Saturday, March 24, 2018

Weekend reading links

1. The persistence of the belief in the use of Public Private Partnerships (PPPs) to address acute problems in health and education, despite overwhelming evidence to the contrary universally from across the world, is an example of why development is a faith-based activity. This is the latest attempt to use PPPs to solve deep structural deficiencies in health care. 

The problem with PPPs in Indian context, apart from the inherent challenges associated with contracting and contract management in these sectors, is that of supply-side constraints with the market itself. PPPs are not going to attract specialist doctors into small town district hospitals. There are unlikely to be more than just a few providers across the country with the attitude and expertise to deliver faithfully and effectively on such contracts. 

The belief that the likes of Apollos and Fortises will step forward to deliver healthcare while also keeping the social equity objectives in mind is misplaced. Forget doing PPPs, these corporate chains do not seem to have the resources and management capacity to even expand by much in their own urban terrains and are now having to fight off foreign takeover attempts. 

2. Livemint points to disturbing signs from India's labour-intensive industries. Since the introduction of GST, exports have been declining, imports rising, production falling, and rural wage growth slowing when compared to the capital intensive industries. 
3. A Livemint analysis of a sample from the Prowess database of over 27000 listed and unlisted firms from both industrial and services sectors provides empirical evidence that the heavy lifting with respect to job creation is done by the small firms. As the graphic shows, the smallest quartile of firms in terms of sales revenues have consistently created more jobs than those in the biggest quartile. 
Further, the largest firms were net job destroyers in recent years. This is in accordance with trends in the developed countries and elsewhere.

4. More labour market news, as Livemint reports of a steep increase in the share of contract labour in organised manufacturing. The graphic shows the share of contract labour from ASI data
To put this in perspective,
In the 17 years between 1997-98 and 2014-15, the compound annual growth rate (CAGR) of directly employed workers was a piffling 0.55%. In stark contrast, the CAGR of contract workers over the same period was 6.79%... In the manufacture of motor vehicles, for example, workers employed as contract labour are now 45.9% of total workers employed. In 1997-98, contract labour was 10.9% of total workers directly employed.
This trend is likely to accelerate as the government has just issued revised rules expanding fixed tenure of contract labour across all industries. 

5. Fascinating comparison of the fates of Martin Shkreli and Elizabeth Holmes, two people who rose to prominence as pharmaceutical entrepreneurs and who have been convicted/admitted of white collar crimes to defraud their investors.

The former gained notoriety for acquiring the rights to generic drugs for rare diseases before jacking up their prices, was convicted for fraud involving $10 million (though he did finally repay the investors, all of whom were wealthy people) for his activities at two hedge funds he ran. The latter becoming a darling of the VC world - appearing on the cover of Forbes, becoming a member of the Board of Fellows of Harvard Medical School, and receiving the Horatio Alger Prize - before being documented to have lied copiously to boost the valuation of her blood-testing start-up Theranos and thereby defraud investors, including public pension funds, to the tune of $700 million. While the former was convicted and jailed for 8 years, the latter settled with the SEC without admitting or denying them and with a fine of $500,000 and a ban on being an officer or director of any public company for ten years.

