The paternalism of behavioral economics

G. Sampath has written a trenchant critique of behavioral economics in The Hindu that’s worth a read if you do work related to this field.  I’m not fully in agreement with it, but he raises some important points.

Behavioural economics uses insights from psychology, anthropology, sociology and the cognitive sciences to come up with more realistic models of how people think and make decisions. Where these decisions tend to be flawed from an economic point of view, governments can intervene with policies aimed at ‘nudging’ the targeted citizens towards the right decision.

All this seems fairly unobjectionable. However, things change when behavioural economists focus their attention exclusively on the behaviour of the poor. Till date, there is no evidence that monitoring and ‘nudging’ the behaviour of the world’s poor is a better route to alleviate poverty than, say, monitoring and ‘nudging’ the behaviour of the financial elite. Surely the latter cannot be deemed as altogether rational economic agents — not after the 2008 crisis?

And:

The report states in all earnestness that poverty “shapes mindsets”. From here, it is a hop, skip, and jump to holding, as the leading behavioural economists of the day do, that the poor are poor because their poverty prevents them from thinking and acting in ways that can take them out of poverty.

Thus the focus as well as the burden/responsibility of poverty-alleviation would shift from the state — from macroeconomic policy, from having to provide employment, health and education — to changing the behaviour of the poor. The structural causes of poverty — rising inequality and unemployment — as well as the behaviour of the owners of capital are evicted from the poverty debate, and no longer need be the focus of public policy.

The point about paternalism here is well-taken.  I don’t think the nudges he references here are harmful or problematic, since they tend to be things like offering people lentils or cash transfers in exchange for vaccinating their children, but it’s also true that these are programs designed by privileged academics and carried out on the bodies of poor people.  This is always, inherently, something to think carefully and critically about.

That said, there are several points on which I would disagree.  The first is that this academic focus on micro-behaviors has somehow silenced conversations on macro-level policies about unemployment and inequality.  There are huge English-language academic literatures on both of these topics in low income countries.  From the policy side, one could also point to the rapid spread of cash transfer programs which are meant to reduce inequality.  These have grown largely on the strength of the microeconomic evidence that people tend to use the money well.  (For two good overviews of this topic, check out the World Bank’s State of Social Safety Nets 2015, and James Ferguson’s Give a Man a Fish: Reflections on the New Politics of Distribution.)

The second issue is Sampath’s reading of the causal links between behaviors related to poverty (like high discount rates) and the incidence of poverty itself.  As indicated by the example of the Indian sugarcane farmers, there’s plenty of evidence that living in extreme poverty is very stressful, and tends to change the way that people think and act.  This is quite different to saying that people stay poor because they think and act a certain way.  Severe poverty of the type found in low income countries persists because of market failures, bad institutions, and (in some places) the absence of the type of stable elite bargains which constrain outright war.   Even if you were a benevolent dictator and could nudge people into making lots of small behavioral changes, like saving more and vaccinating their children, this wouldn’t touch most of the structural causes of poverty.  I don’t think any behavioral economist would disagree with this statement.

So why, then, do people keep studying the behavioral correlates of poverty?  For many researchers, I think the goal of their studies is not actually to reduce poverty rates, but rather to find low-cost interventions that can make life slightly easier for people who are still poor.  The goal is to nudge people into having less debt, or vaccinating their children against the most common diseases, or buying weather insurance for their crops.  None of these things, individually or together, is going to pull a family living on less than US$1.25 per day above that poverty line.  But they are still steps towards a slightly better life – and from a policy perspective, they’re often more feasible than making sustained, multi-million dollar investments in electrical and transport infrastructure, or bringing a civil war to a durable close.  These latter two topics are also active areas of research, but we still know very little about how to solve these complex types of coordination problems.

