Freakonomics points attention to the World Food Program's (WFP) decision to deliver food vouchers to Iraqi refugee families in Syria through mobile phones using SMS text messaging.
The WFP will send a 22-dollar (15-euro) voucher every two months by SMS to each family (who will be provided with a special SIM card), who can then exchange the electronic voucher for rice, wheat flour, lentils, chickpeas, oil, canned fish, cheese and eggs at selected shops. Eight food items are covered by this and three shops are designated to redeem the vouchers. This system provides families with the freedom to select food of their own choice, at any selected shop and at any time they wish.
The beneficiary shows his voucher and a code displayed on his mobile phone to the cashier at the shop. Once the shopkeeper enters the code, the value of items are deducted from the beneficiary's account. After this transaction, the beenficiary receives a new SMS text with an updated balance and a new secret code. This way he can redeem his voucher either in one transaction or multiple transactions.
The Electronic Voucher System is being implemented in collaboration with the General Establishment for Storing and Marketing Agriculture and Animal Products (GESMAAP), a Syrian Ministry of Economy and Trade body. Prior to its implementation, WFP provides training to GESMAAP employees and equips the selected GESMAAP shops with the necessary equipment and software. Information sessions for refugees are held at UNHCR distribution centre and four dedicated hotline numbers are available to respond to refugees' queries. The mobile phone service provider MTN donated SIM cards for the project, with one year of free SMS service for the refugees.
Our Public Distribution System (PDS) could take a leaf out of this and effectively target the delivery of rations under the scheme. Mobile phones can help overcome the targeting problem by SMS-ing the monthly ration vouchers directly to the consumer, who can in turn show the SMS and avail of his ration from his designated ration shop.
Update 1 (23/2/2011)
After the success of the initial pilot, the WFP has now extended it to cover 9600 families, up from the initial pilot for 1000 families. Each family receives one voucher, worth US$30, per person, per two-month cycle.
Saturday, November 7, 2009
The future of auto insurance?
California announces regulations to pioneer pay-as-you-drive insurance policies that allow motorists to buy insurance based on the miles they drive. Per-mile pricing, using measuring devices like Mile Meters, are expected to incentivize consumers to optimize on their vehicle use.
Such insurance is being seen as a means "to accurately tie insurance cost to accident risk, and to provide an incentive to walk, bike or use public transportation". Incentives like higher per-mile insurance cost for those who have higher mileage would entice people to optimize on their private vehicle use.
Coupled with policies on congestion pricing, parking etc, such per-mile insurance could go a long way in increasing the efficiency in private vehicle usage, relieving traffic congestion and increasing road safety.
Update 1 (21/6/2011)
The Nudges blog points to Snapshot, Progressive’s usage-based insurance program, which charge drivers insurance on a pay as you drive (PAYD) model. Progressive has been one of the most aggressive innovators with PAYD insurance. It first began offering a voluntary PAYD program called MyRate in six states in 2008. Three years later, thanks to inexpensive, if not quite cheap wireless technology, the idea is now available nationwide through an initiative called Snapshot.
Progressive gives a discount to policyholders based on information about their driving habits collected over a month-long period. Drivers put a sophisticated little tracking device in their cars for six months. At the end of the first month, certain “good drivers” may be eligible for a discount of up to 30 percent based on that “snapshot” of driving behavior. (At the end of the six months, Progressive uses all the data to calculate a renewal rate.)
Such insurance is being seen as a means "to accurately tie insurance cost to accident risk, and to provide an incentive to walk, bike or use public transportation". Incentives like higher per-mile insurance cost for those who have higher mileage would entice people to optimize on their private vehicle use.
Coupled with policies on congestion pricing, parking etc, such per-mile insurance could go a long way in increasing the efficiency in private vehicle usage, relieving traffic congestion and increasing road safety.
Update 1 (21/6/2011)
The Nudges blog points to Snapshot, Progressive’s usage-based insurance program, which charge drivers insurance on a pay as you drive (PAYD) model. Progressive has been one of the most aggressive innovators with PAYD insurance. It first began offering a voluntary PAYD program called MyRate in six states in 2008. Three years later, thanks to inexpensive, if not quite cheap wireless technology, the idea is now available nationwide through an initiative called Snapshot.
Progressive gives a discount to policyholders based on information about their driving habits collected over a month-long period. Drivers put a sophisticated little tracking device in their cars for six months. At the end of the first month, certain “good drivers” may be eligible for a discount of up to 30 percent based on that “snapshot” of driving behavior. (At the end of the six months, Progressive uses all the data to calculate a renewal rate.)
Friday, November 6, 2009
What is wrong with development policy making?
Longish essay (more on the theoretical and abstract front), summarizing impressions on development policy making.
It is commonplace to have development experts and multi-lateral institutions venturing diagnosis of what ails a developing country and ready-to-implement prescriptions for those problems. They despair that corruption and weak governance are holding back these economies from effectively implementing these magic solutions. Is development as simple as these experts would suggest? Is it merely an issue of our not being able to translate a simple policy prescription into tangible action at the field level?
