The Puzzle of Global Inequality

During a Science Breakfast at #LiNoEcon moderated by Romesh Vaitilingam (left) laureate Eric Maskin, young economist Devaki Ghose and Howard-Yana Shapiro, Chief Agricultural Officer, Mars, Incorporated, discussed how to address global inequality.

During the Mars Science Breakfast moderated by Romesh Vaitilingam (left) laureate Eric Maskin, young economist Devaki Ghose and Howard-Yana Shapiro, Chief Agricultural Officer, Mars, Incorporated, discussed how to address global inequality.


New policies are needed to tackle the surprising rise in inequality within developing countries, even as they have become more integrated into the global economy. That was the core message of a panel of researchers speaking at a science breakfast sponsored by Mars, Inc., on Thursday, 24 August at the 6th Lindau Meeting on Economic Sciences.

The fact that the dramatic growth in average income in large developing countries like China and India has led to increased inequality is ‘deeply troubling’, according to the opening speaker, Nobel Laureate Eric Maskin.

This seems to contradict the long-established theory of comparative advantage, which predicts that relative wages of unskilled labour should rise as their trade increases. It also contrasts with what happened in previous periods of globalisation, for example, in the late 19th century.

Professor Maskin explained that what has changed is that the production process has been internationalised. Communications technologies now allow companies to establish just-in-time global supply chains, and to employ skilled workers around the world, so that the gains of trade are no longer distributed on a countrywide level.

Domestic migration is also fuelling inequality, he added. There is a growing gap between the city and the countryside in developing countries. Those who move to the cities have improved opportunities for education, jobs and income, while the countryside is increasingly impoverished.

Panel member Devaki Ghose, of the University of Virginia, one of the young economists attending the Lindau meeting, drew on her experience of research in India to reinforce these points.

She noted that India’s high-tech sectors, such as its IT outsourcing business, which has been a huge international success, employ only a small percentage of the Indian workforce. It is only open to a small proportion of the population – under 6% – who are both computer-literate and English speakers. She also said that these high-tech firms are concentrated in just a few states in India where they have close links to universities.

In contrast, 60% of the Indian population works in agriculture, where they face problems of low productivity, poverty and lack of investment in modern production techniques.

Dr Ghose cited a personal example, where a large family she knew from a tribal area was unable to farm all the land they owned, but were too poor either to hire extra labour or to buy expensive inputs like fertiliser to improve crop yields. What’s more, the legal system in India, which seeks to protect poor farmers’ land ownership rights, prevented them from selling part of their landholdings to others who could make more productive use of it.

Genetic scientist Dr Howard-Yana Shapiro, chief agricultural officer at Mars, Inc, argued that now was the time for action. What we need, he said, is ‘a change of theory, not a theory of change.’

He pointed out that 37% of the population in rural Africa is malnourished at birth, as are 43% of Indian children. There is a moral obligation to tackle the problem of chronic malnutrition in countries where farmers cannot produce enough food to feed themselves. He said that only an inclusive approach, which could both discover solutions and scale them up would work, using the skills of industry, universities, NGOs and governments alike.

Mars is committed to developing new crop varieties with increased yields that can be freely distributed to farmers. Dr Shapiro said that although the yields on the ten major food crops may have reached their natural limits, there are great gains to be made by genetic modification of 100 less widely grown food crops in Africa.

In India, Mars is working with farmers to improve the yields of chick peas, one of its major food crops yet a commodity for which continuing low yields means it still has to be imported from abroad. Mars has also mapped the genetic sequence of cacao to breed a higher yielding, disease resistant tree, which can also produce tastier chocolate. The company has made the genome data freely available to growers in developing countries.

Professor Maskin suggested that higher crop yields alone would not be enough to tackle rural inequality, as early adopters would gain at the expense of those who could not or would not take up the new crop varieties.

There was considerable discussion about the incentives that might motivate companies to take actions that tackle poverty and inequality, including improving human capital through training. Professor Maskin expressed scepticism that many companies would do so on their own initiative without government incentives such as tax breaks.

Dr Shapiro commented that although Mars had an advantage as it is a privately held company that is not subject to short-term pressure from shareholders, other companies, such as rivals Nestle and Unilever, were following in its footsteps, in their own long-term self-interest.

He added that tackling climate change was another area where companies, such as Mars, were increasingly willing to act on their own to develop a zero carbon footprint, independent of government actions such as the US decision to withdraw from the Paris agreement on climate change.




Elderly Europe

Picture/Credit: JodiJacobson/

Picture/Credit: JodiJacobson/


Europe is growing old. We tend to regard Japan’s old age dependency problem as exceptional: but populations are also ageing rapidly across the whole of Europe. Persistently low birth rates in many countries, coupled with rising longevity due to improvements in healthcare and nutrition, is increasing the proportion of elderly to working-age people. In some countries, this is exacerbated by emigration of the young.

Germany’s population is already the second oldest in the OECD. In 2015, there were about 35 people aged 65 and older for every 100 working-age adults: the OECD predicts that by 2060, this proportion will have doubled. Portugal’s population is ageing even faster: the ratio of over-65s to working-age adults is projected to rise from about 32% at present to over 75% by 2075.

Nor is population ageing limited to Eurozone countries. Poland, currently a comparatively young country, is ageing faster than Germany or Portugal: the OECD forecasts that its old age dependency ratio will hit 57% by 2075.


