Macro Roundup

"...Most of the world’s developing countries have backed a demand for wealthy nations to channel at least $1.3 trillion in climate finance to them annually starting in 2030, the opening salvo in one of the most contentious negotiating topics at the COP26 climate summit. African nations and a group called the Like-Minded Developing Countries, which includes China, India and Indonesia, said in a document they submitted to the United Nations at the summit that half the money should go toward funding renewable energy in the developing world and half toward protecting these countries from the effects of global warming. Developed nations have long pledged to help pay for developing nations to respond to climate change. That promise was crucial to sealing the Paris accord in 2015, when the U.S., Europe and other wealthy countries agreed to provide $100 billion a year from 2020 through 2025...."

Matthew Dalton, "China, India and Other Developing Nations Seek $1.3 Trillion a Year in Climate Finance,"Wall Street Journal, November 4, 2021, https://www.wsj.com/articles/climate-finance-china-india-11636039142

China, India and Other Developing Nations Seek $1.3 Trillion a Year in Climate Finance

GLASGOW—Most of the world’s developing countries have backed a demand for wealthy nations to channel at least $1.3 trillion in climate finance to them annually starting in 2030, the opening salvo in one of the most contentious negotiating topics at the COP26 climate summit.

African nations and a group called the Like-Minded Developing Countries, which includes China, India and Indonesia, said in a document they submitted to the United Nations at the summit that half the money should go toward funding renewable energy in the developing world and half toward protecting these countries from the effects of global warming.

Developed nations have long pledged to help pay for developing nations to respond to climate change. That promise was crucial to sealing the Paris accord in 2015, when the U.S., Europe and other wealthy countries agreed to provide $100 billion a year from 2020 through 2025.

The $1.3 trillion target for mobilizing funds reflects the huge investments that will be needed after that to reach the climate targets of the Paris accord, the paper says.

“The post 2025 mobilization goal must reflect the ambition, progression and the collective agreement to stay well below 2 (degrees) Celsius and aspire to stay within the 1.5 degree Celsius temperature goal,” the paper says.

Developed nations didn’t hit that target in 2020, falling $20 billion short, and aren’t likely to meet it until 2023, climate negotiators said in a report in October. The shortfall has angered developing nations and complicated the talks in Glasgow.

Western officials say they aren’t ready to set a target for climate finance post-2025, given how difficult it has been for them to hit the $100 billion target. They will only begin the talks at COP26 on a goal for post-2025.

“We’re not feeling particularly capable now,” said one European official. “It’s really not the right time.”

Delegates from China, India and Africa didn’t immediately respond to requests for comment.

The European Union said on Thursday that there had been a good start to climate negotiations in Glasgow.

“It’s a bit early to say whether we are on track for a fully successful COP but the early signs seem reasonably good,” said Jacob Werksman, the EU’s lead negotiator.

One of the top priorities for the ongoing meeting is finalizing the rulebook behind the 2015 Paris Agreement. Outstanding issues include defining rules for international carbon trading, whether countries should update their carbon emission reduction plans more frequently than the current five-year cycle, and rules on the reporting of those goals.

Earlier this week some climate negotiators said they had made progress toward establishing a framework for international carbon trading, after Brazil said it was ready to make concessions, having blocked any agreement in the past.

Also on Thursday, two groups that include dozens of countries agreed to stop funding new coal-fired power plants and overseas oil and natural gas projects.

The two agreements fit into a pattern of deals inked by subsets of like-minded countries pursuing their own, limited emissions-reducing ambitions at COP26, which they hope can pressure other countries to act more aggressively.

“These announcements are raising the bar for everyone, including India and China,” said Lauri Myllyvirta, lead analyst at think tank Centre for Research on Energy and Clean Air. “It has a knock on effect,”

The two deals come as a broader U.N.-backed agreement on specific, binding emissions-reductions commitments evades delegates so far. Big polluters like China, India and Russia have pledged emissions cuts, but not to the levels that Western nations, like the U.S., the U.K. and members of the EU have insisted are necessary to limit global warming.

Ending coal financing has been a key focus of the U.K. government in its role as host of the climate talks. Signatories to the coal deal have agreed to phase out unabated coal power—meaning projects that don’t have technology to capture carbon dioxide emissions—in major economies that have signed on in the 2030s, and for the rest in the 2040s. The U.K. government estimates the deal could result in the closure of 40 gigawatts of coal power, equivalent to over half the U.K.’s electricity-generating capacity.

But Thursday’s deal falls significantly short of a global pledge. Leading coal consumers China, India and the U.S. aren’t part of the 40-member group that signed the pledge. Meanwhile, a separate promise by the U.S. and the U.K. to end public funding of oil and gas investments overseas included about 20 signatories.

