Links round up

Hi all,

I’m trying very hard not to get my hopes up: Sri Lanka have managed to reduce India to 74/5. Back in the day, I’d be rubbing my hands with glee in anticipation of the last five wickets falling to our bug-eyed genius, but recent experience has taught me that Pujara and Jadeja will put on a quintuple-century stand and we’re going to be crushed underfoot like a dried-out locust. Either that or it’s going to rain for the next four days. On the plus side, however, my adopted son Joel Embiid  has this week both atomised the self-respect of the Clippers and dominated the Lakers so completely that Lonzo Ball is probably in hiding. He’s playing so well I literally googled ‘Whose soul did Joel Embiid eat for breakfast today?’ yesterday. Anyway, enough inanity.

  1. A while ago, Sarah O’Connor wrote a great piece in the FT, with the title The Best Economist is the one with Dirty Shoes, arguing that economists who get out into the real world learn things that the theories of their discipline cannot teach them. Angrist and co-authors have a really nice paper exploring a similar idea in the intellectual terrain economists travel. They show that economists increasingly cite the work of other disciplines in their papers; and that this intellectual curiosity is mutual. They also show that empirical work is becoming more influential within the discipline (and with others), a sign that economists are looking outwards, and getting their shoes dirtier. This can only be good for the discipline, so long as we learn from what others do, rather than sally forth and ‘do economics’ to them, as they sometimes complain.
  2. Claudia Goldin’s recent NYT piece on the economics of the gender pay gap is brilliant: she’s not afraid of exploring the complexity of its genesis, and of the solutions, and isn’t shy of acknowledging where there are trade-offs. It does no-one any favours to pretend that it is just discrimination and nothing more: real solutions require we think more deeply.
  3. I’ve never been much of a fan of instrumental variables. I’m not enough of an econometrician to formalise my doubts enough, but they’re either complex and lack transparency (so interpreting the coefficients is very difficult) or they seem to capture much more (or less) than is purported (is there anything rainfall doesn’t instrument for?). Alwyn Young, whose genome sequence presumably spells out ‘attention to detail’ takes a hatchet to them here, though from a very different perspective. Related, a good read on replicability and good scientific practice in economics. The David Evans summary would be: we’re getting better but far from fixed, and haven’t got the incentives right yet.
  4. The ODI Fellowship applications are open until 1 December. As an ex-Fellow, I’m biased, but I think the scheme is brilliant, and unlike any other exposure to policymaking in developing countries that a development person will ever otherwise have.
  5. Everyone in DFID should already have internalised this, but here’s our Deputy Chief Economist Nick Lea making the case for tradable-based growth. Not all tradables are equal, of course, and non-tradables can matter too – but the underlying logic here is strong and important.
  6. This totally fits all my priors: Jennifer Aliz-Garcia, Sarah Walker an Anne Bartlett on the economic benefits of refugee camps. Confirmation bias aside, though – I do wonder about the validity of calibrating night lights and consumption from a period prior to the advent of the camps and using this to guesstimate consumption effects of the camps – could the relationship have changed due to impact of the camps? Related: Planet Money go to South Sudan and explore the effect of the civil war on the financial asset most of those in the camps used: cows (transcript).
  7. Finally, and by far the most important article of the week: The Ringer ranks the fifty best superhero movies ever, and confirms that everyone must bow down before Heath Ledger.

Have a great weekend, everyone!

R

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Links round up

Hi all,

So, it’s been a fairly eventful week, so I’ve been more or less glued to the news. This has had the welcome effect of helping me notice all sorts of fantastic stories (like the woman who responded to a politician’s sexist joke by running against him – and winning, and the guy who forced a plane to make an emergency landing because of his infidelity), but at the cost of bringing so much to my attention that this week’s links could easily be thirty bullets long. I’ll try and spare you that particular form of torture, but I make no promises: of all the failings that I’ve been accused of in the past, brevity is notably absent.

