Tim Harford The Undercover Economist

Search Result for development — 128 articles

Development needed? Just give cash

‘A stack of research papers concludes that an excellent cure for poverty is simply to give poor people money’

Is this the most effective development programme in history?” asks Chris Blattman, a political scientist at Columbia University. He adds, “I think it’s a contender.”

The programme is simple enough to explain: give cash handouts of $50,000 to aspiring Nigerian entrepreneurs. Yes, you read that last sentence correctly — but more about the Nigerian cash drop in due course. It is merely the most eye-catching in a stack of research and policy papers to conclude that an excellent cure for the problem of poverty is simply to give poor people money.

That idea seems almost naive. Instinctively, we tend to feel that victims of famines and earthquakes need food and shelter rather than inedible cash. We may feel, also, that cash will be wasted — stolen, spent on drink, frittered away on treats or siphoned off by grasping relatives. Even if the money is well spent, will it generate self-sustaining economic growth? Yet an increasing number of development policy types are reaching the conclusion that cash beats many of the alternatives.

Ponder the most obvious objection first: that poor people will waste the money. David Evans and Anna Popova of the World Bank surveyed 19 randomised trials across the world studying cash transfers. Not one of them found evidence that spending on alcohol or tobacco had increased by a statistically significant amount. Poor people have better things to do with the money and often spend it well or even invest it successfully.

Blattman and his colleagues conducted what one might regard as a test-to-destruction of the “just give cash” policy. They handed out $200 at a time to homeless thieves and drug dealers in the slums of Liberia as part of a larger randomised trial. One could hardly think of a cash injection more likely to be squandered. And yet, on average, just $8 was spent on drinking or drugs; the rest was spent on rent, food, clothes and “business investments”. The most successful of these was a barrel full of strong drink that was resold by the cupful on the street.

What about the rather different idea of handing out cash in emergency situations — after earthquakes or famines or to refugees? (It is now possible to do this electronically through an ATM card or mobile phone.)

Clearly there will be times when cash is useless because there is nothing to buy. But if refugees have money, entrepreneurs will scramble to solve logistical problems and supply them with things to spend the money on. Except for a few cases, such as vitamins and vaccines, refugees are likely to understand their own needs best.

And while cash can be stolen, it is easier to keep electronic cash transfers secure than to ship food long distances through hostile terrain, with each warlord along the way extracting a cut.

Donor agencies are starting to experiment with cash transfers in humanitarian crises. A commission chaired by Owen Barder of the Center for Global Development recently made its recommendations to the UK’s Department for International Development. The first one: “Give more unconditional cash transfers. The questions should always be asked, ‘Why not cash?’ and ‘If not now, when?’”

So what about those Nigerian entrepreneurs? We already knew that small business grants could have big impacts. A few years ago I reported on an experiment conducted by David McKenzie, Suresh de Mel and Chris Woodruff in Sri Lanka after the catastrophic tsunami of 2004.

They gave out modest grants of around $100 to $200 to business owners, and found that on average these cash injections were invested with very high returns — around 10 per cent a month. But these were tiny one-person businesses.

Now David McKenzie has conducted this Nigerian trial of much larger handouts, with the aim of producing larger businesses with the potential to create jobs. The trial examined a business-plan competition — a policy wonk’s version of Dragons’ Den — that was funded by the Nigerian government and run by the World Bank and the Department for International Development. Several hundred applicants won outright but several hundred more were chosen by lottery from the runners-up. By comparing the lottery winners and the lottery losers, McKenzie could see the impact of the cash grant. It was large: three years on, the lucky winners were almost twice as likely as the losers to be running a business, and three times as likely to be employing more than 10 people. Such employers are exceedingly rare in Nigeria but a third of the lottery winners were among their ranks.

Of course, $50,000 is a lot of money and one might expect it to do some good — but McKenzie estimates that the cost per job created compares very favourably with popular entrepreneurship programmes such as mentoring or training. The truth is that while entrepreneurs in Nigeria and other poor countries are held back by corruption, red tape, poor roads and patchy electricity, they are also constrained by a lack of the funds needed to get their ideas off the ground. That is a solvable problem.

