Economic models are so unrealistic

Sometimes listening to criticisms of models feels a bit like this. 

South Sudan non sequitur

Simon Tisdall writes in the Guardian

disputes over oil revenue-sharing, cross-border conflict, and looming famine. These multiple crises combine to pose a fundamental question: can South Sudan survive as a viable state?

Which in a slightly round-about way is a nice reminder of the tremendous benefits of studying economics. Economics teaches you a handful of incredibly powerful core concepts which, once assimilated, you kind of take for granted, and forget that not everybody intuitively thinks this way. Supply and demand. Incentives. Opportunity cost.

Opportunity cost means asking "compared to what." Can South Sudan survive as a viable state compared to what? A Khartoum-led state whose most significant offerings to the South over the last 50 years have been bombs? In what sense was the Khartoum-led state "viable" in the South over the last 50 years?

It's a bit like sceptically asking a daily victim of domestic violence for 50 years whether they are really being realistic thinking that they can survive as a viable independent household.

Would you rather live in a weak state or a state that is literally trying to kill you?

Hold on to your hats

So Juba has decided to stop oil production in South Sudan, in protest of Khartoum theft. Pre-independence, revenues from the South were split 50:50, and Khartoum have basically been trying to continue that by imposing arbitrary fees, asking for up to $30 per barrel (Juba claims that normal prices for pipeline transit fees in other countries are around $1 per barrel).

So now we have a war of attrition. Which side can afford to last out the longest before making a compromise? Who has the largest cash reserves relative to their recurrent spending demands? The numbers are probably not in the public domain, but Khartoum does at least have some other sources of revenue. Revenues in Juba must basically be zero now. But then Juba does probably have a more sympathetic population who seem to be behind the decision, and therefore with perhaps a greater appetite for dramatic spending cuts than citizens in Khartoum. Good luck Juba, and I pray this ends peacefully.

Do chime in if you have any insights.

Update: Alex de Waal notes that if the pipes are shut, it will take 6 months to get oil flowing again. The last chance to come to a deal is apparently Friday when Bashir and Kiir meet in Addis Ababa. 

Lenny Henry in Kibera

Four British celebrities try living and working in Kibera for a week on the £1-£2 average daily income (hattip: my mum).

The culture that is Britain

Or how foreigners view the British:

From a VSO report on "The Live Aid Legacy," via @nathanyaffe

Why do Kenyans save?

0.089% of them apparently answered "When I receive money in ransom" to this question, from the 2009 Financial Access survey. Ahem.

Korogocho

I've spent most of this week wandering around Korogocho, Nairobi's third or fourth biggest slum (against recent FCO advice against "all but essential travel to low income areas of Nairobi, including all township or slum areas" - worth a few dangerzone street-cred points?). 

Korogocho is probably a bit poorer and a bit more dangerous than Kibera so I was advised against taking a camera, but it looks pretty similar to Duncan's photos of Kibera from this week. In fairness, someone did have a phone snatched literally opposite where we were sitting, and there was a stabbing on the same street a few nights ago. A local medical centre reported stabbings as the #1 source of admissions, followed by malaria and typhoid. 

I did sneak one photo from the safety of the NGO building we were based in. Remember those "amazing" sunlight powered water-bottle lights innovated for slums in Philippines that were all over the development blogs a few months ago? Rubbish. Everywhere in Korogocho just fits a square of transparent corrugated plastic into the corrugated iron roof. Much better. 

Lots of other interesting moments, but for now;

Best t-shirt slogan: “No Handouts, Just Empower me.”

Best blog on the neighbouring Kariobangi light industrial cluster where many Korogocho residents work.

What you can do to help: apparently uneaten plane meals from Kenyan Airways get dumped at the enormous dandora dumpsite adjacent to Korogocho, and end up in the market (including things like quite expensive Out of Africa brand Macadamia nuts). So the moral of the story: next time you fly Kenya airways, don't eat your plane meal and donate it to a poor slum dweller!