Invest in education and health care to unleash the full potential of your human resources. Reform governance institutions and processes to be transparent, responsive, and participatory. Design policies to align the incentives of the private sector with the larger economic goals. Open the economy, internally and externally, to free movement of capital, labour and technology. Put in place adequate social security and welfare cushions for the disadvantaged and the poor.
The aforementioned recipe, with small variations, is the general one-size-fits-all panacea to any developing country's ills. But as the East Asian and most impressively the Chinese and Indian examples show, these models are chasing the shadows. Decentralization, transparency, good governance, equity were all given lip-service in the Chinese success.
Accordingly, elections are foisted on institutionally deficient polities in the name of democracy, public utilities and services are privatized in the name of efficiency, welfare government role gets rolled back in the name of corruption, and the economy gets deregulated and opened up in the name of globalization and free trade. With the prescriptions implemented one would naturally expect these developing countries to prosper. But recent history of development economics is replete with numerous failed examples of such experimentation. In fact, for many decades now Latin America has been the laboratory for innumerable such experiments with all versions of the liberal free market economy. And the results are for everyone to see!
There are three major traditional explanations for the problems facing developing economies - lack of resources (and so need for massive foreign aid), lack of proper markets (so deregulation and privatization), and weak and corrupt governments (so need for better governance). All three are possible deficiencies in countries, but none of them alone are enough to explain the problems facing these countries. Any explanation requires going beyond this paradigm.
Dani Rodrik explains his approach towards development economics thus, "the right way to approach development policy is to start with the view that we actually don't know where the problems lie, to acknowledge that the key problems may differ from setting to setting, and to adopt an explicitly experimental attitude to policy selection and formulation so that you can learn about the environment in which you operate. In this approach, monitoring and evaluation are key, as you want to pull back from mistakes and improve policies over time. Indeed, you build the monitoring into the policy process itself so that learning becomes part and parcel of it - rather than something you leave to your researchers or economists."
The development contexts in developing countries exhibit spectacular diversity - racial, linguistic, economic, geographic, societal, and religious. A similar set of problems in different countries may manifest as widely varying outcomes. The same set of policy prescriptions may throw up contrary outcomes in countries with the same social contexts. The inter-play of these forces leads to the emergence of patterns of development that goes beyond the scope of any econometric model. These forces interact with each other both at the micro and the macro levels, at the individual and societal level, revealing a whole spectrum of socio-economic outcomes. There exists multiple equilibria for each socio-economic and political context.
All these forces play themselves out in an even more complex and unstable social and political setting, which intimately and immediately influences the final outcomes of this game. Unfortunately, these models give no place for social and political forces and the need to accomodate them in any reform process. It presumed that these forces will be swept away in the remorseless march of the reform process and a new political alignment and equilibrium would develop. In many ways, it is ironical that neo-classical economics is advocating such a transformation, more revolutionary than anything even Marx had advocated, in the political system.
The over-riding concern with institutional weakness, governance deficiencies and corruption has led to an atmosphere of distrust of government and its institutions in developing countries. Standard development models have no place for existing government systems and clamour for wholesale institutional and process transplants. These models see little prospect of any success without such wholesale reforms. It can be said, there is either a best practice/policy/model or there is no hope!
A traditional economist scrutinizes any development policy through a looking glass which focusses on increasing aggregate demand, efficient allocation of resources, least distortionary incentives, and distributive justice. The standard prescriptions include good governance, strong institutions, decentralization, open markets, flexible labor policies, deregulation, privatization etc. There are also specific sets of prescriptions to achieve each of these objectives.
A linear and incremental outlook towards policies and their implementation and movement of societal forces, is not the most ideal way forward. Addressing development challenges in complex settings like in many Asian and African countries often requires a two-track, heterodox approach, straddling contradictory platforms - orthodox and unorthodox, public and private, open and closed, legal and informal. Thus regulation has to co-exist with free markets, legal and extra-legal have to go hand in hand. Phasing and sequencing of reforms vary across societies and economies.
There is no single "optimal reform trajectory", which can be emulated by all nations and societies. What is suitable for one developing country may not be so for another. The same development strategies and reforms may throw up contrasting outcomes in different societies. Finding out what is most appropriate for any country or society is more an exercise in experimentation than any theoretical analysis. Ex post rationalizations are more likely to be successful than ex ante analyses.
As Dani Rodrik says, it is not that economic principles work differently in different places, or need to be tailored to local conditions, but their institutional embodiments vary. He writes,
Development requires all or some of the aforementioned conventional prescriptions and much more. It is essential to embrace the more unconventional and innovative context-specific approaches, besides exploring, analyzing and drawing from the micro-foundations of development challenges/problems (as is being done by experimenters through RCTs etc). Accordingly, a kaleidoscope of policy alternatives may have to be applied depending on the socio-economic and political contexts.
It is commonplace to have development experts and multi-lateral institutions venturing diagnosis of what ails a developing country and ready-to-implement prescriptions for those problems. They despair that corruption and weak governance are holding back these economies from effectively implementing these magic solutions. Is development as simple as these experts would suggest? Is it merely an issue of our not being able to translate a simple policy prescription into tangible action at the field level?
Invest in education and health care to unleash the full potential of your human resources. Reform governance institutions and processes to be transparent, responsive, and participatory. Design policies to align the incentives of the private sector with the larger economic goals. Open the economy, internally and externally, to free movement of capital, labour and technology. Put in place adequate social security and welfare cushions for the disadvantaged and the poor.
