Inclusion, Changing Preferences, and Public Policy

Nicholas Stern2nd Permanent Secretary to HM Treasury and Head of the Government Economic Service

Overview

1. Development as a process of change2. A strategy for development: two pillars3. Spotlight on the second pillar:

promoting empowerment, participation, and inclusion

4. The dynamics of preferences5. Concluding comments on expanding

theory of public policy

Part I: Development as a Process of Change

Progress on living standards: beneficial change in the developing world

Meanings: what poor people say; conceptual frameworks.Dramatic changes in education and health over the last 30 yearsPerspective over two centuries

Development as a Process of Change

First fall in absolute numbers in 2 centuries: dominated by East Asia

Development as a Process of Change

What does change not consist of?Progress has not resulted from steady accumulation of capital (physical or human or social) within a static or dynamically simplistic single-good frameworkFormal models of growth and development are usually superficial or silent on the most important features of the development process

Development as a Process of Change

Instead, development characterized by:

Fits and starts in growthMassive structural changes in economy and societyGlobal integrationStriking changes in preferences and behaviour (focus of today’s discussion) and ways of living

Part II: A Strategy for Development

Lessons of 50 years of development on spurring the right type of changesTwo-pillar strategy for development

Pillar #1: Improving the investment climatePillar #2: Empowering poor people and promoting participation in development

A Strategy for Development

Governance, institutions, and behaviour central to both pillarsEach of governance, institutions, and behaviour has a conceptually distinct role, although they overlap and interact ‘Behaviour’ is often missing from story

A Strategy for Development

Pillar #1: Improving investment climate

Purpose: • Build a climate promoting growth,

employment, and innovation in private sector • Emphasises farms and small enterprises

Elements of that climate:• Stable macro and openness• Infrastructure• Governance and institutions

Part III: Empowerment and Participation

What does empowerment mean?Gaining control over one’s own life Essential to development effectiveness• In management of schools and water projects• In security of property rights• In improvements in health status• In monitoring government performance

And it is central to poor people’s definition of their poverty (“Voices of the Poor”)

Empowerment and Participation

Empowerment: having the ability to shape one’s life, or to participate effectively (ingredients)Determinants of /constraints on empowerment:

Poor individual endowments & HDExternal constraints created by family, social, cultural, and political contextInternal constraints – the lack of a “capacity to aspire”

Empowerment and Participation

Individual Endowments Assets Human Capital

Empowerment

Internal Constraints Perceptions of own role Preferences Capacity to aspire

External Constraints Family Community (Caste, Religion) Society Governance

Determinants of Empowerment

Empowerment and ParticipationEmpowerment and inclusion – similar but not identical concepts

Empowerment is relevant even when we look at individual in isolationInclusion focuses on

• social interactions within a community• action by agents who may force exclusion• factors that go across generations

In practice, both often identify key policy issues and challenges and imply similar policies

Empowerment and Participation

Can we measure empowerment?Household surveys –

• Focus on outcomes, including HD outcomes • Need to disaggregate by social status, gender

Surveys of governanceSurveys of attitudes and aspirationsSurveys measuring shocks, such as natural disasters and crimeSurveys of public service delivery (QSDS/PETS)

Part IV: The Dynamics of Preferences

Empowerment will often be associated with changing preferences

Indeed, policies to enhance empowerment are often focused on changing preferences/behaviour

Distinguish preferences and behaviourDevelopment is accompanied by momentous changes in preferences (with rural-urban migration, education of women, etc.)This makes increasingly untenable the comprehensive assumption of constant preferences

The Dynamics of Preferences

Why preference change matters: five examples

Shift in attitudes with industrialisation or urbanisation (Tawney)Promoting the education of girlsAttitudes toward women in the workforceRace relationsChanging standards in economic transitions

The Dynamics of PreferencesAssessing reforms or optimising policy with fixed preferences

Very fruitful approach for much of modelling and policy (e.g., theory of taxation and economic regulation)Behaviours in terms of actions change if incentives or information change in a manner modelled via fixed preferencesIf a state of affairs is preferred by one individual and not ranked lower by any other, it is socially preferred (SWF is based- positively- on individual preferences)Provides clear answers

The Dynamics of Preferences

Without the constant-preference assumption, we have 2 options for understanding behaviour:

Retain formal preferences and model how preferences change over timeAbandon preferences, and focus on understanding how opportunities & capabilities change over time

Different approaches to policy are associated with these approaches

For the former, we have to decide how to treat (e.g., weight) conflicting preferences For the latter, we have to be able to identify expansions of ability to shape own life

Both approaches will leave important ambiguities

The Dynamics of Preferences

First approach: attempt to integrate into “neoclassical public economics”

Retains preference orderings, and struggles to make comparisonsExamples: • Meta-utility function• Utility function with preferences over

“fundamental goods” or wants• Experience effects

The Dynamics of Preferences

The challenge of assessing well-being when preferences changeTo judge the welfare effects of a policy, should we use today’s preferences, or tomorrow’s or something else?

The Dynamics of PreferencesTo assess policy change in this type of approach often requires something akin to paternalism

State acts in support of “higher self” against wishes of “lower self”, when preferences are expected to evolveState overrides preferences where it believes they “should” be changedMay be some mileage in partial orderings where rankings relative to two preference orderings are consistent, but strong interest in cases where there is conflict in rankings

The Dynamics of Preferences

Alternative approach focuses on processes: e.g. Austrian school/ Sen approach

Looks beyond preference orderingsWorks in terms of freedoms and capabilities, rather than utilitiesProvides a new basis for policy advice: assess development effects in terms of expanding freedoms

The Dynamics of Preferences

Expansion of freedoms as a criterion for policy choice has a basis in some strands of political philosophy

Nozick’s view: asserts inviolable freedomsBerlin’s assessments of states, governments and policies: but insistence on pluralism and warnings on simplistic, single-criterion, formulations of decision-making

The Dynamics of Preferences

Implication of the Austrian/Sen approach:

Focus of policymaking should be less on comparing outcomes And more on processes for decisionmaking

Examples:Ait Iktel in MoroccoSonagachi anti-AIDS efforts in Kolkata

The Dynamics of Preferences

Validity or legitimacy of action to change preferences: again ‘processes’ Examples show the importance of building mutual trust through co-operation and mutual commitmentConnects to literature of Tocqueville, Mill, Dewey on political interaction and changing preferencesMarket itself is an arena for these social processes

The Dynamics of Preferences

Viewing social actions this way has profound implications for preference change and policy choiceNot top-down preference change, but processes of social decision makingThere are many challenges in implementation, particularly where inequalities and exclusion are severe

Part V: Concluding CommentsEvidence of development as fundamental change plus objectives in terms of empowerment & inclusion point to strategy focusing on processes, as exemplified by two pillars hereTogether the evidence, objectives, and strategy lead us to re-examine basics of theory of public policy

Much of development policy is, or should be, focused on changing institutions & preferences

Part V: Concluding Comments

Have focused here on changing preferencesChanging institutions/governance is another lectureBut we have learned something on changing governance:

transparencyeconomic structure avoiding discretioncivil service reform leadership

Concluding Comments

If we follow this analysis and direction through, we will create a new approach to the theory & practice of public policy which builds on but goes far beyond standard public economicsAt same time will bring different social sciences together in understanding policy and the role of the state