Blog interrupted?

To my dear readers and followers, I have accepted a new assignment to do development work in the Philippines for an internationally funded aid project that will have me occupied until the end of this year. This means that the entries to this blog will be far less frequent than before. As I make the transition now from my role as a policy analyst to that of an implementer of change, I expect new insights and ideas to come. The experience of working on the front-line of the field will provide me with a different perspective, undoubtedly. I am not sure how this will alter the topics and themes that I will choose to write about from now on. Hopefully, it will help me gain a more well-rounded perspective. This may be the end of The Cusp as we know it!

Of Wedding Feasts and Famines

In the media-driven frenzy of royal-watching, the wedding between Kate and Wills harks back to a time when the pomp and pageantry of the monarchy provided a diversion from the daily struggles of their subjects. In England, as late as the 1930s, poor families struggled with the problem of hunger. Yet as George Orwell wrote, 

The basis of their diet, therefore, is white bread and margarine, corned beef, sugared tea and potatoes -- an appalling diet. Would it not be better if they spent more money on wholesome things like oranges and wholemeal bread or if they even, like the writer of the letter to the New Statesman, saved on fuel and ate their carrots raw? Yes, it would, but the point is that no ordinary human being is ever going to do such a thing. The ordinary human being would sooner starve than live on brown bread and raw carrots.

The May/June 2011 online version of the magazine Foreign Policy is devoted to the problems associated with food price inflation and the impact this would have on poverty and hunger. The development aid community has flagged this as a potential cause for dragging many in the middle to low income countries into poverty.

Calls have been issued to address this pressing problem. But in a piece written by Abhijit Banerjee and Esther Duflo, the general consensus regarding the issue is challenged. What if the experts are wrong, they ask.What if the problem of hunger is not caused by the lack of affordable food? Nobel Prize winning economist Amartya Sen has famously pointed to the fact that famines have only occurred in recent times in countries that lacked democratic institutions of accountability. Poor governance rather than a lack of food supply creates extreme hunger.

In India where Sen is from, despite the rise in per capita income, per capita caloric intake has declined. The piece points out that

(t)he change is not driven by declining incomes; by all accounts, Indians are making more money than ever before. Nor is it because of rising food prices -- between the early 1980s and 2005, food prices declined relative to the prices of other things, both in rural and urban India. Although food prices have increased again since 2005, Indians began eating less precisely when the price of food was going down.

What if the problem of hunger is not driven by a lack of affordable food, but the fact that the poor demand a different variety of food? They use one example to bear this out:

Using price data from the Philippines, we calculated the cost of the cheapest diet sufficient to give 2,400 calories. It would cost only about 21 cents a day, very affordable even for the very poor (the worldwide poverty line is set at roughly a dollar per day). The catch is, it would involve eating only bananas and eggs, something no one would like to do day in, day out. But so long as people are prepared to eat bananas and eggs when they need to, we should find very few people stuck in poverty because they do not get enough to eat.

To provide more evidence of this, they cite a study conducted in two regions of China where researchers offered randomly selected poor households a large subsidy on the price of basic staples believing this would result in greater consumption of food. Instead they found that:

(o)verall, the caloric intake of those who received the subsidy did not increase (and may even have decreased), despite the fact that their purchasing power had increased. Nor did the nutritional content improve in any other sense. The likely reason is that because the rice and wheat noodles were cheap but not particularly tasty, feeling richer might actually have made them consume less of those staples. 

They go on to point out the possible reasons why the poor might be eating less. Better water and sanitation for instance may lead to a lower incidence of nutrition depleting diseases. Women in rural villages which now have access to water no longer need to spend a good deal of effort fetching water to and from rivers. Aside from that is the penchant of the poor to spend on non-essentials like vices and other forms of entertainment (televisions, DVDs, mobile phones, movies, etc).

Many programs aimed at boosting protein and iodized salt intake have been met with a dismal response from poor households. It seems that when it comes to deciding what to spend their income on, they seem to have other priorities.

Humans v Rats v Monkeys

This is a case of how “heuristic bias” in humans (a preference for rules of thumb in decision-making) and hubris proved to be their undoing when pitted against rats and monkeys in two experiments. The lessons drawn have implications for anyone engaged in economic development and industrial policy.

Prominent development economist Bill Easterly was not joking when he recently blogged that “rats outperform humans in interpreting data.” He was referring to the experiment recounted in Leonard Mlodinow book The Drunkard’s Walk in which rats and humans were pitted against each other and made to draw green and red balls at random. With probabilities rigged in favour of greens, they were made to predict the colour of the balls drawn after observing the process.

Surprisingly, the rats came out on top:

The rats followed the optimal strategy of always predicting green (I am a little unclear how the rats communicated, but never mind). But the human subjects did not always predict green, they usually want to do better and predict when red will come up too, engaging in reasoning like “after three straight greens, we are due for a red.” As Mlodinow says, “humans usually try to guess the pattern, and in the process we allow ourselves to be outperformed by a rat.”

This experiment is reminscent of the 14 year exercise initiated by the Wall Street Journal which tested Princeton Prof Burton Malkiel’s thesis contained in the book A Random Walk Down Wall Street that

a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.

After 100 iterations of the game, the results showed that while the analysts came out on top, the margin was embarrasingly low, 61-39. One funny way to express this finding would be to say that when it comes to “picking winners”, “monkey see, monkey do” works fine.

Easterly whose stint in the UN led him to take a dim view of so-called “growth experts” has sparked robust discussions with the likes of Jeffrey Sachs of The End of Poverty fame over the effectiveness of international development projects and Dani Rodrik author of One Economics, Many Recipes over the appropriateness of industrial policy.

In terms of developing growth strategies, Easterly’s advice has been to forego well-intentioned interventions emanating from the top (whether they be the in the form of a "big push" for public investment ala Marshal Plan or "shock therapy" ala Sach's approach of introducing market-based institutions to ex-Communist regimes). Easterly’s most recent book contrasts "planners" and "searchers". The former use the instruments just mentioned to (not) achieve their goals. The latter rely more on local feedback and accountability with

lots of political and economic competition with freedom of choice of consumers, investors, and voters.

The belief is that there is no use second-guessing what works when the local market for ideas performs more efficiently and contains more information than the calculations of a detached planner no matter how sophisticated his heuristic models might be. The fact which all these experts agree on is that public investments and industrial policy may have been partly responsible for economic development in some cases in the past. Where they part ways is on whether experts can identify with any reliability the means with which to implement them in different situations in the future.