What explains the grossly disproportionate nature of punishments given the fraud perpetrated by Holmes being orders of magnitude higher?
John C. Coffee Jr., a professor at Columbia Law School who teaches classes on white-collar crime, said, “Typically you get more sympathy from the criminal justice system if you’re an attractive young woman than a brash, arrogant young male”... In comparison to Mr. Shkreli’s fraud, the Holmes allegations “are really a different order of magnitude,” Ms. Apps said.
Their respective reactions after being charged too appears to have played an important role. While Holmes kept a low profile, Shkreli constantly provoked the Court with his public comments about the case.
Mr. Shkreli repeatedly defied Mr. Ben Brafman’s (his defence lawyer) admonitions to keep quiet and avoid the limelight. He smirked through his trial, taunted prosecutors as the “junior varsity,” called the case a “witch hunt” and was suspended by Twitter after he threatened to have sex with a freelance journalist who covered him. His bail was revoked and he was imprisoned after he offered a $5,000 bounty in a Facebook post for a strand of Hillary Clinton’s hair — a “solicitation to assault,” Judge Matsumoto ruled. In theory, Mr. Shkreli’s well-publicized bizarre antics, both in and out of court, should have had no bearing on his guilt or sentence. As Mr. Brafman put it in his opening statement, Mr. Shkreli shouldn’t be found guilty for being “odd,” “weird,” or having a “dysfunctional personality.” But prosecutors cited his behavior to assert in closing arguments that he “had no respect for the law.” At his sentencing, Judge Matsumoto suggested his actions called into question whether his purported remorse was genuine. 
“I’ve never had a client who did more to hurt his own standing with the court than Martin Shkreli,” Mr. Brafman said. His behavior and comments “probably added several years to his sentence.”
While we all get caught up with the minutiae of legal stuff, ultimately we, including the judges, are all human beings. The cases highlight the critical importance of perceptions and prejudices in determining the fates of court cases.

6. Three very good articles by Anjan Basu, a former official of a public sector bank in India, that shines light on possible distortions that crept into the PSU banks over the years. The first is on the corporate culture of these banks. The second is about the progressive liberalisation of credit appraisal processes - elimination of the credit consortium approach of lending to large projects, which would require all the banks to approve the appraisal and terms negotiated by the lead bank, and its replacement with the multiple banking arrangement where the large company could independently negotiate separate terms with different banks so as to encourage swifter disbursals; removal of the minimum long-term margin requirement stipulations for borrowers; and relaxation in norms for identifying stressed assets whereby if a loan by one bank to a borrower had become NPA then all others too had to classify the same loan account as NPAs. The result was a competitive race to the bottom among PSU banks in lending to and retaining large clients.

The third article refers to business practice reforms for the worse driven by consultants - business process reengineering (BPR) which split loan processing functions into marketing, evaluation and assessment, and supervision and monitoring functions and scattered them across multiple layers within the bank, thereby losing critical synergies and accountability; and treatment of banks as a financial supermarket offering a bouquet of products and financial incentivisation of cross-selling by employees, which in turn enraged customers. The result was erosion of accountability mechanisms within banks and distorted incentives among employees.

This is one more example of the problem with deregulation in financial markets as well as the mindless acceptance of business practice fads that consultants peddle to make a living. 

7. A new IMF working paper explores the distribution of income gains from globalisation. Its summary,
In a panel of 147 countries during 1970-2014, we apply a new instrumental variable, exploiting globalization’s geographically diffusive character, and find differential gains from globalization both across and within countries: Income gains are substantial for countries at early and medium stages of the globalization process, but the marginal returns diminish as globalization rises, eventually becoming insignificant. Within countries, these gains are concentrated at the top of national income distributions, resulting in rising inequality. We find that domestic policies can mitigate the adverse distributional effects of globalization. 
The figure shows that in countries with low level of globalisation, increasing globalisation is associated with a greater income growth and the effect tapers off with increase in level of globalisation. 

8. Gaurab Aryal, Federico Ciliberto, and Benjamin Leyden find evidence of anti-competitive collusive behaviour by legacy airlines in the US. They parsed transcripts of quarterly earnings calls for 11 airlines for the 2002-16 period for mentions of "capacity discipline" (restricting the number of offered seats and flights to keep prices high enough). They write,
In recent years, airline executives have been discussing capacity discipline frequently, with the topic coming up in 54 percent of the quarterly earnings conference calls of legacy carriers since the end of 2002... we find evidence that legacy airlines used discussions of capacity discipline in their quarterly earnings calls to coordinate capacity reductions in competitive (non-monopoly) routes. In particular, we found that when all of the airlines serving a particular airport-to-airport market discussed capacity discipline in their most recent earnings call, they reduced the number of seats offered from 1.25 percent in large markets up to 4.21 percent in smaller markets, even after controlling for a rich set of factors that affect airlines’ capacity choices. In other words, legacy carriers used public communication (the discussion of capacity discipline) to collude with their competitors in order to reduce the number of seats that they as a group offered for sale.
An example of how too much information sharing can result in counter-productive outcomes. 

