development

Noble goals

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Talking about growth and development yesterday made me think of the twin institutions that bear the brunt of a decent portion of the anti-growth, anti-capitalist, anti-America, anti-“economics” anger in the world. Those would be the World Bank and the International Monetary Fund (perhaps we could throw the World Trade Organization in too). Remember the Seattle riots around the WTO meeting in 1999? How I sympathize with those who would criticize these institutions, who would debate their goals and their practices. Yet here I go, so help me, to try to raise the defense.

Forget for a moment, if possible, any prejudice for or against these institutions. These were not organizations born of evil purpose. Let’s read along with the part of the Bretton Woods agreement that set up what is commonly known as the World Bank:

“The purposes of the Bank are:

(i) To assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes, including the restoration of economies destroyed or disrupted by war, the reconversion of productive facilities to peacetime needs and the encouragement of the development of productive facilities and resources in less developed countries.

(ii) To promote private foreign investment by means of guarantees or participations in loans and other investments made by private investors; and when private capital is not available on reasonable terms, to supplement private investment by providing, on suitable conditions, finance for productive purposes out of its own capital, funds raised by it and its other resources.

(iii) To promote the long-range balanced growth of international trade and the maintenance of equilibrium in balances of payments by encouraging international investment for the development of the productive resources of members, thereby assisting in raising productivity, the standard of living and conditions of labor in their territories.

(iv) To arrange the loans made or guaranteed by it in relation to international loans through other channels so that the more useful and urgent projects, large and small alike, will be dealt with first.

(v) To conduct its operations with due regard to the effect of international investment on business conditions in the territories of members and, in the immediate post-war years, to assist in bringing about a smooth transition from a wartime to a peacetime economy.”

This reflects both the origins of the Bank as an institution of post-war reconstruction. The World Bank was set up to help nations and people who were in need. Don’t these goals seem kind of noble, or important?

The IMF equivalent:

“The purposes of the International Monetary Fund are:

(i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

(ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.

(iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.

(iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.

(v) To give confidence to members by making the Fund’s resources available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.

(vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium. in the international balances of payments of members.”

It’s a triumph of global cooperation that institutions like these exist, with the aims – broadly expressed – of achieving stability, development and prosperity. It’s amazing. Like I said, part of me hates playing devil’s advocate for institutions that are routinely characterized as evil tools of evil people in evil countries, but, if you don’t like these institutions, at least tell me you don’t reject the idea of these institutions.

Yes, we know that these institutions have dropped the ball – to put it mildly – in the past, and that is not an economists versus the world thing, it’s just a fact. Yes, it’s incredibly, astonishingly misguided to put headquarters of these institutions in the capital of America, and all the more unfortunate given the strong feelings that alone arouses. Yes, the balance of power in the World Bank, the IMF, the WTO, hell, the UN too, is probably a mess.

But here’s the rub: I want international cooperation that tries to tame the beast of the global economy, of the complex and difficult problems that arise when everyone in the world interacts while trying to make the best out of what they have. I want to worry about figuring out how to help countries and people who want help, and then giving it. I want to acknowledge that we’re all in this together and that our decisions matter for each other.

We – everyone – are the people who can embrace the ideals that gave us unprecedented international cooperation in the aftermath of a bloody and destructive war, and develop those noble ideals into institutions that work, practically, for everyone. I can only quote the first principle of the World Trade Organization: “The first step is to talk“. If you believe the institutions are sick, let’s cure them rather than let them die.

Life is good: economic growth, war, and $1

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The unfriendly face of economics is the bland incantation “economic growth”, which, following the “show, don’t tell” principle, means “more stuff”. Sounds a bit unpalatable, does it not?

We’re in measurement-problem-land again, unfortunately. I think a careful normative economist would define “economic growth” as either an increase in the resources (of whatever type) at people’s disposal, or some development that helped people get the things they liked (whatever they are). Unfortunately, again, we get stuck a little on what we can measure, using the amount of measurable stuff like income, goods or services to proxy what we’d really like to achieve.

On top of and related to that, there’s the diverse backlash against “materialistic” economic growth. My own belief – for what it’s worth – is that it’s a bit weird that economic growth ascended to such dominance as a policy goal. Being anti-growth is something different entirely, though; by any definition, the role of growth is radically different for the world around me than for the poor.