Returning to the second point, though, I’d also differ with the way that Sampath read the study about the sugarcane farmers in particular.  I should say first that I completely understand why he was so offended by it.  IQ research is always politically charged, and concluding that “poor people are stupid” is a recipe for terrible policies that strip people of their agency (which is very different to nudging them to save a bit more).  The only reason I differ here is because I saw Sendhil Mullainathan present this work at PacDev last year, and his interpretation ran in the opposite direction entirely.  The main finding of the study was that the cognitive stress of extreme poverty is considerable, equivalent to experiencing a 10-point drop in IQ, or pulling all-nighters for days on end.  But Sendhil’s point was not that poor people shouldn’t be allowed to make major decisions or anything similar.  Instead, it was a call to empathy.  He pointed out that most people are trying as best they can to provide good lives for their families, and asked his audience of privileged Northern academics to think seriously through the challenges of doing that if you started each day feeling like you hadn’t slept at all.  The interpretation, then, was not that “poor people are stupid” but “poor people are highly stressed,” which seems to me like it would lead to a different set of policy prescriptions aimed at giving reducing that stress by giving people higher and more stable incomes.

More books on development for the interested generalist

I’ve read quite a few fine books on on international development since I last wrote about books on development for the interested generalist.  I still stand by books 1 -4 and 6 on that list.  I suspect that 5, 7 and 8 may now be outdated.  Here’s what I would add to the list.  Please send your suggestions in as well!

  1. Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History, by Douglass North, Jim Wallis and Barry Weingast.  A succinct and compelling discussion of why some states become rich and stay rich over the long run, while most remain relatively poor.  Does a great job getting past arguments focused on geography or technology to look at the politics of economic growth.
  2. Scarcity: Why Having Too Little Means so Much, by Sendhil Mullainathan.  A fascinating look at the cognitive effects of poverty, which are considerable.  The brief version of the argument is that people who face constant stress about whether they can afford to meet their basic needs often find it difficult to focus on making longer-term investments, such as making sure their children attend school regularly.  Could be read along with James Scott’s Weapons of the Weak as a short course on why behaviors that might look confusing to outside observers are often quite rational.
  3. Seeing Like a State: How Certain Schemes to Improve the Human Condition have Failed, by James Scott.  Essentially a treatise on standardization (of names, languages, railway gauges, what have you) and the role that this has played in many ambitiously large but ultimately unsuccessful development schemes.  Scott is a wonderful writer, and he has a gift for taking topics that might be dull in the hands of a lesser writer (like the standardization of basket sizes for paying grain taxes in medieval Europe) and finding the human drama within them.
  4. More than Good Intentions: Improving the Ways the World’s Poor Borrow, Save, Farm and Stay Healthy, by Dean Karlan & Jacob Appel, and Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, by Esther Duflo & Abhijit Banerjee.  Both books offer a great introduction to a new type of research in economics aimed at finding effective policies to reduce poverty.  What I appreciate about this type of research is that it represents to me a type of hopeful pragmatism.  It isn’t geared toward identifying the type of big push policies that might lift a whole country out of poverty in a generation (which few states besides China have the capacity to carry out anyway), but it takes an experimental, iterative approach to finding new products and services that are useful to ordinary people in low income countries.
  5. Montaillou: The Promised Land of Error, by Emmanuel Le Roy Ladurie.  A truly remarkable book about daily life in a small town in the mountains of southern France in the early 14th century.  Many people in the town held Albigensian beliefs, and were subject to an inquisition by the Catholic Church, which produced exhaustive records of their interactions with their neighbors and with visiting Albigensian holy men.  Le Roy Ladurie used these records to reconstruct a richly detailed portrait of personal, political and economic life in rural France nearly 700 years ago.  It’s a poignant reminder that even today’s high income countries were once basically just as poor as anywhere else – but also that poverty doesn’t inherently have to mean isolation, deprivation, or constant unhappiness.
  6. The Zenith, by Duong Thu Huong.  A fantastic recent novel by one of Vietnam’s leading authors.  It’s an imaginative retelling of the end of Ho Chi Minh’s life in an isolated mountain villa, and how it comes to intersect with the daily lives of the people living in the small towns nearby.  Rather like Montaillou, this is a much more complex, interesting, and deeply felt portrayal of rural life in a low income country than people from high income countries are usually exposed to.

