Q & A with Esther Duflo

Professor Esther Duflo, the co-director of the Abdul Latif Jameel Poverty Action Lab at the MIT, has answered questions asked to her through Managing Globalization blog. She has also answered the question I asked about policy prescription on macro level from the conclusions derived from RCTs.

Professor Duflo is "one of a new wave of development economists who have been instrumental in changing the focus of their field - away from one-size-fits-all solutions and towards specific, detailed studies of ground-level problems in poor areas. She is known for highly rigorous work addressing the roots of poverty in India, Kenya, South Africa and elsewhere. Her topics have included education, health and pollution, saving patterns and even the rate of return on fertilizer."

Q. How far can conclusions derived from randomized controlled trials be stretched when it comes to policy prescription to tackle poverty? If we find out that a certain intervention is having a positive impact on the fight against poverty, then how appropriate would it be to prioritize the intervention at a macro level and deduce national economic policy based on the result of the intervention? Besides local political and economic institutions, what other factors should we be careful of when scaling up policies which are rigorously and successfully tested at a micro level?

Chandan Sapkota
United States

A. This question, as well as Kartik’s (below), is an excellent question, and both are related. Let me start by reminding everyone what a randomized control trial is, and how they are used to evaluate poverty alleviation intervention. You can find much more information on the site of the Abdul Latif Jameel Poverty Action Lab. In particular, we describe randomized control trials and their rationale in some detail.

Generally, people or communities who benefit from an intervention are not comparable. For example, schools that receive extra textbooks may be either richer or poorer than other schools: they could be richer because only rich schools can afford books, or poorer because an NGO has decided to give textbooks to the poorest schools in the area. This makes it very difficult to evaluate the impact of extra textbooks by comparing schools with and without them. Randomized evaluations follow the lead of medicine: a sample of schools is selected, and half of them are randomly assigned to receive the textbooks (usually, the other half is also given textbooks after the experiment is concluded and the results are out). If the sample is large enough, we can now be sure that the children in schools with and without extra textbooks differ only because of the textbooks. When we compare their scores after a year, we can be sure that any difference is due to textbooks, not to something else. Michael Kremer and colleagues ran exactly such an experiment in Kenya, and found quite surprising results, which you may want to check out….

Now, let me turn to your question. When we run an experiment and we get the results, we know the effect of this program had in this particular place. This is much better than the information we have in general to decide on policy (nothing…), but is it good enough to act on and to move on to recommend a more general policy? There are several obstacles.

First, the results may not replicate across contexts; I discuss that in the next answer.

Second, a program may be implemented in very different ways in a large scale. For example, it may be done well by a non-governmental organization, but corruption problems may creep in when it is implemented by a government. These implementation issues will have to be ironed out. This is important, and scaling up challenges have to be considered, but it does not take away from the finding that we now know what the potential of the program would be if it were correctly implemented. If we find an effective program, this suggests that it is worth investing some effort in figuring out how to correctly implement it on a large scale. This can also be experimented with, by the way: some of the very exciting work in development economics these days is precisely about how to effectively implement programs (see for example Ben Olken’s work, which I discussed in response to another question).

Third, there may be market equilibrium effects. For example, if I find that by randomly offering secondary school scholarship to some kids, I increase their wage, compared to those who did not receive the scholarships, this may not tell me what the effect of doing this nationwide would be: if everybody received a secondary education, the returns to secondary school may go up or down, compared to a situation where few people received a secondary school education. There are two ways to deal with these: in some cases, it may be possible to organize experiments at the “market” level (though I think it would be hard in the example I just described). In others, we have to use a priori economic reasoning to think whether market equilibrium effects are going to be important or not. In many cases, we have no reason to think they would be large enough to undo the effect of the policy.

Abhijit Banerjee and I discuss these issues in a recent article (“The Experimental Approach to Development Economics”), which I have posted on my web page at MIT.

The whole Q&A with Duflo is very enriching and she articulately and in great detail answers other questions related to poverty reduction and the work done through the MIT's Poverty Action Lab.