This recent Economist article argues forcefully that the world is headed in a historically pleasant direction. It’s too rich in detail to do justice to here, but among other things it offers a version of the most compelling defense of economic growth: some people are really, really struggling. It stretches empathy to its absolute limit to try to imagine the most crushing poverty in the world, and if that sounds like a cliché, tough.

“In China 25 years ago, over 600m people—two-thirds of the population—were living in extreme poverty (on $1 a day or less). Now, the number on $1 a day is below 180m. In the world as a whole, a stunning 135m people escaped dire poverty between 1999 and 2004. This is more than the population of Japan or Russia—and more people, more quickly than at any other time in history.”

I remember vividly the slow, horrifying process of understanding what $1 a day means. No jargon: it means that the amount of stuff – any stuff – that a person living on $1 a day can afford is equivalent to the amount of stuff I could afford to buy if I had one US dollar in my pocket every morning, and nothing more. It’s not about exchange rates or the price of stuff or anything like that: it’s real That’s very close to being literally unthinkable.

Yes, the figures quoted in the Economist article are averages, and yes, measurement is a problem. But still:

“A World Bank study of 19 poor countries concluded that every 1% increase in national income per head translates into a 1.3 point fall in extreme poverty… The result [of economic growth] is that the number of very poor people in the world is falling fast—even though many critics continue to believe that the poor have not really benefited from growth. In 1990 those on $1 a day accounted for more than a quarter of the population of developing countries. By 2015, on current rates, the proportion of very poor people should have shrunk to 10%. Moreover, these monetary measures probably understate the real gains from things such as lower child mortality, safer water, literacy and other social achievements. A rich man appreciates his extra cash but this does not compare with what a poor family gains from seeing an infant survive childhood or learn to write.”

If you tell me you oppose “economic growth”, you’d better be damn specific. I doubt anyone opposes this. This is the variety of difficult that led Robert Lucas to famously declare that “Once you start thinking about economic growth, it is hard to think about anything else.” Here‘s a nice quotation about that quotation:

“The Nobel laureate economist Robert Lucas once said “Once you start thinking about economic growth, it is hard to think about anything else.” Non-economists, especially those associated with the environmental movement, regard this as evidence that economics is a form of brain damage, a cancer on our earth. But rural Chinese peasants surviving on less than a dollar per day do not regard economic growth, or Wal-Mart factory jobs, as a cancer.”

There are a lot of “development economists” out there these days, and it’s easy to be facetious and question the real value in what they do, but goodness, they’re dealing with issues whose importance is overwhelmingly difficult to comprehend. I hope they find success.

Not, of course, that economic growth is ever all that matters. The Economist article concludes with the argument that the incidence of war is declining, representing another huge boost to the wellbeing of people around the world. The picture presented there is slightly less rosy than on poverty, but still unusually optimistic. I like the big-big picture view of global trends; putting the modern era in the broadest historical context is a great way to make our problems seem petty and life seem good.

The war talk reminded me of the excellent book “The Bottom Billion” by development economist (the label is mine) Paul Collier, which is a kind of synthesis of much of his, and related, research into the causes of extreme poverty. From the FT review of the book:

“About 80 per cent of the population of developing countries lives in countries whose populations are becoming better off. Billions live in countries that are developing very swiftly. But almost a billion people – 70 per cent of whom live in sub-Saharan Africa – are in economically stagnant or declining countries. In all, 58 countries are in this desperate condition. Yet, as Collier remarks: “An impoverished ghetto of 1bn people will be increasingly impossible for a comfortable world to tolerate.”

Collier argues that these countries have fallen into one, or more, of four traps from which it is virtually impossible to escape. These are the “conflict trap”, the “natural resources trap”, the trap of being “landlocked with bad neighbours” and the trap of “bad governance in a small country”.”

Among other things, Collier investigates the link between conflict and poverty. His book is, to me, a triumph of realistic but fundamentally optimistic policy debate founded on careful, broad scientific research. The world is moving in the right direction, argues the Economist, and Collier and his kind are desperately throwing the line to the most impoverished, the most vulnerable. Think of this next time you read the words “economic growth”. Whatever it is, it need not be the ultimate goal of human endeavor, but is it an evil?

Relevance

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Making Economics Relevant Again, from David Leonhardt in the New York Times, has been recommended to me by more than one tipster. First of all, the most astonishing thing in the article, to me, is this table that includes an account of the number of economics degrees given every year since 1949: I thought majoring in economics had been on a steady upswing for decades, but apparently a lot fewer people were studying economics in the 90s. The number is just back up to where it was in 1990.