Kenyan Political joke of the week

No, not the election news, but this:

Little Njoro of Buru estate in Nairobi wanted Kshs 1,000 badly and prayed to God for two weeks but nothing happened. 

Then he decided to write God a letter requesting the Kshs 1,000. When the postal authorities received the letter addressed to God from Buru buru in Kenya, they decided to send it to State House. 

The letter never even got to the president but an aide was very touched and so he sent the boy Kshs 200. He felt that this was a lot of money for a small kid.
Njoro was delighted when he received the Kshs 200 and sat down to write a thank you note to God, which read: 

Dear God, 

Thank you very much for sending the money.
I don’t want to sound ungrateful but I noticed that for some reason you had to send it through State House and, as usual, those crooks deducted a whole Kshs 800. My teacher tells me that you never forget, but did you not this once forget that Kenya is one of the most corrupt countries in the world and that as my dad is always saying corruption starts at the top? 

I suggest you send an angel next time.
Thanks,Njoro.

HT: @RichardTrillo 

Which countries are most vulnerable to the resource curse?

A new report by my colleague Dan Haglund suggests it is;

Non-fuel, mineral-dependent countries:

Bolivia, Burkino Faso, the DRC, Ghana, Guyana, Laos, Mali, Mauritania, Mongolia, Papua New Guinea, Tanzania and Zambia.

Fuel-dependent countries: Algeria, Angola, Azerbaijan, Cameroon, Chad, Cote d’Ivoire, Iran, Iraq, Nigeria, Sudan, Timor-Leste and Yemen.

See the full report here or coverage in the FT here.

Blessing or curse? The rise of mineral dependence among low- and middle-income countries 

I'm off to Kenya

Sorry. You can blame Stefan Dercon because I found this on his old website. 

Kiva: A Gateway Drug?

It's pretty clear that "lending" money on Kiva is not the best way of giving to the poor. You aren't at all really lending to those individuals, but rather donating the interest you could have earned on your deposit to a microlending institution. And microlending institutions can raise their own money from deposits or capital markets, so you would be much better off donating to something more effective, such as buying bednets or deworming pills (see givewell.org's current recommendations, or the Proven Impact Fund).

The potential saving grace for me is Kiva as a development gateway drug. The story and personal connection is powerful. What if Kiva can get people hooked on development, who will then eventually find out more and graduate to doing something with bigger impact? I feel similarly about voluntourism. Would love to see any research on either of these topics.

Does succumbing to Kiva or voluntourism advertising have a causal impact on individual's attitudes and actions towards development, after the selection effect of those individuals being more likely to be interested in development in the first place?

There is no great stagnation

One of the points that Tyler makes in his great book is that though there has been a US innovation slowdown of late, the internet is a technology which, though not reaping immediate economy-wide benefits in terms of jobs and revenues, is something which might just pay off more in the long-run. Let's hope it can be analogous to steam power:

Steam power is an example of a general-purpose technology (GPT), that is a technology that can be applied to a variety of uses. Other GPTs include electricity and computers. It takes decades to develop the potential of GPTs, so their contribution to economic growth takes place long after their invention. That was certainly true for steam. As late as 1800, almost a century after Newcomen’s invention, steam power made only a minute contribution to the British economy. By the middle of the 19th century, however, the potential of steam was finally being realized as it was applied widely to transportation and industry. Half of the growth of labour productivity in Britain in the mid-19th Century was due to steam. 

And lets hope it doesn't take us a century. From Global Economy History: A Very Short Introduction (thanks Tom for making me read it. Very good. As is much of the rest of the series, including the Economics one)

Marginal (personal) Revolutions

Oliver Burkeman on New Year resolutions:

behind almost every New Year’s resolution, for example, is the unspoken implication that whatever change we’re trying to make – to start exercising more, eating better, procrastinating less – we’re going to do it every day, perfectly, for the rest of our lives. I’d always wondered why my efforts at such extreme self-discipline seemed to fail every time. But then, gradually, I began to understand that real self-discipline is almost the exact opposite: the willingness to make small, incremental adjustments, to tolerate imperfection and bumpy progress, and not to throw in the towel in frustration the moment something starts to go wrong. In this sense, modest action in fact takes more guts than massive action. But it has the inestimable advantage that it really works.

