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A joint initiative of Ludwig-Maximilians University’s Center for Economic Studies and the Ifo Institute for Economic Research
Bulletin
Volume 19 No. 3
July 2009
Globalisation and Intellectal Property Rights
Innovation is key to a knowledge economy. But what if your ideas and products get commercialised without you seeing a penny for your efforts? As Edwin Lai points out, there
are unquestionable interactions between globalisation, intellectual property rights protection, and innovation, an area he continued to explore while at CES.
(page 3)
Trichet on the ECB Credit Policy
Ifo News
A special Munich Seminar was held at the University of Munich to hear European Central
Bank President Jean-Claude Trichet explain his bank’s steps in tackling the financial crisis
and providing enhanced credit support.
(page 7)
(p. 4-5)
Munich Economic
Summit
(p. 2)
Venice Summer
Institute
(p. 2)
Featured Researchers
Chinese Fertility
As the most populous nation on Earth, everyone takes notice of China’s fertilitiy policies.
But, as Carol H. Shiue’s research has found out, there is more than just fertility policies
behind that country’s fertility behaviour.
(page 6)
Softer Constraints
Lower levels of government, such as provinces or federal states, tend to be more profligate
when it comes to spending. As Thomas Stratmann observes, the softer budget constraints
they are often subjected to tend to make them less fiscally responsible.
(page 7)
Sascha O. Becker
(p. 6)
Dirk Jenter
(p. 6)
Wolfgang Keller
(p. 3)
Edwin Lai
(p. 3)
Kalina Manova
(p. 8)
Carol H. Shiue
(p. 6)
Thomas Stratmann
8th Munich Economic Summit
(p. 7)
Jean-Claude Trichet
(p. 7)
From nukes to trees, taxes to extraction caps: no weapons in the battle against the CO2
enemy were left undissected during this year’s Munich Economic Summit.
(page 2)
Offshore Determinants
Offshoring is usually defined as the movement of jobs to other countries. What moves companies to take the step? Wolfgang Keller finds that money is but one among many other
determinants.
(page 3)
Business Climate Perks Up
For the fifth month in succession, the Ifo Business Climate Index rose in July. The
economy appears to be gaining traction once again.
(pages 4-5)
CEO Performance/Turnover Realities
Are CEO dismissals sensitive to performance at all? Dirk Jenter’s research suggests that this
is indeed so, in any case, more than previously thought.
(page 6)
You can also download this bulletin from www.cesifo.de
Vol. 19, No. 3 July 2009
8th Munich Economic Summit:
Climate Policy Conundrums
converted into cash in a cap-and-trade
system would be a start.
For a long time we have worried that there
may be too little fossil fuel left in the
Earth’s crust to supply our needs. Now
comes global warming and, with it, the
realisation that the problem is actually that
we have too much fossil fuel left. That the
worst thing we could do is to extract it all
as quickly as we are doing now.
We also, at least in Germany, started to
veer away from nuclear power. Its waste
is dangerous, lasts for too long and
requires too much storage room. And
then comes the climate problem and, with
it, the realisation that nuclear is not all
that bad after all. It is practically carbondioxide free. And nuclear waste lasts for
only a few thousand years compared to
carbon dioxide, which lasts forever. As to
final storage, carbon dioxide requires a
volume many thousands of times larger
than nuclear waste. So for the time being
we are just storing it in the air we breathe.
These two facts go to show that the climate change discussion contains not a
few paradoxes, and that fresh thinking is
urgently required if we want to devise an
effective strategy to curb global warming. This is what the recently held 8th
Munich Economic Summit provided.
The Summit started from the basis of a fundamental, unavoidable fact: every carbon
atom in the gas, coal or oil that we extract
from the ground to use it as fuel ends up
in the atmosphere. A significant part of it
will stay there forever, contributing to the
greenhouse effect that warms up our
planet and threatens to make it unlivable.
There are only two things we can do to
correct this: either we extract less carbon
from the ground, or we put it back underground after extracting its energy. Our
efforts, however, go in neither of these
two directions. What we have been trying
to do, at great financial cost, is turn to
alternative, CO2-free energy sources and
to use energy more efficiently. But
despite all the sacrifices, our efforts have
not reduced in the least the amount of
CO2 emitted globally, which continues to
increase unabated.
Which means, carbon extraction continues
unabated. Evidently, somebody is buying
2
the carbon we do not consume and burning
it in our stead. And, on top of that, acquiring
it at cheaper prices thanks to our demandreducing, price-depressing strategies.
