What Are We Talking about When We Talk about Digital Protectionism?

December 2018

Susan Ariel Aaronson

IIEP Working Paper 2018-13

Abstract: For almost a decade, executives, scholars, and trade diplomats have argued that filtering, censorship, localization requirements, and domestic regulations are distorting the cross-border information flows that underpin the internet. Herein I use process tracing to examine the state and implications of digital protectionism. I make five points: First, I note that digital protectionism differs from protectionism of goods and other services. Information is intangible, highly tradable, and some information is a public good. Secondly, I argue that it will not be easy to set international rules to limit digital protectionism without shared norms and definitions. Thirdly, the US, EU, and Canada have labeled other countries policies’ protectionist, yet their arguments and actions sometimes appear hypocritical. Fourth, I discuss the challenge of Chinese failure to follow key internet governance norms. China allegedly has used a wide range of cyber strategies, including distributed denial of service (DDoS) attacks (bombarding a web site with service requests) to censor information flows and impede online market access beyond its borders. WTO members have yet to discuss this issue and the threat it poses to trade norms and rules. Finally, I note that digital protectionism may be self-defeating. I then draw conclusions and make policy recommendations.

Data is Different: Why the World Needs a New Approach to Governing Cross-border Data Flows

November 2018

Susan Ariel Aaronson

IIEP Working Paper 2018-10

Executive Summary: Companies, governments and individuals are using data to create new services such as apps, artificial intelligence (AI) and the Internet of Things (IoT). These data-driven services rely on large pools of data and a relatively unhindered flow of data across borders (few market access or governance barriers). The current approach to governing cross-border data flows through trade agreements has not led to binding, universal or interoperable rules governing the use of data. Trade diplomats first established principles to govern cross-border data flows, and then drafted e-commerce language in free trade agreements (FTAs), rather than through the World Trade Organization (WTO), the most international trade agreement. Data-driven services will require a different domestic and international regulatory environment than that developed to facilitate e-commerce. Most countries with significant datadriven firms are in the process of debating how to regulate these services and the data that underpins them. But many developing countries are not able to participate in that debate. Policy makers must devise a more effective approach to regulating trade in data for four reasons: the unique nature of data as an item exchanged across borders; the sheer volume of data exchanged; the fact that much of the data exchanged across borders is personal data; and the fact that although data could be a significant source of growth, many developing countries are unprepared to participate in this new data-driven economy and to build new data-driven services. This paper begins with an overview and then describes how trade in data is different from trade in goods or services. It then examines analogies used to describe data as an input, which can help us understand how data could be regulated. Next, the paper discusses how trade policy makers are regulating trade in data and how these efforts have created a patchwork. Finally, it suggests an alternative approach.

Is There a Kuznets Curve for Intra-City Earnings Inequality?

November 2018

Haixiao Wu

IIEP Working Paper 2018-9

Abstract: Many papers have found a positive relation between income inequality and city size in the US and other countries. This literature has assumed that the relation is linear. Tests performed here find that it is concave, resembling the classic Kuznets curve. A theoretical model based on the Income Elasticity Hypothesis (IEH), explains that inequality is a concave function of housing prices that tend to increase with city size. Further tests confirm the concavity of the relation between Gini and housing costs that is predicted by the IEH. Although for most cities, inequality still rises with housing costs, if housing costs continue to grow in large cities, inequality should eventually fall, resembling the Kuznets Curve at the country level

Private Sector Policymaking

October 2018

David Szakonyi

IIEP Working Paper 2018-8

Abstract: Many papers have found a positive relation between income inequality and city size in the US and other countries. This literature has assumed that the relation is linear. Tests performed here find that it is concave, resembling the classic Kuznets curve. A theoretical model based on the Income Elasticity Hypothesis (IEH), explains that inequality is a concave function of housing prices that tend to increase with city size. Further tests confirm the concavity of the relation between Gini and housing costs that is predicted by the IEH. Although for most cities, inequality still rises with housing costs, if housing costs continue to grow in large cities, inequality should eventually fall, resembling the Kuznets Curve at the country level

Development Economics Meets the Challenges of Lagging U.S. Areas Applications to Education, Health and Nutrition, Behavior, and Infrastructure

