Economic Policy - Number 32

Embargo: 00.01, Friday 6 April 2001

The following is a short summary of each of the papers featured in Economic Policy No 32

Tito Boeri, Axel Börsch-Supan, Guido Tabellini

Would You Like to Shrink the Welfare State? A Survey of European Citizens

The fundamental problems facing European welfare states - high unemployment and unsustainable public pensions plans in particular - have been in the political debate for years, so why have we seen so little reform? To find out, we surveyed the opinions of citizens in France, Germany, Italy and Spain on their welfare states and on various reform options. This is what we found. First, most workers underestimate the costs of public pensions, though they are aware of their unsustainability. Second, the status quo is a majoritarian outcome: a majority of citizens opposes cuts to social security and welfare spending, but also opposes further increases. Since population ageing without reform implies an automatic expansion, our results suggest that most citizens would favour reforms that stabilize but do not shrink the current welfare states. Third, many would welcome changes in the allocation of benefits. A large number of workers in Italy and Germany would be willing to opt out of public pensions and replace them with private pensions, though the details of how this scheme is formulated matter for its popularity.  And many Italians and Spaniards would welcome an extension of the coverage of unemployment insurance. Fourth, conflicts over the welfare state are mainly shaped by the economic situation of the respondent, while political ideology plays a limited role. Disagreements are found along three dimensions: young versus old, rich versus poor, and ‘outsider’ versus ‘insider’ in terms of labour market status. From a practical point of view, this suggests that there is scope to bundle reforms strategically in order to build a large and mixed coalition of supporters

Michael Bordo, Barry Eichengreen, Daniela Klingebiel and Maria Soledad Martinez-Peria

Is the Crisis Problem Growing More Severe?

The crisis problem is one of the dominant macroeconomic features of our age. Its prominence suggests questions like the following: are crises growing more frequent?  Are they becoming more disruptive?  Are economies taking longer to recover?  These are fundamentally historical questions, which can be answered only by comparing the present with the past. To this end, this paper develops and analyses a data base spanning 120 years of financial history. We find that crisis frequency since 1973 has been double that of the Bretton Woods and classical gold standard periods and is rivalled only by the crisis-ridden 1920s and 1930s. History thus confirms that there is something different and disturbing about our age. However, there is little evidence that crises have grown longer or output losses have become larger. Crises may have grown more frequent, in other words, but they have not obviously grown more severe.

Our explanation for the growing frequency and chronic costs of crises focuses on the combination of capital mobility and the financial safety net, including the implicit insurance against exchange risk provided by an ex ante credible policy of pegging the exchange rate, which encourages banks and corporations to accumulate excessive foreign currency exposures. We also provide policy recommendations for restoring stability and growth.

Edmund Phelps and Gylfi Zoega

Structural Booms

The paper proposes a new interpretation of long swings in economic activity. Instead of deviations from a trend growth path explained by misperceptions, long swings are seen as detours in the path itself provoked by rare and deep changes in expectations of future productivity. And such changes are approximately captured by swings in stock markets. In a large sample of OECD countries, the paper finds long-term historical relationships between asset prices and employment or the rate of unemployment. The results suggest that the recent strength of a nation’s stock markets and the accompanying employment response are related to its labour market institutions and the maturity of its stock markets. In particular, corporatist institutions are likely to impede or obstruct entrepreneurs from taking advantage of expected productivity improvements. In contrast, a well-developed stock market – in addition to a young, well-educated labour force – may help both in the creation of profit opportunities as well as in enabling and emboldening firms to increase hiring.

Paul Collier

Implications of Ethnic Diversity

Ethnically differentiated societies are often regarded as dysfunctional, with poor economic performance and a high risk of violent civil conflict. I argue that this is not well founded. I distinguish between dominance, in which one group constitutes a majority, and fractionalization, in which there are many small groups. In terms of overall economic performance, I show that both theoretically and empirically, fractionalization is normally unproblematic in democracies, although it can be damaging in dictatorships. Fractionalized societies have worse public sector performance, but this is offset by better private sector performance. Societies characterised by dominance are in principle likely to have worse economic performance, but empirically the effect is weak. In terms of the risk of civil war, I show that both theoretically and empirically fractionalization actually makes societies safer, while dominance increases the risk of conflict. A policy implication is that fractionalized societies are viable and secession should be discouraged.

Kai-Uwe Kühn

Fighting Collusion by Regulating Communication Between Firms

This paper is an attempt to create a coherent approach to the design of competition policy enforcement against collusion based on theoretical considerations, evidence from economic experiments, and case studies. I argue that collusion should primarily be fought indirectly by targeting types of communication between firms that are particularly likely to facilitate collusion. In particular, I identify types of communication that have high potential anti-competitive effects but where it is unlikely that prohibiting communication will lead to efficiency losses. This analysis leads to some simple rules concerning communication between firms, which could also guide the development of competition rules for emerging B2B electronic market places.

Michele Boldrin and Fabio Canova

Inequality and Convergence in Europe’s Regions: Reconsidering European Regional Policies

In this paper we take a critical look at current European regional policies. First, we document the motivation for such policies, that is, the large income disparities across the regions of the EU15. Large disparities are certainly present. Second, we illustrate the various instruments adopted and discuss their underpinnings in established economic theories.  Next, we look at available data, searching for three kinds of evidence: (1) if disparities are either growing or decreasing, we conclude they are neither; (2) which are the major factors explaining such disparities and, in particular, if they are the factors predicted by the economic models adopted by the Commission to justify current policies, we conclude this is most certainly not the case; (3) if there are clear signs that EU policies, as opposed to other social and economic factors, are actually reducing such disparities, we cannot find any clear sign of such desired impact. Our conclusion is that regional and structural policies serve mostly a redistributional purpose, motivated by the nature of the political equilibria upon which the European Union is built. They have little relationship with fostering economic growth. This casts a serious doubt on their social value and, furthermore, strongly questions extending such policies to future members of the European Union. A successful EU enlargement, in our view, calls for an immediate and drastic revision of regional economic policies.

Please describe this as a ‘journal published by Blackwell Publishers for CEPR, CES and DELTA in association with the European Economic Association’

Economic Policy Issue 32
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