OECD (2015), Demographic old-age dependency ratios: Historical and projected values, 1950-2075, in Pensions at a Glance 2015, OECD Publishing, Paris.

Demographic old-age dependency ratios: Historical and projected values, 1950-2075, in Pensions at a Glance 2015, OECD Publishing, Paris.

Population ageing is slowest in Scandinavian countries and France, where birth rates are higher than in Germany. But even in these countries, the birth rate is below the OECD replacement rate of 2.1 children per woman and the old age dependency ratio will reach nearly 50% by 2075.

Europe is slowly recovering from the crises of recent years. GDP growth is resuming, though at a glacial pace, and unemployment is gradually falling. But the rapid demographic shift raises serious questions about future prosperity. State pension ages are rising across Europe, to 67 and beyond, and many people are choosing to work on beyond their state pension age. The OECD’s definition of ‘old age’, which presumes complete withdrawal from the workforce at 65, may already be out of date.

But raising the age at which people can claim their state and occupational pensions is extremely unpopular with voters, and it is often fiercely resisted. Many older people have a deeply entrenched belief that they have paid for these pensions, so raising the age at which they can take them is a form of theft.

The dependency of those who are not working on those who are is not widely understood, and governments have made little attempt to explain it. The likelihood is, therefore, that pension ages will not rise as much as increases in longevity suggest that they should.

Poland has even reduced its state pension age recently and reintroduced an early pension for women, for which it may face a legal challenge by the EU. Whether these changes are affordable does not concern those who expect to receive their pensions at the age ‘promised’ when they started work half a century ago.


Demographic old-age dependency ratios: Historical and projected values, 1950-2075, in Pensions at a Glance 2015, OECD Publishing, Paris.

Demographic old-age dependency ratios: Historical and projected values, 1950-2075, in Pensions at a Glance 2015, OECD Publishing, Paris.

It is already clear, however, that affordability will be a problem. Germany, for example, is projected to spend 12.5% of GDP on pensions by 2050. Elderly people also make high demands on health and social care services: as the proportion of elderly in the population grows, the cost of these services for working-age adults will inevitably rise. The picture is one of a growing tax burden on a shrinking workforce.

Even if people accept the need to work for much longer, there will be structural changes to the economy from the demographic shift. Older people tend not to be as productive as younger: to some extent, this is offset by greater knowledge and experience, but as cognitive faculties start to decline, this effect diminishes.

Older people are also more likely to work part-time, to eschew work that takes them away from home, and to have health problems or caring responsibilities that restrict the types of work they can undertake. As the proportion of older people in the economy grows, therefore, we might expect poorer productivity, which if not addressed would result in persistently lower GDP growth. Countries need to invest in technology that raises productivity, particularly among those who have physical and mental limitations.

But from the point of view of Germany’s ageing population, ensuring their futures should be the top priority of their government, even if it means pursuing policies that, by stealing demand from other countries, make it more difficult for them to provide for their own people. This is understandable, but it is not sustainable. For it is not just Europe that is ageing: it is three quarters of the world.

If only a few countries were experiencing rapid population ageing, and the rest had young and growing populations, then for those countries to pursue policies aimed at maintaining a high saving ratio and a large current account surplus would make sense.

After all, young and growing populations tend to have excess demand, so an ageing population can siphon off some of it with impunity – indeed, this might help younger countries to control inflation. But when most of the countries in the world are ageing rapidly, policies that rely on demand from other countries are beggar-my-neighbour policies.

The IMF recently expressed concern that the US, and to a lesser extent the UK, are acting as ‘consumers of last resort’, running large current account deficits to mop up their excess savings. ‘While the rotation of excess imbalances toward advanced economies – with deficits increasingly concentrated in the United States and United Kingdom – likely entails lower deficit-financing risks in the near term,’ the IMF said, ‘the increased concentration of deficits in a few economies carries greater risks of disruptive trade policy actions.’ It called on countries with ‘fiscal space’ to rely less on monetary stimulus and to spend more.

Understanding and planning for the challenges of an ageing population requires international cooperation, not competition. We need to have an adult conversation about how the needs of the old can be made affordable for the children and the unborn who have no voice in this debate but will bear the consequences of our decisions in years to come.


Frances Coppola was speaking on a panel with Nobel Laureates and young economists during a press talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meeting

Frances Coppola was speaking on a panel on the future of the European economy with Nobel Laureates and young economists during a press talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

Good Pension Design

Photo/Credit: laflor/

Photo/Credit: laflor/


Ask anyone under the age of 25 about pensions and – unless they are young economists – they will probably yawn, raise their eyes heavenwards and change the subject. This is despite the fact that the provision of an adequate income in retirement is one of the most important obligations on any government wishing to prevent their senior citizens falling into poverty.

As the British economist (Lord) Nicholas Stern put it: ‘A key test of a decent society is the living standards of its older people, particularly the poorer among them.’ Yet many societies in both the developed and developing world fail that test.

For this reason, Professor Peter Diamond, the recipient of the 2010 Nobel Prize in Economic Sciences, has devoted much of the last decade to analysing the differences between different pensions systems.

According to Professor Diamond, economics recognises the multiple objectives of pension plans: smoothing spending across a lifetime; providing financial insurance; poverty relief; and redistribution.

‘It starts with a simple framing: what are we trying to do with a pensions system? It’s economic security in old age and it has multiple objectives and calls for multiple policies’, he told the audience of young economists in Lindau, adding that basic economics has its limitations when applied to pensions.