9. Finally, Times has a nice graphical feature on the latest empirical analysis by Raj Chetty, Nathaniel Hendren et al on social trends in the US. They track the anonymise data of virtually all Americans in their late thirties to find,
Black boys raised in America, even in the wealthiest families and living in some of the most well-to-do neighborhoods, still earn less in adulthood than white boys with similar backgrounds... White boys who grow up rich are likely to remain that way. Black boys raised at the top, however, are more likely to become poor than to stay wealthy in their own adult households. Even when children grow up next to each other with parents who earn similar incomes, black boys fare worse than white boys in 99 percent of America. And the gaps only worsen in the kind of neighborhoods that promise low poverty and good schools... Gaps persisted even when black and white boys grew up in families with the same income, similar family structures, similar education levels and even similar levels of accumulated wealth...

According to the study... income inequality between blacks and whites is driven entirely by what is happening among these boys and the men they become. Though black girls and women face deep inequality on many measures, black and white girls from families with comparable earnings attain similar individual incomes as adults.
The authors point to racist attitudes being faced by black males as explanation for this,
If this inequality can’t be explained by individual or household traits, much of what matters probably lies outside the home — in surrounding neighborhoods, in the economy and in a society that views black boys differently from white boys, and even from black girls... Other studies show that boys, across races, are more sensitive than girls to disadvantages like growing up in poverty or facing discrimination. While black women also face negative effects of racism, black men often experience racial discrimination differently. As early as preschool, they are more likely to be disciplined in school. They are pulled over or detained and searched by police officers more often. It’s not just being black but being male that has been hyper-stereotyped in this negative way, in which we’ve made black men scary, intimidating, with a propensity toward violence... this racist stereotype particularly hurts black men economically, now that service-sector jobs, requiring interaction with customers, have replaced the manufacturing jobs that previously employed men with less education.

Thursday, March 22, 2018

Public policy in the context of India's bankruptcy code

Public policy implementation is hard. Regulations have to trade-off between being too restrictive and too accommodative. The former stifles genuine activities whereas the latter opens up opportunities for subversion. Given the entrenched, and well-founded, concerns about Indian corporate governance standards, bureaucrats tend to err on the side of caution and choose to be more restrictive than they ought to be.  

The implementation of the Insolvency and Bankruptcy Code (IBC) is a good example. With good intent, the original regulations allowed considerable flexibility on who could participate in the bids for resolved assets. But in the very first case itself it became evident that promoters had exploited the flexibility to game the process and gain control over their firm with the added benefit of having knocked off the debt-holders at negligible cost. 

Stung by allegations of supporting crony capitalism, the government responded by amending the regulations to bar defaulting promoters, loan defaulters, people convicted of offences, barred by regulators etc and their related entities from participating in IBC bids. This is a very wide list of exclusions and given that at least some of these are the norm, most of the country's largest industrial groups get covered. And this is what is happening,
It has become a fertile ground for litigation as bidders come out with reasons to show competitors are ineligible.
Consider this,
The high profile case here is Essar Steel Ltd where lenders are hoping to claw back as much as $6 billion. The eligibility of both its bidders is under a cloud because of their perceived connections with defaulters. NuMetal Ltd has bid in a consortium that includes an entity controlled by a trust that has Rewant Ruia, son of Ravi Ruia, as a beneficiary. VTB, the largest shareholder in NuMetal, has said that is willing to drop the Ruia trust and would go to court if its bid was disqualified. It has also said that cases and judgements in other jurisdictions related to VTB won’t disqualify its bids. Similarly, ArcelorMittal had a 29% stake in Uttam Galva, another defaulter, while its chairman L.N. Mittal held a 33% indirect stake in another defaulter entity KSS Petron. Both these stakes had been sold off before the steel giant bid for Essar, which ArcelorMittal believes is sufficient to ensure its eligibility..In the case of Electrosteel Steels Ltd, Abhishek Dalmia led Renaissance Steel has appealed to the tribunal questioning the eligibility of Tata Steel and Vedanta. Renaissance has alleged that some overseas subsidiaries (or officials) of these firms were convicted.
Could some of these have been anticipated with better framing of regulations?
In its current avatar, the law does not specify whether past associations are relevant for deciding eligibility, but this could very well be grounds for litigation depending on how the committee of creditors, that takes the final call on bids, chooses to view this... the code should clearly specify whether past associations with disqualified entities are relevant and for how long. Another could be to clearly specify what kinds of relationships are relevant instead of an all-encompassing definition of related parties and connected parties.
I'm not inclined to be sympathetic to a Ministry which made regulations without paying attention to such basic details - hard to not have foreseen the problems with not defining the kinds of association with disqualified entities and its duration and leaving them so open-ended. This is just as unprofessional as the original regulation did not anticipate and have some basic safeguards to ensure that promoters do not game the process by capturing the Committee of Creditors. I would classify it a failure of the bureaucracy. 