September 2018

Stephen C. Smith

IIEP Working Paper 2018-7

Abstract: This chapter examines the development economics evidence base for insights into policy reforms that would benefit struggling areas in the United States. My focus is on improving education, physical and mental health, infrastructure, and institutions. First, consistent with findings on education policy effectiveness, I propose raising the legal minimum dropout age (prospectively to 19), providing better information about the benefits of completing high school, supporting targeted paraprofessional tutoring, and providing family financial incentives for attending school and graduating from high school. Second, to improve health outcomes in struggling areas, the focus is using and building on existing effective health and nutrition programs and services, identifying ways to include more families who are eligible for but not participating in these programs. Moreover, the recent development and behavioral economics evidence base has extended our understanding of the psychological, cognitive, and economic behavioral lives of the poor; the literature highlights the ways that poverty can impede cognitive functioning, with implications for policies to uplift lagging U.S. areas. Third, a review of evidence on the benefits of improving lagging rural and urban area transportation infrastructure points to the likely benefits of improved connectivity for lagging U.S. areas: reversing the legacy of past discriminatory policies, encouraging sector-based clusters, and extending access to high-speed internet. Finally, the chapter highlights the relevance of some cross-cutting themes in development economics, including the high returns to reliable household microdata and the importance of improving institutions to enable more inclusive, substantial, and lasting progress.

How ETFs Amplify the Global Financial Cycle in Emerging Markets

January 2018

Updated: September 2018

Tomas Williams, Nathan Converse, and Eduardo Levy-Yeyati.

IIEP Working Paper 2018-1

Abstract: Since the early 2000s exchange-traded funds (ETFs) have grown to become an important investment vehicle worldwide. In this paper, we study how their growth affects the sensitivity of international capital flows to the global financial cycle. We combine comprehensive fundlevel data on investor flows with a novel identification strategy that controls for unobservable time-varying economic conditions at the investment destination. For dedicated emerging market funds, we find that the sensitivity of investor flows to global financial conditions for equity (bond) ETFs is 2.5 (2.25) times higher than for equity (bond) mutual funds. In turn, we show that in countries where ETFs hold a larger share of financial assets, total cross-border equity flows and prices are significantly more sensitive to global financial conditions. We conclude that the growing role of ETFs as a channel for international capital flows amplifies the incidence of the global financial cycle in emerging markets.

JEL Classification: F32, G11, G15, G23

Keywords: exchange-traded funds; mutual funds; global financial cycle; global risk; push and pull factors; capital flows; emerging markets

An Examination of the Link between Urban Planning Policies and the High Cost of Housing and Labor

September 2018

Anthony Yezer, William Larson, Weihua Zhao 

IIEP Working Paper 2018-6

Abstract: Past research has established positive empirical relation between city-level land use regulations and housing costs. One interpretation of these findings is that building restrictions raise the cost of producing housing. Alternatively, these price effects could reflect greater willingness to pay for quality urban design. Disentangling and identifying cost versus amenity factors empirically is an unresolved challenge. This paper presents an alternative to empirical tests, relying instead on the predictions of neoclassical urban theory. Simulations of an open city model demonstrate that theoretical predictions differ substantially from those obtained from empirical testing in two main ways. First, restrictions on land use and housing density influence the price level but not the elasticity of housing supply. Second, the effects of land use restrictions on average house prices are ambiguous and depend on the precise location of the planning restriction. Furthermore, the model generates direct estimates of effects on wages and demonstrates that transportation impediments are more consequential for housing prices than land use restrictions. This indicates a potentially fruitful path for future empirical work, and the possibility of omitted variable bias if transportation impediments are correlated with land use regulation.

JEL Codes: R30, R31, R38

Keywords: monocentric city model, price gradient, zoning, standard urban model

Modelling Economic Development: The Lewis Model Updated

September 2018

Carmel Chiswick 

IIEP Working Paper 2018-5

Abstract: This analysis updates the dual-economy model of economic development suggested by W. Arthur Lewis in 1954. The updated aggregate model incorporates advances since then in modern labor economics and the findings of empirical studies of LDC economies and it removes Lewis’ implicit assumption that capital-formation is costless to the host LDC country. Specifying investment in human capital for both sectors refocuses attention on workers’ well-being as the ultimate measure of development. Specifying the cost of capital formation permits the distinction between earnings that recover investment costs and the “surplus” available to workers for consumption. Policy implications include resolution of tradeoffs between “trickle-down” vs. “grass roots” development policies.