The reality is that most people do not save enough for their retirement. This creates what Professor Diamond calls ‘a paternalistic need’ to use policy measures to encourage people to save more during their working lives.

Finding that solution has proved hard because governments naturally seek to find a unified solution that will meet the needs of a highly diversified population, with different needs for different groups of people, most notably the different needs of male and female workers. The downward trend in workers’ earnings and increasingly ageing populations only add to that need.

Policy-makers have trouble when it comes to pensions design because of a number of limitations. Chief among these are high levels of financial illiteracy. For example, a survey found that four of five people (78%) in the US do not understand compound interest, while Arthur Levitt, the head of the Securities and Exchange Commission in the 1990s, famously warned that more than half of Americans do not know the difference between a stock and a bond.


Peter Diamond during his lecture at the 6th Lindau Meeting on Economic. Photo/Credit: Christian Flemming/Lindau Nobel Laureate Meetings

Peter Diamond during his lecture at the 6th Lindau Meeting on Economic Sciences. Photo/Credit: Christian Flemming/Lindau Nobel Laureate Meetings


Professor Diamond said that the products designed by some financial firms are based on that low level of understanding. ‘There are signs that financial firms use complexity to hide financial risk. Obfuscation is something that is often highly profitable.’ This has perhaps enabled firms to claw back a lot of money through annual charges, where a 1% management fee that might look miniscule on paper in fact ends up taking almost 20% of the value of the funds after 40 years.

This is important given that increasing pressure on public finances means that governments are keen to lower the costs of direct state provision and increase the role of the private sector. The most commonly used plan is the defined contribution pensions where employers and/or employees pay money into pension funds, the value of which the workers only discover when they retire and convert their pension pots into an annuity.

Professor Diamond highlighted some countries that have worked to improve the retirement outcomes of their citizens. Chile, for example, scrapped a poor existing pensions system and replaced it with individual savings accounts.

But the Chilean policy-makers discovered that private sector competition was insufficient to deliver the best outcome. Confidence in the system was undermined by the fact that it was put in place by an unelected military dictatorship; and the fact that many people worked on the black market and did not contribute. In 2008, the government added a scheme that was aimed at people who were getting little out of the current system.

Sweden also scrapped its system in the 1980s and replaced it with a contributory system in which the government collected the payments and handled the record system, but around 850 companies were allowed to offer products. When it became clear that many people would not or could not choose, the government set up a default system that ultimately became an option which half of Swedes choose because it is well designed, carries a low cost and includes an asset allocation strategy that reduces risk as workers near retirement.

Professor Diamond’s final example was the US Thrift Savings Plan for more than three million civil servants, which has low costs because it is dealing with a single employer that processes all salary transactions electronically. More significantly, it was set up with five mutual funds that each carries out a regular bidding process for private firms to run them, which also reduces the management cost.

Perhaps the main takeaway from Professor Diamond’s lecture was that countries with a good system are the ones that have kept working at it. As he concluded: ‘This is the reason why I find working on pensions very satisfying and very important.’

Europe: Dangers Ahead?

The Eurozone recovery is fragile, with Europe still facing many economic challenges, according to Nobel Laureate Sir Christopher Pissarides speaking at a press briefing at the 6th Lindau Meeting on Economic Sciences on Wednesday 23 August.

The refusal of Germany to spend more – despite large budget and trade surpluses – is inhibiting growth in other Eurozone countries, he argued. Germany’s policy, he suggested, is driven purely by political decisions that relate to the German economy, not the Eurozone. Austerity is still overshadowing the recovery.

Other dangers lie ahead, Professor Pissarides added. They include the risk to the financial sector, due to the failure of the Eurozone to complete banking reform, and the fact that Europe is lagging behind its rivals in the United States and the Far East in terms of productivity growth.


Press Talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings

Press Talk at the 6th Lindau Meeting on Economic Sciences: Veronika Stolbova, Lenka Fiala, Eric Maskin, Romesh Vaitilingam, Chris Pissarides and Frances Coppola (from left). Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meetings


In banking, despite the introduction of a new resolution mechanism, it remains unclear who would bear the burden of bailing out a major bank that was about to fail. And there are still worries about the fragility of the banking system as a whole, leading to excessive regulation.

Professor Pissarides said that the long-term growth of Europe will depend on supply-side reforms that encourage investment in infrastructure – not just roads and ports but also digital technologies to encourage innovation. He was more optimistic about changes in labour markets in some countries, which he thought would have the long-term effect of reducing unemployment though it would take a number of years before the reforms worked through.

Nobel Laureate Eric Maskin had a radical suggestion for a structural change to address the disconnect between European monetary policy, which is determined for the Eurozone as a whole, and fiscal policy, which is determined at a national level. He said that politicians could be taken out of the equation by the creation of an independent fiscal board modelled on the structure of the European Central Bank.


Eric Maskin during the Press Talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meeting

Laureate Eric Maskin during the Press Talk at the 6th Lindau Meeting on Economic Sciences. Picture/Credit: Julia Nimke/Lindau Nobel Laureate Meeting


Under such an arrangement, experts, appointed by European governments but not subject to their control, would draw up targets for budget surpluses or deficits for each country, using an agreed set of rules. Countries would be free to decide how to meet those targets, and what balance of taxation and spending they wanted to adopt. Professor Maskin conceded that convincing Germany to adopt such measures would be a considerable challenge.