But does McKenzie agree with Blattman that he may have discovered the most effective development programme in history? No, he tells me with a chuckle. The most effective development programme, he says, is to let people move to another country. Now that’s a topic for another day.

Written for and first published at ft.com.

Attested development

The moral case for doing more to help the very poor is unanswerable. The practical case is more problematic: much foreign aid has been spent poorly in the past and we still have plenty to learn.

No one has done more to draw attention to the moral case than Columbia University’s Jeffrey Sachs. But some other development economists argue that Professor Sachs’s flagship project, Millennium Villages, has passed up a chance to advance our knowledge of what works. A new report, written by Michael Clemens of a pro-aid think-tank, the Center for Global Development, and by Gabriel Demombynes of the World Bank’s Kenya office, criticises the Millennium Village programme for a lack of rigorous impact evaluation.

The Millennium Villages are over a dozen clusters sprinkled across Africa, with an average population of about 40,000 people. The basic idea is that an intensive package of aid – fertiliser, agronomical advice, mosquito nets, school meals, clinics, irrigation and more – can transform the lives of these very poor people. The project aims to become self-sustaining over time, so that villagers can “get on the ladder of development and start climbing on their own”. Another important element is the multifaceted intervention: Sachs says this is necessary because there will be “important synergies”.

Given the complexity of the aid package and the small number of pilot projects, it’s not feasible to evaluate every possible element of the villages with the gold standard of a randomised trial. But several evaluation experts told me that it would have been possible to evaluate the impact of the entire project by randomly assigning control and treatment villages, which would have provided a measure of whether the villages were achieving their goals.

Why might this matter? China’s Southwest Project, supported by the World Bank in the late 1990s, also took a multifaceted approach. At the time, the project looked terrific, but a later evaluation by the World Bank showed that non-project villages largely caught up with project villages within five years. The Millennium Villages hope for a longer-lived impact, but Clemens and Demombynes claim that the current evaluation methods in place will not determine whether they succeed.

They point out that the evaluations published so far on the Millennium Villages website offer simple before-after comparisons showing what’s happening on the ground. These are not the only plausible indicators of success. Demombynes says, “It’s very clear that you can’t use a simple before-after comparison, especially in Kenya.” For example, the evaluation shows that mobile phone use in the first village, Sauri in Kenya, has quadrupled. But, says Demombynes, “Mobile phone uptake has quadrupled in Sauri, in the region, and in Kenya as a whole.”

Adjusting for regional trends, Clemens and Demombynes conclude that the impact of the villages is real, but roughly half what the project’s backers claim. And they are worried about sustainability. They stress that their alternative estimate is itself imprecise compared with a true randomised trial.

Jeffrey Sachs robustly defended the Villages when I asked him to reply: he said it wasn’t appropriate to try to control for regional or national trends. Clemens and Demombynes, he wrote in an e-mail, “don’t seem to realize that the interventions we are pursuing in the MVs are also taking place, albeit more sporadically … in the rest of the country.”

Sachs and his colleagues argue that we will learn a lot from the ongoing process of managing, measuring and observing what works within the villages themselves. I agree. But I think it would have been possible and desirable to learn much more.

Also published at ft.com.

The development dilemma: Can parking tickets explain why poor countries are poor?

Economic Gangsters: Corruption, Violence, and the Poverty of Nations, by Raymond Fisman and Edward Miguel, Princeton: Princeton University Press, 240 pages, $24.95

Many economists think corruption is a rational response to irrational incentives. The World Bank’s “Doing Business” database lists 40 countries, from Iraq to Ethiopia, in which legally acquiring the necessary permissions to export a single standard cargo container takes more than one month. The more difficult it is to do something legally, the larger the temptation to do it illegally. Small wonder that in developing countries, few people make more money than customs officials.

If perverse incentives create corruption, that suggests a simple solution to an age-old problem. Hence for the last decade or so the mantra of aid agencies has been “institutions matter”—even if it is not clear what humanitarians are supposed to do with this insight.