How to be slightly happier

This one is a bit embarrassing. About a month ago, I started keeping a gratitude journal. 

In Oliver Burkeman's words;

"After spending some time immersing myself in this self-help business, I reached a fork-in-the-road moment: I realised I was going to have to choose between rejecting certain ideas because they sounded so corny, or accepting them because they work. Gratitude journals are at the extreme end of the cheesiness continuum, but the studies are hard to refute."

Burkeman writes one of my favourite columns; this column will change your life,  which is about the self-help business, but in a very dry, sceptical, English kind of way, with a healthy appetite for rigorous evidence.

The evidence won me over, so I gave it a try, and I'm pretty sure it works. Of course, not that you should pay any attention to my 1 data point anecdote with zero counterfactual when you have actual peer-reviewed studies to go on, but anyway. 

Take a minute every day to think about something you are grateful for. I send myself a daily email reminder as I'm a little bit allergic to actual paper (with ohlife.com), and normally reply with just one word or sentence. And no, you can't read mine.

(Is this my least cool post ever?)

The Hyena Men

---Pieter Hugo

The Political Economy of Fertility

I argue that fertility may be a strategic choice for ethnic groups engaged in redistributive conflict. I first present a simple conflict model where high fertility is optimal for each ethnic group if and only if the economy’s ethnic diversity is high, institutions are weak, or both. I then test the model in a cross-national dataset. Consistent with the theory, I find that economies where the product of ethnic diversity and a measure of institutional weakness is high have increased fertility rates. I conclude that fertility may depend on political factors.

I'm skeptical of the cross-national empirics without having looked at them, because ... they are cross-national empirics (see here for further explanation). But the theory is interesting and sounds plausible.

(And here's the link for the paper by Thorsten Janus, forthcoming in Public Choice)

The Political Economy of Privatisation

Adam Smith or Machiavelli? Political incentives for contracting out local public services 

Why do some local governments deliver public services directly while others rely on providers from the private sector? Previous literature on local contracting out and on the privatization of state-owned enterprises have offered two competing interpretations on why center-right governments rely more on private providers. Some maintain that center-right politicians contract out more because, like Adam Smith, they believe in market competition. Others claim that center-right politicians use privatization in a Machiavellian fashion; it is used as a strategy to retain power, by ‘purchasing’ the electoral support of certain constituencies. Using a unique dataset, which includes the political attitudes of over 8,000 Swedish local politicians from 290 municipalities for a period of 10 years, this paper tests these ideological predictions together with additional political economy factors which have been overlooked in previous studies, such as the number of veto players. Results first indicate support for the Machiavellian interpretation, as contracting out increases with electoral competition. Second, irrespective of ideological concerns, municipalities with more veto players in the coalition government contract out fewer services. 

Yikes!

How to argue well

Ranil and Dave lament the impasse in the great development debates.

Here's some nice ideas from Scott Berkun, taken from his rules for discussing politics with friends (without ending up hating each other)

What would convince you that you are wrong? If you have no answer to this question, you haven’t thought very hard about your position. There must be some set of new facts or conditions in the world that would make you take a different point of view, even if they are unlikely or improbable. It’s not much fun to talk to people who have complete certainty that they’re right about everything. 

Policies, Politics, and Poor Economics

Some gentle criticism of Banerjee and Duflo on political economy. From Poor Economics, they say:

Political economy is the view (embraced, as we have seen, by a number of development scholars) that politics has primacy over economics: Institutions define and limit the scope of economic policy. 

there is no reason to believe, as the political economy view would have it, that politics always trumps policies 

Which is a bit of a straw man.  For example, Benno J. Ndulu and Stephen A. O’Connell write:

Growth depends on the interaction of opportunities with choices.

The central message of the Growth project is to confirm the critical importance of policy for long term growth in SSA.

and Daron Acemoglu and James A. Robinson

Main thesis is that growth is much more likely under inclusive institutions than extractive institutions. 