The Summit examined the idea of taking
the carbon out of the atmosphere and storing it where it would not contribute to the
greenhouse effect. There is the promising
technology of sequestering carbon, i.e.
capturing it, compressing it and storing
the resulting liquid. But the great promise
pales when confronted with the reality of
actually doing it. Scrubbing carbon dioxide from combustion exhaust and liquefying it consumes as much as a third of the
energy obtained from the fuel in the first
place, and the resulting volume is still so
large, even in liquefied form, that our
planet simply does not offer enough room
to store all of it. This results from the fact
that combustion adds two oxygen atoms
to each carbon atom burned, turning it
into carbon dioxide. This gas will always
be several times more voluminous than
the original fuel, even if you compress it
to the limit of physical laws.
There is, however, a device that neatly
captures carbon dioxide from the air,
strips it of those troublesome oxygen
atoms and stores it in a harmless, even
highly beneficial, form. In the process, it
releases the oxygen atoms to the atmosphere, improving it for our breathing.
These devices, best of all, consume practically no fossil energy to function and,
unlike some non-carbon energy sources,
such as wind turbines, are not a blight on
the landscape. Quite the contrary, in fact.
Unfortunately, instead of fomenting the
widespread use of such devices, grouped
under the generic name of “forests”,
many countries are busily destroying
them. A sensible climate policy should
reward every country or institution or
company that promotes reforestation and
afforestation. Carbon credits that could be
Bulletin
But, unfortunately, neat as trees are, they
cannot by themselves remove all the
excess carbon from the atmosphere. So,
the second approach: extract less of it.
But how to go about it? After all, countries like Venezuela need to extract their
resources to finance 21st century socialism, Nigeria to lift its masses from poverty, Russians to buy football clubs and
Middle Eastern potentates for that extra
Rolls. Convincing them to leave more of
it underground will be a tough sell.
A bit of history may be of help here. During
the war, rationing coupons helped allot
scarce resources as evenly as possible. A
similar system could well regulate the
amount of carbon being supplied at a global level: a carbon trading system that sets
the supply level, in effect turning into a
scarce resource of which there is no more
than that on offer, and that encompasses the
entire world in one go. To avoid partisanship, it would have to be administered by
the United Nations. Under such a system, if
a country wants to consume fossil fuels, it
must be in possession of the corresponding
certificate. It will be allowed to consume
only the amount stipulated in it. This would
focus the minds wonderfully on how to
generate and use energy in a more planetfriendly manner, an area where our current
efforts would find a perfect fit.
The keywords here are “all-encompassing” and “in one go”. No countries may
be allowed to trade outside the system,
and for this very reason they all have to
come on board at the same time.
But such a mechanism is surely something for times of war, not for generally
peaceful ones such as now? Actually, we
are in a state of war. In fact, a war that,
if we do not defend ourselves, could
prove to be the ultimate one. The war
against an enemy destroying the only
planet we have.
The Munich Summit is organised by the
BMW Stiftung Herbert Quandt and the
CESifo Group Munich in partnership
with The Times, the Wall Street Journal
Europe, and Handelsblatt.
Vol. 19, No. 3 | July 2009
Globalisation and Intellectual Property Rights
Limits to Offshoring
Lai
Keller
Globalisation has worked
wonders for the bottom line of
many a company, by expanding markets and offering
access to cheaper labour or
services. But it has one problem: the protection of intellectual property rights (IPR).
Many countries clone foreign
products with abandon without
bothering with such nuisances as obtaining licenses or paying royalties.
Still, globalisation is here to stay. And
there are unquestionable interactions
between globalisation, intellectual property rights protection, and innovation.
This is the field that Edwin Lai, of the
Hong Kong University of Science and
Technology, will be exploring in depth
while at CES.
Global trade in IPR-sensitive goods is
increasing fast, but there has been large
international variation in the strength of
IPR protection and IPR standards across
countries, at least before the signing of the
TRIPS agreement (Agreement on TradeRelated aspects of Intellectual Property
Rights) in 1994. The agreement provides a
set of universal minimum standards to
ensure that IPR are protected more uniformly worldwide. Yet many of the provisions of the agreement are still not fully
enforced by developing countries.
A few research questions arise, such as
what explains the large international vari-
ation in strength of IPR protection before TRIPS? Is there any
economic rationale for international policy coordination on
IPR standards? (Can coordination be Pareto-improving?)
How does globalisation affect
government incentives to raise
IPR standards and research
intensities of countries?