Tuesday, March 20, 2018

The economic efficiency Vs social stability trade-off

The challenge posed by the rise of robots and resultant automation is well known. This is a nice summary of the evidence, 
Multiple studies suggest this is just the beginning and that there is more pain that lies ahead. A study by a real estate firm CBRE suggests 50% of occupations today will be gone by 2020. Then there is one by Oxford in 2013 that forecasts 47% of jobs will be automated by 2034. Yet another study has figured that only 13% of manufacturing job losses were due to trade. The rest has happened due to automation. And to make things worse, a McKinsey reckons 45% of knowledge work activity can be automated.
It is not a hyperbole to describe automation as the apotheosis of the search for economic efficiency. Robots make no mistakes, are more adaptable, can work 24X7, are much cheaper than labour, pose not threat of unionisation, and so on. Robots are super-efficient.

But this pursuit of efficiency in the modern economy sits with another trend - declining productivity in services sectors, those presumably most likely amenable to technological disruption and automation. 
Many of these services have seen increase in their share of the US labor force. Noah Smith has a very good article which captures the dilemma posed by this apparent weakness of the services sectors,  
The U.S. economy is sending more and more people into the sectors where productivity is either growing slowly or even falling... Is the stampede of American workers into unproductive industries really a bad thing?

Most economists would answer “yes” -- if construction, health care, education and the rest became more productive, workers would be freed up to go do other, more productive things, perhaps in industries that don’t even exist yet. But it’s also possible that some of these workers would otherwise just choose not to work -- to sit in their parents’ basements and play video games -- or to try to strike it rich in black-market sectors like drug sales. It’s also possible that the economic pressures of automation and trade, combined with the difficulty of retraining for new careers, would be sending some of these workers onto the welfare rolls instead of into new, better jobs.
And this conclusion is very sobering but rarely discussed in the mindless pursuit of efficiency,
So it’s possible that construction, health care, education and other industries are now functioning partly as giant make-work programs. Instead of giving a few people obviously useless jobs, this make-work system hides little bits of useless work in everybody’s job. That could be preserving the dignity of work for thousands, or even millions, of men and women standing around on construction sites, filling out paperwork in hospitals, or filing briefs for frivolous lawsuits. And that dignity, in turn, could be saving the U.S. from greater social unrest than it’s already experiencing.
In the efficiency and evidence maximising world-view that has gripped the worlds of business and academia respectively, the aforementioned would constitute an inefficient and therefore bad equilibrium. But when we step back and take a more comprehensive view, this may actually be a desirable situation. 

Change, especially by way of technological and social progress, is generally good. But such changes generally have an appropriate pace. Expedite the change and stresses will develop to disrupt the system, especially those with too many moving parts. There is no escape from the law of unintended consequences. Despite all its struggles, an organic evolution without too many mutations is the best response to such situations. The role of public policy should be confined to facilitating the process as well as mitigating the adverse consequences. 

This applies as much to a plunge towards automation and efficiency, as with the journey to become formal and shrink informality, or embrace digital technologies to reduce corruption. Press the pedal too early and too fast, and breakdowns or crashes are inevitable. 

