Is evidence-based institutional analysis a possibility?

Chris Blattman writes:

But Acemoglu is right that institutional and political change are more important and the evidence-based crowd have done very little here. Most of that evidence is about anti-corruption or election monitoring or other things that I doubt change politics very much.

Meanwhile all the good political economy research (like Acemoglu’s) has no clear implication for social and political change in the world. There is a big disconnect. These scholars have mostly ignored this gap either because… I don’t know why. Maybe it’s too treacherous or hard, or they don’t find it interesting enough, or they are cynical about policy change. I don’t know. Someone explain it to me.

Blattman is spot on.

I think that students of institutions and institutional development have not joined the evidence-based crowd for two main reasons:

  • Politics I: Much of the evidence-based research out there eschews politics, instead focusing on the technical aspects of problems. Works that explicitly deal with political scenarios exist, but are rare. Part of the reason this is the case is that agencies that finance impact evaluations and other kinds of evidence-based policy research agendas have incentives to remain as apolitical as they can (you need host country government permission to do research in the first place …..)
  • Politics II: The other reason is that it is almost impossible to engage in politically relevant big-picture-development research while remaining apolitical. You see this in splits among macroeconomists in the United States (Macro questions make it really hard for researchers to shed off their normative priors). In the same vein, the best placed people to carry out evidence-based studies of institutions and how to change them are often professors in universities in the developing world — the problem is they do not do enough research due to a lack of resources and/or the relevant skill sets; and their own governments often neglect them. Regardless of their nationality, the most visible development economists in universities in the North Atlantic often lack the political connections or the bandwidth to engage in host-country politics; and are thus limited in the extent to which they can effectively study the most vexing policy questions out there.

These reasons are not due to anyone’s fault, just how research is currently financed and structured.

A possible way to get around these problems could be MBA-style case studies of reform programs from across the globe that can then be retooled by Comparativist country specialists — incoming Stanford CDDRL director Frank Fukuyama has very exciting ongoing work on this front.

On a tangentially-related point, I think that works that combine technical brilliance and deep local knowledge (think Bates’ lesser-read books on the Zambian Copperbelt) are about to come in vogue again. It used to be that only a few grad school programs (at least in political science) emphasized technical competence out of econ envy to match the economists. This is getting more commonplace, thereby establishing a new baseline (the data revolution is also helping a great deal by increasing the scope of country-specific studies of macro questions). And once a critical mass is achieved then the comparative advantage will favor those who are both technically competent and can also speak intelligently about how policy dovetails with local politics. The title “country-specialist” will soon no longer be synonymous with “qualitative research”; and more students will be primed to value good qualitative research.

Chapter 9 of The Gospel of Aid: The Aid Prayer

In Chapter 9 of the Gospel of Aid, the Nigerian author and satirist Elnathan John writes:

CHAPTER 9: The Aid Prayer

  1. You must pray then this way: Our donors, who art abroad, hallowed be thy purse. Thy aid come in dollars and pounds.
  2. Thy will be done in our countries, as promoted by Bono
  3. Give us this day, our yearly funding
  4. And lead us not into self-reliance
  5. But deliver us from our selves
  6. For thine are dollars, the pounds and the euros, forever and ever. Amen

The rest of the “Gospel” in all its hilarity is here.

Have a blessed Tuesday.

Review: Why Economists Miss the Point on Economic Growth in Africa

Africa continues to be a fertile ground for economic research. A significant number of economists in the development economics subfield have made careers explaining the “Africa” dummy variable in cross-national growth regressions — that is, explaining Africa’s “growth tragedy.”

In his latest book, Africa: Why Economists Get it WrongMorten Jerven argues that this is a misguided approach. Instead of explaining African exceptionalism (why is Africa poorer than the rest of the world?), Jerven argues that scholarly inquiry ought to focus on explaining fluctuations in African growth, and intra-Africa variation in general economic performance. Jerven persuasively argues that explaining African poverty and trying to find ways to fix it have distracted researchers and policymakers alike from the more useful endeavor of understanding how economic growth (and decline) happens in Africa. The former approach accepts as a stylized fact the lack of meaningful growth in Africa’s economic history; while the latter more realistic approach acknowledges that African economic history has been characterized by periods of both growth and decline.