Edwin Lai is a Professor of Economics at
the Hong Kong University of Science and
Technology. He was Senior Research
Economist and Advisor at the Federal
Reserve Bank of Dallas until June 2009.
Before that he was Assistant Professor at
Vanderbilt University, Associate Professor
at City University of Hong Kong and
Associate Professor at Singapore Management University. Mr Lai has been a consultant to the World Bank, a visiting scholar with Boston University and a visiting
fellow with Princeton University. He got
his B.S. in Engineering from the University of Hong Kong and M.A. and Ph.D. in
economics from Stanford University.
Mr Lai’s main research areas are international trade, industrial organization, technological change and growth. He is also
interested in studying the economies of
East Asia and China. He has published in
American Economic Review, RAND Journal of Economics, International Economic Review, Journal of International Economics and other respected journals in
the field.
Special Issue of CESifo Economic Studies
Next September CESifo Economic Studies will publish a double issue focusing on two highly
topical questions: executive compensation and inequality in China.
Published by Oxford University
Press on behalf of CESifo, the
journal will include articles on bonus
payments and fund managers’ behaviour,
a short history of executive compensation
regulation in America, insider information and performance pay, and the search
for reasonable executive compensation,
among others topics, to shed light
on an issue that keeps regulators
and board rooms awake at night.
The second section will examine
China’s rising inequality, a phenomenon that could have momentous consequences on social stability in the years to come in that country.
Topics will include what lies behind rising
earnings inequality in urban China, power
as a driving force of inequality, and rural
income volatility. For more, visit
http://cesifo.oxfordjournals.org
Bulletin
What exactly makes a
job
offshoreable?
Lower wages is the
acknowledged key
attraction for firms to
offshore, true, but
actually the phenomenon is generally not
well
understood.
Wolfgang Keller, of
the University of Colorado at Boulder, will
work at correcting this while at CESifo.
Mr Keller’s research stresses two principal
factors prompting companies to take the
offshoring plunge, namely geographic distance and technological complexity. In his
paper “Global Production and Trade in the
Knowledge Economy” (with Stephen R.
Yeaple), he shows that multinational companies typically sell more in countries that
are geographically close: Procter & Gamble’s affiliate in Mexico, for example, has
higher sales than its affiliate in Brazil. The
reason is that offshoring involves technology transfer costs because there is a phase
during which workers need to learn how to
get the technology to ‘work’.
The technological complexity of the activities to be offshored imposes a second
limit. If the host economy has a limited
absorptive capacity to manage such technology, or if relatively complex tasks
require more problem-solving communication between managers in the multinational parent and the workers of the affiliate, the technology transfer costs will
increase substantially, damping offshoring.
While at CESifo, Mr Keller will seek additional new evidence on this by studying the
activities of US and possibly also Swedish
and German multinational companies.
Wolfgang Keller, Professor at the University of Colorado at Boulder since 2005, is
one an acknowledged expert on the transfer of technology between different countries. His research on the roles of international trade and foreign direct investment
(FDI) in this process are often cited by
other academic economists and development organizations such as The World
Bank. He obtained his PhD from Yale University (1995) and his MA from the University of Freiburg (1990).
3
Vol. 19, No. 3 | July 2009
News
Ifo Business Climate Brightens Up
The Ifo Business Climate for industry and
trade in Germany rose again in July. The
firms are no longer quite so dissatisfied
with their current business situation as in
the previous month, and they are again less
sceptical regarding business developments
for the coming half year. It seems that the
economy is gaining traction. Their scepticism regarding foreign business, however,
has weakened further.
credit conditions are likely to remain
restrictive due to recession caused writeoffs. On the assumption that the oil price
stabilizes at USD 70 per barrel of Brent
and that the dollar/euro exchange rate
fluctuates around 1.40 over the forecast
horizon, inflation should move to 0.1%
in September and 1.0% in December.
The Euro-zone Economic Outlook is
jointly produced by the German Ifo Institute, the French INSEE institute and the
Italian ISAE institute.
Credit Conditions Remain Restrictive
In June the credit constraints for German
industry and trade were only slightly
lower than in the previous month. After
42.9% in May, 42.4% of the firms have
appraised bank lending policies as
restrictive.
Euro-zone Economic Outlook:
Economic prospects remain subdued
The euro-zone is still in recession. Real
GDP dropped sharply in Q1 2009 by
2.5%, after a fall of 1.8% in Q4 2008.
