Working Papers
2020
September 25, 2020
IT Shields: Technology Adoption and Economic Resilience during the COVID-19 Pandemic
Description: We study the economic effects of information technology (IT) adoption during the COVID-19 pandemic. Using data on IT adoption covering almost three million establishments in the US, we find that technology adoption can partly shield the economy from the impact of the pandemic. In areas where firms adopted more IT the unemployment rate rose less in response to social distancing. Our estimates imply that if the pandemic had hit the world 5 years ago, the resulting unemployment rate would have been 2 percentage points higher during April and May 2020 (16% vs. 14%), due to the lower availability of IT. Local IT adop-tion mitigates the labor market consequences of the pandemic for all individuals, regardless of gender and race, except those with the lowest level of educational attainment.
September 25, 2020
COVID-19 and SME Failures
Description: We estimate the impact of the COVID-19 crisis on business failures among small and medium size enterprises (SMEs) in seventeen countries using a large representative firm-level database. We use a simple model of firm cost-minimization and measure each firm’s liquidity shortfall during and after COVID-19. Our framework allows for a rich combination of sectoral and aggregate supply, productivity, and demand shocks. We estimate a large increase in the failure rate of SMEs under COVID-19 of nearly 9 percentage points, ab-sent government support. Accommodation & Food Services, Arts, Entertainment & Recreation, Education, and Other Services are among the most affected sectors. The jobs at risk due to COVID-19 related SME business failures represent 3.1 percent of private sector employment. Despite the large impact on business failures and employment, we estimate only moderate effects on the financial sector: the share of Non Performing Loans on bank balance sheets would increase by up to 11 percentage points, representing 0.3 percent of banks’ assets and resulting in a 0.75 percentage point decline in the common equity Tier-1 capital ratio. We evaluate the cost and effectiveness of various policy interventions. The fiscal cost of an intervention that narrowly targets at risk firms can be modest (0.54% of GDP). However, at a similar level of effectiveness, non-targeted subsidies can be substantially more expensive (1.82% of GDP). Our results have important implications for the severity of the COVID-19 recession, the design of policies, and the speed of the recovery.
September 25, 2020
Market Power, Growth, and Inclusion: The South African Experience
Description: Before the pandemic, the South African economy remained stuck in low gear, with anemic growth, stagnant private investment, and a shrinking tradable sector. Subdued growth has raised unemployment, poverty, and inequality, hindering inclusion efforts. The pandemic has worsened economic and social vulnerabilities. Economic recovery and social inclusion hinge critically on structural reforms to boost competiveness and growth. Product markets represent a cornerstone of the reform strategy. Firms have used their market power to drive up prices and limit competition. Important state-owned monopolies provide low-quality services, while representing a fiscal drag. Existing regulations inhibit the entry of both domestic and foreign firms. Addressing product markets constraints could boost per capita growth by 1 percentage point—adding about 2½ percentage points to headline growth—and foster greater inclusion.
September 25, 2020
Worker Mobility and Domestic Production Networks
Description: We show that domestic production networks shape worker flows between firms. Data on the universe of firm-to-firm transactions for the Dominican Republic, matched with employer-employee records, reveals that about 20 percent of workers who change firms move to a buyer or supplier of their original firm. This is a considerably larger share than would be implied by a random allocation of movers to firms. We find considerable gains associated with this form of hiring: higher worker wages, lower job separation rates, faster firm productivity growth, and faster coworker wage growth. Hiring workers from a supplier is followed by a rising share of purchases from that supplier. These findings indicate that human capital is easily transferable along the supply chain and that human capital accumulated while working at a firm is complementary with the intermediate products/services produced by that firm.
