Dissing Development and Economics, Guardian Edition

"Gah! Bad Economics! Bad!"

The Guardian has produced one of those ‘we’re desperate for hits, so lets troll a little’ lists it’s so fond of, this time selecting the 100 Greatest Non-Fiction Books of all time. Though apparently selected by a blind man throwing darts in a library, there are some superb works in there – It’s nice to see EP Thompson and Eric Hobsbawm, though decidedly unsurprising.

What did jolt me a little was this: there is not a single book about development nor about economics in the entire list. They have one by Achebe (his famous The Image of Africa, which attacked Heart of Darkness and Conrad himself for racism), and they have We Wish To Inform You That Tomorrow We Will Be Killed With Our Families, Philip Gourevitch’s excellent account of the genocide in Rwanda, but that’s it. The economics omission is sad, but unsurprising, given the poor quality of the Guardian’s economics writing in general; the lack of a single real development tome is astonishing, what with it’s high profile International Development blog and constant articles by impressive development thinkers.

No Das Kapital? No Wealth of Nations? Development as Freedom? Africans? Mystery of Capital? The General Theory? Asia’s Next Giant?

Some previous recommendations from me here and here. Please add in the comments any development or economics works that you think should have made it in.

This newfangled thing called development economics

We have traveled far across the land - battling enemy tribes - and have finally brought you this thing we shall call: "development economics"

From a Guardian Inter Press Service piece (re-published by the Guardian) on Esther Duflo titled “fighting poverty with economics”:

Doing her PhD at MIT, she was one of the first doctoral students to apply economics to development, linking the two, at a time when there were few university faculties devoted to the subject.

“It was not considered a fancy area of study,” she says. “There was a generation of people who had started looking at development from other fields. They had their own theories and only a few were economists. What I contributed to doing was to start going into detail. But I did have some advisers and mentors.”

I think someone just retconned the birth date of development economics to 1999  (or maybe it’s just been rebooted by a major studio).

To be fair, I’ve got a feeling the article was mainly copied off the back of a J-Pal brochure, as it completely underplays Duflo’s main contributions to the field.

Update: Duflo comments on the article, pointing out that yes, the field is a little older than that and she had been trying to point out that she came in at a time that micro development empiricism hit a springboard (which is what I felt the article had completely missed).

Common mistakes made by economists (and donors)

Don't worry, we expect everyone to be completely rational. This game theory model tells me everything will be all right.

Ezra Klein lays out common mistakes made by economists (when prescribing policy). Except, occasionally, for for number five, I think this applies directly to development policy (just replace the word Washington with `recipient governments’).

So here’s a list of mistakes that I think economists and people who are heavily influenced by economists tend to make when they look at politics. I should preface this by saying I have, at one point or another, been guilty of literally everything on this list:

1. Political power matters. There are many outcomes that are economically efficient in the short term but lead to a dangerous imbalance of political power in the long term — which is, incidentally, not economically efficient at all. This has particular implications for how a lot of economists view unions.

2. Culture matters, as do the real ways that human beings behave. There are policies that fit with theory and evidence but not with communities and people. David Brooks is right about this.

3. If a policy makes sense only in the presence of a secondary compensatory policy — say, a regressive tax where low-income folks get some sort of refund — then you have to ask yourself whether the compensatory policy will pass. If the answer is no, then you need to come up with something that can pass or rethink your support for the policy. The fact that the losers of trade can theoretically be made whole doesn’t allow you to just assume they will be made whole.

4. Lots of policy problems can be solved with clever policy solutions. But Washington isn’t very good at passing or implementing clever. Simple programs and rules are often better in practice, even if they’re worse in theory.

5. Nationalism is a really, really, really powerful force, and you can’t make it go away by condescending to it.

6. “Theory implies” does not end arguments. Moreover, economic evidence should be treated with more humility. It’s often overturned later, or wrongly understood now. And a lot of the stuff you’ve told us in the past — particularly the recent past — didn’t turn out that well.

7. Listen to political scientists, sociologists, etc. They have perspectives, evidence and training worthy of consideration.

8. Policy arguments are often conscripted for political purposes. You may like Singapore’s health-care system, and a politician might find Singapore’s health-care system useful to invoke — usually incorrectly — in a speech against the Affordable Care Act, but before assuming the two of you are on the same side, try to figure out whether the congressman has introduced or co-sponsored legislation on this topic that you consider constructive. Nothing sadder than a policy expert who doesn’t realize he’s being played.

