In the past few weeks, there have been a barrage of media reports about educational achievement and, more generally, life outcomes for the youth of Durham.
The positive news is that these issues are receiving attention, but the downside is that the reports may be more harmful than helpful. At its best, data optimizes decision-making, but at its worst data can be deceptive and divisive.
Specialized knowledge is required to leverage data for decision-making, whereas selectively reporting figures requires some effort but no expertise. In the latter scenario, the ambiguity of statistical assumptions predisposes the audience to personal, as well as, framing bias. Those who go through the effort to produce data often have an agenda, and therefore, have incentives to make claims which imply causes and solutions. Data is dangerous when misused. It can create tension, undermine trust and unity, and result in costly adverse decision-making.
One key characteristic of amateur statistics, aside from lacking an experimental design, is that they do not account for the fact that outcomes are a function of many different variables. For example, schools clearly play a crucial role in influencing academic attainment, but a report drawing relative comparisons between attainment outcomes within or across cities usually implicates unidentified failures of one school district versus another while all but ignoring the effects of transportation, affordable housing, food, healthcare, and social support accessibility, as well as people’s different lived experiences, including traumatic exposure of various kinds.
Reactivity to outcomes is strongly linked to bias and emotion. Making decisions about problems and solutions based exclusively on outcomes is the logical equivalent to going with your gut.
Descriptive statistics alone have a tendency to reinforce what we already think we know rather than helping us to gain an objective understanding of the issues because we often overestimate our understanding of the context. Shards of truth may be buried in our presumptions or between the different storylines, but other times the truth isn’t within sight.
If one wanted to know what public schools are doing right and what positive changes could be made, the reported outcomes would not meaningfully increase understanding. This would be like a college basketball coach using the Ratings Percentage Index (RPI) to make game plans. The RPI is simply a function of outcome variables that are influenced by other, more influential variables over a team’s success, such as shot selection, rebounding, ball control and many others.
Similarly, objective inference about the determinants of academic achievement are impossible when we simply have some measure of the output, like grade level proficiency, graduation rates or achievement gaps. Summarized outcomes do not even begin to untangle the multifaceted causal factors of student achievement, or even point to which factors are within the schools’ control and which are shaped by other institutions that govern infrastructure, real estate development, credit markets and criminal justice.
Good intentions often lead to unintended consequences. Calculating outcomes or deriving slightly new definitions of them does not enhance the cultural or intellectual competence of our community, its citizens or the institutions within it.
This is troubling because the extent of harm done with every report that subjectively frames and selectively reports data will never be known. A symptomatic obsession can enable data to have a negative social impact, leading to the proliferation of economic and racial segregation, adverse selection of people and funds from public schools, victim blaming and the marginalization of objectivity. The focus needs to shift from symptoms to solutions.
Data should be collected and analyzed in a way that enables us to separately identify effects on outcomes, including those determinants within the school’s control and those outside, so that all can be addressed in order of impact and feasibility. Robust evaluations should yield insight, pointing out specific causal factors that affect outcomes that the schools, nonprofits policy and citizens can address.
Applying a scientific lens to social issues transforms data from punitive to instructive. Careful investigation using valid quantitative methods can help us gain an understanding of the inferences that the data will and will not permit. Through empirical analysis, we have the opportunity to disentangle the effects that different factors have on certain outcomes. This is powerful because it enables us to create informed strategies.
Subsequently, when we know how our potential actions will affect an outcome, a cost-benefit analysis can help decide which evidence should be brought to action. Operating in the public and nonprofit sectors, the cost-benefit analysis goes beyond fiscal considerations to examine social returns. Combining these empirical tools puts us in a position to optimize social welfare. Data or analysis vacant of these characteristics will result in suboptimal decision-making.
An empirical basis for decision-making that respects the complexity of determinants on outcomes and the tradeoffs between various actions or lack of action should be utilized at all levels – from the systemic to the programmatic. A symptomatic focus and a preoccupation with a single area will not result in systemic improvement. As institutions, organizations and programs, our goal should be to improve, which can only be achieved through learning.
Durham has great potential to grow while enhancing the well-being of all, including the most marginalized. Continuous improvement requires the commitment of people in the public, private, and social sectors to work together.
Part of analytical integrity is the acknowledgement that sometimes our data tells us nothing at all. If we truly care about addressing systemic issues, lack of information is a strong argument for why we should build more robust datasets that incorporate variables across institutions and the socio-economic environment. This requires a willingness to coordinate and to learn. Importantly, these actions imply the willingness to change.
The Made in Durham partnership exists to address issues of the highest importance. It is the job of data is to increase the role of evidence in the partnership’s decision-making, and because of the gravity of these decisions, I also feel an ethical accountability to this work.
If we aren’t asking the right questions, data can lead to costly decisions that undermine improvement. As members of the community, we should all be able to ask the right questions to hold decision-makers accountable to analytical standards that drive improvement.
Regardless of what the outcomes show now, or anytime in the future, what we should be asking is: what are the causes of these outcomes, what are their magnitudes, and thus, what can we do to improve.