The aforementioned recipe, with small variations, is the general one-size-fits-all panacea to any developing country's ills. But as the East Asian and most impressively the Chinese and Indian examples show, these models are chasing the shadows. Decentralization, transparency, good governance, equity were all given lip-service in the Chinese success.
Accordingly, elections are foisted on institutionally deficient polities in the name of democracy, public utilities and services are privatized in the name of efficiency, welfare government role gets rolled back in the name of corruption, and the economy gets deregulated and opened up in the name of globalization and free trade. With the prescriptions implemented one would naturally expect these developing countries to prosper. But recent history of development economics is replete with numerous failed examples of such experimentation. In fact, for many decades now Latin America has been the laboratory for innumerable such experiments with all versions of the liberal free market economy. And the results are for everyone to see!
There are three major traditional explanations for the problems facing developing economies - lack of resources (and so need for massive foreign aid), lack of proper markets (so deregulation and privatization), and weak and corrupt governments (so need for better governance). All three are possible deficiencies in countries, but none of them alone are enough to explain the problems facing these countries. Any explanation requires going beyond this paradigm.
Dani Rodrik explains his approach towards development economics thus, "the right way to approach development policy is to start with the view that we actually don't know where the problems lie, to acknowledge that the key problems may differ from setting to setting, and to adopt an explicitly experimental attitude to policy selection and formulation so that you can learn about the environment in which you operate. In this approach, monitoring and evaluation are key, as you want to pull back from mistakes and improve policies over time. Indeed, you build the monitoring into the policy process itself so that learning becomes part and parcel of it - rather than something you leave to your researchers or economists."
The development contexts in developing countries exhibit spectacular diversity - racial, linguistic, economic, geographic, societal, and religious. A similar set of problems in different countries may manifest as widely varying outcomes. The same set of policy prescriptions may throw up contrary outcomes in countries with the same social contexts. The inter-play of these forces leads to the emergence of patterns of development that goes beyond the scope of any econometric model. These forces interact with each other both at the micro and the macro levels, at the individual and societal level, revealing a whole spectrum of socio-economic outcomes. There exists multiple equilibria for each socio-economic and political context.
All these forces play themselves out in an even more complex and unstable social and political setting, which intimately and immediately influences the final outcomes of this game. Unfortunately, these models give no place for social and political forces and the need to accomodate them in any reform process. It presumed that these forces will be swept away in the remorseless march of the reform process and a new political alignment and equilibrium would develop. In many ways, it is ironical that neo-classical economics is advocating such a transformation, more revolutionary than anything even Marx had advocated, in the political system.
The over-riding concern with institutional weakness, governance deficiencies and corruption has led to an atmosphere of distrust of government and its institutions in developing countries. Standard development models have no place for existing government systems and clamour for wholesale institutional and process transplants. These models see little prospect of any success without such wholesale reforms. It can be said, there is either a best practice/policy/model or there is no hope!
A traditional economist scrutinizes any development policy through a looking glass which focusses on increasing aggregate demand, efficient allocation of resources, least distortionary incentives, and distributive justice. The standard prescriptions include good governance, strong institutions, decentralization, open markets, flexible labor policies, deregulation, privatization etc. There are also specific sets of prescriptions to achieve each of these objectives.
A linear and incremental outlook towards policies and their implementation and movement of societal forces, is not the most ideal way forward. Addressing development challenges in complex settings like in many Asian and African countries often requires a two-track, heterodox approach, straddling contradictory platforms - orthodox and unorthodox, public and private, open and closed, legal and informal. Thus regulation has to co-exist with free markets, legal and extra-legal have to go hand in hand. Phasing and sequencing of reforms vary across societies and economies.
There is no single "optimal reform trajectory", which can be emulated by all nations and societies. What is suitable for one developing country may not be so for another. The same development strategies and reforms may throw up contrasting outcomes in different societies. Finding out what is most appropriate for any country or society is more an exercise in experimentation than any theoretical analysis. Ex post rationalizations are more likely to be successful than ex ante analyses.
As Dani Rodrik says, it is not that economic principles work differently in different places, or need to be tailored to local conditions, but their institutional embodiments vary. He writes,
"Incentives, competition, hard-budget constraints, sound money, fiscal sustainability, property rights are central to the ways in which economists think about policy and its reform. But these principles do not demand specific institutional solutions. Property rights can be implemented through common law, civil law, or, for that matter, Chinese-style socialism. Competition can be maintained by a combination of free entry and laissez-faire, or by a well-functioning regulatory authority. Macroeconomic stability can be achieved under a variety of fiscal institutions." Economic principles should be implemented through formal and informal institutions that have been suitably adaped to meet local demands and requirements.
Quite often the success of NGOs in social and economic development enggineering is presented as proof of the failure of government in addressing development issues. This euphoria invariably overlooks the important fact that such success stories are most often isolated and one-off examples. These examples present interesting challenges of scalability and are excellent examples of the inherent limitations of the very model that achieved the success story.