Economic prospects remain subdued, but
the contraction of activity is likely to be
less sharp in the coming quarters. Real
GDP is forecasted to shrink by 0.6% in
Q2 and by 0.4%, respectively, in Q3 and
Q4. The fall of industrial production is
likely to continue but at a progressively
slowing pace: recent business surveys
indicate slightly improving production
growth expectations but the economic
environment remains unsupportive. Private consumption is expected to fall by
0.6% in Q2, 0.4% in Q3 and 0.5% in Q4.
While purchasing power could be stimulated by tax cuts associated with the massive fiscal packages, the deterioration of
the labour market situation is having a
dampening effect. Investment is expected to diminish further by 3.2% in Q2,
2.5% in Q3 and 1.4% in Q4. Firms’ earning prospects are still depressed and
4
In manufacturing the credit hurdle fell
from 45.4% in May to now 43.8%. For the
larger firms in particular, complaints
about credit conditions abated somewhat.
Nevertheless, at 50.9% more than half of
the large manufacturers still complain
about difficult credit negotiations. The
large firms are still feeling a credit crunch.
For mid-sized firms the credit hurdle rose
slightly from 40.4% to 40.7%. Smaller
firms reported restrictive bank lending
policies less often. The share of “restrictive” responses has fallen from 41.8% in
the previous months to 39.7%.
In construction the credit hurdle fell
somewhat and now stands at 45.5%
compared to 47.2% in May. A contrary
development was reported in wholesaling and retailing, where 39.9% of the
firms see themselves subject to more
restrictive lending policies compared to
38.9% last month.
Ifo Economic Forecast 2009/2010:
Downturn Continues
The world economy is in the midst of the
deepest recession since the Great Depres-
Bulletin
sion. The pace of the contraction, however, has probably slowed since this spring.
Worldwide programmes to boost economic activity have been implemented, and the
expansive monetary policies of the central
banks are gradually having an effect. Also
measures to stabilise financial markets
have been taken in numerous countries.
Finally, real incomes have been boosted by
the strong decline in raw material prices.
The world economic climate as surveyed
by the Ifo Institute improved in the second
quarter of 2009 for the first time since
autumn 2007. However, the rise of this
indicator was solely the result of more
favourable expectations for the next six
months, whereas the appraisals of the present economic situation continued to deteriorate, falling to a new historical low.
A quick recovery of the world economy is
not to be expected. A major problem is
still the precarious equity capital situation
of the banking sector in the United States
and Europe. This is the result of the necessary write-downs and valuation adjustments of a magnitude that threatens the
existence of the banks. To be sure, after
the insolvency of Lehman Brothers in
September 2008, massive government
intervention has prevented more bankruptcies of major financial institutions.
However, additional value adjustments of
considerable amounts are still looming.
Also the recession-induced defaults on
loan repayments may play an increasingly
important role. In several important countries the real-estate markets are depressed,
which likewise will increase banks’ writeoff requirements. As a result, the banks
will strive to reduce their balance sheets
noticeably in order to improve the
extremely strained relationship of their
capital to their balance-sheet totals. This
will affect bank lending policies towards
private households and non-financial
businesses especially when the demand
for credit, which has been dampened by
the recession, picks up again. For this reason economic recovery will unfold only
very hesitantly, with the current downturn
lasting much longer than would otherwise
be expected.
Vol. 19, No. 3 | July 2009
In total, world GDP will decline by 1.8% in
2009 before it increases by 2% in 2010.
This forecast is based on the countries
taken into consideration by the International Monetary Fund (IMF), whose
growth rates were weighted using 2008
purchase power parities. Inflation will flatten out strongly worldwide, but unemployment is expected to increase markedly.
This forecast is based on the assumption
that the price for Brent crude oil will fluctuate around 70 US dollars per barrel in
the forecast period and that the euro/dollar
exchange rate will stabilise at 1.40. Under
these assumed conditions, world trade
will continue to decline initially before it
gradually recovers. It will fall by 1.4% in
2009 and increase by 3% in 2010.
The German economy is experiencing the
worst recession in the history of the Federal Republic. According to the now available official statistics, economic output
fell in the first quarter of 2009, seasonally
and calendar adjusted, by 3.8%, and
already in the fourth quarter of 2008 the
economic output had declined by 2.2%.
Germany has thus experienced the
sharpest collapse in growth of all major
European economies. The main reason for
this catastrophic economic development
since last autumn is the simultaneous
worldwide collapse in demand for capital
goods and consumer durables that
occurred in the wake of the international
financial crisis. The German economy has
been particularly hard-hit by this external
demand shock due to its high dependency
on foreign trade and its specialisation in
cyclically sensitive industrial products.
