How should we “do” development? From economics to policy

Why use Economics as a Lens ``Economics is the science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time. The object of a model is to segregate the semi-permanent or relatively constant factors from those which are transitory or fluctuating so as to develop a logical way of thinking about the latter, and of understanding the time sequences to which they give rise in particular cases. ….Economics is essentially a moral science and not a natural science. That is to say, it employs introspection and judgments of value.” Keynes to Harrod, 1938

Going from development economics to development policy Economic models lend to a machine analogy for policy-making – The economy has a few big levers and lots of small levers (if you like) – The models suggest which levers we should pull to achieve (some of) our aims. Big question: How do we decide which levers to pull?

Should we start by evaluating the levers? Often easier to get evidence on a small scale (e.g. RCTs), and these can potentially be replicated in various environments On large scale, we often need to rely on cross country regressions. – But often the mechanism may be transparent from theory and/or theory can help us break up a big question into smaller parts. Yet…

Benefits (and limits) of using evaluations to go from theory to policy Clear benefits when policies can be easily (and scientifically) evaluated But… – How do we prioritize action between where we have good evidence that our model is correct v/s where we don't or can't have evidence (but our model might still be correct - Keynes on recessions)? Does this depend on who 'we' are?

Two visions (or lever rules) for “doing” development One innovation at a time – Micro, social policy: Emphasis on education, health, microcredit, service delivery to the poor – Case in point: Progresa-Opportunidades Economy-wide policy reforms – Macro, economic growth – Emphasis on trade, fiscal, financial, industrial, regulatory, governance policies – Case in point: China since 1978

On the face of it, the big lever seems to be clear winner Source:

Not so fast: The policies that produced the Chinese miracle are – Not entirely clear  Was it liberalization, or the limits thereof? – Not readily transferable to other settings Literature on growth policies vacillates between – specific recommendations that find limited support in cross-country data  “set low and uniform tariffs,” “remove interest-rate ceilings on banks,” “improve your doing business rank” – broad recommendations that lack operational content  “integrate into world economy,” “achieve macroeconomic stability,” “improve contract enforcement” …

And growth has not always produced increase in human development These are partial correlations, controlling for level of GDP per capita. Source: HDR 2010.

Yet, a focus on small levers can also fall short Treating symptoms of poverty is not the same as treating causes – “humanitarian assistance” versus “development policy” Poverty may be best addressed not by helping the poor be better at what they are already doing, but getting them to do something altogether different – Productive diversification, urbanization, industrialization

Yet, a focus on small levers can also fall short Underlying causes of poverty may lie at some distance from the poor – poor infrastructure, bad regulation, overvalued currency… Limits to learning from individual projects – scaling up – external validity

A possible convergence There is actually a certain convergence between micro and macro approaches (big and small levers) in using data to go from theory to policy – not on what works, but about how one thinks about and does development policy Abstracting from differences in – level of analysis (micro versus macro), and – empirical methods (RCTs versus cross-country regressions) Recent work in the two styles of work do share common predilections on policy – Both favor diagnostic, pragmatic, experimental, and context-specific strategies

To summarize: How we “do” development depends on: 1.What we are trying to achieve 2.What our “model” of development is 3.Where we think we have good evidence