Screen Shot 2015-06-24 at 4.52.42 PMJerven is an economic historian, and it shows (see also here). He begins by reminding readers that African economic history did not begin in 1960, the time around which aggregate national economic data became available for a large number of African countries. Jerven then shows that economic growth in Africa has been cyclical, characterized by periods of both growth and decline. At the same time, periods of growth in Africa have not necessarily coincided with the implementation of “good” policies as the literature suggests. The “lost decades” of the late 70s and much of the 80s (due to oil and commodity shocks and associated debt problems) were a period of decline that also coincided with the “good” policies implemented under structural adjustment programs (SAPs). Without getting into the details of the specific policies in question, Jerven makes the point that African states’ experiences in the 70s and 80s are not representative of the full history of economic growth and development in the region.

Yet, according to Jerven, it is the growth record from these two decades that has become accepted as the “stylized fact” of Africa’s growth experience. The idea of an African growth tragedy has been so sticky that most economists (with a few exceptions) did not notice the uptick in growth in the region over the last decade and a half. A quick survey of syllabuses on African political economy will reveal this fact.

Why is Africa poor?” is a question common on course descriptions in many American political science and economics departments, giving the impression that the region has always had a growth deficit to be explained.

Second, Jerven takes on the quality of data that have historically been used to study African economies (remember Poor Numbers?). In this part of the book he pokes holes through major papers in the economic growth literature. The data he looks at range from widely used stats on African economies from sources like the Bank, the IMF, country statistical departments, and other academic sources. He also questions the validity of outcome variables (such as institutional quality, property rights protection, et cetera) that are often found on the left hand side in cross-national growth regressions. Jerven does not seek to provide a review of the development economics literature. Instead, his focus is on the substantive implications of statistical models widely employed by economists to explain relative growth between different regions of the world. In doing so he challenges social scientists to think more careful about issues of measurement and the substantive meanings of regional dummies.

Jerven’s critique of what he calls the “Wikipedia With Regressions” style of academic research is welcome, and hopefully will inspire more students of economics and politics (not just in Africa) to invest in acquiring useful knowledge on the specific countries they study. The basic point here is that the cocksure certainty of findings in scholarly studies on the determinants of growth is unwarranted, given the shaky (data) foundations on which many of them stand. Jerven drives the point home by citing Durlauf, Johnson, and Temple who in their review of the growth literature found 145 different regressors that were found to be statistically significant determinants of economic growth.

Lastly, Jerven takes head on the claim that institutions and good governance cause economic growth. His core argument in this section is that “good” institutions are typically the result of, rather than the cause of economic growth. He gives examples of countries that have experienced sustained economic growth without having the typical bundle of institutions that scholars attribute to be the fundamental cause of long-run growth. I am partially persuaded by this argument, especially after having read Working With the Grain (see review here).

This latter section is the least strong part of the book, and may be the result of trying to do too much in one short text. As a student of institutions I am keenly aware of the importance of elite political stability and institutions that lock in intra-elite commitments for sustainable economic growth. It is not enough to claim that the view that institutions cause growth is misguided because some economies elsewhere have achieved growth without the hypothesized good institutions. I would argue, for instance, that a key difference between the “Asian Tigers” and their African counterparts (some of which we are often reminded were relatively richer in 1960) was the level of stateness (i.e. institutionalization of centralized rule) on account of a much longer experience with statehood. Jerven would have helped his argument by providing alternative explanations for Africa’s economic collapse in the late 1970s and much of the 1980s.

What kinds of institutions matter in “late” economic development? Why did African states almost uniformly fail to contain the oil and commodity shocks and the resultant debt problems that visited them during this period? Has there been institutional variation within Africa over time, and can it explain intra-Africa variation in growth?

Overall, Africa: Why Economists Get it Wrong is a fantastic quick read for anyone (whether in the academy or not) interested in understanding economic growth in Africa. Besides being a brilliant economic historian, Jerven is also an engaging writer with an ability to make even the most technical arguments accessible to the reader. I did not have the book on my original summer reading list but couldn’t stop once I started reading it.