  1. This is basically my perfect paper: an RCT about using cricket to investigate the effects of collaboration and competition on discrimination. Matt Lowe randomly assigned Indian men into mixed-caste or same-caste cricket teams, and then randomly assigned opponents and finds that collaborative cross-caste contact increases cross-caste friendship and reduces caste-favouritism when allocating rewards. What’s more, this has effects on efficiency and leads to better teammate selection in future matches. I was having a conversation recently about how seemingly trivial topics can generate important findings – this could potentially be one (or I’m just massively over-weighting the importance of these results because cricket is obviously more important than life itself).
  2. Another Matt, Collin, here considers some of the implications of machine learning for replication and research transparency.
  3. This didn’t get much coverage that I saw, but is really worrying: Zitto Kabwe, a Tanzanian politician and former chair of the Public Accounts Committee was arrested for presenting economic analysis that questioned the Bank of Tanzania’s growth figures. I have no idea if Zitto’s analysis is right (I haven’t seen it), but it’s pretty terrifying if questioning official statistics can get you arrested – when I lived in Tz, it would have made me a criminal on a near daily basis. Justin Sandefur goes into the details of Zitto’s analysis, here. As an aside, Chris Adam points out the importance of keeping an eye on domestic credit to the private sector, one of my go-to indicators on the economic health of a country, in a quote Justin includes.
  4. Gabriel Zucman makes the case for a world financial registry in the Grauniad. He’s one of the best researchers on inequality out there, and well worth reading.
  5. I really liked this: Martin Williams (at the Blavatnik School of Government) summarises his research into why so many public sector projects in Ghana remain unfinished. He shows that corruption is probably not the main reason: firms tend to do more of the work than they’re paid for, not less. Rather, he points the blame at the changeable nature of political decisions – as the political alliances underlying a project unravel, the money allocated to it runs the risk of be siphoned away to start a project with better political backing, but which may itself be subject to the same effect in the future. The paper is underpinned by an amazing data set, too.
  6. David Evans reads 147 development papers and summarises them in one sentence each. It seems like a magic trick, but he does this kind of thing regularly. It’s incredible – click, read, comment and thank him. It’s an extraordinary public good. Related: he examines the geographic coverage of these papers here.
  7. Lastly, two food links: First an amazing Reuters investigation into North Korea’s food markets (some of the food designed out of necessity looks amazing!); and second, an economist teaches about international trade using goulash. And with that, I’m going to have lunch.

Have a great weekend, everyone!

R

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The technological foundations of income inequality: a demand side perspective

Guest Author: Andreas Chai, Griffith University
contact: a.chai@griffith.edu.au

How has technological progress impacted income inequality? The usual answer is that technological progress fosters greater income inequality via changes on the supply side. Technological progress will drive up inequality because of robots stealing jobs, accelerating the rise of the service economy, stimulating global migration. One may be sorely tempted to conclude that rising income inequality is an inevitable outcome of ongoing technological progress.

Yet technological progress also has a lesser known and more positive impact on household living standards. In developing countries, the diffusion and adoption of new technologies has without doubt lowered the cost of everyday household tasks, such as cooking food, gathering firewood, and household chores, particularly in the rural areas of developing countries.

A famous case is the impact of mobile phones in Africa, which had a large impact on everything from banking, getting goods to market, and improving the efficiency of local markets. The problem here is that these effects are much harder to observe due to a lack of data on the characteristics of goods consumed and how they impact everyday life.

Moreover, in terms of how to accurately gauge household welfare levels, a better measure of household living standards beyond income is how much households consume. This approach recognizes that households may have other sources of wealth not captured by income and that income is only as valuable as the amount of goods and services that can be purchased with it. Here a study by Roger Fouquet and Peter Pearson underlines how technological progress has driven immense improvements in the quality of goods consumed over time, thereby effectively raising the purchasing power of households.

In a recent paper, headed by Maneka Jayasinghe (Griffith University), we examined how the adoption of technologies can have direct implications for measuring poverty via the equivalence scales used in calculating the income distribution (draft version available here). When measuring income inequality, equivalence scales are used to effectively deflate the observed income/welfare levels of larger households by making assumptions about the per capita costs of having more people living in the same household. These equivalence scales effectively make assumptions about the degree to which households achieve economies of scale in the sense that large households face lower per capita living costs than smaller households.