Personally, the three fields, in development economics, that I have great interest in and want to work on in grad school are growth diagnostic approach, RCTs, and economic policies (on growth and development) derived from a sound theoretical and a rigorous experimental approach from the first two fields. As for my senior honors thesis I am exploring the growth diagnostic approach and will apply it in the context of Nepal (and if possible Burkina Faso). My future Op-Eds (columns) will be about the identification of constraints to economic growth in the Nepali economy. Read my earlier Op-Eds here. The latest one is here.

Doing Business Report 2009

The IFC and WB have just published an annual report on the ease of doing business in countries around the world. The report, which is widely covered in the media and is taken as one of the tools to gauge investment and business climate in a country, states that the top ten reformers in 2007/08 are: Azerbaija, Albania, Kyrgyz Republic, Belarus, Senegal, Burkina Faso, Botswana, Colombia, Dominican Republic, and Egypt. It tracks ten stages in the "lifecycle of a business" and ranks countries on their regulatory ease of doing business. Here is the report overview.

The indicators used in the report are: starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business. The rankings do
not reflect such areas as macroeconomic policy, quality of infrastructure, currency volatility, investor perceptions, or crime rates.

Singapore leads the global rankings on the overall regulatory ease of doing business for a third consecutive year. New Zealand is runner-up, and the United States third. Bahrain and Mauritius join the ranks of the top 25 this year.

The top 25 are, in order, Singapore, New Zealand, the United States, Hong Kong (China), Denmark, the United Kingdom, Ireland, Canada, Australia, Norway, Iceland, Japan, Thailand, Finland, Georgia, Saudi Arabia, Sweden, Bahrain, Belgium, Malaysia, Switzerland, Estonia, Korea, Mauritius, and Germany.

Sadly, the report states that "no major reforms were recorded." Nepal rank is 121 on the list. In South Asia, Maldives has the highest ranking (69), followed by Pakistan (77), Sri Lanka (102), Bangladesh (110), Nepal (121), India (122), Bhutan (124), and Afghanistan (162).

I will have more on the ease of doing business in Nepal and in South Asia discussion in later posts.

I am getting late for class now!

Links of Interest (9/9/08)

Thomas Friedman talks about his new book Hot, Flat, and Crowded: Why We Need a Green Revolution- and How It Can Renew America(More here from Foreign Policy magazine: Seven Questions)

"Hot, Flat, and Crowded": There is a convergence of basically three large forces: one is global warming, which has been going on at a very slow pace since the industrial revolution; the second--what I call the flattening of the world--is a metaphor for the rise of middle-class citizens, from China to India to Brazil to Russia to Eastern Europe, who are beginning to consume like Americans. That's a blessing in so many ways--it's a blessing for global stability and for global growth ... And lastly, global population growth simply refers to the steady growth of population in general, but at the same time the growth of more and more people able to live this middle-class lifestyle. Between now and 2020, the world's going to add another billion people. And their resource demands--at every level--are going to be enormous. I tell the story in the book how, if we give each one of the next billion people on the planet just one sixty-watt incandescent light bulb, what it will mean: the answer is that it will require about 20 new 500-megawatt coal-burning power plants. That's so they can each turn on just one light bulb!

The green revolution is about how we produce abundant, cheap, clean, reliable electrons, which are the answer to the big problems we face in the world today. I would point to five problems, and they’re all related: Energy and resource supply and demand, petrodictatorship, climate change, biodiversity loss, and energy poverty. They all have one solution: abundant, cheap, clean, reliable electrons. The search for and the discovery of a source of those electrons is going to be the next great global industry. And I think the country that mounts a revolution to be the leader of that industry is going to be a country whose standard of living is going to improve, whose respect in the world is going to improve, whose air is going to improve, whose innovation is going to improve, and whose national security is going to improve. That’s what this book is about.

10 worst ideas of McCain and Obama

Freddie Mac and Fannie Mae: A rebuild or a teardown?

Bail out of NOC, a financially bankrupt state-owned enterprise in Nepal

Reforming without resourcing: The case of the urban water supply in Zambia

The commercialisation of the WSS in Zambia has proven to be less than effective because of inherent design flaws. The reforms stressed tariff rationalisation and cuts in government transfers. At present, commercial utilities persist in a “vicious circle” of low investment levels, high system losses, unaffordable tariffs and low access levels. The commercial improving the effectiveness of cross-subsidisation and ensuring the utilities’ financial viability, since such a step would help reduce the unit cost of production through both the scale effects and lower UFW rates.