History is replete with examples of the failed grand development narratives. We can make a better start this time by acknowledging that there can be no grand narrative in development economics in the first place. Only a series of smaller narratives, which emerge through the routine exercise of trial and error, and not as part of a grand policy or design. The challenge is to smoothen this process of trial and error, so as to minimize costs and expedite the process."
Development requires all or some of the aforementioned conventional prescriptions and much more. It is essential to embrace the more unconventional and innovative context-specific approaches, besides exploring, analyzing and drawing from the micro-foundations of development challenges/problems (as is being done by experimenters through RCTs etc). Accordingly, a kaleidoscope of policy alternatives may have to be applied depending on the socio-economic and political contexts.
Thursday, November 5, 2009
Income inequality across the world
In a recent NBER working paper, Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez examined the top income shares time series over the long-run for more than 20 countries using income tax statistics and uncovers several interesting results.
They find that "over the last 30 years, top income shares have increased substantially in English speaking countries and in India and China but not in continental Europe countries or Japan. This increase is due in part to an unprecedented surge in top wage incomes. As a result, wage income comprises a larger fraction of top incomes than in the past." Here are a few graphics from their findings.
Interestingly, in case of India, the share of the top percentile continued to fall till about 1982-83. Subsequently, coinciding with the first phase of deregulation and liberalization and the consequent , the share of the top percentile has been continuously on the rise.
The share and composition of US national income of the top 0.1% of population.
Income is defined as market income including capital gains (excludes all government transfers). Salaries include wages and salaries, bonus, exercised stock-options, and pensions. Business income includes profits from sole proprietorships, partnerships, and S-corporations. Capital income includes interest income, dividends, rents, royalties, and fiduciary income. Capital gains includes realized capital gains net of losses.
The authors also find that most countries experienced a sharp drop in top income (mostly capital income, as against labor income, for the top percentile) shares in the first half of the 20th century concentrated around the World Wars and the Great Depression. However, the increase in top income shares in recent decades has been quite concentrated with most of the gains accruing to the top percentile with much more modest gains (or even none at all) for the next 4% or the second vingtile. Further, a significant portion of the gains in most countries in post-War era has been due to an increase in top labor incomes (especially wages and salaries), whose share in the top percentile is much higher today than earlier in the 20th century.
Update 1
Maxim Pinkovskiy and Xavier Sala-i-Martin have an interesting article that claims world poverty as falling faster than expected and from 1970 to 2006, poverty fell by 86% in South Asia, 73% in Latin America, 39% in the Middle East, and 20% in Africa.
Update 2
Jonathan Heathcote, Fabrizio Perri, and Gianluca Violante find that recessions (including the current one) raise earnings inequality and income inequality, absent mitigating government transfer programmes. However, during the current recession, thanks to the consumption-rich being disproportionately hurt by declining asset prices, consumption inequality has surprisingly declined.
Update 3 (8/3/2011)
See excellent graphical comparison of the evolution of inequality across a few countries between 2005 and 2009.
They find that "over the last 30 years, top income shares have increased substantially in English speaking countries and in India and China but not in continental Europe countries or Japan. This increase is due in part to an unprecedented surge in top wage incomes. As a result, wage income comprises a larger fraction of top incomes than in the past." Here are a few graphics from their findings.
Interestingly, in case of India, the share of the top percentile continued to fall till about 1982-83. Subsequently, coinciding with the first phase of deregulation and liberalization and the consequent , the share of the top percentile has been continuously on the rise.
The share and composition of US national income of the top 0.1% of population.
Income is defined as market income including capital gains (excludes all government transfers). Salaries include wages and salaries, bonus, exercised stock-options, and pensions. Business income includes profits from sole proprietorships, partnerships, and S-corporations. Capital income includes interest income, dividends, rents, royalties, and fiduciary income. Capital gains includes realized capital gains net of losses.
The authors also find that most countries experienced a sharp drop in top income (mostly capital income, as against labor income, for the top percentile) shares in the first half of the 20th century concentrated around the World Wars and the Great Depression. However, the increase in top income shares in recent decades has been quite concentrated with most of the gains accruing to the top percentile with much more modest gains (or even none at all) for the next 4% or the second vingtile. Further, a significant portion of the gains in most countries in post-War era has been due to an increase in top labor incomes (especially wages and salaries), whose share in the top percentile is much higher today than earlier in the 20th century.
Update 1
Maxim Pinkovskiy and Xavier Sala-i-Martin have an interesting article that claims world poverty as falling faster than expected and from 1970 to 2006, poverty fell by 86% in South Asia, 73% in Latin America, 39% in the Middle East, and 20% in Africa.
Update 2
Jonathan Heathcote, Fabrizio Perri, and Gianluca Violante find that recessions (including the current one) raise earnings inequality and income inequality, absent mitigating government transfer programmes. However, during the current recession, thanks to the consumption-rich being disproportionately hurt by declining asset prices, consumption inequality has surprisingly declined.
Update 3 (8/3/2011)
See excellent graphical comparison of the evolution of inequality across a few countries between 2005 and 2009.
From capital flight to carry trade!
In an earlier post I had blogged about the possibility of an increase in interest rates amplifying the already large inflow of foreign institutional investments (FII) into India. In a situation where the difference between Indian and global (read developed economies) interest rates widen and rupee is appreciating (against dollar), rupee investments in Indian debt instruments become doubly attractive - higher interest rates and more dollars to be repatriated.