An easy way to examine the impact of technology on household economies of scale is via the consumption of electricity. The use of new technologies such as mobile phones, white goods and entertainment goods generally involve consuming more electricity. Moreover, there has been a tremendous growth in the number of households who have access to electricity in the developing world. In Sri Lanka, for example, access to electricity has risen from 29% to 85% between 1990 and 2010.  By enabling households to use a wider range of goods, this will have an important impact on the living standards and the distribution of poverty.

Using electricity consumption as a proxy for the extent to which households adopt technologies, we found that households that used more electricity realized greater economies of scale. The more electricity a household consumed, the lower their per capita living costs (proxied by per capita expenditure on food). The estimates suggest a 10% increase in electricity consumption generated a 6.92% decline in these living costs. Though relatively small, when equivalence scales are adjusted to take this effect into account, the overall number of households falling below the poverty line declined by over 60% nationally in Sri Lanka.

Here it is interesting to note that the changes in income inequality were uneven. For starters, small households benefit less from economies of scale in consumption than large households. So large households tend to make greater gains in welfare relative to small households. Moreover, households in urban areas, where electricity access is better, tended to be among those who made the greatest gains in estimated welfare. Finally, estimated income inequality grew when considering the differences between these households and their rural counterparts who have less access to electricity.

In terms of policy implications, these results highlight the need for poverty alleviation programs to enhance household access to technologies and electricity. In addition, more research is needed to understand precisely which electrified goods contribute to economies of scale and the extent to which income inequality & poverty estimates in other regions exhibit the same pattern.

In the long run, a deeper issue that scholars and policymakers need to face is whether the widespread use of ‘base neutral’ equivalence scales is sensible.  This involves the assumption that the economies of scale realized by households is independent of their income. It seems intuitive that differences in household income will generate differences in the extent to which households are both able to and willing to economize on per capita costs. Think of the range of goods and services rich households can afford to buy relative to low-income households.  The interesting thing here is whether rich households actually do realize greater economies of scale even if they have the greater potential to do so.

Moreover, given that technologies change over time, this suggests that economies of scale realized by households will also evolve over time and thus so too should the equivalence scales used in estimating income inequality. This is particularly important when considering changes in income inequality over long periods of time, which has become a very hot topic. Considering that the characteristics of goods and services used by households has altered dramatically, long run comparisons of income inequality should be treated with great care.

On a more general level, it is a small part of a recent explosion of research on how equivalence scales can be devised using different techniques, including life satisfaction data, as well as intra household bargaining approaches. All of these add to more detailed and realistic understanding of household welfare and ultimately better inform us about the geographic and social distribution of poverty.

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Links round-up

Hi all,

This week I have mainly been breathless with excitement about this. Seriously, it’s been a serious disruption to my ability to think coherently about work, relate to other human beings, basically to do anything apart from freak out about the fact that there’s going to be another Star Wars film, Luke’s in it, and it’s going to be amazing ohmygod. The pendulum has swung pretty far from me worrying that the Force Awakens would be rubbish because the world is a terrible place and so were the last Lucas movies. Adaptive expectations in action.

  1. Let’s start with a rant. Having good intentions does not excuse you from using evidence properly. I’ve recently come across a couple of examples of either pandering to failures of cognition among policymakers or framing evidence in misleading ways that have particularly irritated me, because the culprits seem to think their good intentions allow them to bend the rules with impunity. Maya Forstater lays the smack down on the most recent Oxfam tax justice adverts for this reason, and spares them little ire: “… the Oxfam campaign… links an estimate of $100 billion lost to tax avoidance with eight million deaths. Is this meaningful? No.” Ouch. Even if tax justice is an obviously good thing, this is not acceptable: fudging the numbers this way will only lead to money being reallocated from other good things, not from the “killing baby seals” fund such campaigners apparently believe will finance their proposals.
  2. Speaking of evidence, Duncan Green’s blog ran a piece by two of DFID’s brightest boffins on a programme looking at how evidence is actually used in the wild. I’ve seen some of the underlying research presented by Macartan Humphreys, and it’s really interesting. Definitely something to keep an eye on. Related: Matt has resurfaced at Aid Thoughts channelling his inner Gawande discussing how policymakers’ cognitive biases might affect the ways in which evidence is used, and how to improve this, an area close to my heart (and, indeed, research).
  3. While we’re talking biases, it’s unlikely that anyone has managed to miss the absolute avalanche of popular media pieces about Richard Thaler’s Nobel win, but this Planet Money show deserves a link, as no-one quite brings the subject to life as they do. As they put it, it’s like a nerd superhero origin story.” (Transcript).
  4. Two really good pieces from Development Impact this week. First, David McKenzie on new research he’s done with Anna Luisa Paffhausen on firm death. I actually think he substantially undersells the importance of this work. Firm death is an indicator that an economy is working: the right kind of firm death (i.e. that not caused by exogenous household shocks) is an indicator that competition is working, and there is some form of productivity enhancing reallocation going on – at least, unless firm survival is due to political connections. In a separate post, Markus Goldstein summarises research into worker effort, as measured by Fitbits (one of the co-authors is Pieter Serneels, who is also at DFID part time).
  5. Charles Kenny doubles down on Lant’s piece I linked to last week – bemoaning not only arbitrary poverty lines, but also arbitrary income classifications for countries. It ends with some very useful tips for how to think about poverty and income statistics, avoiding common pitfalls.
  6. Apparently, the grammar pedants are doomed to failure – on balance, probably a good thing, because they’re insufferable. On the other hand, it means I can’t resist ending the links like this;