Evan Seyfried ’16 (Economics of Public Policy) recaps the Barcelona GSE Lecture by Robert E. Lucas (Chicago, Nobel Laureate)
Lecture summary by Evan Seyfried ’16 (Master’s in Economics of Public Policy). Above, the author talks with Robert Lucas after the lecture.
The modish Banco Sabadell Lecture Hall, overlooking grand, prosperous Avinguda Diagonal, is filled to capacity this Thursday evening. Nobel laureate economist Robert Lucas is here to present the 34th Barcelona GSE Lecture, and the GSE community is eagerly anticipating the talk.
“What was the Industrial Revolution?”
The topic would have seemed almost trite in less-skilled hands. Lucas, however, over the past decade has focused his talents on exploring economic models that might explain rapid industrialization like that of the United Kingdom starting in the late 18th century. He views the rise of urbanization and industrialization through the lens of economist Gary Becker’s theory of population fertility and couples it with a human capital growth model.
This talk draws heavily from Lucas’s recent research on human capital and economic growth1, the diffusion of the Industrial Revolution2, and a rejection of the “great men” hypothesis of economic progress3.
The central hypothesis of his lecture tonight is, essentially, that of his 2015 paper on economic growth, with its blissfully short abstract:
“This paper describes a growth model with the property that human capital accumulation can account for all observed growth. The model is shown to be consistent with evidence on individual productivities as measured by census earnings data. The central hypothesis is that we learn more when we interact with more productive people.”1
From this basis, Professor Lucas presents his most recent work on the topic. He begins with a graph—how else would an economist begin any lecture?—showing the striking relationship between a country’s prosperity (measured in GDP per capita) and the share of its population employed in agriculture.
Why is the relationship between these two variables so consistent? Later in the lecture, Lucas will develop his model based on a “dual economy” of low-skilled agricultural workers and various levels of skilled urban dwellers.
But first, a little history.
“Macroeconomics’ finest hour.” (A brief historical digression.)
Thomas Robert Malthus, English cleric and scholar, became famous (and, to some, infamous) when he published “An Essay on the Principle of Population” in 1798. The essay neatly distilled a framework for pre-industrial population dynamics:
“Yet in all societies, even those that are most vicious, the tendency to a virtuous attachment is so strong that there is a constant effort towards an increase of population. This constant effort as constantly tends to subject the lower classes of the society to distress and to prevent any great permanent amelioration of their condition.”4
Its publication led to a massive controversy that rapidly spread across the landscape of political economy. Although Malthus’s work was not nearly as apocalyptic as his deriders asserted, it still pointed out uncomfortable truths about the seemingly unrelenting misery of the lower classes, even in “advancing” nations.
A century and a half later, economist Gary Becker took up the Malthusian mantle with his seminal work, “An Economic Analysis of Fertility,” a study of the dynamics of family planning and income. Becker explicitly acknowledged his debt to Malthus: “[…] Malthus’ famous discussion was built upon a strongly economic framework; mine can be viewed as a generalization and development of his.”5 Becker’s further research concluded that viewing fertility as a result of marginal-cost/marginal-benefit decisions is a satisfying way to explain the phenomenon of high-income families voluntarily lowering their fertility rates. His framework implies that families with more human capital invest more resources in fewer children.
Professor Lucas calls the Malthusian insight and the subsequent robust debate among political economists of the day “macroeconomics’ finest hour.”
The Path Off the Farm: What Is an Industrial Revolution?
Lucas now presents his synthesis: Becker’s fertility model combined with Lucas’s own human capital model, both placed in the context of the urban-agricultural dual economy.
Like Becker, Lucas’s model has parents view their children as “durable goods” that yield a “psychic utility” but also impose costs. As families move up the socioeconomic ladder, they make different decisions regarding investment in the “quality” of the children (everything from time spent teaching, to money invested in tutors and private schools). Over time, the quantity/quality balance leads to lowering fertility among higher socioeconomic classes.
In the dual-economy framework, rural (landless or small proprietor) farmers are pushed by wage considerations to move into dynamic urban environments as low-skilled workers. At first, with no wealth to invest in their children, they make “quantity” a priority over “quality.” Over generations, however, there is a tipping point where a given family has accumulated enough resources to make meaningful human-capital investments in their children. Once this occurs, they can now move up to the higher-skilled tiers of society. Crucially, it is this accumulation, not of wealth, but of human capital, that drives further growth in Lucas’s model. The speed at which these changes occur depends on the magnitude of “interactions” in society: how often and to what degree people engage with one another in productive exchanges—anything from academic discussions to business deals.
A key mechanism in the model is that economic growth itself is what allows the low-skilled workers, coming from the farms, to dependably get better and better jobs over time. Thus, the dynamic is self-reinforcing as more rural workers move to the cities.
When considering the Industrial Revolution, we can appreciate how natural it would be to dismiss the intangible, fuzzy concept of “human capital” and only focus on material capital: factories, infrastructure, mines, etc. But if we view the Industrial Revolution with Lucas’s model in mind, we can at the very least see that Lucas’s statement from his 2015 paper—”human capital accumulation can account for all observed growth”1—is quite plausible.