Is the conditionally necessary in CCT Programmes? Evidence from Mexico

Our results show that the benefits of conditionalities can be large. They could also be made much more efficient by  calibrating the design of programmes based on the heterogeneity of the effect of the conditionality, they could be much more efficient.

Microfinance meets the market

The role of public and private sectors

Here is Jean-Michael Severino on the role of public and private sectors in the economy. Behind his argument lies the fact that market is not perfect and there are numerous sectors where the private sectors have not yet penetrated due to high risks and uncertainty. It is the public sector job to encourage the private sector to invest in these untapped sectors (infrastructure, education, health, irrigation, agriculture, energy, environment protection) by first sharing risk and then, if necessary, providing other incentives like funding and insurance against potential losses due to high overhead costs. Gone are the days of too much inclination to either one of the ideological schools of thought in economics. We need to be practical, which demands the role of both the government and the private sector. No sector is naturally reserved for this or that entity! The depth of state's involvement should be restricted to the point where its involvement is not disturbing incentives in individuals and in the private sector.

 

Severino puts it in a better way:

 

The role of public actors can precisely be to make private actors step into sectors which they would not have thought of penetrating, and enabling or inciting them to walk the extra mile in a way that is compatible with their business approach, but for which they would have lacked financial means, or for which they need to share risks with a third party. So in itself, private sector intervention is a significant contribution to development policy.

The public sector’s role is to comfort the private sector in risk-taking. The private sector’s role is fundamentally to insure and take on that risk, and to manage the concrete operations. Ultimately, what this public-private partnership in favor of economic growth and global public goods in developing countries does is this: developing new services in favor of the populations by taking on additional risks and filling in gaps, I would say, in the financial market. In pushing limits that appear and that would not have been surpassed without concerted action of these two types of actors.”

More on cap on aid to Africa

Adrian Wood, a professor of ID at Oxford University, in a column in FT, had proposed a cap on aid to Africa. More here.

Easterly replies with a positive nod but doubts political leadership and soul searching on accountability on donor's part:

I agree with Professor Wood that heavy aid dependence is a problem in Africa, including for the exact reason he says of making African governments more accountable to donors than to their own people. But the real problem is the one he doesn’t mention - who are the donor agencies accountable to? The short answer is - nobody. The long answer is that at most they are accountable to their own politicians for spending their budgets, after which everyone seems to lose interest what happens to the money or what effect it has. So the donors will continue to follow practices like “aid pushing” because of their own organizational incentives, and Professor Wood’s sage advice will be added to the large pile of unimplemented benevolent ideas to which everyone will pay lip service and then get on with business as usual.

Wood has a different perspective on "reform from within":

As Bill says, the answer depends on donor agency motives and accountability. The behaviour of donors, particularly bilateral ones, is heavily influenced by what tax-paying voters want: no minister could make a change in aid policy that might risk losing an election; and a better-informed public could be a force for improvement. In addition, within political limits, the behaviour of aid agencies is influenced, for good or ill, by those who work in them.

It is on this last point, I think, that Bill and I mainly disagree: my experience has led me to a less pessimistic view than him. I too have met damaging organisational incentives, mindless money-pushing and selfish careerism. But I have also met a lot of dedicated, altruistic, hard-working, self-critical and smart aid agency employees, and I continue to believe that reform from within is possible. Not easy, for sure, but easier than bringing about a helpful upheaval in public opinion of the sort which Bill sees as a necessary condition for change in aid agency behaviour.

Jeff Sachs disagrees:

What a time to be arguing for capping aid based on some new and arbitrary limits, when the donors are flagrantly violating every promise that they've made to increase aid. And targets like 10 percent of GNP are simply meaningless when we're dealing with countries at $200 per capita, disease pandemics, no electricity, roads, ports, safe water. That's a $20 ceiling. Great. There are practical things that can be done to save lives, build infrastructure, develop agriculture, adapt to climate change, put children in school, and more. Aid levels should be based on rigorously assessed needs to achieve given objectives, most importantly the Millennium Development Goals, and should be delivered in a systematic manner, based on milestones, audits, monitoring, and evaluation.