After the drastic drop in the winter half
year 2008/09, economic output has likely
also fallen in the second quarter, albeit at
a reduced pace (current rate: –0.7%),
mainly as a result of a drop in manufacturing, financing, leasing and business
services. Signs of the start of a gradual
stabilisation are seen in recent developments of a number of important cyclical
indicators such as production and incoming orders as well as the Ifo Business Climate. For the first semester of 2009 a seasonal and calendar adjusted decline in real
GDP of 5.2% will occur in comparison to
the second half of 2008; in a year-on-year
comparison the decline amounts to 7.5%.
The downturn will continue throughout
the forecast period. After a temporary
increase in summer primarily driven by
fiscal stimulus, the basic tendency of economic output will be further contraction.
Although no further dampening effects
are foreseeable from net exports, the
decline in equipment and construction
investments will continue. The reduction
in inventories has also not yet been concluded. In addition, private consumption
will fall starting in the autumn months due
to the decline in employment and strong
increases in unemployment.
Not until spring 2010 can we expect the
fall in production and demand to bottom
out. Afterward, real economic output
should increase somewhat. As the world
economy gradually recovers, exports
will increase somewhat; also equipment
investment should recover moderately.
Towards the end of 2010, anticipatory
effects are likely due to the restoration
of the declining balance method of
depreciation.
The economic stimulus packages will
stimulate construction investment. On the
whole, however, the economic dynamics
will not be strong due to the weakness of
private consumption so that the operating
rate of the economy will fall. On average
for 2009 total economic output will
decline by 6.3%, in both unadjusted and
calendar adjusted terms. In 2010, due to
the low initial level, a decline of only 0.3%
(calendar adjusted: 0.4%) is expected.
The recession will become increasingly
noticeable on the labour market as of the
summer months of 2009. The build-up of
reduced working hours will come to a
standstill and the numbers of unemployed
will increase at an accelerated rate. On
average for this year, employment numbers will fall by 460,000 and next year by
as much as 1.05 million. The number of
unemployed will rise by 320,000, on average for 2009, and by 760,000 in 2010. At
the same time, consumer prices will
remain virtually stable. For this year an
inflation rate of 0.2% is expected; in 2010
it will average only 0.4%. The budget
deficit will grow unusually strongly in the
forecast period. In 2009 the deficit will
increase to 3.4% of nominal GDP but in
2010 to 6.0%. This is caused by the economic situation, which will lead to enormous revenue shortfalls and additional
expenditures, but there are also strong discretionary impulses in connection with
the government’s stimulus packages.
Bulletin
60th Annual Meeting of the Ifo Institute
The sixtieth annual meeting of the Ifo
Institute was held on 23 June 2009 at the
University of Munich. After words of welcome by the University's Vice President,
Reinhard Putz, Hans-Werner Sinn presented the latest Ifo economic forecast. He sees
great risks for further setbacks in the world
economy and renewed his criticism of the
strong export orientation of the German
economy, which as a result has been particularly hard-hit by the sharp downturn in
world trade. According to Mr Sinn, the
danger of deflation is stronger than that of
inflation. To combat the financial crisis the
state should take on temporary shares in
the banks.
Guest speaker was Axel Weber, president
of the German Bundesbank, who spoke of
the reactions and the lessons from the
global financial crisis. The event concluded with a panel discussion featuring Axel
Weber, Hans-Werner Sinn, Georg Fahrenschon, Bavarian State Minister of Finance,
and Theodor Weimer, executive board
spokesman of HypoVereinsbank. The
presentation by Hans-Werner Sinn and the
panel discussion are available as a video
on the Ifo website.
Prizes for Ifo Researchers
As recognition of and incentive for highquality research, the Friends of the Ifo
Institute society awards an annual prize for
academic research. The requirement is
publication in a peer-reviewed scholarly
journal. The 2009 prize went to Marko
Köthenbürger, for a number articles published in international refereed journals.
The prize for outstanding success in the
management of contract studies is given
for work on a major research contract of
recognised quality content, with international country comparisons, and within the
time and budget allotted. This year, the
prize went to Marc Piopiunik, Christian
Holzner, Ludger Wößmann, and Edith
Banner for the project 'Measuring Human
Capital in Germany: How it grew and how
it is being utilised'.
Another special prize went to Christian
Holzner, Sonja Munz, Herbert Hofmann,
Thiess Büttner, and Edith Banner for the
project “Evaluation of the Experimentation Clause in Par. 6c SGB II: Macroanalysis and Regional Comparisons”.