Later in the same paper, Lucas asserts: “The contribution of human capital accumulation to economic growth deserves a production function of its own.” 1 In the model Lucas has presented tonight, he answers his own demand. There is, indeed, a “production function” for human capital, and when it is coupled to a fertility model, it can show the dynamics of rapid urbanization and economic growth. In other words, it can model an industrial revolution.
To use Lucas’s own words from the lecture: “We used to think of the Industrial Revolution as factories and coal, but I think the main consequence was the emergence of the bourgeoisie who are just creating things out of nothing, generating wealth and production.”
What does this all mean? What are the implications of this model in 2016?
We go back to the graph showing the relation between GDP per capita and share of population in agricultural work. Lucas mentions how many areas of the world are still in the upper left portion of the graph—poor, agricultural, unskilled-labor-intensive economies. According to Lucas, we must not be deluded into thinking that a pastoral lifestyle is something to be preserved at the cost of indefinite poverty. Lucas states, “The idea that you can prettify this lifestyle is just plain wrong.” Rather, we have a collective interest in the flourishing of all people around the world, and we have emerging evidence that investment in human capital, coupled with smart urbanization, is one of the best ways to achieve it.
The questions following the lecture are—as expected from economists—pointed. In response to questions about the refugee and economic migrant crisis in the EU, Lucas denies that his model says anything specific about it, but states emphatically that he supports immigration in general. Finally, when asked about the prospects of continued economic growth, given recent anxiety about economic stagnation, Lucas responds that since the Industrial Revolution we have seen stable growth unlike any period before in recorded history. He believes that growth will continue, as capitalism reinvents itself yet again, this time for the information age—though he admits that “flush toilets are way more important than Facebook.”
With that, the lecture concludes, and the lucky attendees weigh the expected utility of waiting in line to speak with the most influential living economist against the expected utility of beating the rush to the cava and jamón ibérico at the reception. The gears of the market keep turning.
Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2015. The project is a required component of every master program.
Benjamin Anderson and Ramiro Antonio Burga
Economics of Public Policy
This paper provides empirical evidence of the persistent effects of exposure to civil conflict on political beliefs and participation. We exploit the variation in geographic incidence of conflict and birth cohorts to identify the long-term effects of exposure to violence on belief in democracy, trust in institutions, opinions in support of civil rights, voting turnout and casting of blank ballots, and participation in civic organizations. Conditional on being exposed to violence, the average person exposed to violence during certain sensitive stages of life still holds slightly more negative opinions about the value of democracy and are less likely to participate in civic / political organizations in the long-run.
About the paper
Political preferences heavily dictate the role of the government, the policy making processes that emerge, and potentially even the institutional framework, itself (Besley and Case, 2003; Aghion et al., 2004). Furthermore, consequential effects of various forms of political institutions is a primary focus of Political Economy, and justifiably so, for the array of welfare implications encompassed within, including, economic growth, inequality, health outcomes, and many others (Acemoglu et al., 2001; 2002). In countries where citizens have been exposed to violence during sensitive periods of life, it may be more difficult for governments to gain trust and build support for democratic processes and good institutions.
There are many logical pathways which one could speculate that civil conflict might affect citizens’ political beliefs; perhaps the most conspicuous of which being trust. Lack of protection, safety, and government accountability could lead to a decrease or lack of trust in the government, while exposure to violence, fear tactics, and other criminal behavior could result in distrust toward other members of society (Jaeger and Paserman, 2008; Rohner et al., 2013). Secondarily, residual effects of civil conflict in the form of fear, in particular for safety, could dissuade citizens from various forms of political participation (Salamon and Evera, 1973).
Summary of findings:
We examine the effect of exposure to conflict during sensitive developmental periods of life on persistent changes to various measures of political beliefs and participation. The results show that the average person exposed to conflict during the age range 13 to 17 will have slightly more negative opinions about democracy well over a decade after the conclusion of the violence. Very minor long-term effects are also present for participation in civic organizations. Our results show that the average person exposed to conflict during the age range of 7 to 12 has a decreased likelihood of participating in civic organizations of approximately 3% to 6% for each additional year that the individual experienced violence in his/her district during this period of life. While these effects are economically small, it is notable that any long-term effect is detected given the likely presence of strong attenuation bias as discussed in our threats to identification. We find that the most sensitive stages of life for the formation of political beliefs, with respect to exposure to conflict, are the pre-teen and teenage years. Contrary to the effects of violence exposure on human capital and labor market outcomes, we do not find effects occurring at the earliest life stages.
The detection of effects in both belief and action variables not only helps to validate one another, but it also suggests that beliefs indeed translate to actions. This connection provides some evidence that changes in political perception also corresponds with political behavioral change.
Even though the effects we detect are relatively small, they might have been severe during and shortly following the civil war.
Although we are unable to further analyze heterogeneous effects, the effects could be quite large for certain individuals who may have been exposed to more extreme amounts or types of violent acts.