In that deal, government-backed banks in the U.S., Canada and the U.K. said that they would stop financing unabated coal, oil and natural gas projects abroad by the end of next year. Priority will instead be given to clean energy projects, according to a statement issued by 20 countries and institutions. The group said they currently spend about $15 billion annually financing such fossil-fuel projects.

The largest funders of fossil-fuel development abroad, including South Korea, Japan and China, weren’t part of Thursday’s oil and gas agreement. Europe was split. Portugal and the European Investment Bank, a lending arm of the EU, signed up. Italy, Germany and the European Bank of Reconstruction and Development, a government funded development bank, did not.

On Wednesday, the private sector vowed to help the world transition to cleaner energy. Global banks, major investors and insurers, and financial regulators pledged to incorporate carbon emissions into their most fundamental decisions.

New Fed research looks at changes in rent across income groups from 1985-2019, "...We find that rent growth differentials across groups were fairly minor overall. Rent growth was slightly faster for households at the top of the income distribution from 1985 to 2001, but this differential disappeared in the second half of the sample. Cumulating over the entire period, rent increased by 81 percent at the top quintile, and by 72 percent at the bottom quintile....Cumulating over the entire period, the general price index rose by 136 percent for the top income quintile and by 143 percent for the bottom quintile. These differences are fairly minor relative to the widening in nominal income inequality during this period. Thus, on the whole, we find that accounting for differences in the price of housing services faced by households at different income levels does not change the conclusion that real income inequality expanded substantially over the past three decades....."

"...As shown by Figure 1, only 12 percent of households in the top income quintile in 2019 were renters. Because renting is so uncommon for this group, the rents that are observed may be a poor proxy for the price of housing services of owner-occupied homes in this group. Indeed, research has found that the ratio of rent to prices tends to be lower for high-value homes, signaling that these two types of units may not be comparable for high-income households (Garner and Verbrugge 2009, Heston and Nakamura 2009). That said, because the average growth rate of owners' equivalent rent was almost the same as the average growth rate of tenants' rent over our sample period, we maintain that changes in the rents paid by high-income households should provide a reasonable proxy for the changes in the price of housing services at the top of the income distribution, at least for the purpose of calculating long-run average growth rates in a CPI-type framework...."

Using evidence from Chile Ana Cusolito, Alvaro Garcia Marin and William Maloney find Chinese competition had a net negative impact on local innovation, though local frontier firms became more competitive, "...This column analyses the impact of increased import competition from China on innovation by Chilean firms. It finds a negative overall impact of competition on innovation indicators. Low-productivity firms in particular see declines across all innovation measures, while the most productive firms experience improvements in product innovation and product quality...We illustrate this in Figure 1, where we report the competition-innovation elasticity dividing the sample by leaders and laggards, and then by whether markups rose or declined with the increase in Chinese imports for four of the innovation variables. Research and development (R&D), process innovation, product innovation, and quality all fall for laggards, and the effect is exacerbated when markups are falling. Product innovation and quality rise for leaders, and more so if markups are increasing…Overall, we find a negative impact of competition on innovation across all measures. But we also find important heterogeneity....We illustrate this in Figure 1, where we report the competition-innovation elasticity dividing the sample by leaders and laggards, and then by whether markups rose or declined with the increase in Chinese imports for four of the innovation variables. Research and development (R&D), process innovation, product innovation, and quality all fall for laggards, and the effect is exacerbated when markups are falling. Product innovation and quality rise for leaders, and more so if markups are increasing. Thus, Aghion etal.’s(2005) view of the importance of proximity to the frontier, as well as the classical Schumpeterian view of the importance of rents, both receive support..."

Ana Cusolito, Alvaro Garcia Marin and William Maloney, "Proximity to the frontier, markups, and the response of innovation to foreign competition," Center For Economic And Policy Research, November 4, 2021, https://voxeu.org/article/proximity-frontier-markups-and-response-innovation-foreign-competition

Proximity to the frontier, markups, and the response of innovation to foreign competition

The widely accepted relationship between competition and growth sits somewhat uncomfortably with the inconclusive literature on the relationship between competition and innovation (for reviews, see Cohen 2010 or Gilbert 2006), and this is becoming increasingly relevant to the debate over trade openness and growth. Despite an extensive literature suggesting that trade liberalisation increases productivity, recent evidence from the US, Canada, and Europe generally finds negative or unclear impacts of rising import exposure on innovation (e.g. Autor et al. 2017, 2020, Bloom et al. 2016, Campbell and Mau 2021, Kueng et al. 2016).