In a recent FT op-ed, Nouriel Roubini cautioned against the globally synchronised rally in equity markets since March and argues that this asset bubble is fuelled by the near-zero interest rates and the weakness of the US dollar, and is driven by "the mother of all carry trades". He writes,
Interestingly, the present challenge of managing massive inflows of foreign institutional capital stands in stark contrast to the problems faced at almost the same time last year when foreign investors were fleeing emerging economies in droves driving down currencies and draining off foreign exchange reserves. Since April, FIIs have invested $13.8 billion in India’s stockmarkets, having withdrawn $8.6 billion over the same period last year, and the Sensex has surged by almost 100% since its March lows.
Update 1
Free Exchange has this nice explanation of carry trade and traces two prerequisites - interference in the markets by governments and weak domestic credit demand.
Update 2
Carry trade appraently forms 15-20% of global forex market activity. The Times reports that using "cheap" currencies like the Japanese yen and the Swiss franc to play higher-yielders — often in emerging markets and developing countries — has been a speculative strategy for decades.
In a recent FT op-ed, Nouriel Roubini cautioned against the globally synchronised rally in equity markets since March and argues that this asset bubble is fuelled by the near-zero interest rates and the weakness of the US dollar, and is driven by "the mother of all carry trades". He writes,
"The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions. In effect, it has become one big common trade - you short the dollar to buy any (Roubini's emphasis) global risky assets... the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles."
Interestingly, the present challenge of managing massive inflows of foreign institutional capital stands in stark contrast to the problems faced at almost the same time last year when foreign investors were fleeing emerging economies in droves driving down currencies and draining off foreign exchange reserves. Since April, FIIs have invested $13.8 billion in India’s stockmarkets, having withdrawn $8.6 billion over the same period last year, and the Sensex has surged by almost 100% since its March lows.
Update 1
Free Exchange has this nice explanation of carry trade and traces two prerequisites - interference in the markets by governments and weak domestic credit demand.
Update 2
Carry trade appraently forms 15-20% of global forex market activity. The Times reports that using "cheap" currencies like the Japanese yen and the Swiss franc to play higher-yielders — often in emerging markets and developing countries — has been a speculative strategy for decades.
Wednesday, November 4, 2009
"Hot hand" and "gambler's fallacy" revisited
In cricket, batsmen and bowlers are often credited with enjoying a rich vein of form (or a "hot hand" or "streak") during which period they either score more runs or take more wickets than their career average would appear to suggest. This form is translated into expectations of similar performance in the next match in the minds of their viewers. Their opponents though try to rationalize and form expectations of an imminent failure based on the "law of averages".
Behavioural psychologists describe the "hot hand" belief as an example of "representative bias" and the belief that a long streak increases the chances of a different result in the next go as "gambler's fallacy". They consider both beliefs as examples of cognitive biases that distorts the perceptions of human beings and rejects the opinions formed thereof.
In a famous experiment that examined the shooting records of Philadeplphia 76ers, Amos Tversky, Tom Gilovich and Robert Vallone had found "no evidence for a positive co-relation between the outcomes of successive shots". They attributed the belief in "streak shooting" or "hot hand" and predictions based on previous outcomes to "a general misconception of chance according to which even short random sequences are thought to be highly representative of their generating process".
In another equally famous experiment Isreali flight instructors found that criticism (after a very bad landing) improves performance of student pilots in their next flight while praise (for an exceptionally good landing) does the exact opposite with the next landing. Daniel Kahneman attributed this observation to "regression to the mean" - if an unusual result (either a positive or negative deviation from the mean performance) happens today, it is more likley to be followed by a result closer to the statistical average - and not to the impact of reward and punishment.
However, the aforementioned line of analysis may not convey the full story, atleast in certain contexts. There may be a strong basis in the "hot hand" belief.
The behavioural psychologists make the fundamental mistake of assuming that these events (shootings or runs in successive innings) are random and therefore independent of each other. For example, despite the equal statistical probability of a batsman losing his wicket or surviving a delivery, the performance of a cricket batsman can hardly be described as random. It cannot be denied that his performance (apart from his talent and hardwork) is a function (and at the highest levels, these factors differentiate between an exceptional performance and an average one) of intangible factors like self-confidence and opposition's assessment of his prowess, both of which positively feed into his performance. A batsman enjoying a rich vein of form, being at the peak of his confidence and having intimidated his opponents, is more likely to score heavily than fail in his next innings. It is therefore natural (and even rational) to anticipate the hot hand.
Interestingly, in contact games like football or basketball, another, albeit unexpected, outcome is possible. A "hot hand" in scoring goals or shooting baskets will immediately invite the attention of opponents who deploy tactics that would seek to immobilize the player. Faced with such extra attention, the player is less likely to match his earlier performance. However, on the positive side, the extra attention on the "hot" player is likely to adversely affect the overall strategy of the opponent and therefore increase the propsects for his compatriots to score goals or shoot baskets.
Behavioural psychologists describe the "hot hand" belief as an example of "representative bias" and the belief that a long streak increases the chances of a different result in the next go as "gambler's fallacy". They consider both beliefs as examples of cognitive biases that distorts the perceptions of human beings and rejects the opinions formed thereof.
