The fatal misconception of population control

development ▪ policy ▪

For the holiday, I decided to finish Michael Connelly's Fatal Misconception: The Struggle to Control World Population. It's an excellent history of how a hypothesis -- that unchecked, population growth will result in all sorts of problems -- became an ideology that got translated into policies and spun out of control to ruin many lives of women, mostly in developing countries. From the book's concluding chapter:

The great tragedy of population control, the fatal misconception, was to think that one could know other people's interests better than they knew it themselves. But if the idea of planning other people's families is now discredited, this very human tendency is still with us. The essence of population control... was to make rules for other people without having to answer to them. It appealed to the rich and powerful because, with the spread of emancipatory movements and the integration of markets, it began to appear easier and more profitable to control populations than to control territory. That is why opponents were correct in viewing it as another chapter in the unfinished history of imperialism.

The book is full of examples of how good intentions is a poor substitute for good evidence when devising (and scaling up) public policies. Yet, this seems to be the default mode of policy-making -- not only in Indonesia, but also within many international organizations and NGOs. Personally, I find this rather scary.

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Roger Ebert: The rational film critic

preference ▪ movies ▪

Top film critic Roger Ebert understands the necessity of transitivity (and completeness) that makes up a rational preference:

Do the math. If one week you state, "'Mr. Untouchable' makes 'American Gangster' look like a fairy tale," and the next week we say, "American Gangster" was "Goodfellas" for "the next generation," then you must conclude that "Mr. Untouchable" is better than "Goodfellas."

See the rest of Ebert's critiquing rule book here.

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Scholes on financial regulation

economics ▪ policy ▪

From Myron Scholes's opening statement on The Economist's debate on financial regulation with Joseph Stiglitz:

Economic theory suggests that financial innovation must lead to failures. And, in particular, since successful innovations are hard to predict, the infrastructure necessary to support innovation needs to lag the innovations themselves, which increases the probability that controls will be insufficient at times to prevent breakdowns in governance mechanisms. Failures, however, do not lead to the conclusion that re-regulation will succeed in stemming future failures. Or that society will be better off with fewer freedoms. Although governments are able to regulate organisational forms, they are unable to regulate the services provided by competing entities, many yet to be born. Organisational forms change with financial innovations. Although functions of finance remain static and are similar in Africa, Asia, Europe and the United States, their provision is dynamic as entities attempt to profit by providing services at lower cost and greater benefit than competing alternatives.

Thanks to Puspa Amri for the pointer.

On a side note: Rodrik put up a challenge in his blog for anyone to come up with financial innovations that have made us better off, and Steve Wadman took it up. HT: Dani Rodrik.

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Clive Crook on the crisis and innovation

economics ▪ policy ▪

Growth economists will tell you that the key to long term growth is productivity improvement, driven by technical changes and innovations. Economic history suggests that technical changes create boom-and-bust cycles as people adapt to the new technology. One can say that the crisis is a consequence of technical changes and innovations.

So, what of the present crisis? Does it suggest the utter failure of market forces, hence a need for an overall greater regulation in the financial market -- and not just those related to the specific problems at hand? FT's Clive Crook on the crisis' impact on the regulatory regime:

There is a broader point. The financial crisis was indeed a failure of regulation. The system was overwhelmed by innovation. Regulators are going to have to catch up and, you could say, try to hold innovation back. But finance is not a normal industry. The question to ponder is this: in which other industries will curbing innovation - also known as market forces - strike governments or voters, in the US or anywhere else, as a good idea?

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Easterly on the wrong lessons from the US crisis

economics ▪ policy ▪

William Easterly on what not to learn from the crisis, ie., "that development flows from all-knowing states rather than creative individuals". His last two paragraphs:

How much poverty has endured because individual entrepreneurs were shunned in favor of the likes of the $5 billion state-owned Ajaokuta Steel Mill in Nigeria, which never produced a bar of steel? Or because African governments spend their time preparing World Bank-required national Poverty Reduction Strategy Reports instead of freeing space for innovators?