5
Vol. 19, No. 3 | July 2009
I Will See You to the Door, Mr CEO
Chinese Fertility Behaviour
Jenter
Shiue
A spate of high-profile CEO
dismissals after the dismal
performance of their companies seems to point to a sort
of divine justice for non-performing executives. Still,
most of them left with generous severance packages in
their pockets. And then there
are many companies doing
poorly with their CEOs still firmly on
their seats. What is the actual performance/CEO turnover reality?
capital markets and on questions of corporate governance. His recent research
projects have examined the
capital structure decisions of
US firms, option and stock
compensation for top executives and other employees,
insider trading by managers,
the role of institutional
investors in mergers and acquisitions, and
the effects of the business cycle on forced
CEO turnover.
Carol H. Shiue, PhD, Yale
University, is an Associate
Professor of Economics at
the University of Colorado
whose research interests
are in the economic history
of market development
and trade in China, the
political economy of
famine relief, and long-run
comparisons of living standards and economic growth in China and Europe from
the 17th to the 20th centuries.
Dirk Jenter, of Stanford University, is
devoting part of his research agenda
while at CES to this issue. His research
has shown that CEO dismissals are considerably more sensitive to performance
than previously thought, and especially so
in the beginning of tenure. Preliminary
results also suggest large cross-sectional
differences in the turnover-performance
relation across firms with different governance structures.
Dirk Jenter is an Assistant Professor of
Finance at the Graduate School of Business at Stanford University, where he
teaches the introductory finance course in
the Stanford MBA program. Before joining Stanford, Mr Jenter was an Assistant
Professor of Finance at the MIT Sloan
School of Management, where he taught
corporate finance in both the MBA and
executive education programs. He won
the MIT Sloan Teacher of the Year Award
in 2005 and the MIT Sloan Award for
Excellence in Teaching in 2007.
Another focus of her research is on kinship organisation and social mobility in
China over the last several centuries.
This is an ongoing project that uses
genealogical records of education and
occupation among members of the clan to
study changes in demographic behaviour
and family size over time. The presence
of fertility-control behaviour in the
absence of income or technological
shocks suggests that there may be a much
broader set of economic factors that can
lead to lower fertility behaviour.
He received his undergraduate education
at the University of Frankfurt and the
University of Cambridge, an MPhil
degree in Economics from the University
of Cambridge, and his MA and PhD
degrees in Business Economics from
Harvard University. His research has
won several awards and been featured in
The Wall Street Journal, the Financial
Executive Magazine, Smart Money, and
on CNN.
These relationships are important for
understanding how demographic transitions come about, and whether the demographic transition was primarily a response
to the economic changes of industrialisation, or whether there could be a demographic role for economic growth.
A second project he will pursue while at
CES examines the effects of exogenous
CEO departures (that is, those caused by
illness or death) on firm behavior and performance. The project’s primary goal is to
establish the importance of individual
executives for firms’ policy choices. A
secondary goal is to show that many firms
led by long-tenured, entrenched CEOs
pursue policies that are far from valuemaximising.
Mr Jenter’s research also includes the
interaction of managers and firms with
She has been a visiting scholar at the Russell Sage Foundation in New York City
and the World Bank.
The Many Roles of Education
Sascha O. Becker is currently SIRE Professor of Economics at the University of
Stirling, Scotland. He studied Economics
at the Universities of Bonn, Germany,
and at the Ecole Nationale de la Statistique et de l’Administration Economique
(ENSAE) in Paris, France.
He obtained his PhD at the European
University Institute in Florence in 2001.
In 2000, he was a visiting scholar at the
Center for Labor Economics at the Uni-
6
versity of California in Berkeley. From
2001 to 2008, he worked at the Center
for Economic Studies of the LudwigMaximilians University of Munich. In
2006, he spent 7 months at the University of California in San Diego (UCSD).
While at CESifo, he continued research
on two projects with Ifo researchers. The
first one, with Erik Hornung and Ludger
Woessmann, looks into the role of education in Prussia’s industrialisation process.
Bulletin
The second project,
with Francesco Cinnirella and Ludger
Woessmann, studies the
relationship between
education and fertility
before the 1849 demographic transition.
His research has appeared in the Quarterly Journal of Economics and the European Economic Review, among others.
Vol. 19, No. 3 | July 2009
The ECB’s Enhanced Credit Support
Soft Constraints
Trichet
Stratmann
Jean-Claude Trichet,
the President of the
European
Central
Bank, delivered an outstanding lecture on
July 13 at the University of Munich, within
the framework of
CESifo’s Munich Seminar series.