Knowledge of the size and temporality of these consequential effects of civil conflict on political beliefs and participation as well as mechanisms which drive these changes would be invaluable. This would allow policy makers to develop targeted strategies to help combat the destructive effects of violence on citizens’ political beliefs and behavior that could undermine the healthy growth, development, and stability of society.
On the experience:
The thesis was almost certainly the most fun and rewarding assignment of the year, despite the imposing time constraint. Having received rigorous training to acquire the tools needed for such a project, and having discovered and nurtured our own interests via exposure to a multitude of prominent literature in various applied topics throughout the year, it was exciting to unleash the knowledge we had gained and apply some of our empirical techniques to a new and interesting research question of our own.
Throughout the program, but especially during the thesis, we were fortunate to have access to the knowledge and support of professors. Aided by some enthusiastic and accomplished mentors, we evolved our expectations of ourselves. Their expertise in areas related to those of our paper – conflicts, violence and political economy – optimized the quality of feedback and constructive critique we received in the process. The final presentation to our directors, professors and peers was another valuable component. It served as a welcome challenge that exercised essential communication skills, not only for conveying complex ideas to an audience, but adroitly and favorably reacting to questions and criticism.
The feeling of accomplishment derived from materializing a quality piece of empirical work is great motivation to build on for the future. Just one year ago, not only would this project have been impossible to execute, even the vision of it coming together was unfathomable. By the final term, we knew that we were prepared; now, we carry forth these tools, creativity, and confidence in our abilities.
On working with a coauthor:
At the outset, the thought of working with a coauthor for the thesis did not sound ideal, but ultimately, it had many advantages. It offered another opportunity to gain from the international and cultural diversity of one another and to develop these working and personal relationships; it was an invaluable intangible experience for which we will be forever thankful. Our complimentary skillsets and working styles prevented this beast from ever becoming a burden. We are proud of what we were able to achieve given the constraints, and ended up with a final project that far surpassed anything that we could have done independently within the same amount of time.
While the outcomes of most public investments schemes are not completely foreseeable, the benefits of investing in education to both children and broader society could not be more clear: education is strongly correlated with improvements in health and nutrition, it is one of the best protections against poverty, and it fosters civic participation and democratization.
Although the importance of education to individuals and society is apparent, access to education differs substantially between and within countries. In particular in developing countries the access to education is extremely restricted. Looking at within country disparities, these barriers to education often disproportionately affect girls. In the 1970s the Indonesia’s central government launched the Sekolah Dasar INPRES program (henceforth SD INPRES), one of the largest primary school construction programs in history in order to counteract this trend of stagnating primary school enrollment rates. This large-scale construction program led many economists to study the numerous impacts on the Indonesian population by taking advantage of its form as a natural experiment.
Previous literature on the impact of SD INPRES suggests that until recently only little attention has been paid to the effects of the primary school construction program on girls. This is not very surprising since Indonesia constantly performed poorly among international gender equality measurements such as the Gender Inequality Index by the United Nations or the Global Gender Gap Report by the World Economic Forum. Work by Hertz and Jayasundera (2007), Pettersson (2012), and Ashraf et al. (2014), take differing approaches in studying the effects of the SD INPRES program in women. The novelty in our approach lies in the fact that with our data set, containing more cohorts than previous analyses, we are able to check for persistency of the resulting effects of the school construction program on later cohorts by extending the time range used in Duflo’s pioneering analysis. We also investigate whether the effect of the program on women might not be reflected on the intensive margin, i.e. the actual duration of education, but rather on the extensive margin, in other words the likelihood of completing primary school education.
A key element of our identification strategy to identify causality of the school construction program on educational outcomes relies on variations of an individual’s exposure to the program based on date and region of birth. For the purpose of our analysis, we only treat the combination of these two variations as exogenous. By its nature, the SD INPRES program was designed to allocate more schools to regions where primary enrollment was particularly low, inducing heterogeneity in the number of average schools built per district. A second source of variation is reflected in the age of the students. A child of 12 years of age or older in 1974 when the SD INPRES schools started to operate, could not benefit from the program. On the other hand, a child aged 6 or younger in 1974 was young enough to fully benefit from the newly constructed schools. Similarly, children between 6 and 12 years of age in 1974 only enjoyed partial exposure to the program. If the program had an effect on an individual’s years of education, we would expect the program to have the largest effects for fully exposed cohorts, a somewhat mediocre effect on the partially exposed individuals, and no effect on children that were too old in 1974 to benefit from the program. The large, exogenous shock of the SD INPRES program enables us to differentiate between treatment and comparison groups, in the manner of a quasi-experiment using a difference-in-differences approach.