There are conceptual reasons to think that, in practice, the effects could vary greatly with country context. Aghion et al. (2005) offer a synthesis of the view that competition is necessary to get entrepreneurs out of bed in the morning, and Schumpeter’s argument that higher rents are needed to increase innovation. They accept that firms that are far from the frontier may behave à la Schumpeter and retrench with greater competition, but they argue that firms that are closer to it may see innovation precisely as a way to escape from competition (Akcigit et al. 2018). They find supportive evidence for an inverted U-shaped relationship between industry-level innovation and competition in the UK (Hashmi and Van Biesebroeck 2016), although other evidence (e.g. Hashmi 2013, Gorodnichenko et al. 2010) has been more ambiguous. This raises the question of whether the net impact of competition on innovation might be more detrimental in emerging countries which have fewer globally competitive firms than developed economies.

To shed light on the debate, in a recent paper (Cusolito et al. 2021), we revisit this question exploiting the China shock to study the impact of increased competition on innovation in a prominent upper middle-income country, Chile, which is, perhaps, uniquely suited as a case for two important reasons. First, we are able to draw on a matched firm production-innovation panel dataset that contains information on input and product prices at the firm level and therefore allows us to generate measures of markups and efficiency (physical total factor productivity) that correspond more closely to the concepts of rents and technological leadership envisaged in the Schumpeterian literature. Second, the Chilean data permit us to study the effect of foreign competition not just on patenting, as has been the traditional focus, but on a broader range of plant performance and innovation outcomes than has been possible previously, including quality.

Chile offers a clean experiment to explore the effects mentioned above. It is the iconic ‘textbook’ well-run open economy with few micro distortions that, as elsewhere, saw levels of competition shocked by a major increase in import penetration from China. But, distinct from many trade liberalisation episodes, this shock was not accompanied by other sector-specific reforms. Hence, the effects we see are likely to be purely due to differential exposure to increased foreign competition across sectors.

Overall, we find a negative impact of competition on innovation across all measures. But we also find important heterogeneity along the lines of Aghion et al. (2005). We illustrate this in Figure 1, where we report the competition-innovation elasticity dividing the sample by leaders and laggards, and then by whether markups rose or declined with the increase in Chinese imports for four of the innovation variables. Research and development (R&D), process innovation, product innovation, and quality all fall for laggards, and the effect is exacerbated when markups are falling. Product innovation and quality rise for leaders, and more so if markups are increasing. Thus, Aghion et al.’s (2005) view of the importance of proximity to the frontier, as well as the classical Schumpeterian view of the importance of rents, both receive support.

What is striking in the Chilean case is that when leaders are defined similarly, there is no positive impact on innovation. Sequentially running our specification with different cut-offs across the physical total factor productivity distribution (TFPQ), we find positive effects only when leaders are defined as the top 10% of the distribution, which accounts for 25% of industrial value added. Intuitively, this is consistent with countries further from the frontier having few firms near the frontier. But it also means that the impact of competition on incumbent innovation will be lower than in advanced countries and, potentially, net negative, as appears to be the case in Chile.

Our findings return us to our original paradox - how to reconcile that plant productivity often appears to increase with trade liberalisation, even in developing countries, but innovation does not. We propose two possible explanations. The first one may arise from the fact that the revenue TFP (TFPR) measure commonly used in the literature to define leaders and laggards combines efficiency, quality, and rents. Thus, if greater trade exposure actually leads to higher margins, as shown by De Loecker and Goldberg (2014), then this will show up as increased ‘productivity’. Our ability to exploit product price data to work with a cleaner measure of proximity to the efficiency frontier, TFPQ, allows us to abstract from mark-ups. The second explanation may arise from the fact that it is possible that increased competition leads to one-off adjustments - shedding excess workers, for example - but does not lead to dynamic increases arising from innovation.

Clearly, a finding of limited incumbent rises in innovation and perhaps lesser confidence in previous findings of increased productivity with trade liberalisation does not dictate reducing competition. Competition works through other margins, such as the reallocation of resources from low-productivity plants to high-productivity plants and through the entry of more productive plants and the exit of less productive ones (Melitz and Redding 2021). For the same period covered in the present study, Cusolito and Maloney (2018) show that over 60% of the gains in TFPQ in Chile arose precisely from entry and exit. Liu (1993) finds that in the early phases of the Chilean reforms, much productivity growth precisely occurred along the extensive margin, which rings true given the extraordinary levels of protection and distortions being unwound at the time.

But the evidence does suggest that the positive impact of competition is likely to be greater, the larger the share of frontier-proximate firms. Hence, raising the capabilities of firms and their access to resources may be an important complement to pro-competition policies. This might include extending managerial consulting programs, strengthening local innovation systems, supporting standards compliance, fostering technology adoption, and ensuring access to longer term finance, among other firm-level initiatives.

References

Akcigit, U, S T Ates and G Impullitti (2018), “Innovation, trade policy, and globalization”, VoxEU.org, 02 July.

Aghion, P, A Bergeaud, M Lequien, M Melitz and T Zuber (2021), “Opposing firm-level responses to the China shock: horizontal competition versus vertical relationships?”, Unpublished manuscript, Harvard University.