Have a great weekend, everyone!

R

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Links round-up

Hi all,

So, I’ll be honest: I’m struggling to think of a good intro to this week’s links. I’d normally say something about the cricket, but given Sri Lanka’s performances I can’t think of anything to say that wouldn’t create a new entry into Viz’s Profanisaurus; or about the Basketball, but so far this week there have been no-dimension shifting dunks (though the Ringer are now comparing LeBron to Prometheus, which doesn’t seem too far-fetched to me); so I’ll settle for describing what Oxford looks like today: sunny and inviting, which turned out to be false advertising as I turned into an icicle on this morning’s run.

  1. A few weeks ago, I mentioned that Lant Pritchett delivered the keynote speech at DFID’s annual conference for its economists. It was an absolute barnburner, incorporating basketball statistics, big ideas about what development is and about what change matters, as opposed to how it’s measured. He’s written an essay on his talk here (minus the balloons). As with everything Lant writes, he takes a strong stand – you can agree and disagree with parts because of this. But it should make you think twice about why we do what we do, because he is making an important point. Related, Lant has long taken a strong stand against defining development down to the lowest bar possible, and here reports that the World Bank will now be making it easier to define it back up. Also at CGD and also an important, big issue: Michael Clemens on Global Skills Partnerships as a way to break the impasse in global migration negotiations. He remains substantially the foremost thinker in the world on this topic, to my mind.
  2. I loved this, because it took me to very unexpected places. A five-and-half-year-old asked FiveThirtyEight what if there was no number six?’ The answer takes us into philosophy, music, and modular arithmetic.
  3. Speaking of maths, it’s not just the Supreme Court that are allergic to it: Maya Forstater is still having to point out that the ridiculous numbers bandied about for the scale of tax evasion make no sense at all. For them to be true, there would need to be enormous processing plants operating at full capacity that simply don’t exist.
  4. These ridiculous numbers are fake facts. The peddlers of them may claim they’re not doing damage to our core institutions the ways that others who use them are, but they’re wrong. They’re using numbers they know are ridiculous to shift spending decisions to their hobby horses; and usually, given the way the world works, the money isn’t being taken from some low-marginal value use, but from another important thing that supports the poor and development. So this isn’t costless, and they’re trying to pervert the systems designed to make these choices well. Tim Harford attacks the usage of fake facts while investigating their efficacy here. He has suggestions on how to combat them, too.
  5. Last week I linked to Branko describing inequality through different measures. This week he starts looking at causal mechanisms.
  6. Dietz Vollrath’s blogs are like an economic detective story. They start with a puzzle; he finds some facts around them, tests them against the various plausible theories and – sometimes – finds out what’s going on. This week he’s looking at investment, profits and growth. But I’m struggling to work out which detective he most resembles. He’s not Poirot (that’s more like Lant, with his sense of theatre), and he’s not Maigret (he’s too clear about what’s going on). Does that make him Columbo? Martin Beck?
  7. Apparently, writing is not only hard, it’s dangerous: LitHub on writers sustaining injuries on the job. So I’m going to sign off here, before my leg falls off.