Financial journalist Frances Coppola suggested that Germany’s action was also driven by another of the big challenges facing Europe: the rapid ageing of its population and the need to make provision for an economy where there would be fewer workers relative to dependents. She suggested that Germany’s response to its budget surplus is rational when this is taken into account.

Veronika Stolbova, one of the young economists participating in the Lindau Meeting, pointed out another long-term danger for the Eurozone: the financial effects of climate change. Her research suggests that it is institutional investors – such as mutual funds and pension funds, whose income could be damaged by investing in industries – that could be negatively affected by climate change.

The question of political leadership loomed large in a discussion of the way forward for the Eurozone. Professor Pissarides argued that there was no high-level political forum at the European level that could look at long-term economic issues. The Eurogroup, he said, is focused only on short-term crisis resolution measures.

Professors Maskin and Pissarides agreed that change could only come about if there were leaders prepared to step up with a big vision that transcended national boundaries – such as the founder of the EU, Jean Monnet, or General George Marshall, whose Marshall plan led to Europe’s economic recovery after World War II. But with no such leaders in the sight, the long-term structural problems of the European economy will not be resolved any time soon.


This post is also available in German.

On the Future of the Euro Area

The euro area crisis has laid bare institutional, political and economic weaknesses in the set-up of Europe’s monetary union. In the following, I outline some of these weaknesses and sketch possible solutions – or at least improvements.


Euro sculpture, Frankfurt, Germany. Photo/Credit: instamatics/

Euro sculpture, Frankfurt, Germany. Photo/Credit: instamatics/

First, fiscal oversight of the members is as toothless as it can be. Once Germany and France had violated the Stability and Growth Pact without being sanctioned in the early 2000s, monitoring of national budgets has not been credible – a problem of enforcement. There is also a problem of reporting, as evidenced by Greece’s use of dodgy numbers to gain access to the euro in 2000.

In my view, national budgets that violate the Maastricht criteria for the soundness and sustainability of public finances (which may need some updating) should require approval by a European Union body – probably the European Commission as the ‘guardian of the treaties’, but preferably the European Parliament given its stronger democratic mandate.

The question is whether such fiscal oversight is compatible with the treaties and with the constitutions of the members, as it means nothing less than a partial loss of national budgetary sovereignty. Maybe Germany and other (perhaps overzealous) supporters of fiscal prudence can trade such oversight for some degree of debt mutualisation, which sounds like a typical European idea.

Second, political interaction is too weak. The euro area is a very diverse construct with the ageing economic giants of Germany and France at the centre, young developing economies such as Slovenia and the Baltic states, and countries that have been unfortunately plagued by political gridlock and institutional inadequacy, notably Italy and Greece. Naturally, these countries have different aims for economic policy, and finding a compromise will always be difficult.

I like the idea of officials of the European Central Bank (ECB) being invited to address all the national parliaments as well as the European Parliament. Similarly, heads of state and government could be invited to speak to the parliaments of other members. This would be a further step towards a common European identity, explaining to one another why the economic policy of a government is the way it is – and of course listening to the explanations by others – not behind the closed doors of the European Council, but in public.

Third, ECB officials should realise that it is beyond the institution’s powers to create economic recovery on its own. Neither of its unconventional policies – from full allotment to quantitative easing – has lifted European inflation or expectations of inflation. In most of the euro area, inflation rates are well below the target of close to but below 2% in the medium run. In addition, business activity is weak, with the notable exception of Germany.

We can learn from this that a central bank’s powers are limited to managing the business cycle – which of course it must do. ECB policy in the early days and weeks of the crisis was a flawless execution of a central bank’s textbook role of ‘lender of last resort’. More recently though, all it has done is buy time for fiscal policy to act, at the expense of bank stability – as full allotment saved zombie banks that dragged economies down (notably Italy’s) while rock-bottom interest rates threatened the business model of healthy banks.

The ECB needs to phase out its unconventional policies for three reasons:

  • First, they prevent consolidation of the European banking market and threaten the stability of healthy banks.
  • Second, preparations need to be made for the next downswing of the business cycle, as the very modest recovery in Europe should be close to its end, judging from past lengths of the cycle.
  • Finally, governments need to face greater pressure to get their act together and implement reforms that improve growth, foster competition and increase employment.

The reasons why the members are still struggling to recover are quite different, so there is no ‘one-size-fits-all’ economic policy. For example:

  • Germany needs more investment in (digital) infrastructure and childcare, as well efforts to foster its start-up culture. The country also needs to clean up the mess of the government-car industry nexus that seems to be at the centre of the ‘Dieselgate’ scandal.
  • France is taking the first steps towards reforming its labour market and needs to continue on this path.
  • Spain, too, must reform its two-tier labour market in order to reduce unemployment, particularly among young people.
  • Italy needs to sort out its pile of debt (a task that is likely to require the assistance of the ECB) and fix its institutional set-up in a way that gives the country more stable governments.

Whatever the weaknesses of the members, Europe’s mess is hardly the fault of the euro per se, although it did play a decisive role. Without the possibility of devaluing your own currency, a country’s adjustment after years, sometimes decades, of bad policy has to come strictly from ‘internal devaluation’ – a fancy term for falling prices, subdued demand, stalling investment and unemployment. The euro did not cause the problems, but it has prevented the usual adjustment, and policy-makers have been unable – or worse, unwilling – to adapt.