Though growth is much more likely under inclusive institutions, it is still possible under extractive institutions.

Their basic point is valid, but maybe just a little oversold. I'm not sure that Acemoglu and Robinson really think that there is nothing at all to be done to improve things in countries with weak institutions.

Finally, they make a point also made by Tony Blair which you don't otherwise tend to hear too much - focusing relentlessly on delivery of something can help to improve governance.

Good policies can also help break the vicious cycle of low expectations: If the government starts to deliver, people will start taking politics more seriously and put pressure on the government to deliver more, rather than opting out or voting unthinkingly for their coethnics or taking up arms against the government.  

The political constraints are real, and they make it difficult to find big solutions to big problems. But there is considerable slack to improve institutions and policy at the margin. Careful understanding of the motivations and the constraints of everyone (poor people, civil servants, taxpayers, elected politicians, and so on) can lead to policies and institutions that are better designed, and less likely to be perverted by corruption or dereliction of duty.

Evidence for the Tony Blair "leadership matters" theory of governance and development

Is State Capacity a Political Choice? Two recent papers from IDS colleagues suggest that the answer to this question is “yes”. The paper by Santhosh Mathew and Mick Moore (2011) examines the weak capacity of the State of Bihar in India over the 1990-2005 period, and a paper by soon to be IDS Fellow Stephen Peterson (2011) on Public Financial Management in Ethiopia over the 1996-2010 examines the drivers of successful financial reform. The authors argue, In both cases, that deliberate and calculated political choices drove weak capacity in Bihar and strong capacity in Ethiopia --- Lawrence Haddad

Bit of a snarky rant about Mike McGovern. Might have overdone it.

After all the cooing from Chris, MR, Bill, and Loomnie (yes I believe in Oxford commas) about McGovern's article on Collier, I had rather higher expectations than what seemed to me like a familiar basic misunderstanding of economics and academic hesitancy for policy recommendations.

What follows is thus my attempt at an ethnography of the world—imaginative, discursive, but also technical and action oriented—of Paul Collier and, by extension, of the broader genre of popular economics, from Freakonomics to Dead Aid.

What on earth is similar in any way between the economics of Paul Collier's cross-country regressions and sweeping claims, and the precisely identified but largely irrelevant trivia of Freakonomics?

My aim in this essay is not to demolish Collier’s important work, nor to call into question development economics or the use of statistics. Many others have done a better job of exploring the emergence and growing power of statistics in the “low sciences” than I could.5 But the rhetorical tics of Collier’s books deserve some attention.

Right - the books are popular science. They are not academic research.

Paul Collier, William Easterly, and Jeffrey Sachs can all be tenured professors and heads of research institutes, despite the fact that on many points, if one of them were definitively right, one or both of their colleagues would have to be wrong. If economics really were like a natural science, this would not be the case.

Really? There have never been theoretical disagreements in the natural sciences? Come on.

there is an inherent selection bias in work like Collier’s because the model is built from existing cases of warfare, and thus tends to render counterfactual cases invisible. Places like Guinea, Tanzania, Ghana, and Senegal consequently don’t come in for much discussion while Chad, Sudan, Afghanistan, CAR, and the DRC do.11

Umm, except the work is based on a global dataset including all of the countries that have conflict and that don't. The model predicts the countries where conflict occurs and where it doesn't. I'm pretty sure he even says this in the Bottom Billion.

These are, however, human beings. There are no true control groups, least of all in the context of war or the daily scramble for survival that characterizes the lives of the very poor.

Umm, not really true.

In Collier’s depiction, we end up with two groups only—young men with guns, and the elite older men who lead, organize, fund, and instrumentalize them. Women are virtually absent.

Its a model. Models simplify things. That is the point of a model.

Development economics as a discipline has been systematically unsuccessful in producing desired policy results, at least in the countries where the bottom billion reside. Moreover, those countries such as China and India that Collier hails as truly and rapidly developing have been characterized to a large extent by their rejection of the ministrations of such institutions as the World Bank.