Have a great weekend, everyone!

R

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Links round-up

Hi all,

My attempts to focus on anything this week have been severely undermined by the start of the NBA season (and Sri Lanka’s inability to win any ODIs, but we’ll gloss over that). Between the gruesomely broken ankles and Joel Embiid’s attempt to vaporize Jason Smith, we were also treated to Patrick Beverly putting Lonzo Ball’s soul in his back pocket and snacking on it like a candy bar. It’s been glorious (which is good, because Sri Lanka are now 129/7). Anyway, the week hasn’t all been fun and games, and I’m not only talking about my attempts to reacquaint my brain with the algebra it last met in 2003.

  1. The NYT ran a brilliant article about Amy Cuddy this week. She was one of the authors of the ‘power poses’ study, which purported to show that simply holding a pose for a few minutes could generate measurable physiological changes, and in turn have a significant impact on real-world outcomes. It was the basis of a wildly popular TED talk, but also generated a massive backlash: the experiment failed to replicate and statisticians savaged the paper for violating principles of good statistics (one of the co-authors eventually disowned the study due to these practices). The article is really worth reading, dipping into the culture of academia and how careers are made and lost. I’d also read this response by Andrew Gelman, one of the aforementioned statisticians. I think it’s disingenuous to paint this as victimisation – if the methods were so flawed that you can’t trust the result, this needs to be made clear. In a context where academics are under ever greater pressure to communicate directly with the public this is crucial: good methods and null results do not get Guardian headlines.
  2. Apparently, numbers are a bit of a problem for the Supreme Court in the US, too. John Roberts referred to statistical research presented as part of a case as ‘gobbledygook’, and this isn’t an isolated incident: FiveThirtyEight documents the long and troubled history of statistics in the Supreme Court. It amazes me how many otherwise smart people take some kind of perverse pride in failing to understand statistics.
  3. Vijaya Ramachandran and co. have a new (DFID-funded) paper out on labour costs in Sub-Saharan Africa, and whether it can become a low-cost manufacturing destination. It generated quite a few responses on Twitter, and they’ve made an attempt to address them, here. Francis Teal is the other researcher to listen to on this question, which won’t go away: why are formal sector wages so high in Africa?
  4. What does ‘capitalism with North Korean characteristics’ look like? Planet Money investigate the incipient entrepreneurs of North Korea and their surprising successes (transcript) – including the production of mobile phone software for the global market and animation that was ultimately used in a Disney movie.
  5. Income inequality 101 from Branko Milanovic. As good a summary of what different measures of global inequality tell us as you will find anywhere.
  6. Questions four and five in this interview with Rohini Pande cover her experience as a woman in economics and her research into gender in developing countries, well-worth reading. Apparently, early in their careers, Esther Duflo and Pande were subjected to a male economist asking their male colleague to ‘correct their mistakes’. He must feel like an arse and a half now.
  7. I normally end these on a note of high frivolity, but this week, the best thing I read was this article about Carson McCullers (who wrote two of my favourite books) by Patricia Lockwood. If you’ve never read her, go to the library now and find The Heart is a Lonely Hunter. And if you want to feel inadequate think about this: she wrote it when she was 22.

Have a great weekend, everyone!

R

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Links round-up

So, week two, and it’s actually looking like I’ve started to work out how to negotiate the byzantine world of this university, though I imagine there have been more than a few explorers who thought “I’m on to something here” shortly before disappearing into a pit of quicksand. It’s been a fascinating week, though some moments – usually related to algebra that has been collecting dust on a shelf in my brain for 14 years – have reawakened long dormant demons.