We will never know. But we do know that the free market has a long-run track record of creating prosperity -- even with the occasional crash. The Depression's deceptive intellectual legacy is that development flows from all-knowing states rather than creative individuals. Here's hoping that the backlash to today's crash will not spawn another round of bad economics for the poor.

HT: Marginal Revolution

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Concise Encyclopedia of Economics online

economics ▪ resources ▪

The Concise Encyclopedia of Economics, explaining basic economics concepts, can be accessed here.

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On the economics of superstition

economics ▪ superstition ▪

As part of my economic history class, I was required to do readings (with no symbols and very little graphs). Here is an interesting one, by Vernon Smith, Nobel Laureate in economics. He was talking about the economic principles in the emergence of humankind, and he has the following to say about superstition:

Another example of the hidden economic function of culture is the magical practice of the Naskapi Indians of Labrador, who, when the caribou were scarce and the tribe hungry, resorted to scapulimacy, a divination in which the shoulder blade bone of a caribou was heated by fire until it cracked. As cracks appeared they were interpreted by a diviner in terms of the local geography as caribou trails, one of which the hunter should follow if he was to be successful. All this is commonly interpreted as showing the capacity of Naskapi for belief in magic. But is scapulimacy functional? One function is to sharpen the hunter's concentration, and to impress upon all the need for great dedication. But another effect was to cause the hunter to choose a random route, steering him away from previously successful hunting routes, and preventing the caribou from being sensitized to regularities in hunter behavior. This is precisely the normative argument for using mixed strategies in certain games of conflict. What the Naskapi in effect seem to have discovered was that reading shoulder blades had survival value.

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The utility of math

economics ▪ social sciences ▪

David Colander, reviewing this book, observes:

Economists have a tendency to obfuscate and lose themselves in a maze of equations and statistical tests that often have little intuitive meaning to the researcher, let alone to policymakers. My quest in economics has been to fight against those tendencies in applied policy work. But despite econommists' faults, I have to admit that their medium -- equations and statistical tests -- places a limit on the obfuscation that occurs. Ultimately the equations have to parse. Language -- the medium of sociologists and science scholars -- imposes fewer limits, which makes it easier for them to obfuscate. (JEL, XLVI/3, 78)

...which, I think, explains why it's much easier to do good economics than other social sciences.

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Why a high oil price is a good thing...

economics ▪ policy ▪

Foreign Policy gives five very good reasons.

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stickK's up!

behaviour ▪ economics ▪

I have just been told that now you can really put a contract out on yourself. stickK.com, which aims to help you live up to your promises to yourself, is now up, running, and receiving contracts.

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Boudreaux and Cowen on microcredit

economics ▪ microfinance ▪ policy ▪

Karol Boudreaux and Tyler Cowen ask the following on microcredit:

But can microcredit achieve the massive changes its proponents claim? Is it the solution to poverty in the developing world, or something more ­modest—­a way to empower the poor, particularly poor women, with some control over their lives and their ­assets?

and conclude that, more often, it's the latter:

Microcredit is making people’s lives better around the world. But for the most part, it is not pulling them out of poverty. It is hard to find entrepreneurs who start with these tiny loans and graduate to run commercial empires...[Microcredit] is important even when it does nothing more than stave off ­decline.

With microcredit, life becomes more bearable and easier to manage. The improvements may not show up as an explicit return on investment, but the benefits are very real. If a poor family is able to keep a child in school, send someone to a clinic, or build up more secure savings, its ­well-­being improves, if only marginally.

I agree: A lot of the benefits of microcredit programs come from the "consumption support" function that allows poorest households to smooth consumption (as well as human-capital investment in their children's education) during bad times. Unfortunately, many still don't appreciate this function of microcredits. One World Bank Jakarta official once told me how he could not convince a forum of local NGOs and donor agencies not to require microloans be used for "productive activities" in a microcredit program they were considering. An instance of policymaker paternalism, perhaps?

