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Economic growth in US unlikely to recover soon

LiveMint logoLiveMint 30-06-2017 Tadit Kundu

In his joint statement with Prime Minister Narendra Modi, US President Donald Trump said he was working on taking US growth rate closer to India. A new research paper suggests this is unlikely to happen soon. The US economy is unlikely to witness high growth rates again in the coming years, warn John G. Fernald, economist with the Federal Reserve Bank of San Francisco, and others in a recent research paper. They argue that the slow pace of economic recovery post the 2009 crisis is mainly attributable to two long-term factors which actually pre-date the crisis—slow productivity growth and falling labour force participation. Thus, despite unemployment rate falling to pre-crisis levels, economic growth in USA as yet remains below par and might continue to linger at lower levels in the coming years.

Also Read: The Disappointing Recovery of Output after 2009

An analysis of historical data for 67 districts in southern India by Tarun Jain, assistant professor at the Indian School of Business, Hyderabad, shows that areas where people had the opportunity to study in their mother tongue since the days of the British Raj ended up having better educational outcomes. Districts where the official language and the popular language were different tended to lag behind others. Interestingly, such inter-district disparity persisted for decades after Independence, despite the reorganization of southern states along linguistic lines in 1956. Nevertheless, this reorganization gradually rectified the problem and these districts eventually caught up with their neighbours in around two generations. The author argues that instruction in mother tongue encourages people to study.

Also Read: Common Tongue: The Impact of Language on Educational Outcomes

Nobel laureate Robert Lucas, in a recent paper published by the National Bureau of Economic Research (NBER), argues that investing in education remains vital to realising the “industrial revolution” in all parts of the world. The paper argues that creation of a new educated class, which could contribute to technological improvement, was a major ingredient for the industrial revolution. Transition of the population from agriculture to an educated urban class was the hallmark of industrial revolution in most successful countries. However, many families in developing countries tend to under-invest in education, as they often fail to take into account the positive spill-over effects of education for society. The paper argues that such inefficiency could be corrected by government-financed universal education.

Also Read: What Was the Industrial Revolution?

World Bank’s poverty estimates are unreliable and their methods questionable, according to a recent research paper by Amita Majumder, professor at the Indian Statistical Institute, Kolkata, and others. The World Bank resorts to converting various countries’ currencies into US dollars before calculating world-wide poverty. However, the exchange rates used by the Bank to convert local currencies into US dollar might not be the most appropriate ones. Small errors in such conversion rates could yield poverty estimates which are wide off the mark. Although the Bank uses a concept of “purchasing power parity” (PPP) to convert currencies, the authors argue that better methods to capture PPP exist. The authors propose using a variant of PPP which would make use of household preferences revealed from household budget surveys. However, World Bank’s alleged refusal to share detailed household level data with independent researchers remains an impediment to such research, according to the authors of the paper.

Also Read: World Bank’s Poverty Enumeration

Since the global financial crisis of 2008-09, global trade has slowed down and lagged behind GDP growth. Traditional import-demand models, which link trade to GDP are no longer able to predict trade volumes. Hence, Marc Auboin and Floriana Borino, economists with the World Trade Organization (WTO), have developed “import-intensity adjusted” measures of aggregate demand for 38 major economies, using input-output tables. They claim that their economic model can explain and predict 90% of global trade. Their model suggests that the recent decline in trade is largely attributable to the decline in demand for imported goods and industrial inputs because of structural changes in the global economy. The slowdown in global value chains is another factor weighing on global trade. The authors do not find any significant impact of protectionism on trade flows.

Also Read: The falling elasticity of global trade to economic activity

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