In a famous experiment that examined the shooting records of Philadeplphia 76ers, Amos Tversky, Tom Gilovich and Robert Vallone had found "no evidence for a positive co-relation between the outcomes of successive shots". They attributed the belief in "streak shooting" or "hot hand" and predictions based on previous outcomes to "a general misconception of chance according to which even short random sequences are thought to be highly representative of their generating process".
In another equally famous experiment Isreali flight instructors found that criticism (after a very bad landing) improves performance of student pilots in their next flight while praise (for an exceptionally good landing) does the exact opposite with the next landing. Daniel Kahneman attributed this observation to "regression to the mean" - if an unusual result (either a positive or negative deviation from the mean performance) happens today, it is more likley to be followed by a result closer to the statistical average - and not to the impact of reward and punishment.
However, the aforementioned line of analysis may not convey the full story, atleast in certain contexts. There may be a strong basis in the "hot hand" belief.
The behavioural psychologists make the fundamental mistake of assuming that these events (shootings or runs in successive innings) are random and therefore independent of each other. For example, despite the equal statistical probability of a batsman losing his wicket or surviving a delivery, the performance of a cricket batsman can hardly be described as random. It cannot be denied that his performance (apart from his talent and hardwork) is a function (and at the highest levels, these factors differentiate between an exceptional performance and an average one) of intangible factors like self-confidence and opposition's assessment of his prowess, both of which positively feed into his performance. A batsman enjoying a rich vein of form, being at the peak of his confidence and having intimidated his opponents, is more likely to score heavily than fail in his next innings. It is therefore natural (and even rational) to anticipate the hot hand.
Interestingly, in contact games like football or basketball, another, albeit unexpected, outcome is possible. A "hot hand" in scoring goals or shooting baskets will immediately invite the attention of opponents who deploy tactics that would seek to immobilize the player. Faced with such extra attention, the player is less likely to match his earlier performance. However, on the positive side, the extra attention on the "hot" player is likely to adversely affect the overall strategy of the opponent and therefore increase the propsects for his compatriots to score goals or shoot baskets.
Monday, November 2, 2009
Assessing impact of post-reform Indian economic growth
It is increasingly becoming evident that the depth and vibrancy of urban economic growth will determine whether India achieves its twin objective of poverty reduction and double-digit economic growth. More evidence comes from Martin Ravallion and Gaurav Datt, who examined household survey-based poverty measures for urban and rural India for the 1951-2006 period and claim that in the post-reform period, urban economic growth may be driving overall poverty reduction.
Contrary to earlier studies which found that "the main driving force for overall poverty reduction was rural economic growth" and that urban economic growth brought "little or no benefit to rural poor", the authors find evidence that in the post-reform period, the urban economic growth has emerged as the driving force in overall reduction in poverty. They find much stronger evidence of a feedback effect (through trade, migration, and transfers) from urban economic growth to rural poverty reduction (and living standards) and distributional effects from urban growth benefiting the country’s rural poor than found in the pre-reform data. In fact, they find that the "estimated elasticities of rural poverty measures with respect to urban growth are even higher than those with respect to rural growth". On the flip-side, the authors caution that this reversal of feedback effects also means that the rural poor will be vulnerable to "urban-based economic shocks" (which are more probable, especially given the greater interface and integration between the urban economy and the global economy).
Interestingly, from the survey-based data, they find little conclusive evidence that the higher growth rates of the post-reform era have resulted in faster reduction in poverty. Except for the headcount index, they do not find any statistically significant decreases in poverty between the pre- and post-reform periods from either the linear trend (the annual percentage point reduction in the poverty measures) or the responsiveness of poverty to growth in the survey mean (the growth elasticity of poverty reduction).
Further, using national accounts, they find that the post-reform period has a "lower proportionate rate of poverty reduction from a given rate of growth". They also find from the latest available NSSO data for 2004-05 that contrary to expectations of labor intensive growth in the post-reform period, the employment growth rate in the period 1993-94 to 2004-05 has been virtually the same as the preceding 10 years. On both the role of urban economic growth on national poverty reduction and the impact of higher post-reform rates of growth on poverty, they conclude,
They do find a "long-run trend decline in poverty" in both rural and urban areas and that the biggest gains have accrued to those living well below the poverty line. Using various measures of poverty reduction (outlined in the last two paragraphs), they find that in the post-reform period, both the depth of poverty (as measured by the mean poverty gap relative to the poverty line) and inequality amongst the poor are reduced by economic growth. Some of the results are captured in the graphics below
Both in terms of headcount and squared poverty gap indices, poverty in urban and rural areas have been converging, with urban poverty now even overtaking rural poverty.
Even as the economic growth rate increased, the continuing disparities in the endowments that allow people to take up new market opportunities, has meant widening inequality. The antecendent inequalities in human capital, unless rectified quickly, threatens to leave the poor far behind. The increase in inequality within both urban and rural areas in the post-reform period has been steep.
Further, in an indication that urban areas have been pulling away from their rural counterparts, the grpahic below indicates how urban consumption (per capita monthly consumption expenditures) has increased in relation to rural consumption.