Nancy Birdsall agrees with Sachs:

First, donors do need to tie their hands with simple and clear rules -- to overcome their own coordination and so-called "alignment" (with recipient country programs) pathologies. They have been trying for at least a decade, but so far without any notable progress -- as is clear from their own reports to themselves and their recipient country "partners" (see the new OECD-DAC report prepared for the High-Level Forum on Aid Effectiveness just held in Accra).

So it is hard to argue with the simplicity and clarity of the proposal. (Two weeks ago we suggested six ideas donors might have embraced to lock themselves into better behavior at Accra. Only on transparency did something clear emerge however -- and six ideas may be too many!) But the real problem is that Adrian Wood's simple rule won't work because a proposal to be applied to the collective of donors doesn't make any one donor accountable to anyone. Oops: another accountability problem. How ironic.

Second, Wood's proposal might well create a perverse incentive for aid-dependent governments to resort even more to trade and other indirect taxes than they already do. For why that's bad for the incipient middle class, for small business, and for governance itself, see my working paper Do No Harm: Aid, Weak Institutions, and the Missing Middle in Africa especially p. 16.

Third, some recurrent costs are in fact "investment," including the salaries of teachers who build the human capital of the next generation. The problem is not that donors might reasonably cover some of the costs of salaries in very poor countries. The problem is that under the existing aid system they cannot do so in ways that are stable and predictable and they cannot manage to get out of the way with their own ideas about the key inputs. They cannot, as a group, really cede ownership so they constantly risk undermining local institutions.

I agree with Jeff Sachs that more money could be spent well. And I agree with those who fear that there can be too much of a good thing. What's needed is an approach to aid that helps, indeed forces donors, to shift accountability of recipient governments away from donors and back to citizens -- allowing for the feedback governments need from their own taxpayers. We suggest one way to try that -- called Cash on Delivery Aid. You can read about that here, and, soon, in our forthcoming publication: Cash on Delivery: Paying for Progress with Foreign Aid.

How far to go with government intervention?

Here is an article about how to better utilize government involvement rather than clamoring for less government. Why? Because there is no evidence that higher taxes and bigger government spending on welfare slows down GDP growth rate. Compare the Nordic countries with the more liberal ones like the US!

...Contrary to the romantic claims about the nation's laissez-faire past, American history is a story of government intervening, time and again, to support growth.

...Rather than harm the economy, the evidence shows that government spending, when done well, contributes critically to economic growth. Americans rely on the government for the free primary and high schools that educate the workforce. The government subsidizes college education and has built the immense transportation infrastructure that moves goods across the country and gets people to work. Federal, state, and local government have been essential to the nation's health, building clean-water systems and developing vaccines that have eliminated or minimized diseases like diphtheria, tuberculosis, and polio. The government can waste money, too. But the national rhetoric about the economy needs to stop focusing on how to shrink the government, and start focusing on how best to use it.

...In 1992, President Bill Clinton succeeded in passing legislation to raise the income tax rate on higher income Americans. Harvard's Feldstein, who had served as Reagan's chief economic adviser, claimed that the tax increase would reduce the incentives to work and therefore the incomes of the wealthy. It turned out to do nothing of the kind: the top tier of Americans, in fact, made more money.

A look at tax history suggests that this should have been no surprise. Nancy L. Stokey, of the University of Chicago, and Sergio Rebelo, of Northwestern University, looked closely at the period between 1913 - when the United States first adopted an income tax - and 1942. In that period, the federal bite from income taxes rose from 2 to 15 percent of GDP. Discounting the data for business cycles, including the sharp downturns during the Great Depression, they found that the rate of growth remained consistently strong and positive over the years, despite ever-higher tax rates.

...But to a nation steeped in antigovernment economics, the idea that government cannot be of help - or that taxes are not worth paying - is now seriously jeopardizing its future. There is no rich nation in the world today, including America, that has grown wealthy without significant government involvement. And there will be no rich nation in the future that can stay wealthy without robust government, either

Urban Agriculture: A Cuban Success Story???