Recent conference highlights

It’s been a busy few months of conference attendance recently, and I wanted to share some of the papers that really stood out to me.  At ISA:

  • Lior Lehrs had a very interesting presentation on what he calls “private peace entrepreneurs” – people who act without state support to reach out to the opposing side in a conflict and promote peace.  It doesn’t appear that the paper is public, but Ynetnews has a short summary of his work.
  • Olukunle Owolabi also presented a fascinating comparative study on the extension of political rights to former slaves in the US South and the French Antilles.  It’s currently under review, so keep an eye out for it!

Next up was a workshop on “clientelism in comparative perspective,” organized by the Center on the Politics of Development at Berkeley.

  • Nancy Hite discussed her current book project on how economic development changes citizens’ perceptions of the state in the Philippines, building on an earlier microfinance RCT by Dean Karlan and Jonathan Zinman.  No public paper yet, but I’d definitely look for this book when it comes out – it’s a really interesting micro-level look at how growth affects political behavior.
  • Another highlight for the sheer quantity of data used was Pablo Querubin‘s work with Cesi Cruz and Julien Labonne on political family networks in the Philippines.  Because Filipino surnames contain the family names of both parents (for unmarried people) or a father’s family name plus a husband’s name (for married women), they constructed a database of more than 20 million people and traced family and marriage relationships of everyone in 15,000 villages.  Perhaps unsurprisingly, they found that politicians tended to come from disproportionately well-connected families.

Finally, I had a great time (as always) at PacDev.

  • Berk Özler presented joint work with Sarah Baird, Ephraim Chirwa and Craig McIntosh on a five-year follow-up to a program in Malawi which offered young women cash transfers aimed at getting them to stay in school.  The program had offered conditional grants to women who were already in school, and unconditional grants to women who had already dropped out, both of which were effective in getting them back into school.  Five years later, however, the women who got the CCTs (who might have stayed in school anyway) had marital and economic outcomes that looked similar to the control group, while the UCT group (who otherwise would have dropped out) did have persistently better outcomes.
  • David Yang and Yuyu Chen had a fascinating paper on how people perceive the credibility of the Chinese government in trying to shift the narrative around the Great Leap Forward.  The government blamed the famine of that period on drought, and Yang and Chen find that people living in famine-affected areas where there was in fact a drought reported higher levels of trust in the state than those who didn’t observe drought in their region.  The effects persisted for more than half a century, and tended to get reinforced by marriage, as people who didn’t trust the state disproportionately married each other.

Uncovering researchers’ implicit bias

I loved this post from the World Bank’s Let’s Talk Development blog on uncovering researchers’ own biases in survey design:

Last year, I was in Nairobi, Kenya … to set up the data collection efforts for a four-country study. One of the goals of this study was to replicate results from lab experiments that suggested poverty is a context that shapes economic decision-making amongst households.

One of our replication questions was a vignette proposed by Sendhil Mullainathan and Eldar Shafir in their book Scarcity. … Shafir and Mullainathan’s findings show that commuters in Princeton, NJ were more likely to say that they would travel to another store for a $50 discount when purchasing a $100 product than when purchasing a $1,000 product. Less affluent individuals at a soup kitchen in Trenton, NJ, however, did not display this kind of inconsistency. For them, the marginal utility of money remained constant, regardless of the cost of the hypothetical product.

With the aim of replicating this question in four developing countries, we took the vignette to … Nairobi. After spending two days field-testing this hypothetical scenario, I was surprised that most of the respondents, particularly those from low-income households, said that they would not travel for the discount. Why was everyone hesitant to travel, regardless of the discount amount? Why are they seemingly exhibiting the preferences of the more affluent in the US?

Somewhat surprised by this discrepancy, I asked multiple respondents’ the reasons behind their choice. One person replied quite plainly, “There is no guarantee that the product will still be there once I go across town. It’s very likely that the product is gone by the time I get there.” Of course! By assuming the availability of the product, we had let our own implicit biases, based on our mental models, influence the design of the question. Since the original question was conducted in the United States, a developed country, implicit in the question was the assumption that availability is generally not a problem. However, for the respondents from less affluent communities, this assumption was not explicit.