The lesson is that in a monetary union, sane and sustainable economic policy becomes ever more important both for a country’s own economy and for the other members. Burden-sharing of one kind or another may help, but it is no substitute for economic prudence. While this lesson is clear, it remains uncertain how Europe will react to the lesson in terms of both institutions and policy.

Smart Resettlement: A Refugee Success Story From Rural Australia

The town of Nhill in rural Australia is an unlikely setting for a refugee success story. A farming community 400 kilometres inland from Melbourne, Nhill’s 2,500 inhabitants are largely made up of white, conservative Christians. Yet over the course of the current decade, the town has seen a remarkable transformation.

Seven years ago, Nhill struggled with a steadily decreasing population coupled with a lack of workers, as is symptomatic of many Australian country towns. To fill its employment needs, the town’s main producer invited a handful of refugees from Myanmar to resettle in Nhill and work at the local factory. Today, over 200 refugees call Nhill home and are credited with having revived the town, with an estimated net gain of more than AU$42 million (€28 million) over a four-year period.


The town of Nhill in Victoria, Australia. Photo/Credit: Mattinbgn CC BY-SA 3.0

The town of Nhill in western Victoria, Australia. Photo/Credit: Mattinbgn, CC BY-SA 3.0, Wikimedia Commons


Stories like Nhill’s rarely make the headlines during the world’s largest refugee crisis since the Second World War. Given the wave of recent terrorist attacks on European soil, the focus of the media and public discourse has understandably been on security.

But there remain many questions about how best to integrate refugees once they have been approved for resettlement in a host country. Randomly allocating new arrivals to Western cities with few employment prospects and expecting a smooth assimilation is unlikely to be a successful long-term strategy. And given that there are 65 million forcibly displaced people worldwide in need of resettlement, with another 30,000 more displaced every day, it is clear that the issue of resettlement will not go away soon.

We should thus start to learn from positive examples like Nhill. Most academic research to date suggests that the main channel by which newly resettled refugees produce an economic cost to society (if they do at all) is through the labour market. Increased competition for jobs (particularly among lower-skilled workers) may put pressure on employment and wages.

But not all parts of host countries face the same economic conditions – and so it is logical to investigate resettling new arrivals in geographical areas that actually need to increase their population and workforce.

Done correctly, hosting refugees can be less about minimising burdens and more about cultivating benefits. In addition to filling employment and skills gaps, refugees and migrants are more likely to start new businesses that create wealth, employ local residents and stimulate investment.

Other rural towns in Australia have followed Nhill’s lead in using refugee resettlement to combat population ageing. Several fading Italian towns in Sicily and Sardinia have been rejuvenated by the successful integration of Syrian refugees. And a small town outside Atlanta, Georgia, has been proudly labelled the ‘Ellis Island of the South’.


Refugees Welcome Banner in Dortmund, Germany. Photo/Credit: Michael Luhrenberg/

Refugees Welcome Banner in Dortmund, Germany. Photo/Credit: Michael Luhrenberg/


These are not isolated examples. But ultimately, the reasons for the reluctance to accept and resettle asylum-seekers may be less about economics and more about psychology. Fear of cultural contamination and consequent frictions have cultivated a popular view that resettling refugees places a strain on the social fabric of communities.

Are these fears justified? Social scientists have debated this issue for decades, as what appears to be a social impact may in fact be confounded with symptoms of economic stress. Cases like Nhill, however, can help to shed light on this issue.

In recent research, we find strong evidence that resettlement has had surprisingly positive social effects on the community, even after taking account of economic benefits. Nhill locals trust refugees more; they also hold more positive attitudes towards resettlement in general.

And the benefits don’t just accrue to the locals. Under carefully targeted rural resettlement policies, refugees receive crucial employment security and a visible role in their new community, which can ease the process of integration. In Nhill, the refugees report feeling safer and more positive about resettlement than fellow refugees in the cities.

In principle, there is little reason why such policies can’t be ‘win-win’. Overall, the message coming out of our research is that ‘smarter’ resettlement programmes in small towns may be able to harness economic and social benefits for locals and migrants alike.

While the evidence does suggest that small, rural communities are good candidates for successful resettlement, of course this is not a panacea by itself. When unplanned and unmanaged, refugee resettlement can overstretch communities’ resources and potentially lead to social tensions.

But our research begins to identify other common elements from successful towns. A gradual, transparent process, strong community leadership and well-established communication channels are key components of an effective policy. One thing is clear: given the extent of the challenges facing policy-makers in the area of resettlement, lessons from models of success are too important to ignore.

Meanwhile, in Nhill, the locals aren’t thinking in terms of trade-offs. The refugees have been a success – both economically and culturally – and the town’s focus has remained on participating in and embracing their community as a whole. This includes some new additions to the community calendar, such as the colourful celebration of Burmese New Year, hosted by the refugees themselves. The new arrivals haven’t turned out to be a burden at all.

Happier Than Ever

Wellbeing has become an important topic for researchers and politicians. Measuring wellbeing enriches the discussion of what determines a good life.

Until recently, gross domestic product (GDP) was the only welfare indicator of a nation. But it has been criticised as a comprehensive indicator: first, because it underestimates many factors, such as the value of having a job or good health; and second, because it does not take account of such factors as income inequality, quality of education, environmental status and voluntary work.