9. No one knows what the word “stochastic” means.

10. Odds are good that you primarily know one sort of person: highly educated, high-achieving, extremely cerebral, etc. Odds are also good that you give too much weight to feedback and ideas from this sort of person, while discounting arguments and complaints from people who don’t know the right way to persuade you. Try to keep that in mind.

Hat tip to Tyler Cowen.

The arbitrage strikes back

For better or for worse, speculators are just trying to figuring out what the future holds.

John Vidal at The Guardian (which seems to be holding our attention this week) wholeheartedly condemns food speculation. I was going to write a lengthy post about the basic economics behind speculation (i.e. arbitrage across time), and I might still do so, but in the meantime I felt that this comment by Tim Worstall on the blog sums up my feelings really, really well:

This really does so damn irritate me. The World Development Movement are loons on this issue.

So, imagine, there’s going to be a future shortage of food. Doesn’t matter what’s going to cause it, could be biofuels, could be climate change, could be population growth.

OK, so there’s going to be a future shortage of food.That will mean that in the future some people will die from starvation. This is not a desirable outcome.

So, what do we want to happen? We want to pull those future high food prices into the present. Instead of finding out that we’re short 10 million tonnes of grain in 2012 (or 1 million in 2015, or 100 million, whatever and whenever) we’d like people to be aware of this future food shortage. And getting lots of people to do two things.

1) Among consumers, we want people to substitute away from the foods that will be in short supply. Eat potatoes, or polenta, instead of bread or pasta. Cassava instead of rice. We also want people to be a bit more careful about the food they buy: not waste so much of it. A high price now does this.

2) We want farmers to plant more land, also to farm more intensively so they get a larger crop from each acre they do plant. A bit more weeding, a tad more fertilser, this sort of thing. A high price now makes this happen.

So, we want high prices now to reduce consumption and increase production so that we don’t in fact run out of food in the future.

So that people don’t starve to death, right?

And it is speculators that achieve this desirable goal. They are the people who bring the future high prices forward in time and thus stop the starvation.

It’s all laid out by Adam Smith in his book The Wealth of Nations. Book VI, Chapter 5, start at paragraph 40. Here.

That book was only published 235 years ago. You’d think that people would have managed to absorb the point by now really. But apparently not.

Update: Lest it be thought that I think private speculation is the answer-to-all things (see Liam’s comments below for some very good reasons why it probably isn’t) – I think the main thing to take away from Worstall’s counterargument is that speculation isn’t fundamentally bad in theory, as I think Vidal probably believes, not that it is necessarily the first-best solution to food price volatility.

Malawi, like many SSA countries, has as strategic grain reserve, which is held in case there is a massive food shortage during the lean season. The Malawian government loads this reserve with some assumptions about the future supply of food, whilst also reducing supply in the short term. This is still speculatory behaviour, even though we prefer to think of it having a social purpose (with any profits accrued to the government instead of international investors).

Hopeless?

I’ve just written a piece for Change.org about Oswaldo de Rivero’s book, The Myth of Development. De Rivero argues, in essence, that development is never going to happen for most of the poor countries in the world: they lack natural endowments, and more importantly, the world economic and political structure has changed in such a way that they cannot exploit or manipulate what they do have to achieve development in the same way that the currently developed world has done. It’s an advance on the crude biological determinism of Jared Diamond, in that it’s crude economic and political determinism as well.

I’m not much of a fan. On the one hand, it depends on predicting the future, something that economists have been very bad at in the past; indeed even historians have difficulty working out why economies developed in the way they did. On the other, he acts as if the global political regimes that stifle the poorest countries are givens that cannot be changed, which is unduly pessimistic. Also, if he is right, and certain countries can never develop, it immediately makes open borders and free migration the only real solution to endemic poverty (as the Roving Bandit would not doubt be quick to point out).

Yet the conclusion he does draw, that non-viable national economies should focus on the basics (water, sanitation, health and education) closely resembles the actual policies of many development agencies, even if these same entities would argue vigorously against the idea that development is impossible. Considering his arguments is worthwhile, then, just to focus our attention on the reality that we are doing far too little to actually address the economic problems of developing countries. We shy away from getting involved in the development of domestic capitalism, we do very little to encourage banking to the middle classes (a far bigger problem from a purely economic point of view than banking to the poor), and intently study our feet when called upon to make any strong statements on trade, subsidies, tariffs and the immense hypocrisy of the West on all of these issues.

I don’t believe in the inevitable economic failure of the poorest countries. But I believe that their success will take far longer than those countries that used colonies and force to accelerate their development and others who used their geopolitical importance to push through policies that would otherwise have been sabotaged by the Western powers unless we actually address the economy directly. It’s easy to focus on social development and ignore the national and international economy. It’s just also morally dubious.