In my view this book is the economics companion to Thandika Mkandawire’s excellent critique of scholarship on African politics. It also raises several very interesting questions that will inspire or reinforce a few dissertations in the field of development economics.

Traditional birth attendants and antenatal care in western Kenya

This paper examines the extent to which locally informed intermediaries can be exploited and provided with incentives to change the health-seeking behavior of pregnant women in rural Kenya. Despite Kenya being the largest and most advanced economy of East Africa, maternal and infant health outcomes are typical for those of other sub-Saharan countries, which lag significantly behind the developed world. There is evidence that antenatal care (ANC) is associated with improved maternal health outcomes, yet the majority of women in rural Kenya fail to meet recommendations for ANC timing and use, despite the availability of government subsidized healthcare. I examine whether a local intermediary, whose own incentives might oppose those of the government, can be co-opted to assist the government’s objective of increasing women’s ANC utilization.

I use a randomized controlled trial (RCT) to evaluate a program, which provides financial incentives for TBAs to encourage pregnant women to seek ANC at a formal medical facility. Competition between the TBAs and the formal clinics makes the effect of the program an empirical question, as there is no guarantee that the TBAs will respond to the incentive.

I find that living in a TBA treatment village increases the likelihood of attending the recommended number of visits by 20.7%. Women living in TBA treatment villages are 4.4 percentage points more likely to attend the recommended number of visits than women living in control villages, who attend the recommended number of visits 21.3% of the time. The results of this experiment, the first to study the extent to which TBAs can be motivated to encourage women to attend the prenatal clinic, could have important policy implications. The program’s success suggests that despite having a risk of losing clients, TBAs can be utilized as intermediaries of health facilities. Furthermore, finding that TBAs can induce pregnant women to attend ANC visits indicates that cultural norms, which discourage women going to ANC visits, can be overcome with relatively small financial incentives. By increasing the demand for formal maternal healthcare, TBAs’ encouragement of ANC attendance by women may help achieve improved maternal and child health outcomes.

That’s Georgetown’s Nisha Rai, in an excellent paper on the possibilities of integrating the use of traditional birth attendants with the formal healthcare system in Kenya (and developing countries in general). You can find a summary of the paper at the Bank’s Development Impact blog here.

If you know a policymaker in the health ministry of a developing country, please have them read this paper.

A call for “politically robust” evaluation designs

Heather Lanthorn cites Gary King et al. on the need for ‘politically robust’ experimental designs for public policy evaluation:

scholars need to remember that responsive political behavior by political elites is an integral and essential feature of democratic political systems and should not be treated with disdain or as an inconvenience. instead, the reality of democratic politics needs to be built into evaluation designs from the start — or else researchers risk their plans being doomed to an unpleasant demise. thus, although not always fully recognized, all public policy evaluations are projects in both political science and political science.

The point here is that what pleases journal reviewers is seldom useful for policymakers.

H/T Brett

On Contracts and Motorcycle Taxi Markets in Benin and Togo

In the motorcycle-taxi market in most Sub-Saharan African countries, the relation between vehicle owner and driver is characterised by a principal-agent problem with the following features: the owner cannot observe the final output of the driver and therefore cannot condition a wage on it, and higher effort from the driver depreciates the motorcycle. These two feature simply that it is in the owner’s best interest that the driver exerts as little effort as possible while still leasing the motorcycle from him. The problem with low effort implementation is that the motorcycle will not generate enough revenue. I analyse the contractual arrangements between owners and the drivers in this market using survey data from four cities in Togo and Benin. Evidence suggests that the quest for trust through kinship between owner and driver may explain the prevalence of a contract that induces drivers to exert excessive effort, leading to adverse outcomes like traffic accidents.

That is Moussa Blimpo in a new cool paper in the Journal of African Economies.

One of the questions the paper addresses implicitly is whether trust necessarily leads to better development outcomes (you’ve seen those cross-country regressions with trust as an independent variable…)

……. in the presence of trust, people tend not to sign formal contracts that define residual rights and the actions to be taken in different expected situations. For example, if the owner and the driver are family members, they will be unlikely to draft a contract that caters to litigation, given that it is socially unacceptable to take a legal action against family.