Photo/Credit: Jan-Otto/

People at the beach of St.Peter-Ording in Germany. Photo/Credit: Jan-Otto/


Measuring Wellbeing

 For a rigorous analysis of wellbeing, it is important to use a representative longitudinal survey that covers a variety of demographic, economic, social and personal characteristics. A common way to measure wellbeing is to simply ask the question: How satisfied are you with your life, all things considered? Please answer on a scale from 0 to 10, where 0 means completely dissatisfied and 10 means completely satisfied.

This scale is used by many major surveys, such as the German Socio-Economic Panel (SOEP) and the World Value Survey (WVS). The 11-point scale is often transformed into three categories: high satisfaction (8, 9 or 10 points); medium satisfaction (3-7 points); and dissatisfaction (0,1 or 2 points). This is a simplification of the symmetric scale that my colleagues and I use in our research.


Wellbeing in Germany

Wellbeing in Germany is now at its highest level since reunification in 1999. In the latest representative SOEP survey from 2015, 55% of German residents said that they are very satisfied with their life in general. Only 2% were not satisfied and the remaining 43% reported medium satisfaction with their life.

On average, reported life satisfaction was 7.28 in 2015. Ten years earlier, in 2005, the comparable figure was 6.84 and in 1995, it was 6.86. This positive trend has arisen because substantially fewer Germans report being dissatisfied. At the same time, the fraction of Germans that perceive themselves as very happy has remained constant across the decades. The positive shift results in lower variance: in other words, there is less inequality in the distribution of life satisfaction across the population.


The Reasons: Economic and Social Improvements

 What are the reasons for the 6.4% increase in Germans’ average life satisfaction between 2005 and 2015? The three most important impact factors for a good life are employment, health and social interaction (number of friends, marriage and so on) – and all three of these factors have improved over the past two decades.

The unemployment rate has reached an all-time low since reunification: just over two and a half million people are unemployed today, whereas in 2005, the number of unemployed people was nearly twice as high with about five million people searching for a job. Life expectancy has also increased, including among people on lower incomes. In addition, the digital transformation has simplified social interactions and the divorce rate has decreased.


Correlation but Not Necessarily Causation

While noting these changes in employment, health and social interaction, it is very important to understand that causal evidence is rare when analysing wellbeing. Nearly all findings on wellbeing represent correlations only and no causal evidence.

For example it is not feasible to find out whether marriage makes people happy. There are at least two potential explanations for the fact that married people are happier; one is that happier people find a partner more easily; the other is that marriage improves happiness. It is hard to find evidence that makes it possible to discriminate between these explanations.

Germany’s Monetary Mythology: Central Bank Independence and Crafting the Past

Financial district in Frankfurt, Germany. Photo/Credit: fotoVoyager/

Financial district in Frankfurt, Germany. Photo/Credit: fotoVoyager/


The job of a central bank is to ‘take away the punch bowl just when the party gets going,’ as William McChesney Martin, an American central banker, once quipped. In other words, the central bank should raise interest rates to rein in the economy before things get out of hand.

This is not always a popular job – and some central banks have done it better than others. Think of the Deutsche Bundesbank, for instance, which celebrated its sixtieth birthday at the start of this month. West Germany’s central bank was among the most successful in the post-war fight against inflation.

Indeed, we have long since reached the stage where the image of the Bundesbank has become a caricature. The German central banker: conservative, independent and not a smile to be seen. To be sure, if there were a punch bowl at a party, the German central banker would be the first to confiscate it.

Reputation is a priceless asset in the world of central banking. Credibility matters. How can we explain the Bundesbank’s reputation? Statistics are important, of course. The Bundesbank ensured that Germany experienced lower inflation rates than its trading partners, boosting the country’s competitiveness and prosperity. Such success breeds reputation.

But can numbers explain everything? Well, no. Another important factor can be history – or, at least a certain version of history. Germans, so the story goes, have long been scarred by the traumatic experience of inflation in 1920s: ever since, they have been dead set against inflation and for an independent central bank.

So no wonder the Bundesbank has been so successful fighting rising prices. The German central banker is motivated by the powerful example of his or her history.

But hold on a second. This picture is a little too neat – and there are some holes in the story. For example, Germany is not the only European country to have experienced a hyperinflation during the twentieth century. A bunch of others, including Poland and Hungary, have endured them. Yet it is only Germany that places price stability at the top of its list of economic priorities, ostensibly because of its traumatic history. What makes the German inflation so special?

To understand why Germany’s political culture is so fixated on inflation, we need to focus less on the hyperinflation itself and more on what happens afterwards. This is where approaches of cultural history – and my research – come in.

Put more precisely, we need to examine how the country’s monetary history became caught up in a post-war power struggle over the direction of monetary policy between the central bank, on the one hand, and the federal government, on the other.

The lessons stemming from Germany’s experience of inflation became politicised and mobilised into arguments in support of – and against – the need for central bank independence.

Wait, against? Contrary to popular belief, central bank independence was a controversial issue in 1949, the year in which the West German state was established. It was controversial because the Reichsbank, Germany’s central bank prior to the end of the Second World War, was legally independent of government instruction during both the hyperinflation and deflation. That is a historical fact – and it is one that is often forgotten.

In part this is because, today, we tend to associate independent central banks with economic stability, not instability. After all, that is what (most of) the post-war period teaches us. In 1949, however, that association was a far tougher sell. It was not a given. So the link between central bank independence and economic stability had to be carefully crafted, using select examples taken from Germany’s inter-war history, with other, more inconvenient facts shoved to the side.