There is a popular alternative view that says corrupt countries are corrupt not because the incentives are perverse but because they’re stuffed full of crooks, born and bred. In this view, corruption is cultural, and poor countries are poor because their citizens are dishonest (or lazy, or fools).

Into this controversy strode two economists, Raymond Fisman of Columbia and Edward Miguel of Berkeley, with a 2006 research paper that was brilliant and trivial in roughly equal measure. Fisman and Miguel realized that to test the two theories about corruption, you would ideally need to pluck people from all over the world, place them into a community whose laws they could ignore with impunity, then see who cheated and who was honest.

Impossible? Not at all. The United Nations in Manhattan kindly provided guinea pigs for just such an experiment. Diplomatic immunity meant that parking tickets issued to diplomats could not be enforced. The decision to park legally or not, therefore, was a matter of each person’s conscience… (more…)

Arrested development

When you’re lost and running late, it is frustrating to stop and figure out the lie of the land. Nevertheless, that has to be better than speeding off in the wrong direction, however fleetingly satisfying the illusion of activity may be.

Few problems are more urgent or important than that of desperate poverty.

Aid can feed the starving, heal the sick, educate young children before they grow too old for school. But Abhijit Banerjee, an economist at the Massachusetts Institute of Technology (MIT), is one of a growing band who believe that the development industry nevertheless needs to stop and work out whether it is moving in the right direction.

In Making Aid Work, a slim new book that deserves an audience, Banerjee cites a recent World Bank report as recommending a cornucopia of initiatives, including but not limited to ”computer kiosks for villages; cell phones for rural areas; scholarships for girls attending secondary schools; school-voucher programs for poor children; joint forest-management programs; water-users’ groups… ” The problem is that while this stuff sounds sensible, we don’t really know how much of it works. Whether and when aid works at all remains a hotly debated subject, which tells you something about the quality of the research devoted to working out whether it does.

In fairness, that is not an easy job. Economists are well aware that correlation isn’t the same thing as causation – emergency aid goes hand in hand with earthquakes but does not cause them – and it is hard to figure out whether some improvement happened because of an aid programme or despite the aid programme.

Banerjee argues that there is a solution…

Continued at ft.com, subscription free.

The private sector development blog

The World Bank’s first blog is up and running, thanks to yours truly and my wily colleague Pablo Halkyard. Wish us luck!

Grants or Loans: Development finance and incentive effects

By Michael Klein and Tim Harford

Some people think the best way to give aid is through grants. Others advocate aid embedded in subsidized loans. Mostly, incentive effects on donors and recipients are ignored in this debate. But grants and loans carry different incentives and in some settings can be complementary. Donors should offer a wider menu of options, including ongoing forgiveness of loans, unbundled subsidies, and loans combined with output-based grants. Donor agency staff should be rewarded for outcomes, not volume of funds out the door.
http://rru.worldbank.org/PublicPolicyJournal/Summary.aspx?id=287

Part of the series on the future of the aid industry: http://rru.worldbank.org/Themes/AidEffectiveness/

A development strategy for Asian economies

by Stanley Fischer

This presentation describes the rise of East Asian economies, the lessons of that success, and includes remarks on South Korea in particular. I helped Stanley Fischer prepare the paper. Read the full text here.

The weakest link theory that explains our economic woes

My new podcast, “Cautionary Tales“, launches tomorrow with two episodes – one about what we can learn from an oil tanker that was too slow to change course, and another about why we fall for cons. I’m very excited about the show, and proud of it. Do please subscribe and have a listen! [Apple] [Spotify] [Stitcher]

Now, on with this week’s column…

I was delighted to see Abhijit Banerjee, Esther Duflo and Michael Kremer announced as winners of the Nobel memorial prize in economics. By championing the use of randomised controlled trials in development projects, they have added large and useful doses of rigorous evidence to a discipline that can be overfond of reasoning from a comfortable armchair.

