Recommended Weekend Read
The Long-Run Consequences of Sanctions on Russia, North Korea’s High Casualty Learning Curve, Economic Security and Industrial Policy, and Real-Life Grand Theft Auto
February 28 - March 2, 2025
The Ukraine War
Long-Run Consequences of Sanctions on Russia David Baqaee & Hannes Malmberg / National Bureau of Economic Research
This paper examines the long-run economic consequences of Western sanctions on Russia. Using a new framework for balanced growth path analysis, we find that the long-run declines in consumption are significantly larger when capital stocks are allowed to adjust --- 1.4 times larger for Russia and 2.2 times larger for Eastern Europe. This is contrary to the common intuition that long-run effects should be milder due to greater adjustment opportunities. In our model, Russian long-run consumption falls by 8.5%, Eastern European consumption by 2%, and Western countries' consumption by 0.3% in response to sanctions. The model also reveals important distributional effects: as capital adjusts, Russian real wages fall more than rental prices in the long run. These findings show that accounting for capital adjustment is quantitatively important when analyzing trade sanctions.
The Ukraine Reparation Loan Solution Hugo Dixon & Lee Buchheit/American Enterprise Institute
Vladimir Putin will not agree to a reasonable ceasefire with Ukraine so long as he believes he will win a war of attrition. Making sure that Ukraine has a war chest to outlast Russia is therefore key to getting it a good deal. Given America’s unwillingness to continue funding Ukraine and Europe’s fiscal constraints, the best source of cash is Russia’s $300 billion in frozen assets, the lion’s share of which is in Europe. The “reparation loan” idea is an innovative way to mobilize these funds for Kyiv’s benefit without confiscating them. Europe, which balked at the reparation loan idea of outright seizure, is warming to the idea. If European governments back this plan, it will help get them a seat at the peace talks that Donald Trump has started. Threatening to use the assets in this way will give Ukraine and its allies leverage in negotiations with Russia—and will be part of a back-up plan if Putin refuses a reasonable deal.
North Korea’s Military Intervention in Kursk: A High Casualty Learning Curve 38 North
On February 8, North Korea’s (Democratic People’s Republic of Korea or DPRK) Supreme Leader Kim Jong Un issued his strongest statement of support yet for Russia’s invasion of Ukraine. While it appears as if North Korea is staying the course, its military performance thus far should give it room for pause. During the first three months after their arrival in October 2024, North Korea lost 40 percent of its 11,000-strong force contingent. An estimated 1,000 of those troops perished while 3,000 more were too severely injured to continue fighting. North Korea’s heavy casualties can be attributed to their unfamiliarity with high-intensity frontline combat, technological shortcomings and morale crises. Despite this troika of countervailing forces, North Korea’s security partnership with Russia will likely continue to strengthen.
The Maritime War in Ukraine: The Limits of Russian Sea Control? The Hague Centre for Strategic Studies
At the start of the Russian full-scale invasion of Ukraine in February 2022, the primary maritime basins of the war were under the firm grip of the advancing force. Throughout the previous decade, Russian authorities had sought to reaffirm the country’s sea control in the Black Sea and the Sea of Azov. But by November 2024, Ukrainian forces estimated Russian naval losses to include 28 warships and small boats, and one submarine. How did this reversal of fortunes happen? Russia had overwhelming capabilities and was fighting against a country with virtually no navy to speak of. How did Russia lose the battle for sea control?
Geoeconomics
Beyond the Data: China’s Economy with Leland Miller China Considered Podcast with Elizabeth Economy
In a wide-ranging conversation, Dr. Elizabeth Economy and Leland Miller talk about his experiences running China Beige Book, his insights on the Chinese economy, and conclude with a discussion about the Trump Administration’s trade policy. Miller discusses the early skepticism surrounding the China Beige Book and the process of transforming it into a valuable tool that gathers data from across the Chinese economy while serving as an independent “check” to the Chinese government. He provides insight into the methodology used, from conducting thousands of surveys within China, to looking at labor, manufacturing, and market data which altogether provide a unique view of the Chinese economy and at times, run against the consensus. The two then transition to a conversation on the Trump Administration, having a nuanced discussion on how tariffs and a reshaping of US trade policy affect both the domestic and global economy.
Economic Security and New Industrial Policy Asian Economic Policy Review
Abstract: The paper analyzes the emergence of Japan's economic security strategy to address the risks of weaponized interdependence in a context of heightened geopolitical tension. We detail the rapid institutionalization of economic security measures through the adoption of an Economic Security Promotion Act and ongoing reforms in areas such as foreign direct investment screening and export controls. We find, however, that Japan has made little headway in reducing its dependence on China for critical products, and export controls have had ambiguous trade effects. We discuss the role of the private sector in economic security and find significant divides by firm size on the uptake of new measures to address supply chain vulnerabilities and the protection of sensitive technologies. We examine the new industrial policy on semiconductors and point to the exigencies of success in fostering cutting-edge technologies. Our conclusion identifies policy challenges going forward and offers possible solutions.