Both supporters and opponents of central bank independence reverted to historical lessons amid efforts to influence the provisions in the Bundesbank Law, a crucial piece of legislation that established the post-war Bundesbank as we know it today.

Historical narratives of Germany’s past were forged amid this struggle for power – and in the end, those lobbying for central bank independence won the day.

Crucially, however, the Bundesbank Law itself reaffirmed this powerful struggle over monetary policy. In providing for a central bank that was independent of political instruction, the law made it highly likely that conflicts between the central bank and government would become ‘dramatised’ and spill into the public sphere.

These public controversies often centred on central bank independence. It was in these very episodes that the lessons of Germany’s experience of inflation became relevant yet again, geared in support of central bank independence.

Some historical experiences are more useful than others. A post-war institutional power struggle, one that centred on monetary policy, made Germany’s history of inflation more relevant for future generations of West Germans. Contemporary political disputes were treated in distinctly historical terms. An institutional struggle helped to foster this cultural preoccupation with inflation. That is what has made the German inflation so special – and so consequential – as opposed to those experienced by other countries.

Reputation is a priceless thing in the world of central banking – and it is even more powerful when a central bank has the right kind of history, or story, backing it. ‘The past is never dead’, the novelist William Faulkner once wrote: ‘It’s not even past.’ In the post-war era, Germany’s monetary history became a political football – and it remains one to this day.

Is the Paris Agreement on Climate Change ‘Bad for Business’?

Concerns are growing about the impact of climate change on macroeconomic and financial stability. Researchers, policy-makers and other stakeholders are trying to calculate the costs of climate change – and also whether there are potential opportunities from global warming.

Many see the costs in term of the economic losses from natural disasters associated with climate change. There is a considerable body of research estimating these costs of the physical risks of climate change. But the financial costs potentially go far beyond that, notably as a result of the risks from climate policy.

Growing public awareness of climate change has led many countries to emphasise the importance of ‘turning down the heat‘, aiming to keep global warming to no more than two degrees Celsius above pre-industrial levels. This ultimately resulted in the 2015 agreement made in Paris within the United Nations Framework Convention on Climate Change.

The Paris agreement seeks to mitigate the greenhouse gas emissions that cause climate change, in particular by encouraging ‘fossil fuel divestment’. Climate policies that are being implemented to achieve that ambition include the European Union’s emissions trading system and carbon taxes – fees imposed on the burning of carbon-based fuels such as coal, oil and gas.

Risks from these policies arise from the fact that some financial assets will have to be re-evaluated: for example, firms in the fossil fuel sector will lose their value, while renewable energy firms will rise in value. Financial market participants that own shares in these firms need to know their exposure to climate-sensitive sectors of the economy.

It is important to note that while the physical risks of climate change are difficult to avoid, climate policy risks can be evaluated and diminished if recognised early enough. The crucial questions for policy-makers and the public are first, what are the costs of the transition to a low-carbon economy (‘decarbonisation’); and second, how can the costs of climate change be transformed into opportunities?


A Coal-fired power plant, solar energy and windmills. Photo/Credit: rclassenlayouts/

What are the costs of a transition to a low-carbon economy? Photo/Credit: rclassenlayouts/


Research Evidence

As the inevitable process of decarbonisation gathers speed, more and more financial institutions are becoming concerned with climate policy risks. Many banks, insurance companies and pension funds are recognising the need to ‘stress-test’ their asset portfolios for their resilience to climate policy.

It is important to highlight that shocks imposed on the financial system as a result of climate policy risks are not necessarily negative: they can also be positive and could boost the economy. Financial institutions are interested in finding the best portfolio of assets for the transition to a low-carbon economy.

Several global initiatives are seeking to estimate the costs and gains for the economy on the path to decarbonisation. One example is the Financial Stability Board of the G20, which has launched a Task Force on Climate-related Financial Disclosure, aiming to give firms the incentives to disclose publicly their climate-relevant information and thereby help investors create a sustainable portfolio.

Another example is a Green Finance Study Group, launched under China’s G20 presidency with the support of the Bank of England and proposing to address the challenges of achieving a climate-friendly economic and financial system. Both initiatives have lead to wider awareness of the issue and are working towards a deeper understanding and the development of appropriate measures.

The question of climate-related exposure is also being addressed at the national and regional level. For example, the Carbon Bubble project, commissioned by Germany’s environmental agency, is creating tools for investors to evaluate their climate-related risks for all important asset classes and sectors. Several central banks have conducted analyses of climate stress testing, and the European Commission recently published the interim report of its high-level expert group on sustainable finance.

Most of the proposed new stress-testing methodologies focus on the direct exposure of individuals, firms, pension funds or banks to climate policy risks. But it is also important to consider ‘counterparty climate policy risks’. For example, a pension fund wanting to invest in low-carbon firms might find that the investment fund it uses has a ‘brown’ portfolio rather than a ‘green’ one. This is an illustration of so-called second-round effects.

One recent climate stress test proposes a methodology to take account of second-round effects. By analysing the listed equity holdings of firms, the analysis shows that such effects can amplify positive and negative shocks caused by climate policy and, therefore, could decrease the accuracy of climate policy risk estimations.

Despite growing interest in methodologies for assessing climate-related financial risks, as yet there are no estimates of the magnitude of the exposure of the euro area to climate policy risks. Building on the recently proposed climate stress test methodology, our research is trying to estimate the monetary value of gains and losses for the euro area on the path to decarbonisation.