Oh right, yeah, because poor nations have of course just blindly followed every World Bank diktat to the absolute letter right?

I wish Paul Collier had opened The Bottom Billion with a passage like “In this book, I will present some intriguing and counterintuitive correlations between poverty and a variety of social and political phenomena. I will add to these correlations some insights from thirty-five years of experience as a development economist that may begin to explain some of the correlations. Some day, we may have a good enough understanding of these causal links in specific countries to make useful policy interventions there.”

And in the meantime.... let's all just sit and watch?......? Thank god nobody did anything about the Rwanda genocide huh, we clearly didn't understand the precise causal mechanisms right?

Towards a Growth Strategy for Africa?

Long before all those randomised evaluations, my youthful enthusiasm for microfinance was killed by this:

"in the long-run, a growth strategy is the most cost effective way of dealing with poverty. This is true for two fundamental reasons: first, growth lifts many of the poor out of poverty; second, it generates the government revenues necessary for anti-poverty measures. A donor strategy that focuses exclusively on short-term poverty alleviation is a dead end, condemned to last indefinitely ... 

Food relief, micro-finance, improved wood-stoves, and reforestation are all examples of interventions aimed primarily at helping the poor to deal with their harsh environment.1 In nearly all cases these interventions correspond to a real need. In many cases they are effective in alleviating the worst effects of poverty. But by themselves they cannot lift the African continent out of poverty any more than food relief, micro-finance, and improved wood-stoves were responsible for lifting England, Japan, or Korea out of their poverty."

1. This is not to deny that these programs also have expected growth benefits. But it is probably a fair approximation to say that their primary effect is poverty alleviation.

Marcel Fafchamps, Francis Teal, and John Toye

(Of course, I've now come full circle and lean closer to the Banerjee-Duflo "we have no clue really how to do growth so lets focus on helping the poor deal with their harsh environment")

Political Economy is Hard

2 big political announcements in South Sudan this week (umm, this was written on 31 Oct 2011) illustrate how difficult it is as an outsider to even begin to understand local politics.

The respected Minister for Civil Service Reform Awut Deng Acuil has resigned for reasons that have not been made clear, and top civil servant Aggrey Tisa Sabuni has been appointed Economic Adviser to the President (from Undersecretary at the Ministry of Finance. Congratulations Tisa!). The implications of these two moves are probably significant, but there just isn't any English-language media analysis.

Doing "political economy analysis" in the UK simply means picking up almost any newspaper on a regular basis. What is a donor supposed to do when they can't do that?

So the implications of this:
(a) if we believe that understanding politics is important for effective policy design, and
(b) we generally aren't very good at understanding politics in developing countries

---> we should probably go for simple interventions with either very high benefit-cost ratios, or with low dependence on understanding local systems.

Sidenote: I did a bit of googling for some analysis of the last Nigerian budget. Well done to PWC for coming up with something. But really, the rest of the whole entire world, we don't think its worth bothering to figure out some way of funding someone to take a really hard serious look at the spending decisions of the government of the most populous country in Africa, and then get surprised when things blow up??

When rigorous evaluation is NOT necessary?

Sometimes simple descriptive survey data is basically fine to tell us what we need to know. But if you want to get published in a top economics journal, you need a really convincing statistical demonstration of causality (unlike, say, some top medical journals *cough* American Journal of Clinical Nutrition *cough*).

Case #1 - Oster & Thornton's very cool paper on menstruation and school attendance. They found two things
(a) - from a simple survey/school attendance records - girls in Nepal miss an average of 0.4 days per 180 day school year due to menstruation.

(b) - a randomized intervention providing sanitary products has little impact on reducing that 0.4 days.

Now - the interesting part here is part a - based on simple descriptive statistics - which tells us everything we need to know. Part b - the randomized intervention - is basically irrelevant once we already know that girls are not missing school due to menstruation

Case #2 - Friedman, Kremer, Miguel & Thornton - on education and attitudes to democracy and ethnicity. By offering randomized primary school scholarships they get a very clean identification of the causal impact of education on attitudes. Which is great. But we also knew that there is a ton of descriptive statistics on this already.

