I had a lunch with my boss a long,long time ago at the World Bank Research Department to discuss my research. He listened impatiently to my description of my various research papers and finally burst out, “yes, but what would you tell the Finance Minister to do tomorrow?” I got asked this question what seemed like thousands of times while I was at the Bank. It’s still at the heart of the Bank’s approach to development today, shared by many others.
It is fairly simple to calculate the following:[1]
All these probabilities are likely to be low. Multiplied together, the overall probability of my advice paying off is pathetically, infinitesimally low.
If my boss forced me to answer me that question, today I would say to the Finance Minister: “Disregard us World Bank experts. You already know that principles of economics help solve economic problems. You already know you should be democratically accountable to your own citizens. You’ll muddle through.”
I didn’t yet have the courage or wisdom to give that answer at that lunch long ago, so my Bank research department career lasted a while longer after that.
[1] This equation is partly inspired by a different equation that Pete Klenow suggested for the value of economics research in the Brookings volume “What Works in Development: Thinking Big and Thinking Small”
11 Comments
None of these probabilities are constants. And your solution might not work either – plenty of Finance Ministers I’ve worked for haven’t had basic understandings of economics (a colleague of mine once got a note signed by the Minister of an un-named country asking if we could return to barter for all foreign trade). And plenty of them weren’t exactly *democratically* elected.
We need to be careful in navigating the line between acknowledging our limits and drawbacks and absconding from all responsibility to provide the best advice we can.
The cumulative probability may be small, but the payoffs are potentially very large indeed and the costs are tiny; so the cost benefit analysis still comes out looking pretty rosy.
Maybe we should be thinking of these kinds of activities more like venture capital investment – many investments, each with low probability of a high payoff?
Ranil, If the Finance Minister doesn’t know economics then he is even less likely to listen to me or to want to implement something based on economics.
Owen, unfortunately, the larger the potential payoff of a piece of advice, the lower will be all of these probabilities, possibly more than offsetting.
A – relatively perverse – value for World Bank advice that I found is the external commitment that may come with it, or at the very least the presence of a foreign body – the World Bank, the IMF, the European Commission, etc – to lay the blame on when said advice or reforms prove too painful.
I think I’ll start calling this “the witch added–value” to international intervention. Hmm.
This is a brilliant illustration of why advice alone almost never pays off. Alternatively, you could probably come up with an algorithm that might lead to better decisions. If your research points to useful advice, then proceed to the next step which is to analyse the politics around accepting the advice. If this analysis shows enough likely winners from the advice who can drive the decisions, then proceed to the next step which is to invest in policy dialogue to persuade the Minister and the other people who have to sign off on the decisions. Be prepared for compromise, adaptation and political sausage making. Something resembling your original advice might actually get implemented.
Bill, a fair point, but just because someone doesn’t know economics doesn’t mean they disregard it altogether.
The former British Prime Minister, Alec Douglas-Hume once admitted he had to use matchsticks to visualise how the economy functioned (I don’t know how the matchsticks helped, frankly). But he didn’t reject the need for good economics to improve the British economy.
Jeff’s comment is also important: advice must be implementable. It’s obviously true that not all good advice will be implemented (for various reasons). But it’s also true that we do know quite a lot about what helps economies thrive, even if we don’t know everything. I think one of the most important things we can do is change the discourse about development based on what historically has worked; working for Governments in the UK and in developing countries has shown me that it’s necessary to challenge and inform Ministers and elected representatives. They’re not immune to good sense, though their incentives might not be ideal.
The best thing to do is probably to have countries formulate their own plans based on their own political realities (if they can) and then amend it is as needed.
Even if they can’t there should be someone from the country who understands economics and can adapt it to political realities in their country.
Again, part of the problem with such problems with planning is the huge explosion of the “development research” business which is leaving Africa’s higher institutions behind. This is what happens when you leave all the work to western trained economists who lack knowledge of the necessary political context.
My University recently set up one of those “Center for Development” type things and I made a clear case against them here:
http://imprint.uwaterloo.ca/2009/nov/13/opinion/right-seed-wrong-soil/
Keep shutting developing countries and their peoples out of the development conversation and you’ll keep needing napkin equations like this
Prof. Easterly, I don’t agree with this analysis, since it implicitly assumes that Finance Ministers are not accountable to anyone.
There is a usually critical mass of concerned citizens (and I am specifically thinking of opposition parties) who would pressure government to undertake the (if we assume) effective policies you espouse, these Finance Ministers would be pressured to act in ways that are beneficial to the country in question. I have seen many times in my country that the only way to bring about good policy decisions is not by electing a good government, is by pressuring whatever government is there.
The only situations where that mass could not build up is where there is political repression, but then the World Bank shouldn’t be talking to these countries in the first place!
I think you need to add to the equation a variable for “probability that the finance minister actually cares about his people.”
Finance ministers understand the game. They must appear deeply concerned about the welfare of their people in order to keep the money flowing from the West. But their actions betray them while the West pretends not to see.
I really liked that post because this seemed to be the problem I was facing at the time. The ‘good’ advice to the Minster was basically well know and I was merely trying to highlight to him profitability and benefits of this policy/investment. However, it was not being implemented probably because of probabilities 2 and 4. Surprisingly, since this post has been published the Minister gave in and agreed to give the money for the project which will finally bring in some manufacturing/industrial capabilities to a Sub-Saharan African country. But why did he do that than? Well, the rumor has it that he was just basically fed up with everyone bugging him about why this investment is not taking place so he got fed up and finally disbursed the money. So I would add another variable to the equation – * the ability of civil servants and development partners to bore the Minster to death about the benefits of policy x. Sounds like a joke but it seems that what has actually happen.
@ Owen Barder comment: This is exactly what I though – probability of getting the policy implemented are v. small payoff seem to be large – lets have a go – it does not cost me much.
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