Forecasting the growth of municipal budgets in Africa

The Prepaid Economy has a good piece on the challenges of budgeting for rapid growth in major African cities.  I’m not sure how the figures in the graph below were derived, but it’s an interesting way of thinking about the relationship between current city size, population growth, and GDP growth.  Looks like Kinshasa won’t be overtaking Lagos as the largest city in sub-Saharan Africa any time soon if these population growth projections hold true.

municipal budgets

What’s the best way to pay people not to rebel?

Saumitra Jha recently gave a fascinating lecture at Berkeley’s comparative colloquium in which he discussed some of his current work on designing financial instruments that can promote political stability. He drew extensively on the case of Japan in the late 1800s, where the government granted bonds to ex-samurai who were opposed to its modernizing reforms, then encouraged the bondholders to invest in the national banking system.  This gave a potentially militant group a significant stake in political stability and financial modernization.  Jha’s description of this process is worth quoting at length:

The government created an innovative, ethnically-delimited asset – the bonds given to samurai — even while eliminating the privileges and obligations that had made this ethnic group distinct. It then took the ex-samurai, one [group] that was the most likely to engage in violence and enhance political risk, and gave them incentives to become local bankowners – a group with arguably the greatest incentives to avoid engaging in violent actions that would raise the political risk of their investments in local ventures (often rice and silk). By aligning the samurai’s interests against political risk, these financial innovations aligned their interests with not only the merchants who were their fellow merchant share-holders but society at large. Since all could benefit, and in fact the samurai had explicit stakes, as bankers, in the nation’s future, they also meant that the samurai could give up their arms and credibly share the gains that modernisation and reduced political risk provided.

This process also produced a truly phenomenal photo of samurai-turned-banker Eiichi Shibusawa, who’s known as the father of Japanese capitalism for his role in founding the Tokyo Stock Exchange and a number of other publicly held companies.

Eiichi_Shibusawa_transformationFrom Wikipedia

What I find fascinating here is the ways in which this process is both similar to and different from current debates about post-conflict power-sharing in Africa.  The idea behind consociationalism is that placing representatives of all contesting groups in power ought to give them a common interest in maintaining the stability of the state.  This appears to have worked out relatively well in Burundi for the last ten years.  Lemarchand is explicit about Bujumbura’s focus on maintaining interethnic stability even at the cost of good governance: “[the administration is] a top-heavy political machinery whose sole purpose is to provide as many jobs as are needed to meet the requirements of political stability.  The government is not meant to govern; its purpose is to offer an attractive alternative to rebellion” (2009, p. 149).  In a sense, then, this is simply a less efficient means of accomplishing what the samurai bonds did in Japan.

However, institutionalized power-sharing has often failed in Africa as well.  The prime case here is obviously the DRC, where the 2002 power-sharing accords got most – but not all – of the major rebel groups durably off the battlefield.  The Nkunda- and Ntaganda-centric set of groups which continually rebelled in the east were largely spurred on by Rwanda, but also presumably believed that they might get a better deal out of some future peace agreement.  Would a different benefit structure for ex-rebels – shares in banks as opposed to positions in the government – have led to a different outcome?  The Congolese central bank has been issuing bonds for several years now, and the banking sector is badly underdeveloped, so promoting investment (and of course concomitant regulatory mechanisms) there might indeed benefit everyone.  If readers have other examples of the strategic use of financial instruments to promote political stability, I’d love to hear about them.

Which African countries have the highest income tax rates?

Mark Anderson recently shared a link to an interesting map of tax rates on the average income for each country in Africa.  The original map is from an international relocation site called MoveHub.  I’m guessing this is about nominal tax rates and not effective tax collected.

Africa taxes

Which countries surprise you?  I for one would not have expected that Rwanda’s tax rates are higher than either Burundi’s or Uganda’s.