It is clear from the aforementioned graphics and analysis that the faster post-reform economic growth has not translated into a proportionate or higher poverty reduction due, in large measure, to the increasing inequality, both between urban and rural areas and within each of them. And going forward, bridging inequality, especially on the human capital and endowment front, will be critical towards ensuring that the benefits of faster economic growth and increasing urbanization and urban economic growth (with its greater elasticity of poverty reduction) are accessible to the poor.
The human capital dimension assumes greater significance in view of the fact that the dominant share of population is still rural (about 70%) and the human capital deficiency is greatest among the rural poor. Sustaining high rates of growth, especially for economies in its initial economic growth take-off stage, requires drawing in of massive quantities of incremental physical capital inputs, most critically human resources (mainly semi-skilled and skilled), most (if not all) of which has to be supplied from the rural areas. Surely we cannot make much headway with poverty reduction when almost half (rural areas housed 72% of the poor and rural areas formed 71% of population by end of 2005-06) of its main source of human capital supply are income (and most likely and more importantly human capital) deficient and are therefore not likely to be able to access the opportunities created by the high rates of economic growth.
Even assuming the role of Kuznets effect in explaining the widening inequality, it is important that effective universal education and health care policies, coupled with targetted government redistribution programs, are in place to ensure that everyone is able to access the opportunties thrown up by economic growth and those affected are cushioned from the adverse effects of growth. The latter assumes even greater significance in the aftermath of globalization and the impact of the global events of the past eighteen months on foodgrain prices and the lives of the poor.
As a footnote, the authors define "pro-poor growth" in terms of that which reduces an agreed measure of poverty (measured by the extent of poverty reduction) and that which disproportionately benefits the poor when judged relative to the rate of growth (measured by the elasticity of the agreed poverty measure with respect to economic growth). And they use three poverty measures to translate these two definitions of pro-poorness - headcount (HC), poverty gap (PG) and squared poverty gap (SPG) indices. The HC index is the percentage of the population who live in households with a consumption per capita less than the poverty line. The PG index is the mean distance below the poverty line expressed as a proportion of that line (the mean is formed over the entire population), counting the non-poor as having zero poverty gap, and this is a measure of the depth of poverty. The SPG index is the mean of the squared proportionate poverty gaps and reflects the income distribution amongst the poor and is a measure of the severity of poverty.
The study uses data from 47 surveys carried out by the National Sample Survey Organization (NSSO) since 1951 to track various poverty measures, and the national accounts to derive economic growth and consumption data. However, with more sustained high rates of economic growth, widening inequality and greater dispersion of benefits of growth among the population, the divergence between NAS and survey-based data would increase. It may be appropriate to track the trends in the now well established category of below poverty line (BPL) population. Another dimension of the impact of economic reforms on poverty reduction can be brought out by analysing the relative impacts on the different categories (industrialized to agriculutral to mineral resource rich) of Indian states.
Update 1
See this discussion on different poverty estimates for India. The conventional NSSO's household survey based estimate (2400 calories consumption for rural areas and 2100 for urban areas) puts rural poverty at 28.5% for 2004-05. An expert group, headed by Suresh Tendulkar, appointed by the Planning Commission, expanded the criteria for defining those below the poverty line (BPL) by including education, health and actual spending on rent and conveyance as part of an individual’s consumption basket, besides expenditure on food and found that four out of 10 people in rural areas are poor. It pegged national poverty at 36% (65.2 million families) for 1993-94.
Another report, prepared by the National Commission for Enterprises in the Unorganized Sector, headed by Arjun Sengupta, and published in 2007, found that 77% of the population subsists at just Rs 12 per person per day, much below the prevailing minimum wage, which ranges between Rs40 and Rs150 a day across states.
Contrary to earlier studies which found that "the main driving force for overall poverty reduction was rural economic growth" and that urban economic growth brought "little or no benefit to rural poor", the authors find evidence that in the post-reform period, the urban economic growth has emerged as the driving force in overall reduction in poverty. They find much stronger evidence of a feedback effect (through trade, migration, and transfers) from urban economic growth to rural poverty reduction (and living standards) and distributional effects from urban growth benefiting the country’s rural poor than found in the pre-reform data. In fact, they find that the "estimated elasticities of rural poverty measures with respect to urban growth are even higher than those with respect to rural growth". On the flip-side, the authors caution that this reversal of feedback effects also means that the rural poor will be vulnerable to "urban-based economic shocks" (which are more probable, especially given the greater interface and integration between the urban economy and the global economy).
Interestingly, from the survey-based data, they find little conclusive evidence that the higher growth rates of the post-reform era have resulted in faster reduction in poverty. Except for the headcount index, they do not find any statistically significant decreases in poverty between the pre- and post-reform periods from either the linear trend (the annual percentage point reduction in the poverty measures) or the responsiveness of poverty to growth in the survey mean (the growth elasticity of poverty reduction).