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To wake you up in the morning

behaviour ▪ economics ▪

More behavioural economics at work: Along the line of this post, now we have this alarm clock:

Connects via WiFi to your online bank account, and donates YOUR real money to an organization you HATE when you decide to snooze!

HT: Tyler Cowen. This thing seems to be a prank, but it's a cool application of trying to influence behaviours at the margin.

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Does poverty kill?

economics ▪ poverty ▪

A recent NBER paper by Abhijit Banerjee and Esther Duflo:

This paper uses household survey data form several developing countries to investigate whether the poor (defined as those living under $1 or $2 dollars a day at PPP) and the non poor have different mortality rates in old age. We construct a proxy measure of longevity, which is the probability that an adult's mother and father are alive. The non-poor's mothers are more likely to be alive than the poor's mothers. Using panel data set for Indonesia and Vietnam, we also find that older adults are significantly more likely to have died five years later if they are poor. The direction of causality is unclear: the poor may be poor because they are sick (and thus more likely to die), or they could die because they are poor.

For Indonesia, they find that:

[In] all age groups, there is very little difference in death rates between the poor and the extremely poor, but the non-poor are less likely to die than the poor and the extremely poor. This is true both five years out and ten years out, and in both rural and urban areas. In rural areas, depending on the age group and whether we look at five to ten years out, the extremely poor are 1.4 to 5 times more likely to die than those who live between $6 and $10 dollars a day. (p. 14)

They find a similar pattern in the Vietnam data. Though they have not established the direction of causality between poverty and longevity, "[on] balance, we are tempted to interpret the evidence accumulated in this paper as revealing, at least in part, that poverty does kill."

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A stickky dilemma

behaviour ▪ economics ▪

If I were to ask this company to help out with my new year resolution, should I:
a) Offer myself or a third-party to verify my compliance?
b) Choose a cause that I like or dislike to receive my money should I balk on my commitment?

Tim Harford, who plans to send his penalty payments to charity, thinks he himself is an honest enough verifier because he will not lie to cheat a cause that he supports. But by choosing cause that he likes, there is an incentive to rationalise away the failure to comply.

Alternatively, I can choose a cause that I dislike. But here, having myself as a verifier probably isn't going to work for the opposite reason -- I can now rationalise away my lying: i.e, to cheat a cause that I hate.

If I were to do this, I'd probably try to maximise my incentive to comply and minimise the incentive to lie by choosing a cause that I dislike and a third-party verifier. Now, all I need is a new year resolution worthy of the hassle.

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Restricting modern retailers: Winners and losers

economics ▪ urban ▪ policy ▪

From last week's Jakarta Post:

The government has issued a regulation to restrict the expansion of modern retailers including supermarkets, hypermarkets and convenience stores, which have been widely criticized for edging out traditional retailers.

Widely criticized for edging out and causing the decline of traditional retailers? Sure -- but are they really the culprit? Not according to this study.

The law apparently will focus on zoning issues. Take Jakarta, for instance. According to one of the ministry's general, in Jakarta, (I presume, new?) hypermarkets can only be opened at the outskirts. This is, indeed, a victory... for Carrefour, Giants, and all others that have managed to establish themselves in Jakarta prior to the regulation (I presume, the local government isn't going to revoke the licenses for existing hypermarkets). Unfortunately, it's bad news for the rest of us, which is very likely to include the very small retailers that the regulation was supposed to protect.

Why? Hypermarkets operate in an oligopoly market. By removing the threat of new entrants, the regulation makes the environment in which the hypermarkets operate more "stable". This has an effect of "softening" the competition amongst existing oligopolies. This softened competition allows oligopolists to increase their profit margins. Hence, I suspect that this regulation will increase the real profits of hypermarkets located in Jakarta.

