The New Paradigm Papers of the Month of October

Industrial Policy with Conditionalities: A Taxonomy and Sample Cases

By Mariana Mazzucato & Dani Rodrik 

FULL PAPER.

Around the world, industrial policy is resurging, with not only the European Union and the United States, but also countries like Brazil and South Africa investing in measures to boost domestic industries and drive economic growth. This new industrial strategy aims to create greener, more inclusive, and resilient economies, recognizing that economic growth impacts both people and the environment. In their recent working paper, Mariana Mazzucato and Dani Rodrik argue that the key to this new approach is embedding a directionality of growth (less inequality and more sustainability) into tools like subsidies, loans, grants, and intellectual property rights in public-private partnerships. This conditionality ensures equitable access and shared rewards, and is seen by the authors as a central element of shaping the economy for the common good. While historically implicit in industrial policy, Mazzucato and Rodrik argue that the concept of conditionality remains underdeveloped and not widely studied. With this paper, the authors aim to provide a framework to understand the various forms of conditionality in policies such as funding agreements, partnership contracts, and tax incentives, with a focus on fostering inclusive and sustainable economic growth.

Why Women Won

By Claudia Goldin

FULL PAPER.

In this new paper, recent Nobel laureate Claudia Goldin dives into the role of female employment and women’s participation in the labor market on the road to achieving equal legal rights with men in the United States. A historical analysis, the paper traces back all the way to the civil rights movement. In it, Goldin identifies 155 crucial moments in the history of women’s rights achievements between 1905 and 2023 and finds that 45% of them transpired in the short span of 1963 and 1973. She attributes this progress to the substantial increase in female employment, the formation of women’s rights organizations, the recognition of the significance of women’s votes, and the unwavering efforts of various members of Congress during this particular time.

The impact of global warming on inflation: averages, seasonality and extremes

By Maximilian Kotz, Friderike Kuik, Eliza Lis, Christiane Nickel

FULL PAPER.

While comprehension of the broader economic consequences of climate change is progressing, we still have limited insight into its effects on both past and future inflation. In a recent ECB working paper, Maximilian Kotz et al. make use of a global dataset containing monthly consumer price indices to identify the causal links between climate variations and inflation and to evaluate their implications in a warming future. Their findings reveal that rising average temperatures lead to non-linear inflationary pressures that persist for up to a year, affecting both high and low-income countries. Projections from advanced climate models indicate that, unless unprecedented adaptation measures are taken, future global warming will result in annual increases in food and overall inflation, ranging from 0.92 to 3.23 and 0.32 to 1.18 percentage points per year, respectively, based on the 2035 climate projections. Additionally, their estimations show that the extreme heat experienced in Europe during the summer of 2022 raised food inflation by 0.67 percentage points (with a range of 0.43 to 0.93), and that future warming predicted for 2035 would magnify the impacts of such extreme events by 50%. These results suggest that climate change presents a threat to price stability by exerting an upward influence on inflation, altering its seasonal patterns, and intensifying the repercussions of extreme climate events.

Zero-Sum Thinking and the Roots of U.S. Political Divides

By Sahil Chinoy, Nathan Nunn, Sandra Sequeira & Stefanie Stantcheva

FULL PAPER.

The political and societal climate of the present is divided. In a new study, researchers from Harvard University, the University of British Columbia and the London School of Economics surveyed a representative sample of 20,400 US citizens to examine the relationship between zero-sum thinking, policy preferences and political views. Zero-sum thinking assumes that actions that benefit one person or group must come at the expense of others.  Their findings indicate a strong connection between a more zero-sum mindset and increased support for government redistribution, affirmative action based on race and gender, and more restrictive immigration policies. Additionally, they can trace the roots of zero-sum thinking to both an individual’s personal experiences and their ancestral background. These factors include the level of intergenerational upward mobility, whether they or their ancestors immigrated to the United States, their proximity to immigrant populations, and whether they or their ancestors were subjected to slavery or resided in areas with a history of enslavement.

The Political Costs of Austerity

By Ricardo Duque Gabriel, Mathias Klein & Ana Sofia Pessoa

FULL PAPER.

This paper by Ricardo Duque Gabriel et al. presents fresh empirical findings regarding the political effects of fiscal consolidations by utilizing an innovative regional database encompassing more than 200 elections across various European nations. To pinpoint reductions in regional public spending that are independent of other factors, they employ a Bartik-style instrument that combines regional responsiveness to variations in national government expenditures with documented national consolidation events. The outcomes of fiscal consolidations include a notable surge in the vote share of extreme political parties, decreased voter participation, and a growth in political fragmentation.

The study underscores the strong association between adverse economic developments and the electorate’s backing of extremist parties. The authors also demonstrate that austerity measures generate substantial economic drawbacks, resulting in reduced GDP, employment rates, private investments, and wages. Recessions stemming from austerity measures significantly amplify the political repercussions of economic downturns by fostering greater distrust in the political landscape.