their growth wasn’t built on simply importing technology to produce goods for the world market. In contrast, today, instead of having to develop an entire industry, an emerging market economy can just house some of an industry’s tasks, such as assembly and operation. This has enabled China to grow rapidly by leveraging its cheap and abundant labor force, while also mollifying the internal demands for political changes that earlier societies undergoing catch-up growth had to contend with.

So, technology seems to have allowed China to prosper:

Here we therefore encounter a paradoxical consequence of the technological breakthroughs originating from inclusive institutions: they may aid the continuation of extractive institutions elsewhere in the world. The globalization of production that technology without borders has created may have fueled rapid Chinese growth, but in so doing it may have lessened domestic pressure for institutional changes. In fact, this paradox might be deeper. One phenomenon related to Chinese growth is the fifth trend, the transformation of work and wages, which has helped produce the inequality gap that has opened up within advanced economies.

He says when thinking about technology we should  be aware that it could allow countries to prosper despite having extractive instis. But this cannot continue for a long time and it is just that technology has sort of allowed China to grow for such a long time despite not having the right framework for sustained growth..

An amazing essay… Connects so many dots..

"Mostly Economics"

The Devil Called 'Energy Subsidies'

FOR decades, governments from Egypt to Indonesia have subsidised the price of basic fuels. Such programmes often start with noble intentions—to keep down the cost of living for the poor or, in the case of oil-producing countries, to provide a visible example of the benefits of carbon wealth—but they have disastrous consequences, wrecking budgets, distorting economies, harming the environment and, on balance, hurting rather than helping the poor.

Emerging markets are not the only places that distort energy markets. America, for instance, suppresses prices by restricting exports. But subsidies are more significant in poorer countries. Of the $500 billion a year the IMF reckons they cost—the equivalent of four times all official foreign aid—half is spent by governments in the Middle East and north Africa, where, on average, it is worth about 20% of government revenues. The proceeds flow overwhelmingly to the car-driving urban elite. In the typical emerging economy the richest fifth of households hoover up 40% of the benefits of fuel subsidies; the poorest fifth get only 7%. But the poorest suffer disproportionately from the distortions that such intervention creates. Egypt spends seven times more on fuel subsidies than on health. Cheap fuel encourages the development of heavy industry rather than the job-rich light manufacturing that offers far more people a route out of poverty.

How to save $500 billion and the planet

For all these reasons the benefits of scrapping subsidies are immense. Emerging economies could easily compensate every poor person with a handout that was bigger than the benefits they got from cheap fuel and still save money. In the process, they would help the planet. According to the International Energy Agency, eliminating fossil-fuel subsidies would reduce global carbon emissions by 6% by 2020.

Some emerging-market governments are persuaded by these arguments, and are getting serious about reform (see article). Indonesia raised petrol prices by more than 40% last year, and the front-runner in the upcoming presidential election says he will consider a more comprehensive fuel-subsidy revamp. Iran has just begun the second phase of a big subsidy overhaul, raising the price of petrol, gas and electricity. Egypt’s new president is being pushed towards tackling energy subsidies by a gaping budget deficit. Morocco and Jordan have cut subsidies in the past couple of years. Even Kuwait announced this week that it plans to scrap diesel subsidies.

Yet the politics of reform are exceedingly difficult. Politicians are loth to antagonise the urban elite; insiders benefit (often corruptly) from cheap fuel; ordinary citizens do not believe they will be compensated. Many previous attempts to cut subsidies have been abandoned in the face of popular protests or rising global oil prices. Experience suggests that any attempt to cut subsidies needs to be accompanied by a public-education campaign to explain the costs and inequities of subsidies, to have a clear timetable for gradual price increases and to be supported by targeted transfers to counter the effect of higher fuel prices on poorer people.

Even with better politics and the best-laid plans, it would be a mistake to expect too much too fast. Entrenched subsidies anywhere are devilishly difficult to get rid of. If the oil price rises, so too will the pressure on emerging economies to “protect” their citizens from dearer fuel. But, for the moment, there seems to be a chance to accelerate reform. It is an opportunity not to be missed.

ECONOMIST

Does Europe face the prospect of a lost decade?

Christian Noyer of Banque De France asks this q in a recent speech.

He says lost decade could happen in Europe for two reasons (though adds it is not limited to Europe alone):

Questions about long-term growth are not limited to Europe. What we hear about our continent reflects a more general concern: the possibility of “secular stagnation” in advanced economies. Larry has launched this crucial debate. I don’t know whether he was thinking specifically about Europe, but, of course, this question is very relevant for us.

Secular stagnation rests on the assumption that the natural interest rate is negative. This may happen for two reasons:

• In the short run, we may have a downward shock on demand and an increase in savings resulting from the deleveraging process. I have just explained how we are currently addressing this issue.
• In the longer run, ageing and slower innovation may push up saving rates and bring down the return on capital. Therefore, the ultimate response to the risk of secular stagnation is to improve the return on investment, thus pushing the natural interest rate back into positive territory. Again, this is not only a European problem. But we do have difficulties in this regard. Structural reforms are not easy.

Many, however, are currently being implemented. Italy is abolishing its provinces, generating savings that will allow for a reduction in taxes and liberalising its labour market. France is on the same track and has reduced taxes on its labour costs as well as improving labour market flexibility.

   

He says opposite forces are hitting Europe:

Strangely, in the euro area, growth and inflation are moving in opposite directions. As growth accelerates, inflation keeps going down. This “disconnect” in the Philips curve is puzzling. We must look, then, at the broader picture. Euro area economies have attracted strong capital inflows over the recent months, with two opposite effects on financial conditions: first, easing through lower long-term interest rates. And, second, an appreciation of the euro exchange rate.

It’s not clear whether the overall effect is positive. While nominal conditions are more accommodating in euro area than in the US, real indicators point to a more restrictive stance. We may see a perverse feedback loop develop, with low inflation, increasing real rates, capital inflows and exchange rate appreciation mutually fuelling each other. The financial economy may be heading towards a bad equilibrium that would threaten the real economic recovery.

The situation called for an appropriate policy response and, as you know, the Governing Council has agreed last Thursday on a strong package of four significant measures

India just has an opposite problem. Despite slipping growth, inflation remains high.

What a mess we all are in…All basic macro conditions are all over the place.

From: Mostly Economics, Amol Gupta