Category Archives: Development economics

Making policy is hard, but really important

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We’ve talked a bit about the costs of unemployment recently and that discussion lead me to re-read Ken Rogoff’s letter to Joe Stiglitz from 2002. It’s clear in the letter than Rogoff is enraged with Stiglitz criticism of the IMF, but also with his arrogance and the potential consequences for vulnerable people. He’s right to be: the conduct of public policy has huge consequences for millions of people and we take on a heavy burden upon ourselves when we make policy recommendations. It should never be done lightly.

This confidence brims over in your new 282 page book. Indeed, I failed to detect a single instance where you, Joe Stiglitz, admit to having been even slightly wrong about a major real world problem.

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You seem to believe that when investors are no longer willing to hold a government’s debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.

Joe, throughout your book, you condemn the IMF because everywhere it seems to be, countries are in trouble. Isn’t this a little like observing that where there are epidemics, one tends to find more doctors?

AJR vs Sachs: the conflict drags on…

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Acemoglu and Robinson have proven to be extremely combative bloggers but they have, until now, refrained from engaging directly with their nemesis. Well, it seems they might have been harbouring a little bit of a grudge:

Several people asked us why we haven’t responded to Jeffrey Sachs’s review of Why Nations Fail. Well the answer was sort of in-between the lines in our response to Arvind Subramanian review: we said that thoughtful reviews deserve thoughtful answers.

Grab your popcorn and head on over for the full reply!

Cliff notes on the financial crisis

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At work we are writing occasional articles for the fine people over at Rates Blog at the moment.  I’ve decided to focus on an issue that will get people irritated – an explanation of the GFC where I largely defend economists (although admiting that the mainstream missed the development of the shadow banking sector).

I’ve stuck with the view I’ve articulated in the past (as can be seen here with and with the links), but I’ve attempted to articulate it in a clearer fashion.  I’m aiming to have a related article out at some point trying to discuss why the crisis has persisted – after all in the article I’ve linked to above, if my explanation was true, the actions of the Fed and US Treasury should have led to the crisis being over by now.   My view is that policy failure in Europe put us on this darker and more persistent path.  The three other primary views are:

  1. Fed and US Treasury policies did nothing, and this is still in essence the same crisis.
  2. Financial crises, but default, are long and ardueous.
  3. This is irrelevant and monetary policy has just been too tight due to central bankers being more conservative.

I would note here that these views (including the one I posited) are not mutually exclusive, and each has a significant grain of truth to it.

Our explanation for the crisis matters right now because it determines what sort of policy response we think is right – which is the main reason why many analysts out there are purposefully “over-arguing” how confident they are about their explanation.  In truth, things are never as simple as they seem.

Note:  And before anyone starts saying that by defending economists on some level (even though I do appropriate blame on them as well) and therefore I’m being purely self serving regarding my own failure to publically warn about the crisis, I’d also note that I only started my job in 2007 – I was just starting to get used to data sources and writing about economics on a regular basis (including starting the blog) once the crisis had begun.

It would be in my interest to attack the establishment that was already in place and pretend to be a “fresh voice” – but unlike some economists around the world who seem quick to attack the rest of the discipine, and misrepresent the views of other economists to sell their own image, I’d prefer to take a bit more of a balanced view ;) [this comment isn't aimed at New Zealander commentators, just to make that clear].

Progress is hard to measure

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Wellington Regional Council have recently published their Genuine Progress Indicator, which is intended to measure changes in regional well-being. Measuring well-being is very difficult and the technical documentation provided by the WRC shows how hard they have found it to overcome the challenges.

The GPI has been constructed by taking about 100 variables of relevance to well-being, normalising each, and averaging the 100 indices. The Council have declined to weight the aggregation because they recognise that people may disagree over the weighting. They seem to want to avoid arguments over the normative weighting decisions. Unfortunately, weighting everything equally is just as much of a value judgement as any other weighting system. For instance, the council consider the prevalence of smoking to be a negative indicator. Due to the equal weightings, a 1% decrease in smoking in the region would be as good for progress as a 1% increase in incomes, or a 1% decrease in unemployment. With other variables, from access to public transport to dairy farm soil quality, it seems unlikely that many people would agree with weighting them all equally.

There are plenty of other difficulties, too: ensuring comparability of the variables measured and selecting a baseline for normalisation, for instance. What these difficulties illustrate are the importance of value judgments in creating these GPIs, even when the architects try to steer away from making them. Each of us, given the opportunity to choose our own variables and weightings, could come up with a different result for the region’s progress. Because of that it’s hard to take the GPI seriously as a reliable measure of regional progress, except insofar as it is defined by the council’s own preferences.

Public battles are such fun!

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If you read this blog you’ve probably heard of Acemoglu, Johnson, and Robinson’s (AJR) work on development economics. You may even have read their magnum opus (minus Johnson), Why Nations Fail, and if you haven’t then I highly recommend it. They’ve also started a great blog to support the book.

But even better than that, they’ve started engaging in public battles with other major names in the field! The thesis of Why Nations Fail is that the prosperity of nations is largely determined by the quality of their institutions. Jared Diamond, of ‘Guns, Germs and Steel’ fame, wrote a largely positive review in the New York Review of Books but made sure to remind us of his own thesis. He spends plenty of time explaining how geography is the underlying determinant of the institutional composition of a nation, thus undermining the work of Acemoglu and Robinson.

They then had a scathing reply to the editor published, which rolls out arguments that they’ve rehearsed many times in their academic sparring with Jeff Sachs. Finally, there is the response from Diamond to their criticisms of his thesis. I won’t ruin it with quotes so click through and read the whole thing for yourself.