Is inflation still slowing? Early 2025 data pivotal to outlook Federal Reserve Bank of Dallas
January inflation data were stronger in 2023 and 2024 than forecasters expected, even after more encouraging results had been reported for the ends of 2022 and 2023. Rather than reflecting seasonal adjustment difficulties, this pattern may be caused by a large share of firms changing prices at the start of a new year. If this is the case, first-quarter inflation data may exhibit greater persistence and sensitivity to swings in the business cycle. Whether early 2025 monthly inflation rates are similar to late 2024 or a repeat of the previous years’ surprises will be key to assessing the underlying momentum of inflation ahead
An Evaluation of World Economic Outlook Forecasts: Any Evidence of Asymmetry? International Monetary Fund
Using a large cross-country dataset covering over 150 countries and more than 10 macroeconomic variables, this study examines the consistency of IMF World Economic Outlook (WEO) forecasts with the full information rational expectations (FIRE) hypothesis. Similar to Consensus Economics forecasts, WEO forecasts exhibit an overreaction to news. Our analysis reveals that this overreaction is asymmetric, with more measured response to bad news, bringing forecasts closer to the FIRE benchmark. Moreover, forecasts align more closely with FIRE hypothesis during economic downturns or when a country is part of an IMF program. Overreaction becomes more pronounced for macroeconomic variables with low persistence and for forecasts over longer horizons, consistent with recent theoretical models. We also develop a model to explain how state-dependent nature of attentiveness may drive this asymmetric overreaction.
The Impact of Generative AI on Work Productivity Federal Reserve Bank of St. Louis Economy Blog
Generative artificial intelligence (AI) has rapidly emerged as a potentially important workplace technology. In an earlier blog post, we discussed results from the first nationally representative U.S. survey of generative AI adoption, conducted in August 2024. We showed that 28% of all workers used generative AI at work to some degree. We ran our survey again in November 2024 and found that usage rates were fairly stable between August and November. In this blog post, we leverage a novel question in the November survey to provide an estimate of potential aggregate productivity gains from generative AI.
Americas
How Does Latin America and the Caribbean View the Ukraine Conflict After Three Years of War? Ryan Berg/Center for Strategic and International Studies
Three years into the full-scale war between Russia and Ukraine, the conflict appears at an inflection point. The new U.S. administration of President Donald Trump has pledged to end the fighting and take the first steps toward negotiations with Russia. U.S. allies in Europe and beyond have, in turn, found themselves taken by surprise and decried what they see as a U.S. posture that is overly favorable to Moscow and potentially disastrous for Kyiv. For countries in Latin America and the Caribbean (LAC), a region which has, with few exceptions, sought to avoid taking strong positions on the conflict, the prospect of a ceasefire or peace agreement raises new questions, as well as opportunities for the region to assert itself on the global stage if it can take them.
With ELN Offensive, Colombia’s Security Crisis Has Come Roaring Back World Politics Review
Colombia now faces the worst security and humanitarian crisis it has seen in recent years, leading President Gustavo Petro to declare a state of emergency. Human rights organizations have raised concerns about the ELN’s conflation of civilians and EMB combatants. Indeed, it appears that the guerilla has especially targeted social activists and community leaders as well as those demobilized under the 2016 peace agreement.
IMF Loan to El Salvador Raises Transparency Concerns Center for Strategic & International Studies
In December 2024, El Salvador and the International Monetary Fund (IMF) reached a staff-level agreement for a $1.4 billion loan. The agreement, which outlines key policy commitments and structural reforms, remains subject to approval by the IMF Executive Board before the funds can be disbursed. However, concerns persist among civil society organizations and broader segments of the Salvadorean public that approval of an arrangement with the IMF could enable continued democratic backsliding and allow Nayib Bukele to further consolidate his authoritarian grip. The IMF Executive Board can help mitigate such concerns by enhancing transparency and accountability in the IMF-supported program. As a first step, including the following considerations into the IMF program would strengthen democratic norms and the rule of law in El Salvador, especially in the areas of governance and anti-corruption. Similarly, by improving consultation and encouraging communication with and the involvement of civil society actors, the IMF team, management, and the board would support broader public buy-in and strengthen program implementation.
Global Crime
Grand Theft Auto: Real Life Bloomberg/Business Week
When a car is stolen in the US, there’s a good chance that the thief is a teenager, and that the vehicle will end up in western Africa. Nowhere is international stolen-car traffic more robust than in the trade from the eastern US to ports in West Africa. With long-established routes hauling millions of shipping containers each month, car thieves have become bold in their efforts to slip stolen vehicles into this flow of legitimate commerce. Used-car brokers in West Africa know what models their customers will snap up, so they call US-based thieves to beef up inventory of highly desirable models – send orders for what they want to the US. All told, there were 1,020,729 car robberies in the US in 2023, the latest annual figure from the nonprofit National Insurance Crime Bureau.