Sinan Koont, Professor of Economics in Dickinson College, in a paper about Cuban urban agriculture, terms the urban agricultural movement in Cuba "'a success story." (This reminds me of a similarly titled and very popular research paper by Acemoglu, Johnson, and Robinson: An African Success Story: Botswana ). While AJR's paper was about how strong institutions of property rights and complementary political leadership contributed Botswana to enjoy more than 7% GDP growth rate for more than three decades, Koont's paper is about how the Cuban government (something like the planners), alarmed by cut in aid by the Soviet Union during the 1990s for "industrial" agriculture development, spearheaded a program called "organoponicos" to increase agriculture productivity, mainly "agro-ecological" or "organic"  in urban areas.

This carefully planned policy, according to Koont's paper, led to roughly one-thousand fold increase in production: 4,000 tonnes to 4.2 million tonnes between 1994 and 2005 (annual growth rate of about 78 percent). Well, based on this increase in output, this exercise is termed as a "success story." It could be entirely possible that the increase in output was a result of farming in the usual idle land, which the government has complete control over. I would consider it a success story if productivity increases by multiple folds for more than a decade or so and the contribution from increase in productivity of factors of production is higher than that from increase in farming land (i.e. area). Also, most of the production boom occurred in vegetable and fresh condiment production, not in general staple food crops, multiple fold increase in productivity and production of which would have been an actual success story to celebrate on. Nevertheless, the achievements as of now is in fact awesome and could be modeled in crowded cities somewhere else, if possible.

In fact, it seems that increase in outcome was partially a result of land redistribution by the government:

...Before the crisis, land was either privately held and worked by owners, or it was state-owned and worked by employees. Now, land was also distributed in permanent usufruct to individuals (as parcelas, with the individuals being called parceleros) and cooperatives.

However, Koont also provides statistics of increase in yields per square meter:

...This kind of growth obviously implies an extensive increase in the surface area being cultivated but yields per square meter also went up impressively (in organoponicos, for example, from 1.5 kg/square meter in 1994 to 25.8 kg/square meter in 2001: a seventeen-fold increase).

Success behind the achievement:

...The most important principle underlying this spectacular success is organizational: strong, disciplined, coherent central direction and guidance are combined with decentralized action in input provision, marketing, and production.

How far this model differs from the Chinese land reform of 1970-80, which led to successful programs like household responsibility system and TVEs, leading to increase in productivity and spectacular economic growth for over three decades?

The author argues that four main policy responses from the part of the state played a critical role in the urban agriculture revolution: research and development, training and education, provisioning of inputs, and material and moral incentives.

One of the interesting arguments on the paper is that institutional reforms might not become a hit even if they are meticulously designed- it requires well-founded movement on the direction of institutional reform so that expectations are matched with reality and new policy reforms. If reforms are formulated without heeding underlying dynamics of the situation in concern, then however grand a policy may be, it won't produce expected results. Easterly, in his book The White Man's Burden, argues that movement towards individual farming was well underway in some provinces in China before the implementation of household responsibility system. The communist leaders learnt that farmers have more incentives to increase productivity when they practice individual farming. The Chinese reform post-1978 basically institutionalized this movement, leading to its success.

Koont also argues that preparation for this institutional reform was well underway before it became a policy.

The basic ingredients of such success were (and are) already present in Cuba: an educated population; a socially concerned and committed, people-oriented central government giving support and organizational backbone to the effort; and ample stimulation of decentralized initiative and decision making by producers at the base, encouraging the finding of local solutions to local problems.

Regarding institutions, reforms, and behavior of agents, Carolyn Lesorgol, in her new book Contesting the Commons: Privatizing Pastoral Lands in Kenya, also argues that for a reform program like privatization of pastoral lands to be successful, people for whom the program is being targeted need to participate to strengthen feedback mechanism, and power struggle between nay-sayers and yes-sayers should be expected. Yes-sayers may win the struggle not because the reform program is grand but because the ability to change in line with the reform program comes from the participating people itself (through a gradual process, often influenced by education and social interactions). This is an interesting book about the dynamics involved in institutions and in agent's behavior regarding privatization of pastoral lands in Kenya!

Anyway, this is a good, short paper on a topic we rarely hear about! Here is a piece about food security in Cuba by Koont.