What this means is that sub-optimal contracting and economic outcomes in developing countries may not be due to a general notion of lack of trust, but rather the lack of a specific kind of trust, let’s call it civic trust. This is the kind of trust that is infused with a healthy dose of skepticism and accompanied by explicit contracting under the shadow of credible enforcement by a third party, the state.

The Anatomy of Tax Evasion in Africa

Africa Confidential has a great piece analyzing leaked documents from PwC, the professional services firm, showing the various arrangements that enable multinational companies to evade taxes in Africa. You can read the whole piece here (gated).

  • One of the measures PwC advised multinationals to take was to create a wholly-owned Luxembourg-based subsidiary which would hold the rights to intellectual property used by the rest of the group. The rest of the group would then pay licensing fees to the Luxembourg-based subsidiary which, by agreement with the authorities, would be granted tax relief of up to 80%……
  • A second tax avoidance mechanism simply involved the companies becoming incorporated in Luxembourg. In 2010, Luxembourg concluded an agreement with several companies of the Socfin (Société financière) agribusiness group, which was founded during the reign of Belgian King Leopold II by the late Belgian businessman Adrien Hallet. The companies chose Luxembourg as their base and made an agreement under which their dividends were subject to a modest 15% withholding tax, a lower figure than those in force where their farms are located (20% in Congo-K and Indonesia, 18% in Côte d’Ivoire).
transfer-pricing

The art of hiding profits

Altogether, Socfin subsidiaries in Africa [in Sierra Leone, Nigeria, Liberia, Cote d’Ivoire, and Cameroon] and Indonesia produced 123,660t. of rubber and 380,770t. of palm oil in 2012. The combined turnover of its main African subsidiaries reached €271 mn. in 2013. The list also includes the 100%-owned Plantations Socfinaf Ghana Ltd. (PSG) and Socfin-Brabanta (Congo-Kinshasa). Socfin also holds 88% of Agripalma in São Tomé e Príncipe and 5% of Red Lands Roses (Kenya).

  • A third mechanism involves cross-border lending within a group of companies. Companies registered in Luxembourg are exempt from tax on income from interest.

According to the Thabo Mbeki High Level Panel report between 1980 and 2009 between 1.2tr and 1.4tr left Africa in illicit flows. These figures are most likely an understatement. Multinationals, like the ones highlighted by Africa Confidential, accounted for 60% of these flows.

Alex Cobhan, of the Tax Justice Network, has a neat summary of the various components of illicit financial flows (IFFs) and how to measure them. He also proposes measures that could help limit IFFs, including: (i) eliminating anonymous ownership of companies, trusts, and foundations; (ii) ensuring that all bilateral trade and investment flows occur between jurisdictions which exchange tax information on an automatic basis; and (iii) making all multinational corporations publish data about their economic activity and taxation on a country-by-country basis.

Alex Cobham blogs here.

More on debt, macroeconomic stability, and natural resources in Africa (Uganda Edition)

See earlier posts on this subject here and here. Below is a quote from FP on Uganda’s growing petroleum sector (see also the Global Witness report on Uganda’s secret oil contracts here):

Source: Global Witness

Uganda’s Projected Oil Production Curve. Source: Global Witness

The bulk of Ugandan government borrowing against future oil revenues has focused on grand infrastructure schemes built and funded by the Chinese. In 2014 alone, the government signed deals with China to build two hydropower dams worth $2.2 billion, a standard gauge railway that could cost up to $8 billion, and a $600 million fertilizer plant. Additional projects include a $2 billion oil field being developed by the state-owned China National Offshore Oil Corporation and a $350 million roadbetween Uganda’s capital, Kampala, and Entebbe International Airport. The possibility has even been raised that a Chinese bank may bail out Ugandan parliamentarians in danger of going to jail for failure to honor their debts.

And how efficiently is Uganda spending the [expensive] borrowed money?