  1. I’m sure all of you spent Monday morning glued to your computer screens, feverishly pressing ctrl-R, until the news emerged: Richard Thaler is this year’s Nobel laureate in economics (yes, yes, it’s not a real Nobel. Change the record). Thaler is a popular choice: Tim Harford describes his work admiringly, as does Tyler Cowen here; and this appreciation is written by one of his early co-authors. It is, however, driving some round the bend that people constantly say that his work ‘proves that people are irrational’. It does not. Rather, it proves that there are limits to the accuracy of rational choice models in some contexts, and these limits can be transcended by changing some assumptions about how people behave. To get a sense of this, no better place to start than Thaler’s ‘Anomalies’ column in the Journal of Economic Perspectives.
  2. A really good paper linking firm-level inequality to exporting, summarised on VoxDev. The paper builds Bloom’s Firming Up Inequality work, linking the dispersion of wages across firms to their exporting status (the intuition is that exporting firms see revenue growth and share this bonus with their workers – something that is predicted by behavioural models of firm-worker engagement rather than standard neo-classical economics), suggesting an inverted-U relationship between exporting and inequality. When no firms export, inequality is low, as all firms are similar; differentiation is introduced as some firms begin to export; and it is removed once all firms do. Of course, even in the most advanced economies a minority of workers work in exports.
  3. A super article about James Scott, author of Seeing Like a State, a book far more people in development should read (however much you may, like me, find it more than a little one-eyed).
  4. “Arthur B. Robinson is not some lonesome crank tinkering in his garage. He’s something much more unusual: an extremely well-connected crank, with ample funding…” Fantastic long read from FiveThirtyEight about a scientist who went from working alongside Linus Pauling (a double Nobel winner) to running experiments in his backyard, with the only scientists he trusts: his family. He is one of the founders of ‘alt-science’, winning followers among the politically important in the US at the moment. My take is that this isn’t all bad, so long as the rules of scientific inquiry still govern whose theories survive.
  5. I’m going to keep going on about this: the robots are (probably) not coming to destroy the pathways for economic development in poor countries.
  6. Ian Mitchell lays out CGD’s vision for how the UK can structure its trade offer to developing countries to be even better than what the EU offers. I like the general thrust of this, but I think we now need to get very quickly into the weeds: the details of exactly what is possible and how will determine the offer, more than the grand sentiments involved.
  7. This is Joel Embiid’s world – you’re just allowed to live in it.

Have a great weekend, everyone!

R

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Links round-up

So, you’d think a switch to the ivory towers of the academic establishment would mean more time for all the reading that goes into the links and hence an earlier dispatch? Not a bit of it. I’ve discovered that the art of tortured bureaucracy is not one that the hallowed halls of Whitehall has garnered a monopoly on, but it takes different forms and is masked by different norms everywhere. I’ve spent part of the week having fascinating conversations with eminent and brilliant thinkers and part of it doing mind-numbing bureaucracy and screaming inwardly when my university card doesn’t let me in my home department. It’s pretty much exactly like my last week in the civil service. As ever, the links provide my succour.

  1. This one feels appropriate, given that I’ve spent my week surrounded by experts and budding experts: Simon Kuper in the FT on how experts can win over the general public again. One of the problems the experts have is that the non-experts who peddle ill-informed rubbish aren’t always wrong (experts are just more likely to be right, and more likely to be wrong for reasons that are consistent with good scientific inquiry); and even if they are wrong, it won’t be obvious for some time, if ever. Essentially, it’s a competition to convince the public that cannot be won by the evidence of who is right; it will be won by who is better able to convey the impression of being right. This worries me deeply.
  2. Speaking of experts not always being right, how often do you read an article that opens with an award-winning economist apologising for being wrong (well, so far)? That’s what Nick Bloom does here, as he presents evidence from firm-level surveys on the effect of Brexit. An important point that he hints at here but doesn’t fully go into: the average effect on firms will be quite different to the average effect on the economy, as some firms are systematically more important for generating the value-added that powers the non-tradable sector of the economy, where most people are employed. So read these surveys thinking about which firms are the ones that have the most general importance to the economy.
  3. Probably my favourite thing about Dietrich Vollrath is that he’s not afraid of detailed explanation. He takes us through the impact of different kinds of tax cuts on growth to explain why ‘cutting taxes’ in the way most politicians conceive of it probably won’t do much good (for growth). Essentially, the main problem is that for capital and labour, we’re just not that sensitive to marginal tax rates: we work and invest more or less the same amount either way. Innovation operates differently, but is rarely the subject of tax cuts.
  4. This week in questioning my priors: Markus Goldstein on rigourous evidence for the value of vocational training. But read it all the way through – this paper goes against a lot of the rest of the literature, and the reasons for this need to be considered.
  5. And this week in losing my faith in humanity: students taught by women do just as well as those taught by men for the same amount of effort, but nevertheless rate the men as better teachers. This happens for both male and female students. This paper and the Woodruff paper on female garment factory managers both work with fairly old people – young adults at least. Is this replicated among children? If so, exactly how early are we screwing up the way we construct our worldviews?
  6. I loved this: “evidence-informed policymaking is about truth, justice, equality, creativity, and love of others.” Ruth Levine on the moral case for evidence.
  7. And finally, last year the Nobel committee decided to irritate the piss out of me by giving their prize for literature to Bob Dylan; this year they’ve returned to giving it to a y’know writer in Kazuo Ishiguro. Here he is on songs, writing and films, from 2005.