Keywords: Economic development, growth, human capital, dual-economy model

Data Minefield: How AI is Prodding Governments to Rethink Trade in Data

April 2018

Susan Ariel Aaronson

IIEP Working Paper 2018-11

Key Points: No nation alone can regulate artificial intelligence (AI) because it is built on crossborder data flows; countries are just beginning to figure out how best to use and to protect various types of data that are used in AI, whether proprietary, personal, public or metadata; countries could alter comparative advantage in data through various approaches to regulating data — for example, requiring companies to pay for personal data; and Canada should carefully monitor and integrate its domestic regulatory and trade strategies related to data utilized in AI.

Opening Up Argentina to the World: Some Strategic Observations

May 2018

Danny Leipziger

IIEP Working Paper 2018-4

Introduction: Argentina is at a decisive point with respect to economic policy, and nowhere is this more apparent than in its external outlook. Exports have never been the main economic driver for economic growth, although, at times, due to domestic issues, they have played an incredibly important role. The Macri Administration has rightly identified trade and investment policies as crucial stepping-stones in the rebuilding of the economy and the repositioning of Argentina to be a competitive international player. Major domestic reforms in the areas of tax and pensions, as well as prudent macro-policies to both gradually reduce fiscal deficits and inflation, will be prerequisites for sustained positive results. These efforts need to be complemented by microeconomic reforms to improve the productivity and efficiency of the economy. This note aims to examine how Argentina, as a late mover into the global economy and as an economy that has experienced serious prior setbacks, can now position itself in a world that that requires the utmost in efficiency and innovation, and in which distance is an increasingly less important constraint to economic activity. We take as given the fact that Argentina has been somewhat isolated from global value chains, that it has not benefited as much as it should have from regional trade agreements, and that it now faces an international economy that is both less robust in terms of commercial trade and also more open to disruptive forces. In other words, Argentina faces internal as well as external obstacles in its announced desire to better integrate into the world economy

Migration and Online Job Search: A Gravity Model Approach

April 2018

Tara Sinclair and Mariano Mamertino

IIEP Working Paper 2018-3

Abstract: Most studies of migration focus on realized migration. Data on realized migration take substantial time to collect and are available to researchers and policymakers only at a significant delay. In this study we consider a new potential data source in the form of tracking the patterns of online job seekers actively searching for a job in a country other than their current home. The advance of internet job search allows job seekers to explore international employment options before making a decision to move. We characterize job seeker interest across national borders by looking at user behavior on a major job search website. We investigate the determinants of cross-border job search using a standard gravity model and find that both the determinants and the relative importance of the determinants for job search are strikingly similar to those for past realized migration. This suggests both that job seekers are likely to act on their international job search and that these data may be useful for predicting future migration patterns. We use our results to explore the labor market mobility implications of a country, such as the UK, leaving the EU and find that leaving the EU may have international immigration impacts similar to increasing the distance between the leaver and the other EU countries by over one third.

JEL Codes: J6, J4, F22, O15

Keywords: international migration, labor mobility, online labor markets, European Union, Brexit

The Rise of Patient Capital: The Political Economy of Chinese Global Finance

July 2018

Stephen Kaplan

IIEP Working Paper 2018-2

Abstract: As the United States has retreated from its lead role in globalization – first because of the 2008 financial crisis, and now under President Donald Trump’s leadership – China has become a major global financial player. China, as the world’s largest saver, has rapidly expanded its cross-border lending since the crisis, more than doubling its overseas banking presence. What are the implications? I contend that China’s state-led capitalism is an important form of patient capital, characterized by a longerterm horizon. While technically classified as mobile capital, its higher risk tolerance and geopolitical shrewdness make state-owned capital less likely to swiftly exit debtor countries. Compared to traditional mobile capital, debtor governments thus gain more policy freedom, particularly during hard times when Western creditors might otherwise impose austerity and other onerous policy conditions. Employing an originally constructed dataset, the China Global Financial Index, I conduct an econometric test across 15 Latin American countries from 1990-2015. I find that left governments are more likely to borrow from China. However, notwithstanding this initial creditor choice, Chinese state-to-state lending then uniformly leads to higher budget deficits. It endows governments with more fiscal space to intervene in their economies by reducing their reliance on conditionality-linked Western financing. These results suggest that Chinese financing could be a development opportunity, but only if governments invest wisely. Otherwise, by lending without policy conditions, China may be encouraging developing country governments to spend without bounds, sowing the seeds for future debt problems.

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