From this simple cross-tabulation of Afrobarometer data (the website is pretty cool by the way) - I'm guessing that primary school probably doesn't have a huge impact on support for democracy, because almost everyone supports it to begin with. 

Get any presents?

Everything you ever wanted to know about RCTs and Microfinance but were too afraid to ask

If you’re looking for a thorough, careful, and clear summary of the latest research, and one that gets to those important design questions, you can do no better than read this review. My own chapter 6 is not nearly as complete and precise. --- David Roodman

When Cash isn't best

We randomly gave cash and in-kind grants to male- and female-owned microenterprises in urban Ghana. Our findings cast doubt on the ability of capital alone to stimulate the growth of female microenterprises. First, while the average treatment effects of the in-kind grants are large and positive for both males and females, the gain in profits is almost zero for women with initial profits below the median, suggesting that capital alone is not enough to grow subsistence enterprises owned by women. Second, for women we strongly reject equality of the cash and in-kind grants; only in-kind grants lead to growth in business profits. The results for men also suggest a lower impact of cash, but differences between cash and in-kind grants are less robust. 

Marcel Fafchamps, David McKenzie, Simon Quinn, Christopher Woodruff

Development: People or Places?

The Guardian's economics leader writer (with a.... history qualification?) has a long rant about the de-industrialisation of Britain, claiming that the government has written off an entire region. Here's the thing - I sadly don't have time to reference all of this but;

1 - Globalisation is not a government policy - it is a thing that is happening.
2 - Government-led area-based regeneration generally doesn't work
3 - So - government policy should be, and largely is, about supporting individuals wherever they live. The best that we can do to respond to the shift in jobs from the North-East to the South-East, is ensure that wherever they are born, kids get a great education giving them an equal opportunity to compete, and making it easy to move to where jobs are (allowing more house-building in the South-East would help with this).

So - support people not places - and let people move. Or social protection and migration. Works in Britain. Sound anything like a recipe for global development?

Addendum: Here's the thing about Thatcher - when she said "let Liverpool decline," she probably basically had the economics about right, as with weakening the unions, and as the Nigerian government with fuel subsidies today. Just don't be such a **** about it yeah?

Lessons for London (from Bosnia)

a unique field experiment involving Muslim and Catholic students in Bosnia-Herzegovina suggests one avenue for building emerging states: The existence of integrated civic institutions such as schools, the study finds, helps foster greater collaboration across ethno-religious lines ... 

In the study, students from an integrated school were willing to make financial contributions to the public good that were as much as three times larger than the contributions made by students from segregated schools, among other effects. The results appear in a paper published this week in the journal Science, co-authored by MIT political scientist Fotini Christia. (MIT News)

My take on the London riots came down to schools. If religions and social classes don't mix when they are kids then they probably never will. Need any more evidence that faith schools are a terrible terrible idea?

Drafts

There are 37 half-written drafts, ideas, and links sitting in my blogger account. Can I publish them all in the next hour?

Ghanaian Hip-Hop

I can't get enough of this

via the excellent http://www.okayafrica.com/ and http://africasacountry.com/

The Economics of the Nigerian Fuel Subsidy

Are pretty simple. Fuel subsidies are a terrible way of transferring resources to the poor. Economists have rightly been calling for their removal for ages.

But maybe just maybe, rather than heeding the Economist magazine's call to "End them at once!", it might have been a good idea to think about the adjustment costs that might exist to an overnight doubling of petrol costs, and also to consider another way of transferring resources directly to the poor in which they might actually notice. Putting those savings straight back into the government coffers for some kind of nebulous infrastructure spending just doesn't cut it.

The Roman Catholic archbishop of Abuja and former head of the Christian Association of Nigeria observes that the subsidy is a tiny resource transfer to the Nigerian people, who otherwise receive little or nothing from the current political economy. It is, therefore, morally justified, “no matter what the World Bank says.” (via John Campbell)

Oh economics, and your Kaldor-Hicks efficiency...