Sunday, March 18, 2018

Weekend reading links

1. The Economist on the decline of publicly listed companies in the US,
According to Jay Ritter of the University of Florida, the number of publicly listed companies peaked in 1997 at 8,491 (see chart). By 2017 it had slumped to 4,496... Mr Ritter attributes much of the decline in the number of companies that are listed to the difficulty of being a small public company... listing requirements have become more burdensome over time. For example, he notes that the prospectus for Apple Computer’s public offering in 1980 ran to a mere 47 pages and listed no risk factors, despite its novel product, inexperienced leaders and formidable competitors. The prospectus for Blue Apron, a meal-delivery company that listed last year, weighed in at 219 pages, with 33 devoted to risks, presumably intended to pre-empt litigation. One of those risks was the possibility that Blue Apron would not “cost-effectively acquire new customers”.
2. Staying on with the declining of public markets, Craig Doidge, Kathleen M. Kahle, G. Andrew Karolyi, René M. Stulz have a paper which analyses the trends in US equity markets. Their findings are striking,
Since reaching a peak in 1997, the number of listed firms in the U.S. has fallen in every year but one. During this same period, public firms have been net purchasers of $3.6 trillion of equity (in 2015 dollars) rather than net issuers. The propensity to be listed is lower across all firm size groups, but more so among firms with less than 5,000 employees. Relative to other countries, the U.S. now has abnormally few listed firms. Because markets have become unattractive to small firms, existing listed firms are larger and older. We argue that the importance of intangible investment has grown but that public markets are not well-suited for young, R&D-intensive companies. Since there is abundant capital available to such firms without going public, they have little incentive to do so until they reach the point in their lifecycle where they focus more on payouts than on raising capital.
But, this trend may be unique to the Wall Street capitalist that US follows 

The challenge posed by intangible assets intersects with both the limitations of prevailing accounting practices as well as the excessive transparency of disclosure requirements, 
Public markets are better suited for firms with mostly tangible assets than for firms with mostly intangible assets. This is especially true when the usefulness of the intangible assets has yet to be proven on a large scale. Sometimes the market is extremely optimistic about some intangible assets, which confers a window of opportunity on firms with such assets to go public. But otherwise, firms with unproven intangible assets may very well be better off to fund themselves privately. Accounting information conveyed by U.S. GAAP for such firms is of limited use because GAAP treats investments in intangible assets mostly as expenses, so that these assets may very well not show up on firms’ balance sheets. Private funding allows firms to convey information about intangible assets more directly to potential investors who often have specialized knowledge, something that they could not convey publicly... The issue with disclosure of intangible assets is not what firms have to disclose. Rather, it has to do with the nature of the intangible assets they need to disclose. Once an idea is made public it becomes possible for other firms to use it... Investment in intangible assets is highly sensitive to the legal environment in which a firm operates and to the pace of financial development it experiences. A plant is hard to steal. A new idea is not...
As intangible assets continue to increase in importance, it should not surprise us to see a further eclipse of public markets. This stalling of public equity market development should be more pronounced in a country like the U.S., where intangible assets are relatively more important for the corporate sector... this evolution also reflects that U.S. financial development has evolved in such a way that some types of firms can be financed more efficiently through private sources than through public capital markets because the intrinsic properties of intangible assets make it harder for them to be financed in public markets. No deregulatory action is likely to restore the public markets in this case. Instead, we should focus on creating a fertile ground for investment in intangible assets by having appropriate laws, appropriate financing mechanisms, and maybe new types of exchange markets, as these assets appear to be the way of the future for corporations.
3. Another paper by René M. Stulz, with Söhnke M. Bartram and Gregory W. Brown explore another consequence of the reduction in listed companies - correlatedness among stocks.
Since 1965, average idiosyncratic risk (IR) has never been lower than in recent years. In contrast to the high IR in the late 1990s that has drawn considerable attention in the literature, average market-model IR is 44% lower in 2013-2017 than in 1996-2000. Macroeconomic variables help explain why IR is lower, but using only macroeconomic variables leads to large prediction errors compared to using only firm-level variables. As a result of the dramatic change in the number and composition of listed firms since the late 1990s, listed firms are larger and older. Larger and older firms have lower idiosyncratic risk. Models that use firm characteristics to predict firm-level idiosyncratic risk estimated over 1963-2012 can largely or completely explain why IR is low over 2013-2017. The same changes that bring about historically low IR lead to unusually high market-model R-squareds.
4. Times reports of California's aggressive embrace of transit-oriented development (TOD) by way of a legislative Bill to allow eight-storied buildings around transit stations even if local communities object. The Bill proposes to allow apartments of upto 85 feet tall within half mile of train stations and a quarter-mile of high-frequency bus stops. It would overcome one fo the biggest stumbling blocks to increased densification in the region, entrenched local opposition.