Further, using national accounts, they find that the post-reform period has a "lower proportionate rate of poverty reduction from a given rate of growth". They also find from the latest available NSSO data for 2004-05 that contrary to expectations of labor intensive growth in the post-reform period, the employment growth rate in the period 1993-94 to 2004-05 has been virtually the same as the preceding 10 years. On both the role of urban economic growth on national poverty reduction and the impact of higher post-reform rates of growth on poverty, they conclude,
"While pre-1991 urban growth did not seem to matter for national poverty reduction, after 1991 not only did a significant urban growth effect emerge, but the urban growth elasticities of all three national poverty measures were higher (in absolute terms) than the corresponding elasticities with respect to rural growth... Overall, while the higher rate of growth in the post-reform period has come with a higher proportionate rate of progress against poverty, we do not see in these data a robust case for saying that the growth elasticity of poverty reduction has risen since the reforms began."
They do find a "long-run trend decline in poverty" in both rural and urban areas and that the biggest gains have accrued to those living well below the poverty line. Using various measures of poverty reduction (outlined in the last two paragraphs), they find that in the post-reform period, both the depth of poverty (as measured by the mean poverty gap relative to the poverty line) and inequality amongst the poor are reduced by economic growth. Some of the results are captured in the graphics below
Both in terms of headcount and squared poverty gap indices, poverty in urban and rural areas have been converging, with urban poverty now even overtaking rural poverty.
Even as the economic growth rate increased, the continuing disparities in the endowments that allow people to take up new market opportunities, has meant widening inequality. The antecendent inequalities in human capital, unless rectified quickly, threatens to leave the poor far behind. The increase in inequality within both urban and rural areas in the post-reform period has been steep.
Further, in an indication that urban areas have been pulling away from their rural counterparts, the grpahic below indicates how urban consumption (per capita monthly consumption expenditures) has increased in relation to rural consumption.
It is clear from the aforementioned graphics and analysis that the faster post-reform economic growth has not translated into a proportionate or higher poverty reduction due, in large measure, to the increasing inequality, both between urban and rural areas and within each of them. And going forward, bridging inequality, especially on the human capital and endowment front, will be critical towards ensuring that the benefits of faster economic growth and increasing urbanization and urban economic growth (with its greater elasticity of poverty reduction) are accessible to the poor.
The human capital dimension assumes greater significance in view of the fact that the dominant share of population is still rural (about 70%) and the human capital deficiency is greatest among the rural poor. Sustaining high rates of growth, especially for economies in its initial economic growth take-off stage, requires drawing in of massive quantities of incremental physical capital inputs, most critically human resources (mainly semi-skilled and skilled), most (if not all) of which has to be supplied from the rural areas. Surely we cannot make much headway with poverty reduction when almost half (rural areas housed 72% of the poor and rural areas formed 71% of population by end of 2005-06) of its main source of human capital supply are income (and most likely and more importantly human capital) deficient and are therefore not likely to be able to access the opportunities created by the high rates of economic growth.
Even assuming the role of Kuznets effect in explaining the widening inequality, it is important that effective universal education and health care policies, coupled with targetted government redistribution programs, are in place to ensure that everyone is able to access the opportunties thrown up by economic growth and those affected are cushioned from the adverse effects of growth. The latter assumes even greater significance in the aftermath of globalization and the impact of the global events of the past eighteen months on foodgrain prices and the lives of the poor.
As a footnote, the authors define "pro-poor growth" in terms of that which reduces an agreed measure of poverty (measured by the extent of poverty reduction) and that which disproportionately benefits the poor when judged relative to the rate of growth (measured by the elasticity of the agreed poverty measure with respect to economic growth). And they use three poverty measures to translate these two definitions of pro-poorness - headcount (HC), poverty gap (PG) and squared poverty gap (SPG) indices. The HC index is the percentage of the population who live in households with a consumption per capita less than the poverty line. The PG index is the mean distance below the poverty line expressed as a proportion of that line (the mean is formed over the entire population), counting the non-poor as having zero poverty gap, and this is a measure of the depth of poverty. The SPG index is the mean of the squared proportionate poverty gaps and reflects the income distribution amongst the poor and is a measure of the severity of poverty.
The study uses data from 47 surveys carried out by the National Sample Survey Organization (NSSO) since 1951 to track various poverty measures, and the national accounts to derive economic growth and consumption data. However, with more sustained high rates of economic growth, widening inequality and greater dispersion of benefits of growth among the population, the divergence between NAS and survey-based data would increase. It may be appropriate to track the trends in the now well established category of below poverty line (BPL) population. Another dimension of the impact of economic reforms on poverty reduction can be brought out by analysing the relative impacts on the different categories (industrialized to agriculutral to mineral resource rich) of Indian states.
Update 1
See this discussion on different poverty estimates for India. The conventional NSSO's household survey based estimate (2400 calories consumption for rural areas and 2100 for urban areas) puts rural poverty at 28.5% for 2004-05. An expert group, headed by Suresh Tendulkar, appointed by the Planning Commission, expanded the criteria for defining those below the poverty line (BPL) by including education, health and actual spending on rent and conveyance as part of an individual’s consumption basket, besides expenditure on food and found that four out of 10 people in rural areas are poor. It pegged national poverty at 36% (65.2 million families) for 1993-94.
Another report, prepared by the National Commission for Enterprises in the Unorganized Sector, headed by Arjun Sengupta, and published in 2007, found that 77% of the population subsists at just Rs 12 per person per day, much below the prevailing minimum wage, which ranges between Rs40 and Rs150 a day across states.
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