In line with previous literature, we find that the SD INPRES program had significant effects on schooling outcomes of Indonesia’s children. However, children did not benefit from the primary school construction program equally. In fact, we find substantial heterogeneity of the program’s effect between genders, mostly favoring boys over girls. On average, one more school per 1,000 children in the district of birth increased schooling duration by 0.12 to 0.21 years for boys. However, this effect is less clear-cut for women: depending on the sample specification and type of analysis, we were able to obtain significant results for women albeit substantially smaller in magnitude. In particular when breaking down the analysis on each birth year cohort, our estimates suggest that only the youngest cohorts hitherto benefited from the program, with effects ranging from 0.1 to 0.17 additional years of schooling for an additional school built in the district of birth. Such suggestive late onset of the program’s effectiveness on women motivated us to perform a persistency analysis on later female cohorts. Including eight additional birth year cohorts, we find increasing and significant effects of on average 0.2 additional years of schooling. These findings suggest that a potential effect on women’s schooling might have set in later. Our mixed evidence thus far gives rise to doubts whether the SD INPRES program worked on the extensive margin of schooling attainment. Due to possible selection disadvantages at the transition between primary and secondary school, the effect of the program for girls might not be reflected in the in years schooling but merely in their likelihood of primary school completion. We find significant but negligible effects on women’s likelihood to graduate from primary school.
Ideally, a policy trying to increase education should be targeted at disadvantaged groups of society in order to decrease inequality and break the vicious cycle of poverty. Our findings suggest that women in Indonesia are particularly disadvantaged when analyzing educational outcomes. Further research should hence try to identify other possible heterogeneities when stratifying the sample interest. During our analysis, we made first attempts by looking at different specifications such as the difference in effects between individuals living in rural versus urban areas, or looking at potential heterogeneity varying by ethnicity. Such deviations of our analysis might unmask further heterogeneity, which will be essential to identify when assessing and improving Indonesia’s education policy. It will therefore be necessary to devote further research and policy attention towards the long-term impacts of the program by analyzing the educational and labor market outcomes of later cohorts, captured in the SUPAS 2005 and 2015 polls. On the basis of these results it will be necessary to identify and study potential policy remedies to overcome the tremendous challenges Indonesia’s education system faces.
Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2015. The project is a required component of every master program.
Authors: Genevieve Jeffrey, Yi-Ting Kuo, Laura López and Stella Veazey
Economics of Public Policy
We examine the effect of income on birth weight by employing two identification strategies using US Vital Statistics Natality data. First, following a study by Hoynes et al. (2015), we take advantage of an exogenous increase in income from the Earned Income Tax Credit using a difference-in-differences methodology. The Earned Income tax credit (EITC), enacted in 1975, is a refundable transfer to lower-income working families through the tax system and is one of the primary tools used in the United States to fight poverty. The EITC underwent an expansion is 1993 (Omnibus Budget Reconciliation Act), increasing the maximum credit families with and without children could receive. Following Hoynes et al. (2015), we take advantage of the difference in maximum credit available for families with different numbers of children. We find that the increase from the EITC reduces the incidence of low birth weight and increases mean birth weight. In addition, we discover that maternal smoking and drinking behavior during gestation is reduced.
Next, in order to try to capture the effect of income on birth weight across the population (as opposed to just high-impact groups), we exploit income variation from a policy change in Alaska that allowed payments from oil wealth to be distributed to all Alaska residents. We employ a comparative case study methodology using a synthetic control group following Abadie et al. (2010). Our comparison group is comprised of a combination of North Dakota, Oregon, Delaware, Kentucky and Nevada. The analysis shows a substantial increase in Alaska’s average birth weight over its synthetic counterpart around the onset of the policy. However, we refrain from attributing the divergence to the dividend payments alone, given significant changes in Alaska’s economy that coincide with the policy and are not well-mirrored by the control states.
Adam Aten ’13 (Health Economics and Policy) is a researcher at The Brookings Institution focusing on evidence development and biomedical innovation within the Center for Health Policy. Prior to joining Brookings, he was a civil servant at the U.S. Department of Health and Human Services developing policy expertise in health insurance for low-income populations, digital information systems and information governance, and cost effectiveness of public health programs.
This week he has written a post for the World Bank’s Investing in Health blog on universal health coverage (UHC). Here are some excerpts:
Decision-makers now have many tools at their disposal to analyze trends and take strategic decisions – increasingly in real-time – thanks to the rapid diffusion and adoption of information and communications technologies. New approaches to collect, manage and analyze data to improve health systems learning, such as how the poor are benefitting (or not) from health care services, are helping to ensure the right care is given to the right patient at the right time, every time – the goal of UHC.
It is relatively easy to agree on public health targets, but actual progress requires a management structure supported by dashboards that can allow monitoring of intermediate outcomes in real-time.
Nobel Laureate Roger Myerson presented his latest paper, ‘Local Agency Costs of Political Centralization’ to the Barcelona GSE community on the 3rd of June.
The central focus of the paper is to examine how efficient the widely accepted notion of Political Centralisation is.
Some existing literature already argues that political decentralization and community empowerment may be the key to successful development. They show how autonomous local governments can reduce entry barriers in national politics. Creating the space for success on a smaller scale can lead to them becoming strong candidates for higher office. The decentralization of power also gives local leaders a stake in nation building.
Others argue that one centralized government could also have the same effects by applying differentiated policies accounting for regional differences.
The need for targeted policies for differing dynamics in different regions is clear but the way to achieve this is still being explored. Myerson comes in with this paper is to show that in order to achieve efficient local public investment there needs to be accountability which is best achieved with decentralization of power.