Speaking to a packed
audience, he reviewed
the ECB’s policy
actions in these times of exceptional
challenges for monetary policy-makers.
In the last two years the environment in
which the ECB operates has changed
profoundly. “We are still in uncharted
territory”, Mr Trichet warned. The
ECB’s actions since the onset of the
financial crisis have been bold, with
unprecedented action taken in August
2007, on day one of the financial tsunami. And it seems to have worked: since
the crisis began, he stressed, “not one
systemically important financial institution has collapsed in the euro area”.
Since October 2008, the ECB’s key policy rate has been cut from 4.25% to 1%,
reflecting a policy of fully accommodating banks’ liquidity needs. And the bank
has been far from passive in recent
months, broadening the set of measures
that, collectively, represent the policy
toolkit that Mr Trichet calls “enhanced
credit support”.
But first, he provided the ECB’s assessment of the current situation in the euro
area: economic activity is expected to
continue declining for the remainder of
this year, he said, but significantly less
strongly than it did in the first quarter of
2009. Looking ahead into next year, following a period of stabilisation, a gradual recovery with positive quarterly
growth rates is expected by mid-2010.
Inflation, in turn, will stay below but
close to 2%, in line the bank’s Governing Council’s aim.
The financial turmoil since late 2007
has made it unavoidable to take monetary policy measures that are unprece-
dented in nature,
scope and magnitude.
These measures fall
into two categories:
first, standard measures in the form of
interest rate changes;
and second, a number
of non-standard measures, which together
constitute the ECB ’s
policy
toolkit
of
enhanced credit support. These are special
and primarily bank-based actions we
have taken to enhance the flow of credit above and beyond what could be
achieved through interest rate reductions alone.
These measures include fixed-rate fullallotment, expansion of collateral,
longer-term liquidity provision, liquidity provision in foreign currencies, and
financial market support through purchases of covered bonds.
He stressed that all the ECB’s policies
are conducted in full continuity of its
mission of pursuing price stability.
Moreover, all measures are deliberately
designed in a way that they can be
unwound once any upside risks to price
stability should emerge.
This, he said, will contribute to what is
lacking most, namely confidence on the
part of households and companies, and
will lay the groundwork for a return to
sustainable prosperity.
Economic research has demonstrated that
two-thirds to three-quarters of European
households are “Ricardian”. This means
that they consume less and save more if
they lack confidence in the soundness of
future public finances.
The anchoring of sound policies in a medium to long-term framework is more important than ever if we want to effectively
counter the present adverse circumstances.
The ECB, for its part, he concluded, will
do all that is necessary to continue to be a
solid and reliable anchor of stability and
confidence in these challenging times.
Bulletin
Lower levels of government, such as states or
provinces, often tend to
enjoy softer budget constraints compared to the
central governments’. Just
think of the profligate
ways of Argentinean
provinces or Brazilian
states. But the phenomenon affects European countries and the US as well.
Thomas Stratmann, a Professor of Economics at George Mason University, will
devote part of his research while at CESifo to studying the determinants of fiscal
responsibility of such lower levels of government. In many countries, the subordinate governments’ soft budget constraints
fuel their expectation to be bailed out by
higher level governments in the event of
severe financial crises. Often, soft budget
constraints are institutionalised by a
national intergovernmental transfer system
that equalises budgets per capita across
states. These institutions in federal systems
can give rise to perverse incentives leading
to unsound fiscal policies.
Since the bail-out guarantee is given to all
state governments, budget constraints
may appear to be equally soft across
states. There are, however, state-specific
political factors that may influence the
softness of the budget constraint. Some
states have more political power than
other states, and a simple political economy model predicts that politically influential states will obtain more transfers,
have higher deficits, and will not pursue
fiscally responsible policies because they
expect to receive help from the federal
government in times of financial crises.
In Germany, for instance, some states are
politically more influential than others
because states’ voting weights differ in
the upper chamber of the German parliament, the Bundesrat, with smaller German states being overrepresented relative
to their population. Something similar
occurs in the US, where smaller states are
overrepresented in the Senate. Mr Stratmann will analyse whether smaller states
receive more federal transfers than larger
ones, have larger deficits, and pursue less
efficient policies.
7
Vol. 19, No. 3 | July 2009
10th CESifo Venice Summer Institute
Survival Through Differentiation
Manova
The
CESifo
Venice Summer
Institute celebrated its 10year anniversary with a
range of workshops
that
atracted over
one hundred
participants to
its venue at
Venice International University, on San
Servolo, a tiny island across the water from
San Marco in the bay of Venice.