And, if I am correct, guess from whose pockets will these increased profits come from? The rest of us, obviously. Since many owners of warungs -- street-side vendors -- also purchase their goods from these hypermarkets, they are likely to have to pay more that before. They would pass some of those costs to the consumers, but since goods offered by these small vendors tend to be elastic, this will reduce their overall revenue.

Herein lies the irony: A regulation that is supposed to "protect" smaller retailers (despite evidence showing that the hypermarkets are not the most important culprit in their decline) might end up accelerating their demise. On the other hand, the supposedly "big-and-evil" hypermarkets might actually gain from the whole enterprise. And consumers, which is clearly the largest constituents, will lose out from all this.

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Growth policies: No substitute for thinking

economics ▪ growth ▪ policy ▪

I have just finished reading Chapter 2 of Rodrik's latest book (which is a revised version of this "Growth Diagnostics" paper):

Most well-trained economists would agree that the standard policy reforms included in the Washington Consensus have the potential to be growth-promoting. What the experience of the last 15 years has shown, however, is that the impact of these reforms is heavily dependent on circumstances...We argue in this paper that this calls for an approach to reform that is much more contingent on the economic environment, but one that also avoids an “anything goes” attitude of nihilism. We show it is possible to develop a unified framework for analyzing and formulating growth strategies that is both operational and based on solid economic reasoning.

The authors then offer a growth diagnostics framework that is summarized by Rodrik here. The paper concludes with the following:

Across-the-board reform packages have often failed to get countries growing again. The method for growth diagnostics we provide in this paper should help target reform on the most binding constraints that impede growth... As our discussion of El Salvador, Brazil, and the Dominican Republic illustrates, each of these circumstances throws out different diagnostic signals. An approach to development that determines the action agenda on the basis of these signals is likely to be considerably more effective than a laundry-list approach with a long list of institutional and governance reforms that may or may not be well targeted on the most binding constraints to growth.

I agree with Rodrik's general message on the context-dependency of growth policies. His offered framework is also useful for policymakers. Yet it is no substitute for thinking by developing countries' economists and policymakers: They need to analyze which of the agenda are particularly relevant to their respective economies. Rodrik puts it best: "The framework does not economize on inputs (the thoughtfulness required to reach decisions), only on outputs (the list of things that we recommend governments should do to get growth going)".

PS: For a somewhat similar exercise for Indonesia (though it doesn't seem to be using this exact framework), see the reports posted here (particularly its Special Focus on Regions reports, on the left sidebar).

PPS: Here is a set of papers commissioned by the Commission on Growth and Development.

PPPS: Charles Kenny offers a review of new evidence on growth in the last six years (his answer: Not very much!). HT: Marginal Revolution.

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Put your money where your resolution is!

behaviour ▪ economics ▪

The new year is coming; time to "renew" last year's resolution. Now, if this sounds familiar, maybe this company can help you. The company, founded by three economists, helps columnist Tim Harford do sit-ups:

Economists rarely make good forecasts, but let me venture one: most readers of this column will eat and drink heavily over the next two weeks (as will its writer), and many of us will, on January 1, vow to do better in future. Can economics provide a little assistance in coping with this annual ritual?

I think it can, and so do three economists at Yale who’ve been helping me out. Professors Dean Karlan and Ian Ayres (who is also a law professor and the author of Supercrunchers), along with Jordan Goldberg, a business-school student, have a cheque from me for $1,000, about £500.

If I do not do 200 press-ups and 200 sit-ups each week, they’ll start sending my money to a charity, $100 at a time. (I chose the hugely deserving DC Central Kitchen.) They will shortly offer the same dubious privilege to countless others via a new company, Stickk.com – customers name their own pledges, sign pro-forma contracts, and put their cheques in the post.

Sounds like a promising idea (and I love the company's slogan: "Put a contract out on yourself!"). Immediately, though, I thought of a few of my friends who bought gym memberships (charged at the beginning of each month), vowing to exercise regularly, only to flounder and forfeit their memberships. How is this different?