Anyway, the article kicks off:

“It was only a decade ago that economics seemed to be an old and tired discipline. The field no longer had intellectual giants like John Maynard Keynes or Milton Friedman who were shaping public policy by the sheer force of their ideas. Instead, it was devolving into a technical discipline that was even less comprehensible than it was relevant.”

Possible revisionism here, but it’s certainly a tempting argument. It might reflect the sleepy state of economic policy rather than the discipline as a whole, but I take the point. We’re pointed to an old New Yorker article from 1996 which drives the point home in spectacular fashion; forgive the long quotation:

“A few weeks ago, the Nobel Prize in Economics was awarded to William Vickrey, an 82-year-old professor at Columbia, and James Mirrlees, a 60-year-old professor at Cambridge…. the newspapers had some difficulty explaining the prize-winning work, which the Nobel committee referred to as “the economic theory of incentives under asymmetric information.” ..But when reporters tracked down Vickrey, an amiable bear of a man, he refused to play along: instead of expanding on the obscure mathematical theory that gained him world attention, he insisted on talking about his practical ideas for reforming the subways, the electoral system, the budget deficit, and much else besides. A “Times” reporter tried to pin him down, but Vickrey quickly dismissed his prize-winning 1961 paper as “one of my digressions into abstract economics.” And he went on to say, “At best, it’s of minor significance in terms of human welfare.””

What a priceless story. However, it might not just be the abstract math that marginalizes economics: Leonhardt goes on to argue that some economists are disgruntled at what they see as the cause of the “recovery” he perceives in economics. I can’t really argue with this:

“the new research often consists of cute findings — which inevitably get covered in the press — about trivial subjects, like game shows, violent movies or sports gambling.”

It’s like the Christmas stuff I talked about before. It isn’t a true reflection of economics research and it makes economics look ridiculous. To try and figure out what really mattered, Leonhardt decided to survey economists to find out who they thought “was using economics to make the world a better place”. It’s a question begging to reject Vickrey’s digressions into abstract economics. Presumably, to be an economist who actually does some good for the world, your research must be good science and very, very close to a solid and appealing economic policy. And lo:

“there was still a runaway winner…. the Jameel Poverty Action Lab at M.I.T., led by Esther Duflo and Abhijit Banerjee.”

I won’t try to put this any better than the original article:

“They want to overhaul development aid so that more of it is spent on programs that actually make a difference. And they are trying to do so in a way that skirts the long-running ideological debate between aid groups and their critics…. The basic idea behind the lab is to rely on randomized trials — similar to the ones used in medical research — to study antipoverty programs. This helps avoid the classic problem with the evaluation of aid programs: it’s often impossible to separate cause and effect.”

Let’s figure out what’s going on here. The research uses randomized trials to disentangle causality, the ubiquitous problem for figuring out relationships from real-world data; because the method is strong, they can rely less on normative judgment when they make the jump from the science to the policy, thus cutting ideology out. Just like the Obama team I was talking about yesterday, the gap between science and policy is vanishingly small here, but clearly it’s crucial for the success of the whole venture that the science be pure as snow. The science can’t tell you you’re right or wrong to hold the belief that children should be educated – that’s all on your head – but it can perform the true role of positive economics and help you figure out exactly how to improve the quality of education if that’s what you want.

The reason why these development economists are perceived as the most “relevant” is twofold: they have easy to understand, convincing science and they explicitly embrace the normative implications of their science. Their science is as sophisticated as it gets, but they certainly don’t need esoteric math. On that note, the last word goes to that New Yorker article:

“One way to encourage economists to become more worldly might be to abolish the Nobel Prize for economics, which since its introduction, in 1969, has helped foster a professional culture that values technical wizardry above all else. Deprived of the publicity surrounding the annual Stockholm ceremony, economists would actually have to do something useful to get noticed.”

EDIT: Actually I’m not sure that should be the last word. By the merits of, for example, the work Duflo, Banerjee and co. are doing, they would absolutely qualify for a Nobel memorial prize in economic science. The prize does seem to have become at least as much an applied math prize as a “good economic science” prize, which I guess is the problem the New Yorker article is highlighting. The problem isn’t the prize, but the criterion for winning, perhaps.