5. Noah Smith point again to the rising business concentration in the US economy.
He describes the resultant dynamics a "toxic cycle"
As industries grow more concentrated, dominant companies become a bigger piece of the stock market, and their profit margins push stock valuations higher. Politicians naturally will be less willing to take steps to make markets more competitive, allowing superstar companies to become even more powerful. All the while, retirement accounts do OK, but workers’ wages and the economy suffer from decreasing competition.
6. Alec Schierenbeck makes the case for a progressive approach to the imposition of all forms of financial penalties. In simple terms, people should be made to pay fines based on their respective income levels. He argues that scaled fines, like in Finland and Argentina which have had them for than 100 years, are more equitable and have greater deterrence value.

7. One more consequence of quantitative easing - rising property prices in the world's largest cities. FT writes,

Over the past 10 years, the life-cycles of global cities such as London, New York and Sydney start to look very similar. They begin with central banks cutting rates; then foreign buyers are welcomed in, prices go up, high-end homes are built, capital appreciation drops and then cities are left with a lot of stock which is too expensive to sell.

8. Finally, from a nice FT essay on long-haul flights, to put air transportation in perspective,
The world has never been smaller, as it spins beneath a web of flight paths; at any one time, there are an average of almost 10,000 aeroplanes in the air, carrying 1.2m people between countries and continents at more than 500mph.
Yes, 1.2 million people in air at any time! 

Thursday, March 15, 2018

Two graphs on India's credit market

It is true that the share of incremental credit flows to non-financial corporates is nowadays more or less equally split between bank and non-bank sources.

But, even among all its peers, the share of the stock of private non-financial sector credit coming from banks is the highest in India. In fact, just about 5% of it comes from non-bank sources. No other major country has this skewed distribution.

Further, the stock of credit to non-financial sectors from all sectors at market value as a share of GDP has hardly changed in India over the past 16 years and is well below the average for emerging economies.

Wednesday, March 14, 2018

Do we need evidence on the efficacy of rural roads and electricity?

This paper on rural electrification program in Kenya finds,
We do not find meaningful medium-term impacts on economic, health, and educational outcomes nor evidence of spillovers to unconnected households. These results suggest that current efforts to increase residential electrification in rural Kenya may reduce social welfare. 
This paper on India's rural roads construction program finds,
There are no major changes in consumption, assets or agricultural outcomes, and nonfarm employment in the village expands only slightly. Even with better market connections, remote areas may continue to lag in economic opportunities.
The fact that we are trying to generate evidence on rural roads and electricity baffles me. What is it that we takeaway from such papers? What is it that the "headline readers" among development professionals would takeaway?

Is it that the high upfront investments that are required with any kind of rural infrastructure (since it cannot leverage economies of scale) is social surplus reducing, and therefore undesirable (in econ-speak)? Or is it that grid electrification/BT roads is not cost-effective to comparable alternatives? Or that rural infra works have leakages which make them social surplus reducing or engendering incentive distortions? Or that the measurement approach that the researchers take is limited in that it is not able to capture all the potential general equilibrium effects - after all without electricity and roads you cannot have a life of modernity, which I guess is a salient material objective of development? Or is it even that developing countries should make choices between roads and electricity for their villages and nifty innovations like deworming, nudges, shiny technology Apps, micro-insurance, self-help groups, cash transfers, and so on? Or is it that the short-term benefits of roads and power are small - if so, what about the long-term benefits? 