Have a great weekend, everyone!

R

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Beyond the Breakpoint: Can Cross-Country Regressions Still Guide Development Policy?

Much influential research on the relation between economic growth and the income of the poor has relied on the unstated assumption that positive and negative growth rates are equivalent in their effect on the poor. As I show in the CSAE Working Paper “Breaking Up The Relationship – Dichotomous Effects of Positive and Negative Growth on the Income of the Poor”, this assumption is easily refuted. Positive and negative growth rates correlate differently with the income growth of the poor. This finding becomes all the more powerful as it is produced using the same data and the same methodology, cross-country regressions, as one of the most influential papers based on the assumption that the effect is equal: “Growth is Good for the Poor” by Dollar and Kraay (2002). In this blog post, I would like to discuss not only the results of my paper but also how they reflect on cross-country regressions as a research tool and guideline for policy.

“Growth is Good for the Poor” by Dollar and Kraay (2002) established a one-to-one relationship between economic growth and the income growth of the poor. This implies that the poorest quintile in a country benefit to the same extent from economic growth as every other income segment of society. According to the authors, the rate of economic growth of a country over five years and the growth rate of the income of the poorest quintile of the country’s population are equal on average. Below is a replication of their central scatter plot. It shows a panel of 92 countries over four decades. The compilation of this data set alone was a noteworthy contribution of the authors. Along the 45° line, an increase in a country’s growth rate of one percentage point coincides with a one percentage point increase in the income growth rate of the poor. The authors fail to reject the hypothesis that the regression line’s coefficient is indeed one.

The notion that growth benefits all members of society alike quickly gained traction and remains influential to this day. The Dollar and Kraay (2002) paper has an impressive track record. With over 4,500 citations on Google Scholar and positioned roughly among the top 0.02% of RePEc IDEAS research items, the paper has left its mark (I heard reference to it at last year’s CSAE Conference as well). For the World Bank, findings like this meant that its focus of growth promotion was sufficient to fulfill its mandate of the reduction of poverty. It has even trickled all the way down into introductory development economics text books. Their result is simple but compelling. Neither the original nor my paper use particularly involved econometric methods. It is the simplicity of the original result that made it so appealing – as well as catchy – and the simplicity of the critique I bring forward that, as I hope, makes it hard to ignore. While the strength of my paper is pointing out flaws using the original data and methodology, this means that my paper inherits the flaws of cross-country regressions. I state my estimated results regardless – to be consumed with a pinch of salt – to counter the catchiness of a one-to-one growth relationship that “Growth is Good for the Poor” has so skillfully created. Or, if nothing else, as ammunition for the next time you stumble into a cross-country regression seminar.

In my paper, I estimate the coefficient to correspond to around 0.75 percentage points income growth for the poor for every 1 percentage point of economic growth, while the effect of negative growth is found to be as high as 1.6 percentage points. While the statistical significance of the difference between my findings and the original is beyond doubt, it is the economic significance that is striking. The figure below illustrates the extent to which the poor are estimated to be worse off, both under positive and negative growth rates, than what the authors claimed to have found. To be clear, even when approaching this result in the same mind set as Dollar and Kraay did, this does not mean that growth is bad for the poor. It is simply not as good as they thought (though significantly less so). The correlational evidence that I offer suggests that especially the starkly negative growth rates of long-lasting recessions are detrimental for the poor. In this light, radical liberalization and deregulation that promise high positive growth rates at the cost of an increased risk of volatility and recession should be viewed with much greater caution than if the Dollar and Kraay (2002) result holds. I thereby refute the assumption of homogeneity in the relationship between the growth rates. The conventional wisdom that the poor benefit as much from growth as everybody else is losing ground – and with it the research methodology that brought it about.