The spotlight this week has understandably been on Prof Duflo. She is a superb economist, highly charismatic and the youngest winner by far. She is also only the second woman to win the prize, after Lin Ostrom in 2009. Since Prof Ostrom was a political scientist, and not as well known in the economics profession as she should have been, Prof Duflo is arguably the first female economist to win the prize. That has huge symbolic importance for a profession that continues to struggle with diversity.

All three winners have made major contributions beyond the championing of randomised trials that won them the prize. Prof Kremer, in particular, has made an unusual series of insights. With Seema Jayachandran, he proposed a way to constrict funding to oppressive or corrupt regimes. An international court could declare that their borrowing was “odious” and need not be repaid by a successor government. This declaration would dissuade banks from lending in the first place.

With his wife, Rachel Glennerster, now chief economist of the UK’s Department for International Development, he set out the case for an “advanced market commitment” to fund the development of vaccines and medicines that the market would otherwise be unlikely to provide. That proposal later took shape as a $1.5bn fund to pay for a pneumococcal meningitis vaccine that did not yet exist. Several hundred million children have since received the vaccine.

Then there’s Prof Kremer’s O-ring Theory of Development, which demonstrates just how far one can see from that comfortable armchair. The failure of vulnerable rubber “O-rings” destroyed the Challenger space shuttle in 1986; Kremer borrowed that image for his theory, which — simply summarised — is that for many production processes, the weakest link matters.

Consider a meal at a fancy restaurant. If the ingredients are stale, or the sous-chef has the norovirus, or the chef is drunk and burns the food, or the waiter drops the meal in the diner’s lap, or the lavatories are backing up and the entire restaurant smells of sewage, it doesn’t matter what else goes right. The meal is only satisfactory if none of these things go wrong.

Once you start to think about O-ring problems, you see them everywhere. A bank is useless if you can’t trust it to keep your money safe from hackers. The most stylish and comfortable car is worth nothing without reliable brakes. You can build a sophisticated factory in a jungle but your efforts will be in vain if you can’t keep the road to it open.

What’s less obvious is that the logic of O-ring problems dramatically changes the way an organisation — or an entire economy — works. Because a single failure can doom an entire project, several things follow. The first is that like attracts like: the best chef does his or her best work with the best suppliers and the best waiters in the best kitchen. It is pointless to ask the best waiter to serve poisonous slop made by an incompetent chef, and pointless to ask the best chef to prepare meals into which an incompetent waiter will sneeze. To spread out the talent is to squander it.

(Prof Kremer’s own career offers an example: he was a research assistant for a paper co-authored by Larry Summers, future US Treasury Secretary. Another assistant was Sheryl Sandberg, future Facebook chief operating officer. High performers seek out high performers.)

The second implication is that inequality is endemic. Since the most skilled workers have the most skilled colleagues and the best equipment, they are vastly more productive than others who are only fractionally less skilled. A modest variation in skills leads to a huge variation in wages. This is why blue-chip companies recruit only from elite colleges and universities. Why take a chance on someone whose face doesn’t fit? Policymakers trying to create a more equal society must find some way to swim against this tide.

Third, O-ring economies are self-perpetuating. If an economy has undrivable roads, unreliable electricity, impassable queues at customs, corrupt courts, and untrained workers . . . well, where is progress to come from? Improve the roads and you’ll still be foiled by the electricity; train the workers and the crooked legal system will still take you down.

For an individual, the question is how much education should I try to acquire? It depends on how much skill others have. If I can’t reach a job market full of highly competent people, there is little point in wasting time and effort developing skills that will be wasted.

The O-ring model is merely a simple way of thinking about how an economy might work — albeit one that seems packed with insight. Prof Kremer didn’t stay in his armchair for long. He and this year’s other winners have been demonstrating just how much economics, wisely used, can deliver.

 

Written for and first published in the Financial Times on 18 October 2019.

My new podcast is “Cautionary Tales” [Apple] [Spotify] [Stitcher]

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Black holes in data affect health and wealth

Nearly seven decades ago, the noted psychologist Solomon Asch gave a simple task to 123 experimental subjects: to pick which one of three quite different lines was the same length as a “reference” line. Asch had a trick up his sleeve: he surrounded each subject with stooges who would unanimously pick the wrong line. Confused, the experimental subjects were often — not always — swayed by the error of those around them.

