The Psychology of Poverty

Latest edition of Governance Agenda in Pragati draws attention to the importance of accounting for behavioral issues in addressing poverty.

The "other" internal and external validity problems with RCTs

Randomized Control Trials (RCTs) have been described as the "gold-standard" in estimating causal relationships in development. At the heart of the matter is that randomization helps us create a counter-factual group (the control group), without any observable or un-observable bias (from the treatment group), that any final variation in outcomes is due to the treatment itself. The findings of RCTs have been acclaimed as having revolutionized development research, especially in illuminating what works best in addressing specific development problems.

I am not sure. Consider two possibilities. The first, a "pseudo-placebo" effect, arises from the fact that most RCTs are not double-blind. The treatment target knows that he/she is receiving the particular intervention, and that alone many be enough to modify the individual behaviors or the environment in a manner that enhances outcomes. In other words, the treatment effect may be overstated. As a recent study found, "the expectation of receiving the treatment can cause people to modify their behaviors in a way that produces a significant "average treatment effect" even if the actual intervention is not particularly effective".   

The second, the "scale-up effect", arises from the fact that the outcomes of a small pilot implementation does not always gets replicated when the intervention is scaled up. This is especially true of social policy interventions in developing countries with pervasive micro-governance failures and very weak delivery systems. I blogged earlier about "the concentrated effort and scrutiny of the research team, the unwitting greater over-sight by the official bureaucracy, and the assured expectation, among its audience, that it would be only a temporary diversion, contributes to increasing the effectiveness of implementation". This means that "there is the strong possibility that we will end up implementing a program or intervention that is qualitatively different from that conceived experimentally". 

Taken together, both these add several layers of complication. The former doubts the internal validity, and thereby the causal mechanisms of the outcome. The later questions the external validity of the finding, in terms of its replicability. It raises doubts about wisdom of drawing the conclusion that once we know what is the best strategy, in terms of policy design and implementation, then the big development problem can be resolved. 

Both these, different from the conventional measures of internal and external validity, are not easily addressed, if addressed at all. The nature of the interventions, the need for human stakeholders to calibrate actions in response to a treatment, makes them not amenable to double-blind trials. And, the gap between pilots and scale-up is a function of state capability, which has no easy or short-term answers. 

In other words, after all the statistical gymnastics, we are not any significantly nearer to the development holy grail than when we started. The fundamental challenge of what works in a scaled-up intervention still remain unresolved. 

Moral Hazard and Time Inconsistency in NHAI Projects

I have blogged earlier here, here, and here, about the moral hazard concerns unleashed by contract re-negotiations and how the power sector in India has been badly affected by it. Now comes news that some of the aggressive bidders for road projects bid out by the National Highways Authority of India (NHAI) may be thinking of pulling out of their contracts.


The Times of India has a report on GMR which had won the 555 km Kishangarh-Udaipur-Ahmedabad by quoting Rs 636 Cr in annual premium payable to the NHAI. This meant that instead of receiving annuity payments from the government, GMR would assume the traffic risks and make annuity payments to the government. In a public auction in 2011, GMR had offered to pay NHAI Rs 636 Cr every year for 26 years, to win the four-lane to six-lane conversion project estimated at Rs 5387 Cr tender. GVK Power was the next highest bidder at Rs 516 Cr. It writes,

This particular case and the trend of several top highway builders struggling to tie up funds for their projects are signals of tough times ahead. Though GMR has cited delay in getting environmental clearance for the project to start its expansion as the main reason to walk out of the project, highway ministry sources called this an indication of early "course correction" to "aggressive bidding" that happened during the last financial year. There were around a dozen projects where almost all bidders quoted high premium (upfront revenue to NHAI that increases by 5% annually) and doubts were raised whether this would be sustainable. At present, about 35 projects are awaiting financial closure... GMR's move could have been because of many other reasons including the project's financial viability considering  the high premium offered.

Now, it is quite possible that GMR have a genuine reason for seeking a termination of the contract. But it is also clear that such aggressive bidding, where concessionaires assume all sorts of market risks and also provide handsome premiums, was not exactly fundamentals-driven. Atleast some of the bidders were clearly aware of the risks they were taking and also knew how to mitigate them, legally or through the backdoor. Some others saw benefits from adding one more project to their project portfolio, especially in leveraging their balance sheets.

Site clearance problems and environmental clearance delays are inevitable parts of any such project in India. They should not form the reason for bidders to renege on their contracts. Most of these contracts would already contain cost-escalation and other provisions that would largely insulate the contractors from such risks. If they do not, then future contracts should incorporate these provisions.

But allowing such contracts to be terminated, especially for non-regulatory reasons, is certain to unleash moral hazard concerns and vitiate the bidding environment for the upcoming tenders. It will entrench expectations within contractors about the inviolability of contractual obligations and encourage similar aggressive bidding in the forthcoming bids.