September 25, 2020
In the Eye of the Storm Firms and Capital Destruction in India
Description: This paper examines the response of firms to capital destruction, using a new measure of firm exposure to tropical storms as a negative exogenous shock on firms’ capital stock. Drawing on a panel of Indian manufacturing firms between 1995 and 2006, we establish that, depending on their strength, storms destroy up to 75.3% of the fixed assets of the median firm (in terms of its productivity and industry performance). We quantify the response of firm sales within and across industries and find effects akin to Schumpeterian creative destruction, where surviving firms build back better. Within an industry, the sales of less productive firms decrease disproportionately more, while across industries capital destruction leads to a shift in sales towards more performing industries. This build-back better effect is driven by firms active in multiple industries and, to a large extent, by shifts in the firm-level production mix within a firm’s active set of industries. Finally, while there is no evidence that firms adjust by investing in new industry lines, firms tend to abandon production in industries that exhibit lower comparative advantage.
September 18, 2020
Sovereign Investor Relations: From Principles to Practice
Description: This paper defines sovereign investor relations (IR) and places it in the context of modern debt management theory. It highlights the role that improvements in IR and debt transparency can play in improving the cost-risk tradeoff in debt management, supporting market access and acting as a first line of defense in times of crisis. It sets out a policy framework and institutional arrangements for effective IR, as well as discussing the various practices, publications and strategies that underpin an IR program.
September 18, 2020
What are the Economic Effects of Pandemic Containment Policies? Evidence from Sweden
Description: This paper examines the economic effects of policies to contain Covid-19, by extracting lessons from Sweden’s experience during the ‘Great Lockdown’. Sweden’s approach was less stringent and based more on social responsibility than legal obligations compared to European peers. First, we provide an account of Sweden’s strategy and the health outcomes. Second, drawing on a range of data sources and empirical findings, our analysis of the first Covid-19 wave indicates that a less stringent strategy can soften the economic impact initially. These benefits could be eroded subsequently, due to potentially higher infection rates and a prolonged pandemic, but in Sweden’s case, the evidence remains mixed in this regard, and it is premature to judge the outcome of Sweden’s containment strategy. In addition, the economic effects of the containment strategy also depend on social behavior, demographics and structural features of the economy, such as the degree of export orientation, reliance on global supply chains, and malleability to remote working.
September 18, 2020
Intangible Investment and Low Inflation: A Framework and Some Evidence
Description: Intangible investment is growing as a share of economic activity. We present a simple framework incorporating its distinguishing characteristic of generally greater scalability and lower marginal costs than tangible investment. We show evidence that this may have contributed to more elastic aggregate supply in recent years, which is consistent with lower inflation and a flattening of the Phillips curve. This framework also highlights the channels through which technological change, a large constituent of intangible investment, may be leading to wage stagnation and greater market concentration.
September 18, 2020
Financial Amplification of Labor Supply Shocks
Description: We study how financial frictions amplify labor supply shocks in a macroeconomic model with occasionally binding financing constraints. Workers supply labor to entrepreneurs who borrow to purchase factors of production. Borrowing capacity is restricted by the value of capital, generating a pecuniary externality when financing constraints bind. Additionally, there is a distributive externality operating through wages. The planner’s allocation can be decentralized with two instruments: a credit tax/subsidy and a labor tax/subsidy. Labor shocks, such as the COVID-19 shock, amplify the policy responses, which critically depend on whether financing constraints bind or not.
September 11, 2020
Will the AI Revolution Cause a Great Divergence?
Description: This paper considers the implications for developing countries of a new wave of technological change that substitutes pervasively for labor. It makes simple and plausible assumptions: the AI revolution can be modeled as an increase in productivity of a distinct type of capital that substitutes closely with labor; and the only fundamental difference between the advanced and developing country is the level of TFP. This set-up is minimalist, but the resulting conclusions are powerful: improvements in the productivity of “robots” drive divergence, as advanced countries differentially benefit from their initially higher robot intensity, driven by their endogenously higher wages and stock of complementary traditional capital. In addition, capital—if internationally mobile—is pulled “uphill”, resulting in a transitional GDP decline in the developing country. In an extended model where robots substitute only for unskilled labor, the terms of trade, and hence GDP, may decline permanently for the country relatively well-endowed in unskilled labor.