Note that neither paper even qualify its findings with such a preface.

In fact, a cursory reading of the abstract, as is what happens most often, can easily leave one with the takeaway that rural roads and rural electrification are a bad use of public money. We only need to look at how much damage this one work contributed to misleading the fiscal austerity debate. Clearly, this time is no different. No pun intended.

A more appropriate response to such papers and the comes from Lant Pritchett's description of these as "kinky development",
What the World Bank chose to highlight in its official publicity about Dr. Jim Kim’s visit (to Somalia) was that it had figured out a way to use mobile phone surveys to track the poverty status of people in Somalia on a quarterly basis. Imagine the joy and celebration among Somalis to know that the World Bank was going to promote Somalia’s national development not with a port upgrade, or a road or electricity or water, or even a school or a clinic, but by being able to track and tell them every quarter just how poor they really are—something I suspect they know quite well already...
Perhaps promoting energy source diversification is why President Obama, while touring a power plant in Africa, thought it politically expedient to promote the Soccket ball. For those of you who still have not been introduced to this technological marvel, the Soccket ball is a soccer ball containing a battery that is charged by the kinetic energy of being kicked. This contraption is perhaps one of the best illustrations of the gap between development realities (the average Ethiopian consumes 52 kwh of electricity and the average American 13,246 kwh) and the “solutions” being proposed by the world’s elite: ban coal and limit hydro and if Africans want power, let them kick some soccer balls round.
This nails it
In another 2013 Center for Global Development study, Benjamin Leo used the authoritative Afrobarometer and Latinobarometer surveys to document the discrepancy between poor country citizen preferences and U.S. foreign assistance allocations. In Africa, surveys asked the question “In your opinion, what are the most important problems facing this country that government should address?” and grouped the responses into eight broad categories. In Africa, 71 percent mention jobs/income among their top three problems, 52 percent mention infrastructure, and 63 percent name either jobs/income, infrastructure or economic/financial policies as their priority. Independently of what we may think African priorities ought to be, only seven percent named health, four percent education, and one percent governance as among the top three problems the government should address. Yet of American assistance to Africa from all agencies (e.g. USAID, PEPFAR, and MCC), only six percent goes to jobs/income and only 16 percent to jobs/income and infrastructure. Fully 60 percent of American assistance goes to areas that the Africans surveyed think are distinctly lower-tier priorities.

Monday, March 12, 2018

The implementation validity problem with RCTs

Randomised Control Trials (RCTs) are extensively used in development today. Funding decisions by multilaterals and other donors are swayed by evidence from RCTs. In fact, in certain rarefied confines of international development, RCTs have become the definition of evidence itself. 

A typical RCT is a small experimental pilot with the smallest sample size consistent with statistical requirements done under the supervision of some principal investigators and with the field support of smart and committed research and field assistants. This poses a problem.

How do we separate these two effects?
  1. The immense energies of reputed researchers and their committed and passionate young RAs to protect the integrity/fidelity of the experiment
  2. The effect on Sl No 1 (which would be absent in business as usual implementation) contributing to the experiment's effective implementation. 
In other words, how do we evaluate the treatment (or the innovation being proposed) in the business as usual environment?

An RCT typically establishes the efficacy of the treatment. But it does not tell much about its effectiveness, a measure of both the efficacy and implementation fidelity.

This assumes great significance since the same innovation or treatment is generally implemented through government systems, which are notoriously enfeebled. In fact, given the weak state capacity, trying out innovations whose efficacy has been established through RCTs is akin to pumping all kinds of exotically engineered liquids through pipes which leak everywhere.

It is also the reason why practitioners are lukewarm to many headline RCT findings which generate intense interest among academics and the global development talkshops.

Do we call this the implementation validity problem?

It is surprising that while papers and books have been written about the internal and external validity problems associated with RCTs, this arguably more important challenge, given the weak state capacity in all the implementation environments, hardly gets a mention.