Over the years, the Summer Institute, one
of CESifo’s most popular events, has
attracted nearly 1,000 scholars to some 50
workshops. Both seasoned economists
and young upcoming talents have found
here the perfect setting for a fruitful
exchange of ideas.
The secluded, relaxed atmosphere of San
Servolo lends itself ideally for intensive
study and informal networking during the
day, with a truly unique town just ten
minutes away by boat to enjoy in the
evening.
As Peter Neary of the University of
Oxford puts it, “you are in the midst of
the most tourist-infested spot on the planet, and yet cocooned in a setting that
offers you the best conditions for academic learning and quiet interaction with
your peers.”
Many other guests over the years have
expressed similar opinions. Some of them
have been world-class figures, such as
Nobel laureates Robert A. Mundell,
Edmund Phelps and Edward C. Prescott,
and Jeffrey Sachs, Robert J. Shiller, Martin Wolf, Philippe Aghion, Jean-Paul
Fitoussi, Lucas Papademos, Christopher
Pissarides, the late Pentti Kouri, and
Jorma Olilla, to name but just a few.
This
year’s
workshops
opened
with
Economics and
Politics of Climate Change.
Organised by
Mika Widgrén
and Panu Poutvaara, it had
keynote
lectures by HansWerner Sinn and Larry S. Karp.
Parallel to it, a workshop on European
Unemployment, organised by Christopher Flinn and Klaus Waelde, included
keynote lectures by Christopher Flinn,
Jean Marc Robin, Robert Shimer, and
Lars Ljungqvist.
By mid-week, the workshop Behavioural
Public Economics, organised by Bernd
Genser and Jean-Robert Tyran, had
keynote lectures delivered by Arno Riedl
and Joel Slemrod, and ran parallel to
another workshop dealing with Operating
Uncertainty using Real Options, organised by Yu-Fu Chen and Michael Funke.
Two further workshops rounded off the
Summer Institute, Rethinking the Privatisation of Social Security, organised by
Gerhard Illing and Efraim Sadka, with
keynote lectures from Stephen Zeldes,
Gary Burtless and Laurence J. Kotlikoff,
and Heterogeneous Firms in International Trade, organised by Peter Egger,
Stephen Redding and John Whalley,
with the cooperation of NORFACE, the
Centre for Economic Performance, the
London School of Economics, and CIGI,
with a keynote lecture by Peter Schott.
As someone said about the Institute,
thoughtfully looking out the window over
San Servolo’s park, “there are worse settings for an economics conference...”.
Quite so. So, see you there next year!
Kalina Manova, an
expert on firms’ participation in international
trade and investment,
will work on three
research projects during
her stay at CESifo. The
first one explores firms’
potential to differentiate
the quality of their product across
export markets in response to the toughness of market competition, using a
uniquely rich and detailed dataset on the
export activities of Chinese firms.
The second project establishes stylised
facts about the extent of firm heterogeneity in these data, in terms of the number of
export destinations firms target, the range
of products they export, and the frequency of firm and product turnover. These
stylised facts shed light on the cost structure of exporting, and highlight distinctions between private and state owned
Chinese corporations, joint ventures, and
affiliates of foreign multinationals.
The last project will examine the collapse of international trade flows in
response to the current financial crisis.
Ms Manova’s research on international
trade and investment shows a special
interest in the nature and significance of
firm heterogeneity. Her recent research
projects have explored the role of credit
constraints in firms’ exporting and FDI
decisions, the effects of equity market
liberalisations on countries’ trade flows,
the implications of financial development for aggregate growth and volatility, and the consequences of IT outsourcing for firm and industry performance.
Kalina Manova is an Assistant Professor
at the Stanford University Department of
Economics. She received her BA, MA
and PhD degrees from Harvard University, and her research has been published in
the Journal of International Economics.
Bulletin
Munich Society for the Promotion of Economic Research (Münchener
Gesellschaft zur Förderung der Wirtschaftswissenschaft, CESifo GmbH)
is the international platform of Ludwig-Maximilians University and
the Ifo Institute for Economic Research.
President and CEO: Hans-Werner Sinn
Address: CESifo, Poschingerstr. 5, 81679 Munich (Germany)
Telephone +49 (0) 89/9224-1410, Fax: +49 (0) 89/9224-1409
Editor: Julio C. Saavedra. Ifo News provided by Annette Marquardt.