Taking account of various channels of exposures between euro area governments and financial institutions, our preliminary estimates show that the most exposed to climate-sensitive sectors of the economy are governments, investment funds, insurance companies and pension funds, while banks have relatively little exposure.


Future Challenges for Research and Policy Action

There are many open issues associated with estimating monetary exposure to climate change. First, there is no standardised economic classification for firms that would allow easy estimation of their climate sensitivity; and second, there is no financial transparency that would make it possible to calculate the costs of climate change and, in particular, take account of second-round effects. New policies need to be introduced to resolve these issues.

Finally, not everyone supports the Paris agreement, notably the American president who said during his election campaign that ‘the climate change deal is bad for business.’ Is this really true?

Preliminary findings of our research show that it is not the case. The actual exposure to fossil fuels is small for the euro area and the exposure to climate-sensitive sectors is about 50 percent, which could be both a loss and an opportunity.

Research estimating the extent of climate change effects on business continues and there are many issues to be resolved. But it is widely realised that change is inevitable and society needs to be better prepared for it. With further research on well-defined paths to decarbonisation, safe asset allocation and climate-related financial disclosure, it will be possible to tackle climate change and ‘make our planet great again.’

Why Finance Ministers Prefer Carbon Taxes

‘In Germany, there is massive under-investment in infrastructure’, warns Joachim Käppner of the Süddeutsche Zeitung, one of the country’s most read daily newspapers. He continues: ‘[schools], streets and bridges are crumbling. In Germany, investments of more than 100 billion euros are needed.’ Economists Pedro Bom and Jenny Ligthart confirm Käppner’s warning in a study showing that there is a shortage of investment in infrastructure almost everywhere.

Why is there such an under-supply? One reason is that finance ministers throughout the world are constrained by tight budgets. Next to the need to repay debt, governments are under pressure to lower corporate tax rates to prevent private capital – and with it jobs – from leaving the country.

With the growing integration of world markets, this has become an increasingly harmful ‘race-to-the-bottom’. The problem of crumbling roads, schools and bridges is thus compounded by the problem of finding sources of public revenue to finance maintenance of existing infrastructure as well as investments in new infrastructure.


Photo/Credit: yio/

Photo/Credit: yio/


Carbon taxes can help to solve the problem of tax competition and the under-provision of public goods

 A solution can be found off the beaten track in a study of mine that makes a strong case for green tax reform for the sake of the national budget. My co-authors and I analyse how governments should reform their tax system when they find themselves competing for mobile capital and are constrained by tight budgets, but have to finance productive public investments.

Our results show that it is best to lower corporate taxes and instead put a price on the carbon content of fossil resources. That way, the tax system distorts the economy less while raising higher revenues. If the additional revenues are then invested to increase productivity – for example, in education and infrastructure – everyone is better off.

In short: It’s better to tax ‘bads’ instead of ‘goods’. Protecting the environment and stimulating the economy can go hand in hand.

What explains this result? At first glance, both kinds of tax seem to harm the economy in a similar fashion. Both increase the costs for businesses, potentially encouraging the private sector to react by moving part of its activities abroad.

But a carbon price has the decisive advantage of shifting part of the tax burden away from businesses that produce goods and services, and towards the owners of fossil resources. That way, the carbon price captures the ‘resource rent’ – that portion of a resource owner’s total revenue that is in excess of the costs needed to supply the resource.

When the resource owner’s rent is thus reduced via a carbon tax, resource extraction decisions do not change and there is no adverse impact on the real economy. (The Economist explains rent income using the example of a soccer star’s income.) 

Unless a corporate tax is paid by a monopolist, it cannot capture as much rent as a carbon tax would. This is because businesses in a competitive market have comparably little revenue in excess of their production costs, when we include payments on interest, insurance against risk and managerial activities. Otherwise, high excess revenues would be competed away. 


Even if carbon taxes are implemented only for fiscal reasons, they will help to mitigate dangerous climate change

 Now let’s suppose that finance ministers actually implement our suggested tax reform and succeed in balancing their budgets. Is there not a danger that resource owners will anticipate higher carbon taxes in the future and accelerate extraction? Might carbon taxes then actually harm the environment due to an increase in emissions?

The answer is a clear no: when carbon taxes are used to finance productive public investments, this will affect both the demand for and supply of fossil resources. With supply, the rate of extraction will not increase because rent taxation has no effect on extraction decisions. Therefore, the demand side will fully determine when and how much of a resource is extracted. For buyers of resources, the price of carbon increases, which lowers demand, postpones extraction and reduces emissions. 

This is not to say that we don’t need a global agreement on climate change. A unilateral fiscal reform that includes a carbon tax will not solve the climate problem just by itself. But when politicians, and finance ministers in particular, understand that green fiscal reforms benefit the whole economy, fiscal considerations can be an entry point for more stringent climate policy.


This blog post is based on research reported in ‘Why Finance Ministers Favor Carbon Taxes, Even If They Do Not Take Climate Change into Account’ by Max Franks, Ottmar Edenhofer and Kai Lessmann, published in Environmental and Resource Economics in 2015. The study was recognised as the ‘best overall paper’ at the third annual conference of the Green Growth Knowledge Platform, hosted in partnership with the United Nations Environment Programme (UNEP), the OECD and the World Bank.