I’ve written before about these experiments, but there’s something I neglected to mention: not a single one of the stooges nor the experimental subjects was female.

If Asch had conducted all-women experiments, he would have discovered that women tend to conform to the group more often than men. Perhaps this omission doesn’t matter. Retellings of the Asch experiment have tended to exaggerate the conformity that was demonstrated, while glossing over the fact that it was an all-male study. The two biases may cancel each other out.

Still, it is a lesson in how easy it is to ignore important data — or to assume that they are comprehensive, when in fact they omit half the planet.

Invisible Women (US) (UK) a new book by Caroline Criado Perez, explores countless cases in which everything from the height of the top shelf to the functionality of an iPhone is predicated on the assumption that the user will be male. (Apple once released a “comprehensive” health app that could track your selenium intake but not menstruation.)

Much of this imbalance has nothing to do with data, but some of it does — and this “gender data gap” is particularly important because good statistics are one of the only windows we have into the lives of an entire population, rather than just a handful of friends.

Consider the UN Sustainable Development Goals, admirable targets to improve the lives of 7.5bn people. Yet as development economists Mayra Buvinic and Ruth Levine have pointed out, while one of these goals is gender equality, we lack much of the data on whether that goal is being achieved.

Some missing numbers — for instance, on sex-trafficking — are obvious. Others are more subtle, such as the ubiquitous choice to measure the income not of individuals but of households. Does that household income come from a man, a woman or both?

We shouldn’t assume that the balance between “wallet and purse” is irrelevant. Economist Shelly Lundberg and colleagues studied what happened when in 1977, child benefit in the UK was switched from being a tax credit (usually to the father) to a cash payment to the mother. That measurably increased spending on women’s and children’s clothes relative to men’s. The UK’s new universal credit is payable to a single “head of household”; that curious decision may well favour men. Given the data we have, it will be hard to tell.

The story is often told of the accidental discovery of sildenafil (Viagra). Intended as a treatment for angina, the clinical trial revealed a side-effect: magnificent erections. Had the original trial included women, we might have fortuitously discovered a treatment for severe period pain. As it was, men got their miracle drug but women are still waiting. We can’t confidently prescribe sildenafil as a safe and effective treatment for period pain because, as Ms Criado Perez reports, only a small and suggestive trial has yet been funded.

There are many data gaps out there — statistician David Hand calls them “dark data”. There are the unpublished studies that produce less interesting or lucrative results than published ones. There are the voters who are coy about confessing their voting intentions to pollsters — the “shy Tory” effect. There are the psychology experiments that study only “WEIRD” subjects — Western, Educated and from Industrialised Rich Democracies.

We have plenty of statistics on shares and currencies, but not much on debt and derivatives. What Gillian Tett called the submerged iceberg of financial markets got less attention, until it turned out to have holed the entire financial system below the waterline in 2007.

There is no simple way to shine a light on all this dark data. There is a reason why it is easier to collect statistics in a rich country than a poor one, and why fluent speakers of English are more likely to fill in the UK census form. Collecting data on who bears the burden of “life admin” is harder than collecting that on primary paid occupations. But what we count and what we fail to count is often the result of an unexamined choice. We can make better choices, both by involving ordinary citizens in survey design, and by trying to get more women and minority groups into economics and statistics.

It is hardly encouraging that the Office for National Statistics has just been found wanting in a sexual discrimination case, but there is hope. The president of the Royal Statistical Society, the managing director of the International Monetary Fund and both heads of the UK Government Economic Service are all women. Still, plugging data gaps takes time, and considerably more thought than I once gave to Solomon Asch’s curious experimental line-up.