Further, this will also aggravate the time-inconsistency problems that contractors face when bidding for such long-gestation infrastructure projects. Ex-ante, the contractors will bid aggressively without much regard for market risks so as to win the bid. Some of them presumably realize that they could re-negotiate and wrest a more favorable deal from the government agency. But ex-post, after all due-diligence and covering for risks, they will decide to pursue only those contracts with large margins and low risk. In other words, this practice will also allow contractors to cherry-pick on their public projects portfolio.

All this negates the very purpose of open competitive tendering, which seeks to address precisely such problems.

Update 1 (14/1/2013)

After GMR walked out of the Kishanpur Project, GVK has decided to terminate its 12 January 2012 BOT contract for four-laning of the Shivpuri-Dewas section of the NH 3 in Madhya Pradesh. The two to four-lane conversion of 332.46 k of the Delhi-Agra NH had a concession period of 30 years and construction period of 2.5 years at an estimated cost of Rs 3300 Cr. It invoked the Clause 34.8 of the concession agreement, citing delays in site handing over and environmental clearances. However, aggressive bidding where the contractor over-committed annuity payments to the government may be the real reason for the pull-out.

Australia's "Dutch Disease" in three graphics

As I blogged earlier, in recent years, on the back of the surging demand for ores and minerals, the Australian economy has been showing signatures of resource mis-allocation, popularly described as the "Dutch Disease".

The boom in commodity prices has resulted in the Australian dollar surging against the US dollar.

The country's terms of trade, the price of its exports relative to imports, have risen sharply. This has made its tradeable sector more attractive, since it fetches more domestic currency for the same volume of exports.

The strong exchange rate has boosted the commodities mining sector, but at the cost of non-mining tradeable sectors like tourism and manufacturing. Mining, though just 10% of the economy, is estimated to suck up nearly 70% of total capital expenditure across the economy. These trends are starkly reflected in the respective contributions of each to the national economic growth.

The Great Recession and World Economy in a graphic

Times has this graphic that captures the performance of the major world economies and their equity markets over the past five years.

Nudging to prevent losing your phone

The Ciago iAlert and Cobra Tag are Bluetooth keychain fobs that communicate with your iPhone or Android phone. Once you’re 30 feet away from the phone, the keychain starts beeping, as though to say, “You’re leaving your $200 phone behind, you idiot!” It works the other way, too; the phone beeps if you leave your keys behind.

(HT: Pogie Awards NYT)

India's coal crisis is a political problem

MR points to this graphic which captures the widening demand-supply mismatch in coal availability for power generators.

This blog has been a strong advocate of electricity deficit being arguably India's biggest growth constraint. The widening mismatch, for whatever reasons, should be addressed with the highest priority. But that is easier said than done.

While the state-owned coal mining monopoly, Coal India Limited (CIL), should its share of the blame for the current crisis, the major problems lie beyond mining per se. The three most critical problems facing the sector are lack of rail transportation facilities, and difficulties in land acquisition and environmental clearance for expansions and new projects. We therefore have a situation where even the mined coal is stuck up at pithead for lack of adequate transportation facilities and capacity addition projects are delayed inordinately.

The conventional wisdom on addressing India's coal crisis is to open up coal mining for private exploitation. But this argument fails to appreciate the aforementioned underlying reasons. Though the private sector would be effective at mining coal, the problems of transportation, land acquisition and environmental approvals would remain.  Its resolution lies in the political and social realm.

Land acquisition and environmental clearances are essential for both laying rail transport lines and establishing new projects. In the prevailing social and political climate, where populist rhetoric and media trials shape the mainstream discourse, both these issues present extremely difficult, increasingly insurmountable, challenges.

The private sector will be even less capable of addressing these non-mining challenges. In fact, private involvement is likely to vitiate the environment and make its resolution even more difficult. It is no wonder that the coal blocks allocated for captive power generation remained mostly unexploited. Governments cannot afford to be seen to be supporting private participants in "dispossessing" poor people and "damaging the environment". Nor would the private sector agree to policies like provision of employment to land losers, long used by the CIL to buy-out local opposition to its projects.

All this means that India's coal crisis can be resolved only through a mature political process. A reasonably generous relief and rehabilitation (R&R) policy, which enjoys bipartisan political support, has to form the centerpiece of any such process. In its absence, no government - whether the Congress or BJP or a third front - will be able to effectively address the problem.

The million-dollar problem then is to achieve a political consensus on such policies. Coal mining is just one of the areas where bipartisan political support is sine-qua-non for any progress. Unfortunately, this looks likely to remain an elusive goal in the current political environment.