Andhra Pradesh has been a shining example of the Self Help Group (SHG) movement, boasting repayment rates in excess of 97% for bank loans taken by the women groups. Now, it is being reported that SHGs across parts of the State have stopped loan repayments in anticipation of the possibility of loan waivers (or interest-free loans) announced by various political parties in their manifestoes for the State assembly elections.
These waivers, like the farm loan waivers, raises serious moral hazard concerns, which threatens to roll back the considerable success achieved by SHGs over the past two decades. Hitherto SHGs have been remarkable in being free from the general dependency syndrome, characterized by reliance on handouts and doles, that have been the mark of welfare programs across the country. Moral hazard concerns arising from expectations of waivers introduces the first sprinklings of dependency into the SHG movement. Do we have the beginnings of an incentive distortion spiral in one of our most successful anti-poverty programs?
Monday, May 4, 2009
Sunday, May 3, 2009
Studies on vote buying and salaries of legislators
Two interesting papers relevant to the election season
1. Frederico Finan and Laura Schechter claim that vote-buying is sustained by an "internalized norm of reciprocity" arising from social preferences. They find that "citizens who receive money from a candidate feel obliged to vote for him and citizens who do not receive money from a candidate feel a desire not to vote for him". They show that "politicians are 15 percentage points more likely to offer reciprocal individuals something in exchange for their votes. Reciprocal individuals are in turn 15.9 percent more likely to vote for the party that offered them a good". In other words, the surest way to seal a vote is to offer cash payments to those belonging to the candidates community or caste network. It also partially explains the persistance of caste-based vote banks in India.
2. Claudio Ferraz and Frederico Finan examined the variation in the salaries of local legislators across Brazil’s municipal governments (based on population thresholds) and find evidence to support the claim that "higher wages increases political competition and improves the quality of legislators, as measured by education, type of previous profession, and political experience in office".
But their studies do not shed light on whether this increase in performance is due to the positive selection or the incentive effects of higher wage and whether it ultimately translates into improvements in voters’ welfare. Given the massive data set available from Indian electoral politics, it would interesting if some study could explore the effect of higher monetary incentives on development outcomes.
1. Frederico Finan and Laura Schechter claim that vote-buying is sustained by an "internalized norm of reciprocity" arising from social preferences. They find that "citizens who receive money from a candidate feel obliged to vote for him and citizens who do not receive money from a candidate feel a desire not to vote for him". They show that "politicians are 15 percentage points more likely to offer reciprocal individuals something in exchange for their votes. Reciprocal individuals are in turn 15.9 percent more likely to vote for the party that offered them a good". In other words, the surest way to seal a vote is to offer cash payments to those belonging to the candidates community or caste network. It also partially explains the persistance of caste-based vote banks in India.
2. Claudio Ferraz and Frederico Finan examined the variation in the salaries of local legislators across Brazil’s municipal governments (based on population thresholds) and find evidence to support the claim that "higher wages increases political competition and improves the quality of legislators, as measured by education, type of previous profession, and political experience in office".
But their studies do not shed light on whether this increase in performance is due to the positive selection or the incentive effects of higher wage and whether it ultimately translates into improvements in voters’ welfare. Given the massive data set available from Indian electoral politics, it would interesting if some study could explore the effect of higher monetary incentives on development outcomes.
Tax increases are back!
As the global economic crisis induced fiscal strains on governments increases, and the public debt and deficits mount, Governments across the world are re-examining their tax rates and schedules. After two decades of an ideological assualt on taxes, tax rises are back in vogue!
In keeping with his election manifesto, the Obama administration has already declared that it proposes to let the Bush tax cuts expire by 2010, thereby effectively increasing the marginal tax rates from 35% to 39.5%. It has also proposed other tax increases, including one that forces hedge funds and private equity firms to pay higher corporate income tax rates on their profit as opposed to the lower capital gains tax rates.