 

Written for and first published in the Financial Times on 8 March 2019.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Nominations for a silly economics prize with a deeper purpose

While the Nobel Prizes are no doubt a splendid thing, the Ig Nobels are far more fun. Ig Nobel prizes have been awarded for discovering that every language has a word for “huh?” (Literature, 2015) and for comparing the discomfort of looking at an ugly painting with the discomfort of being shot with a laser beam (Art, 2014), and of course for studying farts (Biology, 2004; Literature, 1998).

They do not seem very important, and indeed Robert May, then the UK’s Chief Scientific Advisor, requested in the 1990s that Ig Nobels not be awarded to British scientists for fear of damaging their reputations.

That seems a little po-faced. It may be better for researchers to laugh at themselves than to let politicians do it for them. The late William Proxmire, a former US senator, relished his “Golden Fleece” awards, a destructive and sometimes inaccurate mockery of research conducted at taxpayers’ expense.

Proxmire did not seem to care that silly research sometimes has serious benefits. The Ig Nobels are designed to “make you laugh, then make you think”, and they have a surprising record of turning up gems. Andre Geim won an Ig Nobel for levitating a live frog, en route to his Nobel Prize in physics for his work on graphene. David Dunning and Justin Kruger received an Ig Nobel prize in psychology for discovering that incompetent people are too incompetent to know they are incompetent. It seemed funny at the time; nobody is laughing these days.

I have been disappointed, however, with the quality of Ig Nobel prizes in economics and business, which have recognised rogue trader Nick Leeson, Lloyd’s of London, Enron, WorldCom, and the entire banking system of Iceland. This is a shame, because if silly-seeming research in physics and biology might lead somewhere intriguing, why not recognise silly research in economics and business?

I have a few candidates in mind. I’d like to nominate Benjamin Scheibehenne, Peter Todd and Rainer Greifeneder for discovering that whether you offer shoppers a choice between a few types of jam, or lots of types of jam, it doesn’t make much difference to whether they buy jam. This finding might seem unremarkable, but the received wisdom in behavioural economics had been that consumers simply stop buying if offered too many choices. Prof Scheibehenne’s team examined 50 studies and concluded that on average, offering more choices made no difference either way.

I also nominate economists Hunt Allcott and Matthew Gentzkow, for studying fake news by inventing fake fake news. They conducted their study immediately after the 2016 presidential election, in an effort to measure how much fake news was around, and how many people had seen it. The use of “fake” fake news was to test people’s recall of “real” fake news stories: some people will say they remember seeing things that they did not, and so Profs Allcott and Gentzkow put fake fake news alongside real fake news and real real news in order to understand what was really going on. Clear?

Perhaps the Ig Nobel committee is concerned that the pair are trespassing on the domain of recent winner Gordon Pennycook (a psychologist) with the economist David Rand. Profs Pennycook and Rand are studying “bullshit receptivity”, a tendency to read profound meanings into randomly generated sentences such as “we are in the midst of a high-frequency blossoming of interconnectedness that will give us access to the quantum soup itself” and “hidden meaning transforms unparalleled abstract beauty”. Highly bullshit-receptive experimental subjects were more likely to believe in fake news headlines, even when part of the study was conducted on April 1.

If all this seems rather obvious, note that there’s an important difference between the kinds of things people believe because they don’t stop to think (for instance, that Pope Francis endorsed US president Donald Trump), and the kinds of things people believe because their political identities depend on it (for instance, that Mr Trump is “draining the swamp”). Anyone trying to restore sanity to political debate needs to understand the distinction. If you think this isn’t an important issue, I have a story about EU cabbage regulations to tell you.

Finally, I nominate Sendhil Mullainathan and Eldar Shafir, for discovering that being “hangry” is a major impediment to economic development. In their book, Scarcity (UK) (US), Profs Mullainathan (an economist) and Shafir (a psychologist) argue that there is a common response to being short of almost anything: money, time, and even food. Scarcity absorbs our mental energies and makes us act in ways that can be deft in the short term but self-defeating over the long haul.

The Ig Nobels glory in the opposite: a surplus of weird ideas that are foolish in the short term but may pay dividends in the end. And if they do not? There’s no harm in being silly.

Written for and first published in the Financial Times on 21 September 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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