The difference lies in the way the costs are incurred. In the case of the gym membership, the cost is paid in advance. This is what economists call "a sunk cost": Once incurred, it cannot be recovered -- and therefore, as economists would like to advise you, rational individuals should not let it affect their decisions.

Here, however, the cost is only incurred if a person fails to live up to his/her own promise (to himself/herself). Hence, an individual's present decision can still affect the cost. This contract on yourself increases the cost of reneging on your own promises.

Individuals who are likely to register to this service are those "at the margin" -- individuals who (think that they) generally have self-control, but sometimes need a little help. Blatant (but rational) resolution-breakers will not join because they know it's a waste of money. The service has potential.

I see one potential problem and a way to improve the service. First, the problem: enforcement under adverse selection. In order for the system to work, there must be a means to verify that the individual followed through on the contract. Otherwise, we will quickly revert to the status quo. Otherwise, individuals have an incentive to say they did follow through to avoid getting penalized.

My second issue is on the use of the penalty. Harford suggests the penalty will be sent to a charity of his choosing -- i.e., the charity that he likes. The downside to this is that it's easy for individuals to rationalise broken contracts ("Oh, I feel like being charitable this month!"). To remove such delusions about our motives, I propose that the penalty be sent to a cause that the individual dislikes.

PS: Harford is coming up with his second book, The Logic of Life, another attempt to popularise economics following his entertaining The Undercover Economist.

UPDATE: The people at stickK have addressed the issues I mentioned above. Thank you to Jordan Goldberg for the clarification.

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Are malnutritioned children doomed forever?

economics ▪ health ▪ policy ▪

A question a policymaker might ask is whether a person with poor nutritional status when young can recover from the predicament when older. Subha Mani of the University of Southern California (USC) uses the IFLS data to answer this question and come to a heartening conclusion:

[The] dynamic results indicate that there exists catch-up potential in health outcomes, that is, children who suffered from chronic malnutrition during childhood are not likely to remain as undernourished forever. The presence of catch-up potential suggests that focused attempts must be made towards improving nutritional outcomes of children at all ages with special emphasis on the very young.

The disadvantage will still be there. Her model suggests that children with poor nutrition would have had 0.6 less grades of schooling compared to well-nourished ones, but that in the absence of any catch-up effect, the gap would have been four times larger.

You can read the rest of the paper here.

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Do supermarkets harm traditional markets?

economics ▪ urban ▪ policy ▪

Not according to this not-so-new report by SMERU:

This study measures the impact of supermarkets on traditional markets in urban centers in Indonesia quantitatively using difference-in-difference and econometric methods as well as qualitatively using in-depth interviews. The quantitative methods find no statistically significant impact on earnings and profit but a statistically significant impact of supermarkets on the number of employees in traditional markets. The qualitative findings suggest that the decline in traditional markets is mostly caused by internal problems from which supermarkets benefit. Therefore, ensuring the sustainability of traditional markets would require an overhaul of the traditional market management system, enabling them to compete with and survive alongside supermarkets.

Note that the one statistically significant negative impact of supermarkets was to reduce employment in the traditional markets. However, since supermarkets create employment, I wonder whether the net employment impact is positive or negative.

The report looks comprehensive and I think it deserves a wider coverage in the conventional media. I sure wish SMERU has an Indonesian version of it. Who knows, Indonesian journalists might actually take a look at and investigate the (absence of) empirical evidence behind the case against modern markets, instead of just parroting the anecdotal arguments of the traditional-market lobbies.

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Data for development researchers

data ▪ development ▪ economics ▪

For researchers looking for global development data, developmentdata.org provides links to various datasets:

developmentdata.org contains links to developing country data on inequality, trade, aid, education, agriculture, migration, health, FDI, population, governance and debt, and to websites that host and/or catalogue household survey data. The links take you directly to the data you need or to the database or publication that contain the data. For each area, there is a brief data description or list of the variables available. Searchable, general databases that include data for many different variables can be found under databases together with topic-specific databases.

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