In its annual budget, the British government recently announced more than $1 trillion in deficit spending over the next five years, to be partially financed with increase in marginal tax rates from 45% to 50%, coming into effect from April 2010.
As can be seen from the graphic above, the marginal tax rate in India is one of the lowest. Therefore, given the limited fiscal space available for the government and the massive and mounting need to scale up government spending, India has enough room to raise its marginal tax rates to finance this expenditure. I have blogged earlier about the case against lowering direct taxes in India and the importance of luck in determining success.
Update 1
An excelletn graphic comparing income tax rates and their incidence in major economies.
In keeping with his election manifesto, the Obama administration has already declared that it proposes to let the Bush tax cuts expire by 2010, thereby effectively increasing the marginal tax rates from 35% to 39.5%. It has also proposed other tax increases, including one that forces hedge funds and private equity firms to pay higher corporate income tax rates on their profit as opposed to the lower capital gains tax rates.
In its annual budget, the British government recently announced more than $1 trillion in deficit spending over the next five years, to be partially financed with increase in marginal tax rates from 45% to 50%, coming into effect from April 2010.
As can be seen from the graphic above, the marginal tax rate in India is one of the lowest. Therefore, given the limited fiscal space available for the government and the massive and mounting need to scale up government spending, India has enough room to raise its marginal tax rates to finance this expenditure. I have blogged earlier about the case against lowering direct taxes in India and the importance of luck in determining success.
Update 1
An excelletn graphic comparing income tax rates and their incidence in major economies.
Saturday, May 2, 2009
Commitment to environment protection
The debates on policy actions on climate change, have oscillated between the supporters who propose aggressive caps and regulations, and opponents who decry it for the unacceptably high costs it will impose on the economy. It has also been claimed that all such policies should wait for the economy to recover, so that the already on-the-kneels businesses do not get burdened by the additional costs of those policies.
It is in this context, the always incisive Paul Krugman, suggests that the government make firm and specific, short to medium-term commitments on emission reductions, that would incentivize businesses to make investments energy efficient businesses. He writes,
If adequate attention were paid to ensuring that the policies are designed to not be market distorting, then a gradual move towards a stronger regulatory regime will be in the interests of everyone. It would open up investments in smart infrastructure, smart electricity grids, exploitation of renewable energy sources, clean technology alternatives, environment friendly practices,
It is in this context, the always incisive Paul Krugman, suggests that the government make firm and specific, short to medium-term commitments on emission reductions, that would incentivize businesses to make investments energy efficient businesses. He writes,
"But if you really believe in the magic of the marketplace, you should also believe that the economy can handle emission limits just fine... Right now, the biggest problem facing our economy is plunging business investment ... since they’re awash in excess capacity... But suppose that Congress were to mandate gradually tightening emission limits, starting two or three years from now. This would ... create major incentives for new investment — investment in low-emission power plants, in energy-efficient factories and more.
To put it another way, a commitment to greenhouse gas reduction would, in the short-to-medium run,... give businesses a reason to invest in new equipment and facilities even in the face of excess capacity. And given the current state of the economy, that’s just what the doctor ordered."
If adequate attention were paid to ensuring that the policies are designed to not be market distorting, then a gradual move towards a stronger regulatory regime will be in the interests of everyone. It would open up investments in smart infrastructure, smart electricity grids, exploitation of renewable energy sources, clean technology alternatives, environment friendly practices,
Comparing recessions in Europe and US
The St.Louis Fed have excellent graphics comparing the economies of US, UK, Germany and France, on four important economic indictors (also tracked by the NBER) - industrial production, real income/real compensation, employment, and real retail sales. It is clear that on all the indicators, in the US, the ongoing recession is already the worst or set to become the worst.
In contrast, for Germany, apart from Industrial production (which highlights the export-dependent nature of the German economy, which has been badly affected by the global nature of recession), all other indicators are at no worse than that in an average recession.
Further, cross-country comparisons between the data for these two, France and UK confirms the fact that the recession is at its severest in the US.