The mechanism he uses to analyze this issue is a model of moral hazard in local public services in which an efficient solution is only feasible when officials are held accountable to local voters.
Political Decentralization can lead to Accountability
If the quality of the local public services can only be observed by the local residents, then unless the residents have power over the officials’ career, they will not be accountable.
If the local residents do not have the power to dismiss the officials, their careers would depend more on political relationships than on effectively managing local public services. This would have a roundabout effect on development as without good public services, private investments would be scarce since the success of these investments would depend on the quality of these public services.
In his talk he expounded on the following example to illustrate his findings. In a remote town, if we imagine each resident invests to start an enterprise whose probability of success would depend on the amount spent on public services in the town. The only observable evidence that the official spent the money on public services would be the number of successes among the residents’ enterprises.
This budget is managed by the local official, who could divert any part to his personal consumption. What Myerson shows is that there is a premium that can be paid to the official in addition to his salary that would incentivize the official to stay. This would make up the moral hazard rents and allow the efficient amount of investment to be spent.
Myerson shows that for a given budget if the official is paid ‘p’ if a specified fraction of residents report success then the renewal thresholds and official salaries can be set as functions of the local population ‘n’ that would result in the efficient budget and induced public investment levels.
Distrust and Instability
However if there were distrust, the voters would rather replace the incumbent if they expect the funds to be stolen in the future. In this case, public investment and residents’ benefits would be a decreasing function of the political instability parameter ‘q’. However as long as the utility from the induced public investment for the given level of instability is positive, residents can still benefit.
Autocracy – Rulers Incentive
In an autocracy the national ruler can commit to allow the town to elect an autonomous local government in exchange for a tax the residents would pay until their utility is maximized.
Moral hazard rents would be paid by candidates in terms of cash or political support. The autocracy could offer these offices as rewards for support and help them ward off challengers in this way.
If the national ruler could credibly commit to allow an autonomous local government after picking the first incumbent local official, the ruler could gain fiscal and political benefits per resident. But for this to happen, the ruler must make a credible commitment to the division of power constitutionally which would be against his interests ex-post.
With local accountability then the ruler would not be able to use the offices as rewards as this would make him vulnerable to voters distrust.
If successful they could be serious contenders for national office competing against him. This may be politically too costly for the incumbent national leader.
Separation of Information from Influence in an Autocracy
Key supporters are important for the success of any leader. A leader can get more support when key supporters monitor how he treats others so not rewarding one would cause distrust in all. If successful, competitors cannot recruit supporters without constraints.
Since an autocratic ruler is only accountable to these courtiers, they must deter wrongful dismissals as he can resell the vacant offices with moral hazard rents.
Courtiers can impose political costs on the ruler but these costs cannot depend on information that the ruler would be able to manipulate.
Courtiers could impose a penalty on the ruler depending on the set of dismissed officials. They should choose this penalty such that the dismissal set is a small fraction of all offices. If the net service value the ruler would get from replacing the official would equal his penalty for dismissal, the ruler would pick the dismissal set based on information on public services. However on the other hand, he might choose to dismiss those with the best services as they may prove to be strong contenders and rivals.
Under democracies also, political leaders need the reputation of rewarding patronage to motivate supporters. Under democracy, local autonomy threatens to increase competitive entry into national politics against the interest of national officials. One example of this given was Pakistan. National democratic competition also raises the political risk for the retention of appointees.
However if Local Accountability leads to better Public Services could Democracy induce leaders to promise it?
An analysis shows that with sequential bids the challenger can win by offering marginally more in most districts and zero where the incumbent spends the most. Contrary to the optimal socially, this will lead to small offers everywhere.
Endogenous Decentralization in a Unitary Democracy
However if public budgets are fixed as in most cases, then candidates can compete based on promises of accountability of the local officials. An alternative for this would be for the candidate to sell the office for a political contribution and then spend this money obtained on the campaign. This would win over the uninformed voters while the informed would vote for the best promise. This result thus depends on the proportion of the population that is informed.
Inefficient Centralization in a Unitary Democracy
Citing the example of Ukraine, Myerson also warned of the possibility of politically neglected regions being dangerous for a nations territorial integrity if it facilitated the opportunity for disaffected regions to secede. In an equilibrium of a 2-candidate election for national leadership of a unitary state, each candidate would naturally maintain inefficient centralized management of local public services in a fraction of all districts.
The key points were that moral hazard in local public investments can be efficiently managed with local accountability. When the public services can only be observed by local residents, officials can only be held accountable if their careers depend on the resident’s approval. Political decentralization would guarantee such local power.
However if the leader can resell offices then he would not a neutral judge of the local public services. In the specific case of a centralized autocracy, dismissal must be approved by the national elite and residents cannot communicate their complaints to them, so without a guarantee of local political rights there can be no credible commitment to sustain efficient local investments by the autocratic national government.
By Hugo Ferradans, current student in the Barcelona GSE Master in Economics of Public Policy. Follow him on Twitter @Hferradans.
“In my over 50 years of academic life, the 1% has never had as much influence in shaping the knowledge of economics as it does now.”