Aghion, P, N Bloom, R Blundell, R Griffith and P Howitt (2005), “Competition and Innovation: An Inverted-U Relationship”, The Quarterly Journal of Economics 120(2): 701-728.

Aghion, P, R Blundell, R Griffith, P Howitt and S Prantl (2009), “The effects of entry on incumbent innovation and productivity”, The Review of Economics and Statistics 91(1): 20-32.

Autor, D, D Dorn, G H Hanson, G Pisano and P Shu (2017), “Competition from China reduced innovation in the US”, VoxEU.org, 20 March.

Autor, D, D Dorn, G H Hanson, G Pisano and P Shu (2020), “Foreign Competition and Domestic Innovation: Evidence from U.S. Patents”, American Economic Review: Insights 2(3): 357-374.

Bloom, N, M Draca and J Van Reenen (2016), “Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT and Productivity”, Review of Economic Studies 83(1): 87-117.

Campbell, D and K Mau (2021), “On ‘Trade Induced Technical Change: The Impact of Chinese Imports on Innovation, IT and Productivity’”, The Review of Economic Studies, forthcoming.

Cohen, W M (2010), “Fifty years of empirical studies of innovative activity and performance”, Handbook of the Economics of Innovation 1: 129-213.

Cusolito, A P, A Garcia-Marin and W F Maloney (2021), “Proximity to the Frontier, Markups, and the Response of Innovation to Foreign Competition: Evidence from Matched Production-Innovation Surveys in Chile”, Policy Research Working Paper Series 9757, The World Bank.

Cusolito, A P and W F Maloney (2018), Productivity revisited: Shifting paradigms in analysis and policy, Washington, DC: World Bank Publications.

De Loecker, J and P K Goldberg (2014), “Firm Performance in a Global Market”, The Annual Review of Economics 6: 201-227.

Gilbert, R (2006), “Looking for Mr. Schumpeter: Where are we in the competition-innovation debate?”, Innovation policy and the economy 6: 159-215.

Gorodnichenko, Y, J Svejnar and K Terrell (2010), “Globalization and innovation in emerging markets”, American Economic Journal: Macroeconomics 2(2): 194-226.

Hashmi, A R (2013), “Competition and Innovation: The Inverted-U Relationship Revisited”, The Review of Economics and Statistics 95(5): 1653-1668.

Hashmi, A R and J Van Biesebroeck (2016), “The Relationship between Market Structure and Innovation in Industry Equilibrium: A Case Study of the Global Automobile Industry”, The Review of Economics and Statistics 98(1): 192-208.

Kueng, L, N Li and M-J Yang (2016), “The Impact of Emerging Market Competition on Innovation and Business Strategy”, NBER Working Papers 22840.

Liu, L (1993), “Entry-Exit, Learning, and Productivity Change Evidence from Chile”, Journal of Development Economics 42(2): 217-242.

Melitz, M J and S J Redding (2021), “Trade and Innovation”, VoxEU.org, 28 July.

Jack Mountjoy and Brent Hickman, "The Returns to College(s): Estimating Value Added and Match Effects in Higher Education," University Of Chicago, January 2020, https://bfi.uchicago.edu/working-paper/the-returns-to-colleges-estimating-value-added-and-match-effects-in-higher-education/

Overall the paper does look at admitted “elite” students choosing less selective schools however I don’t see a carveout for those students and STEM selection, "...While Figure 2 shows that admission portfolio controls nearly eliminate imbalances in observable student potential acrosscollege treatments, a lingering concern with the matched applicant approach is that it relies on “the small share of students who make what is a very odd choice” (Hoxby, 2009): enrolling in a less selective college when admitted to a more selective alternative. Table 2 directly investigates the nature of this identifying variation in our sample, and finds that such choices are actually far more common than the concern supposes. The first section of Table 2 shows that among students in our identifying sample, i.e. those admitted to at least two colleges, only 55% end up enrolling in their most selective option, with the average admission portfolio spanning a selectivity range of 116 SAT points (SD 78). The second section of Table 2 shows that this phenomenon is not confined to students choosing solely among less selective institutions. Of the 27% of students in our identifying sample who are admitted to UT-Austin, the most selective campus in our students’ choice sets, only 58% choose to enroll there. And the remainder are not simply sidestepping en masse over to the other flagship: conditional on being admitted to UT-Austin and not being admitted to Texas A&M, still only 60% of students choose UT-Austin, meaning 40% forgo it in favor of a less selective, non-flagship school. Very similar patterns also arise among Top Ten Percent students in our sample, who are guaranteed admission to every Texas public university they apply to. Only 30% of them end up enrolling at UT-Austin, and 25% at Texas A&M, leaving fully 45% who decline to exercise their flagship entitlement and instead fan out across the 28 non-flagship campuses in our sample...."