Costs for the Ugandan section of the East African Standard Gauge Railway are especially out of control. The project had an initial price tag of $4.5 billion for the Ugandan side of the railway, compared to $3.8 billion for the Kenyan side. Estimated costs in Uganda subsequently shot up, first to $8 billion and then to a staggering $11 billion

So what will happen when China decides to deal with its public debt situation and the effects propagate to its many public companies involved in mega-projects in Africa?

To reiterate, let’s not declare mission accomplished in the war against the resource in Africa just yet.

The Long-Run Economic Impact of the Tse Tse Fly in Sub-Saharan Africa

The Tse Tse is estimated to have had substantial effects on precolonial Africa: a one standard deviation increase in the TSI [Tse Tse suitability index] is associated with a 23 percentage point decrease in the likelihood an African ethnic group had large domesticated animals, a nine percentage point decrease in intensive cultivation and a six percentage point reduction in plow use. A one standard deviation increase in the TSI is correlated with a 53 percent reduction in historical population density….

The TSI has a negative correlation with current economic outcomes as measured by satellite light density or the observed cattle distribution in Africa. The modern analysis is performed at the district level and is robust to including country fixed effects. The evidence suggests that the relationship between the TSI and satellite lights is driven by the Tse Tse’s effect on shaping historical institutions, particularly political centralization.

You can find the entire paper here.

HT Tyler Cowen.

Working With the Grain in Development

I finally got to reading Brian Levy’s Working With the Grain. It is easily the most underestimated development book of 2014, and should be read alongside William Easterly’s Tyranny of Experts (which it both complements and pushes back against). Like Easterly, Levy worked at the Bank and has insightful case studies and anecdotes from South Korea, to Ethiopia, to Bangladesh, among other countries. The book’s main thrust is that approaches to interventionist development policy ought to internalize the fact that:

… Successful reforms need to be aligned with a country’s political and institutional realities. For any specific reform, an incentive compatible approach begins by asking, who might be the critical mass of actors who both have standing and a stake in the proposed arrangements – and so are in a position to support and protect them in the face of opposition? [p. 142-3]

From a policy perspective, Levy tackles the relationship between governance, regime types, and development head on. How do you deal with the Biyas, Kagames or Zenawis of this world if you deeply care about [both] the material aspects of human welfare – roads, hospitals, schools, electricity, etc., [and] political freedoms and inclusive institutions?

Screen Shot 2014-12-17 at 12.32.06 PM

Levy’s answer is that development experts should work with the grain, focusing on incrementally solidifying past gains in specific agencies and issue areas, instead of engaging in epic battles against ill-defined and equally poorly understood “bad institutions” and evils like “corruption.” He aptly points out that you do not need the full set of the “good governance” bundle in order to continue chugging along on the path to economic prosperity.

In other words, we don’t have to put everything else on pause until we get the institutions right (or topple the bad guys). It is not an all or nothing game. His argument is persuasive (“good governance” has failed as a prescriptive remedy for underdevelopment), albeit at the cost of casting the immense toll of living under autocratic regimes as somewhat ineluctable on the road to economic prosperity. But at least he dares to challenge conventional approaches to governance reform that have at best failed, and at worst distracted governing elites from initiatives that could have worked to improve human welfare in developing countries.

As I read the book I wondered what Levy might think of the current state of development research. We are lucky to live in an age of increasing appreciation for evidence-based policy development, implementation, and evaluation. However, the resulting aura of “objectivity” in development research often leaves little room for politics, and its inefficiencies and contextual nuances. Sometimes the quest for generalizability makes us get too much into the weeds and forget that what is good for journal reviewers seldom passes the politicians’ (or other influential actors’) incentive compatibility test, rendering our findings useless from their perspective.

It is obvious, but worth reiterating, that the outcomes we can quantify, and therefore study, do not always overlap with the most pressing issues in development or policies that are politically feasible.

Perhaps this is a call for greater investment in public policy schools (not two-day capacity building workshops) in the developing world that will train experts to bridge the gap between academic development research and actual policy formulation and implementation (talking to policymakers makes your realize that this gap is wider than you think). Linking research findings to actual policy may sound easy, but you only need to see a “policy recommendations” section of a report written by those of us in the academy to know that it is not.