UPF Professor Vicenç Navarro, author of Podemos’ electoral program, talks about the way economics is taught today and some of the policies put forward by Podemos.
Vicenç Navarro is currently a professor and the director of the Public Policy program both in Pompeu Fabra and John Hopkins University. Being one of the most internationally cited researchers in the field of social sciences, Vicenç Navarro is an economist, political theorist and sociologist who has been widely recognized for challenging neoliberal approaches to the study of economics. Together with professor Juan Torres, he is the author of the controversial electoral program put forward by Podemos, where they advocate for a strong public sector and welfare state, as well as a move away from an economy based on speculative industries like construction. Love-him or hate-him, Navarro’s strong opinions have been able to shake the current economic academia and Spain’s political scenario – and we are here to ask him about it.
Part 1: Reflections on the way Economics is taught today
Hugo Ferradáns (HF) – There is little doubt that neoclassical economics has contributed to a very large extent to the study of economics and social sciences. Nevertheless, it seems that this neoclassical school of thought has monopolized the economic syllabus in top universities around the United States and Europe, leaving alternative economic perspectives ignored.
You suggest in a number of articles that many of the economic policies that are being implemented currently in Europe come from specific power relations within the Eurozone (European Central Bank and the IMF against anti-austerity movements in Greece, Spain, etc.). In relation to the study of economics, how does the lack of teaching about institutions and politics in the economic curriculum, as well as the lack of debate against the foundations of neoclassical theories, are limiting our understanding of today’s economic and political scene?
Vicenç Navarro (VN) – One of the major problems we encounter in the production of economic knowledge is its excessive disciplinary approach. Actually, the academic institutions are usually divided by departments based on disciplines, one of them being economics. The reality that surrounds us, however, cannot be understood following the disciplinary approach. The understanding of our realities, including the economic ones, calls for a multidisciplinary analysis, with the understandings of the historical, political and social forces that shape and determine that reality. In order to understand the current Great Recession, for example, we have to understand how power—class power, race power, gender power, national power—is produced and reproduced through political institutions, as well as social and cultural ones. In other words, we have to comprehend how power relations shape the governance of our societies, including their economies.
Modern economics is used as a way of confusing and/or ignoring the political realities that shape the economy.
The current economics, for the most part, do not do that. They specialize in branches of the tree without understanding, or even less, questioning, the nature of the forest. Moreover, they have given great emphasis to the methods, depoliticizing the realities of the economic phenomenon. Today, modern economics is used as a way of confusing and/or ignoring the political realities that shape the economy. Currently, most of the major economic problems we face are basically political.
You cannot understand, for example, the current crisis in Europe without understanding the decline of labor income, and, thus, of domestic demand; this is the result of the changing power relations—primarily class power relations—that have occurred in the last thirty years. You can also not explain the crisis without understanding the enormous influence of financial capital on the European Central Bank. To try to explain reality by referring to the working of the financial markets as a point of departure is profoundly wrong and naïve. Financial markets have very little to do with markets. It was enough for Mario Draghi, the President of the European Central Bank, to speak a sentence, to reduce the interest rates dramatically.
The absence of the study of the political and social context, determined historically, makes current economics an apologetic message for current power relations, mystifying, hiding, and/or confusing the understanding of the economic phenomena. It is not surprising, therefore, that the critical traditions within economies are completely ignored or marginalized. It is predictable that current economists did not perceive the arrival of the current recession, which is a Great Depression for millions of Europeans. Only analysts from critical traditions were able to predict it. And we did it.
HF – Many people would ask why are historical and political contexts so ignored in the economics syllabus if they are so important to understand economics. Does this rejection come from a clash of interests between economic and political powers and Universities, or was it a slow transition towards a neoclassical orthodoxy led by the academia?
VN – The current emphasis on methods and its analysis of the economic reality without looking at the political context that determines it is a consequence of changes in the power relations in our societies. The apologetic function of current economies of the current power relations explains its lack of relevance. What we have been seeing since the 80s has been the enormous growth of income derived from capital, and the decline of income from labor. This has resulted in the drastic growth of inequalities.
The influence of financial and economic institutions in the production of knowledge is enormous.
But those who derive their income from capital have enormous influence on value-generating systems, including the media and universities. This is extremely clear in the US but is happening also in the European universities. Today, the influence of financial and economic institutions in the production of knowledge is enormous. They fund research, support economic journals, and shape, to a large degree, the academic culture in the area of economics. It is very similar to what happens in medicine where the pharmaceutical industry has a major influence in shaping clinical knowledge and practice.
In my over 50 years of academic life, never has the 1% (those who derive their income from capital) had as much influence in shaping the knowledge of economics. The situation in Spain is even worse than in the US, due to the lack of public funds for economic research. The major research institutions are funded by major banks or major corporations. This explains the dominance of the neoliberal ideology in most academic forums, journals, and major media.
HF – Does this influence go beyond universities? How does this affect democracy in Europe and the United States?