The St.Louis Fed's latest report on recession trends is available here. Using data from the Economic Cycle Research Institute (ECRI), it writes that six of the world’s seven major developed countries that make up the G7 are now experiencing a recession. Only Canada has escaped thus far. Further, 61 percent of 18 developed and emerging countries (the G7 plus 11 other major U.S. trading partners) are now in recession, according to the ECRI.
In contrast, for Germany, apart from Industrial production (which highlights the export-dependent nature of the German economy, which has been badly affected by the global nature of recession), all other indicators are at no worse than that in an average recession.
Further, cross-country comparisons between the data for these two, France and UK confirms the fact that the recession is at its severest in the US.
The St.Louis Fed's latest report on recession trends is available here. Using data from the Economic Cycle Research Institute (ECRI), it writes that six of the world’s seven major developed countries that make up the G7 are now experiencing a recession. Only Canada has escaped thus far. Further, 61 percent of 18 developed and emerging countries (the G7 plus 11 other major U.S. trading partners) are now in recession, according to the ECRI.
The statistical bias against life-saving drugs
Quality adjusted life year (QALY) is a statistical parameter that helps economists compare the costs of medical interventions. It hepls them make cost-benefit analysis of different treatment options and take decisions on how to ration scarce resources. One QALY means the same thing as one year of perfect health, two years of half-perfect health, or four years of one-quarter perfect health. To ration care, a government or insurer determines how much a QALY is worth, and cuts health services with costs above where that line is drawn.
Darshak Sanghavi, a Pediatric Cardiologist, makes a well reasoned case against the use of QALY logic saying that it creates a very powerful bias against any form of expensive life saving treatment, and in favor of preventive measures. With multi-lateral institutions and aid agencies increasingly relying on QALYs, poor people suffering from fatal diseases like AIDS or requiring expensive life-saving medical interventions are most likely to be denied any external assistance and left to die.
Citing the example of India and Brazil which started manufacturing generic versions of expensive drugs, he argues that health care costs, especially for life saving drugs, are entirely elastic and negotiable. It was also found that collective bargaining reduced costs considerably, so much so that Brazil is today able to treat all its AIDS patients with antiviral drugs, virtually free of cost.
Darshak Sanghavi, a Pediatric Cardiologist, makes a well reasoned case against the use of QALY logic saying that it creates a very powerful bias against any form of expensive life saving treatment, and in favor of preventive measures. With multi-lateral institutions and aid agencies increasingly relying on QALYs, poor people suffering from fatal diseases like AIDS or requiring expensive life-saving medical interventions are most likely to be denied any external assistance and left to die.
Citing the example of India and Brazil which started manufacturing generic versions of expensive drugs, he argues that health care costs, especially for life saving drugs, are entirely elastic and negotiable. It was also found that collective bargaining reduced costs considerably, so much so that Brazil is today able to treat all its AIDS patients with antiviral drugs, virtually free of cost.
Friday, May 1, 2009
Nudging on safe driving
Steve Levitt draws attention to a field experiment by James Habyarimana and William Jack that sought to "nudge" drivers to drive safely.
They selected a random sample of over 1,000 minibuses in Kenya and pasted posters that told passengers to speak up if the driver drove dangerously. Their analysis of comprehensive insurance data covering a two year period that spanned the intervention shows that insurance claims for treated vehicles decreased by one-half to two-thirds, compared with the control group and claims involving an injury or death decreased by at least 50%. They used passenger and driver surveys to find that passenger heckling contributed to this reduction in accidents.
They selected a random sample of over 1,000 minibuses in Kenya and pasted posters that told passengers to speak up if the driver drove dangerously. Their analysis of comprehensive insurance data covering a two year period that spanned the intervention shows that insurance claims for treated vehicles decreased by one-half to two-thirds, compared with the control group and claims involving an injury or death decreased by at least 50%. They used passenger and driver surveys to find that passenger heckling contributed to this reduction in accidents.
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