There are three fundamental flaws in using cross-country regressions as a research tool in development economics. First, causality is tremendously hard to establish. Second, the estimates hardly ever translate into actionable policy. Third, estimation results can be very fragile. “Growth is Good for the Poor” illustrates all three of these flaws. The authors’ analysis is purely correlational as they themselves admit. Even if we take their results (or mine for that matter) at face value, they will not offer us much insight into how to alleviate poverty. The variance around the 45° line (or whatever shape the relationship may have) is simply too large for a government or development actor to base its poverty alleviation policy on. Cross-country regressions also cannot tell us how poor people benefit from growth. Finally, and this is where my paper comes in, modest alterations to the regression specification turn the narrative of growth being equally good for you no matter where you are in the income distribution on its head. My take-away from working on this topic is that cross-country regressions are certainly interesting for preliminary analyses. They can provide new research ideas as well as catchy facts to start a conference presentation. To guide policy-making, they prove to be a bit thin.

I would like to thank Thomas Ziesemer for his support in making this project happen and Simon Quinn for an enlightening discussion that put my thoughts on this in order and context.

References

Dollar, D., and A. Kraay (2002), “Growth Is Good for the Poor” Journal of Economic Growth, 7(3), 195-225

Poll, M. (2017), “Breaking Up The Relationship: Dichotomous Effects of Positive and Negative Growth on the Income of the Poor” CSAE Working Paper Number WPS2017-12, University of Oxford

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Links round-up

It seems like a lot of goodbyes have accumulated in the two weeks since the last e-mail. Harry Dean Stanton (watch Repo Man), Bobby “The Brain” Heenan, and the Screaming Eagle of Soul, Charles Bradley (listen to Ain’t it a Sin) all died. Kumar Sangakkara retired from first-class cricket, and I’m (temporarily) leaving DFID. But, unlike the others, I’ll be back, and in the meantime I will be continuing to send these links out every week, since the good people in the admin department are letting me hold on to this machine until I return. So, with a minimum of fuss, on to the links.

  1. Last week, I talked a bit about Stefan Dercon’s habit of blockbuster presentations at the DFID Economics Conference. This year his presentation covered, among other things, the importance of the mental models we have for determining our action. The role of human aspirations in our decisions is increasingly the subject of research in international development, and this excellent paper by Emma Riley demonstrates why: kids who watched a movie about someone like them overcoming difficulty and making something of themselves did better in school – an effect that was strongest for those in the worst schools and at the worst starting position. David Evans also discusses the paper here.
  2. So, Emma’s study involved showing kids movies, which sounds a lot more fun than the average research project. But there’s a place for more prosaic research that confirms what we already guessed – like this VoxDev write-up of research by Davids Atkin and Donaldson on trade costs in Africa, demonstrating that the costs of moving goods around within Africa are around five times greater than those in the US. While this remains the case, any country not on the coast will struggle to reap the gains of globalisation.
  3. “No one can understand the economic consequences of large migrations without careful economic research on the ripple effects—which are subtle, invisible, delayed. When politicians brush this aside they are being duplicitous, or at least disingenuous.” When Michael Clemens writes about migration, everyone should listen – because amidst the duplicity and disingenuity, integrity and clarity and rigour become ever more important.
  4. My normal reaction to anything Alex Tabarrok says is to look for the reset button, and hope when he starts up, the empathy module will have installed. But in this case I’m simply admiring: his response to David Roodman’s replication of one of his papers is superb, and shows real integrity.
  5. Branko in unusually personal form: about growing up in Yugoslavia and the absence of anything resembling his past in the official histories of the end of Communism.
  6. This week in absolutely stunning headlines: The media is really, really bad at dealing with probabilities, and this makes for bad coverage of an uncertain world.
  7. And lastly, the NBA season is nearly upon us, so thank god LeBron James and Gregg Poppovich are there to talk some sense.

Right, I’ve got to pack my stuff and leave the building, but the links will be back next week. Have a great weekend, everyone!

R

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