VN – The influence of what now is called the 1% on society affects all institutions that reproduce information and knowledge, from the major media in a country to the university, and now including the entire educational system, starting with the schools. The expansion of the teaching of economics to the school systems in an intent to expand a vision of reality that is in accordance with conventional wisdom in a country, the wisdom shaped by the 1%, and its allied classes (which includes approximately another 10% of the population).
Part 2: Public policy in Spain
HF – Moving now to policy in Spain, we would like to talk about the role of media in democracy. The importance of and the ways to achieve a plural media independent from public institutions and economic powers has been subject of intense debate over the past years due to its relevance to democratic quality. As an example, Prat and Strömberg (2011) suggest that to achieve this plural and independent media we need to encourage financially independent outlets. McChesney and Schiller (2003), however, focus on the importance of public media as a way to insulate outlets from being controlled by corporations.
In the economic program that Podemos presented, of which you are one of the authors, you suggest that there should be a “separation by law between the property of financial groups and communication outlets, thus ensuring the independence of all media companies from the government and large corporations” (page 10). Furthermore, you mention that there should be a “legislation that provides a minimum quota of independent public media outlets”, by which “no company could take more than the 15% of the total media market” (page 10).
Many people would question these policies, arguing that independence and quality in media markets are not necessarily achieved by constraining private companies and expanding public media outlets. Many examples of private media outlets that are independent of private corporations can be given, such as The Guardian, The New York Times and even La Sexta in Spain. How would an increase in the presence of public media outlets improve the independence of media from economic and political powers in Spain? Isn’t the problem of media independence about a casta that operates both at the private and public level?
VN – Today, financial capital—primarily banks and insurance companies—have the dominant voice in the major media. In Spain this is obvious. All major media are in deep debt and are in the hands of the banks. It is because of this that Professor Juan Torres and I indicated in our economic proposals for the new party Podemos that that linkage should be discontinued, because it enormously limits the necessary ideological diversity that should exist in any democracy. Today, there is no such diversity in Spain.
But that situation is not unique in Spain. I have lived for many years in the United States, teaching at the Johns Hopkins University for over fifty years, and ideological diversity is also very limited in that country. Rarely, if ever, will you see intellectuals such as Noam Chomsky in the major media. Incidentally, I have to correct you regarding The New York Times in the US and La Sexta in Spain. The largest groups of members on the Editorial Board of the NYT are related to insurance companies and banking. This explains the hostility of that daily to the specific single-payer proposal for reforming health care in the US. This proposal, put forward by the left of the Democratic Party and the labor union would be a model of the health care system that already exists in Canada, and would eliminate private health insurance within the publicly funded system.
And La Sexta is owned by economic and financial interests that also fund some of the extreme right-wing media, like La Razon. They allow some space for the left, but always in a very limited way. They expose those critical voices because they realize that the audience increases when critical voices are allowed. But the major owner supervises the production and do not leave much space for progressive forces.
HF – The economic program of Podemos also argues that it would encourage the presence of small and medium size companies to foster employment creation.
The Economist published an article called “Supersize me” (February 21, 2015) arguing that a lack of larger firms in Spain means fewer jobs and a less resilient economy. In particular, it mentions that “bigger firms tend to be more resilient in hard times than smaller ones. In Britain, for example, large companies – those with more than 250 workers – provide almost half of all private-sector jobs, compared with just a quarter in Spain. The Círculo de Empresarios calculates that if Spain had the same mix of firms as Britain, it would have lost half a million fewer jobs since the global financial crisis.”
From this perspective, what is attractive about medium and small size firms in an economy with such high unemployment rate, and what makes big corporations not a good option to overcome the challenges that Spain is facing today? How would this influence unemployment for young people?
VN – The major economic problems existing in Spain are not the size of the enterprises. Most of the largest Spanish enterprises used to be public enterprises that were privatized and run by friends of the governing parties. Many of them are less efficient than they were when they were public. Some of the major private banks that have run into major problems have been banks that used to be public. And even public banks were forced to act as private banks. And that is one of the major problems. Private banking in Spain is far too large. Spain is the country in the European Union with the smallest public banking sector. It is also one of the countries where it is most difficult to get credit. This, and the lack of demand due to the large reduction of wages (the lowest wages in the EU) and cuts in public expenditures (the lowest public expenditure in the EU) are the causes of the recession and limited recovery.
If Spain had the same percentage of adults working in the welfare State as Sweden, it would have about four million more people working then it has now.
The greatest need in Spain to restructure the economy, changing its dependency on sectors very prone to speculation, like construction. Also, contrary to what the 1% in Spain claims, the public sector is very underdeveloped. If Spain had the same percentage of adults working in the welfare State as Sweden, it would have about four million more people working then it has now.
HF – In your opinion, then, what would you say is Spain’s biggest challenge from an economic and political point of view, and what could the country do to overcome it?
VN – I would say that the biggest problem Spain is facing right now is the very limited democracy that it exists in the country. The transition from dictatorship to democracy in Spain took place in conditions very favorable to the conservative forces that controlled the State and the media. As a consequence, the Spanish state has a very limited democracy and underfunded welfare state. There is a need for a transition from the dramatically insufficient democracy to a real democracy, with active participation of the citizenship in the governance of the country.
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