Convergence in recessions

Growth theory and data teach us that, at least in developed countries, economies tend to converge in the long run: the dispersion across regions or nations of per capita income (or similar indicators) tends to decline. While this is a long term phenomenon, there is a priori no reason to believe this is a constant process.



Eldon Ball, Carlos San Juan and Camilo Ulloa study total factor productivity in agriculture across US states. While they indeed find a general trend towards convergence, it turns out that its speed is much faster during recessions. Why would this happen? If we follow Schumpeter, the worst firms should be dropping out during a recession, thereby relatively increasing TFP in the worst areas. And voilà, you have faster convergence. But only farm-level data would tell whether my conjecture is true.

Aid and remittances as hedges against food price shocks

Food is a substantial part of household expenses in developing economies, and in many of the latter foreign aid and remittances from emigrants provide a substantial part of national income. As world food prices have been subject to large fluctuations lately, causing much grief and even riots, it is natural to ask whether aid and remittances can provide some smoothing against the effects of these fluctuations.

Jean-Louis Combes, Christian Ebeke, Mireille Ntsama Etoundi and Thierry Yogo use a cross-country panel data set to study this question. First, they confirm that food fluctuations have a notable impact on aggregate consumption, especially in the poorest economies. Second they find that aid and remittances do help, and remittances seem to be more efficient at hedging. Indeed, an aid-to-GDP ratio of 29% is theoretically necessary to absorb food price fluctuations, while 9% is sufficient is for remittances. Only Mozambique and Nicaragua satisfy the first, while a few more countries satisfy the second.

The economic behavior of bees

I find it fascinating that there is also plenty of Economics in the animal kingdom. Two recent papers about bees just caught my attention.

Antoine Champetier studies the interaction of bees and farmers, as bees play an important role in pollination and are thought to be subject to a mysterious decline in numbers. He takes California almonds as an example and builds a model of pollination supply with hive owners and bees that forage. One aspect appears to be rather important: economies of scale in the hive, as larger hives have an easier time regulating the temperature and can devote more time to more aggressive foraging. Champetier formulates a spatial model of foraging and coordination in the bee colony, where energy used and gained by foraging is assessed, as well as time costs in each step of pollen acquisition and storage.

Noam Bar-Shai, Tamar Keasar and Avi Shmida study what makes that a bee departs early or stays longer in a flower patch. Looking at videos, they concluded that bees cannot count, but are rather governed by clues left by odor marks (to prevent revisiting the same flowers) and current foraging success.

Pollution has an impact on worker productivity

Pollution regulation is typically cast as a game between citizens and firms, the first suffering the consequences of pollution while the second are the origin of the pollution. In such a case, there is no incentive for firms to abate pollution, and the government has to mediate. But could a case be made that firms should be willing, individually or collectively, to reduce pollution. One way can be green labeling, which could increase the demand for their products. Another would be if firms realize pollution has an impact on their on productivity or on the labor supply.

Joshua Graff Zivin and Matthew Neidell take the worker productivity angle by using a dataset of dairy farm workers from a large farm in the Central Valley of California. In particular, they look how ozone levels impact the output of piece rate workers. At it is substantial. For example, a 10 ppb reduction of ozone increases productivity by 4.2%, noting that the standard deviation of ozone levels is 13 ppb. And if you object that some of the workers fall under minimum wage law and may not exert the right effort, be reassured, the authors took that into account. In addition, this impact happens even when the ozone level is well below the current national standards. Realizing this, industry should be more willing to accept the suggested tightening of pollution standards for ozone, and for nitrogen oxides and volatile organic chemicals that are the source of ground-level ozone.

Does it make sense to subsidize biofuels?

Ina relatively short time, biofuels have become remarkably popular, especially as an additive to regular petroleum based fuel. This is at least in part due to massive subsidies from the US to fuel and corn producers. As biofuels compete with food, this has lead to major price increases for corn and sugar, with adverse consequences for importing countries. This begs the question: is it actually a good idea to subsidize biofuels? I mentioned previously that it is preferable to tax other energy products rather than subsidize alternative energies (1, 2), but let us revisit this issue.

Subhayu Bandyopadhyay, Sumon Bhaumik and Howard Wall use a general equilibrium trade model and confirm that if there is a Pigovian tax on conventional fuels, subsidies are not needed. But if the Pigovian tax is not available or too low (as is the case in the US), then a subsidy for biofuels makes sense, But if the country in question is large, there are other implications through increased worldwide demand for food. In that case, a food exporter wants to subsidize biofuels and tax conventional fuels. A food importing country would only want to subsidize biofuels if the pollution reduction effect is large enough.

Hector Nuñez, Hayri Önal, Madhu Khanna, Xiaoguang Chen and Haixiao Huang look more specifically at the interaction of policies in the US and Brazil, the two largest producers of biofuels. Indeed, the US imposes a special tariff on the importation of biofuels, in particular the more advanced sugarcane based one from Brazil. Brazil is also the largest producer and exporter of beef. The paper uses a multi-country, multi-good model, unfortunately with a partial equilibrium, but it takes into account possible crop rotations and different categories of land. It concludes that eliminating the tariffs would significantly reduce biofuel production in the US, with the latter importing biofuels from Brazil and exporting corn. While this reduces producer welfare compared to the status quo, it increases consumer welfare. Given the political system in the US, guess what will happen.

Paying farmers for landscaping

Switzerland has had for centuries a rather unique system of communal land tenure for the alpine areas. Indeed, cattle owners send their livestock up from the villages for the Summer season, and these grazing areas are commonly owned and rights to them are inherited. The returns of agriculture in the mountainous areas are, however, far from competitive in this era of globalization, and Switzerland has resorted to compensating farmers for keeping the cows up there. The reason is that cows and some other farming bring landscaping benefits, for example keeping the grass short improves snow management for avalanche prevention and skiing, or preserves biodiversity and prevents invasive plants to take foothold. These direct payments are very close to making farmers civil servants. Note that payments depend on the size of the farm, its location, the treatment of animals and the general ecological friendliness of the business.

A pair of recent papers analyze the new situation for farmers in the Swiss Alps. Chiara Calabrese and Gabriele Mack used an agent-based model to study how incomes of a large number of heterogeneous livestock farmer families would evolve until 2020. Different scenarios are explored (a not described status quo, more subsidy for summered livestock and lump sum subsidy to all alpine farmers proportional to farmed area). Results are not unexpected (no change, more summered livestock and income, less of both). Prices are assumed to grow at a steady rate unknown to reader. Give the recent wide fluctuations for food, that needs to be made more explicit and additional scenarios are needed. Also, this study basically assumes that the government does not face a budget constraint and will always be willing whatever it takes to maintain a policy. At least the costs of the program should be reported.

The other study by Nadja El Benni, Stefan Mann and Bernard Lehmann looks at how these direct payments to farmers influence the distribution of incomes. Due to the terrain, farms are small almost everywhere in the country, and Gini coefficients for farmer income have been rather low compared to other countries. The new policy increased the Gini coefficients even though the payments were implemented in part to redistribute income and they constitute now 79% of a farmers income. The reason is that the disparities in market income have increased tremendously and direct payments are tied to farm size after all.