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Tuesday, April 10, 2012

Thinking Small Rather Than Thinking Grand

I found this recent paper by Mark Rosensweig to be a scathing review of Duflo and Banerjee's new book on Poor Economics. It's a well-thought out critique of randomized control trials in development economics and I think I agree with it, even if it does not completely move my priors that rigorous impact studies are needed. We do a lot of these RCTs here in Michigan. But it's nice to keep this in mind, as a young and impressionable grad student. There are many important questions that can't be answered by an experiment. At the same time, one cannot always afford to think small. To quote Rosensweig:
The authors have a point of view: they believe that in the absence of grand schemes or radical transformations of government leadership that will promote the mass escape of people from poverty, there are small interventions that can be undertaken right now that will marginally improve the health, schooling and incomes of the poor. The poor will still be poor, but they can be made better-off. It fol- lows that, by studying the poor, we can equip ourselves, in small steps, to more effectively and intelligently help them, if not radically transform their lives. This is the “radical rethinking” of the subtitle, the turning away from a focus on deep institutional reforms about which we still know little to practical, on-the-ground, rigorously assessed direct assistance. Thinking small, rather than thinking grand. There are otherwise no new radical ideas. The basic analytical approach is very much in the mainstream of contemporary microeconomics, with the poor depicted as no different from the rich in terms of how their brains are wired or in what they can enjoy, given their limited constraints. Some of this conventional economic thinking, of course, might be seen as radical thoughts to NGOs and donors. 
By focusing on assisting the poor on the margin, of course, the book is missing analyses of circumstances where and when there was real poverty reduction—substantial increases in the number of people who become nonpoor. Indeed, it is elementary social science that it is not possible to under- stand how poverty can be eliminated, rather than made less onerous, by only studying the lives of those who have not escaped poverty, as here (there are a few anecdotal exceptions). Thus the book is missing, for example, a comprehensive analysis of the “green revolution” in India, which helped to raise the real wages of the poorest of the poor more than threefold over three decades, despite the fact that many of the interventions and studies cited were based in India. No intervention described in the book has anything near that effect on incomes. Studies of migration, occupational mobility, the growth of manufacturing sectors employing large numbers of formerly poor persons (e.g., the Bangladesh garment sector), major routes to the escape of poverty, are also absent. The book is about helping the poor via transfers, behavioral nudges and subventions, rather than about reducing the number of poor through economic development and growth.
The full paper is here.

Wednesday, April 4, 2012

Japan's Phillips Curve Looks Like Japan?!

Startling. And it's a 3-page paper published in the Journal of Money, Credit, and Banking as well.

HT to Hyejin.

Sunday, April 1, 2012

A Return on Investment of ~1000% for the Poor?

Yes, disbelief is the correct reaction but it does appear to exist. That is, if you find this latest working paper by Bryan, Chowdhury, and Mobarak convincing, as I have. What could it be, you may ask. Nope, it's not education. Not microfinance either. It's none of those traditional development initiatives one usually thinks of. It's investment on seasonal migration. Here's an abstract:
Pre-harvest lean seasons are widespread in the agrarian areas of Asia and Sub-Saharan Africa. Every year, these seasonal famines force millions of people to succumb to poverty and hunger. We randomly assign an $8.50 incentive to households in Bangladesh to out-migrate during the lean season, and document a set of striking facts. The incentive induces 22% of households to send a seasonal migrant, consumption at the origin increases by 30% (550-700 calories per person per day) for the family members of induced migrants, and follow-up data show that treated households continue to re-migrate at a higher rate after the incentive is removed. The migration rate is 10 percentage points higher in treatment areas a year later, and three years later it is still 8 percentage points higher.
The researchers offered an $8.50 incentive to migrate during the lean season to a nearby city and they document that among induced migrants, they earned $105 on average and saved and remitted more than half of that. That's a pretty darn large return on investment for the government. This suggests an innovative policy of offering cash transfers conditional on migration to populations in agrarian areas during lean seasons.

The big question of course is, if the returns are so large, why aren't farmers seasonally migrating already? The paper goes at length to answer this question. They try to downplay a credit constraint story (the initial costs to moving to a new area is costly, and farmers can't finance this because credit markets are missing) and focus instead on how risky it is to move and not know whether you could find employment. I'll leave readers to take a look at the paper for the details and judge accordingly.

Something I realized while reading this: we assume traditionally that development is something we bring to poor people, or that development is something poor people realize where they are at. But shouldn't development also be about poor people bringing themselves to development like through migration?

Note: The paper I link to does not seem to be the latest version.