„THE NEW DEVELOPMENT ECONOMICS: WE SHALL EXPERIMENT, BUT HOW SHALL WE LEARN?“ D.RODRIK (2008)

Presented by Chantelle Blachut & Elisabeth Niendorf –Development Workshop – 2nd year MADE – Faculty of Economics – University of Warsaw

OUTLINE

Introduction Divergence of research strategies

Cross-Section Analysis Survey Analysis Randomized Experiments

Convergence of Policy Mindsets Conclusion Discussion

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WHICH DEBATES DO WE FACE TODAY IN DE? 2

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Easterly - „The White Men‘s Burden“ (2006)

Planners vs. Searchers

Advocates searchers approach – sequential appraoch to reform

Similar of Rodrik‘s line of argumentation – identify binding

constraints to growth

Sachs – „The End of Poverty“ and United Nations Millennium Project

Substantial increase in foreign aid – „big push“ to escape the poverty trap

Doing everything at once

e.g. Millenium Villages

Far away from any consensus

???

GOOD NEWS AND BAD NEWS FOR DEVELOPMENT ECONOMICS

Macro dev. economists

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Micro dev. economists

• substantial convergence in policy mindsets of micro-evaluation enthusiasts and growth diagnostics

• methodological divergence

GIVE BEDNETS OUT FOR FREE?

Research strategies

Cross-Section econometrics – macro- specfication

Survey – qualitative research

Experimental Approach – randomized evaluation

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GIVE BEDNETS OUT FOR FREE?

Research strategies Cross-Section econometrics – macro-

specfication(1) Yit = α Pit + ∑j βj PitXit + ∑j γj Xit + Di + Dt +

εit

Pros: broad coverage, control for at least some of the background conditions

Cons: identification

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GIVE BEDNETS OUT FOR FREE?

Research strategies cont‘d Survey – qualitative research

Pros: can be carried out in a more open-ended manner, allowing unanticipated information to play a role

Cons: relevance

Experimental Approach – randomized evaluation

Thought excursion

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THOUGHT EXCURSION: EXPERIMENTAL APPROACH IN DEVELOPMENT ECONOMICS

o MIT Poverty Action Lab (A. Banerjee & E. Duflo)o „hard evidence“ vs. „soft evidence“

o Randomized experiment or natural experimento Ask counterfactual question: How would an

individual have performed in the absence of the program?o Treatment and control group chosen randomly

o Strong candidates for the application of this methodology: o sanitation, local government reform, education

and health programs directed at individuals or local communities

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THOUGHT EXCURSION: EXPERIMENTAL APPROACH IN DEVELOPMENT ECONOMICS

Randomization: gives good estimates for the effects of the policy

BUT does not provide a way to analyse how the background conditions have affected the outcome

BUT makes extrapolation of the results is infeasible Superiority in terms of identification

BUT depends on: What evidence is needed for? How wil it be used?

BUT we need a hypothesis about the cause- effect relationship in advance

Guidance for policy makers

BUT specificity of locality, group, conditions

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THOUGHT EXCURSION: EXPERIMENTAL APPROACH IN DEVELOPMENT ECONOMICS

Esther Duflo on Ted Talks about Social Experiments to fight Poverty

http://www.ted.com/talks/lang/eng/esther_duflo_social_experiments_to_fight_poverty.html

For overview about the methodology and some examples of implementation see also: „Use of Randomization in the Evaluation of

Development Effectiveness“ - Duflo & Kremer (2003)

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GIVE BEDNETS OUT FOR FREE?

o Experimental Approach – randomized evaluation

Pros: identification Cons: moral concerns, problem of „external

validity“

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INTERNAL VS. EXTERNAL VALIDITY

Internal validity: quality of causal identification Has the study revealed the link between

policy/treatment and the outcome of interest?

External validity: generalizibilty

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Sound inference requires both !!

MACRO DE AND CHANGING POLICY MINDSETS

Experimental approach spurs innovation by “making it easy to see what works” (Banerjee)

Premise: policy innovation is useful in that it promotes the development of unconventional solutions

Until recently this idea ran counter to growth theory & up until one decade ago macro-development economic theorists believed they knew exactly how to turn around economic performance in closed statist economies

Today: less confidence & a call for humility

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YESTERDAY & TODAY2

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Traditional Policy Frame (presumptive)

New Policy Mindset

(Experimentalist)

Presumptive (not Diagnostic)

Characterised by list of reforms

(when these fail add more)

Emphasises complementarity of reforms over sequencing/prioritisation

Bias: favouring universal remedies

Diagnostic (agnostic basis)

Emphasises experimentation to discover what works

Tends to look for selective, relatively narrow targeted reforms

Suspicion: ‘best practice’ or universal approaches

THE GOOD NEWS

Although new in the context of growth these recent developments this pattern of reasoning is very similar to that of micro-development economists focusing on randomised experiments.

Commonalities:- Diagnostic / Scientific Methodology- Begin with no presumptions- Postulate hypothesis re underlying process- Use continuous monitoring & evaluation to

check if evidence is consistent with the signals you would expect to find under the given hypothesis

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WHAT DOES IT MEAN TO BE A MDE AND EXPERIMENTALIST AT ONCE?

No contradiction (need to interpret experimentalist broadly not only equate with randomised evaluations)

Experimentalism (macro) = simply a predisposition to find out what works through policy innovation

Some of the most significant gains in economic history can in fact be attributed to this approach

China’s experience with experimental gradualism

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CHINA: EXPERIMENTATION UNDER HEIRARCHY

Crossing the river by feeling the stones

Core: public action should be basedupon evaluations of experiences withdifferent policies (Experimental).

Ravallion (2008)

Chinese example as the crowning achievement of

the method of experimentation and evaluation

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CHINA: EXPERIMENTATION UNDER HEIRARCHY

Mindset of China’s reform process is perfectly illustrative of the potential for convergence of the ideas of micro & macro development economists.

Illustrates … “a vastly significant real-world instance (that shows) how the experimental approach need not remain limited in scope and can be extended into the domain of national policies”

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CHINA: A REAL WORLD EXAMPLE What constitutes scientific?

“Three Parts Natural, Seven Parts Man-Made: Bayesian analysis of china’s great leap forward demographic disaster”

(By Houser, Sands & Xiao) GLF (1958-61) Goal: Achieving Economic Growth Famine 1959-61 (est. 14.8m casualties) Approx. 71% due to effects stemming from

bad policies need for caution - DE is not a

game

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WHAT DO WE NEED? CHANGES ON BOTH SIDES !

Macro dev. economists

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Micro dev. economists

• recognize that randomized evaluation is restricted by narrow and limited scope • focus more on the external validity of their studies

• recognize distinctive advantages of experimental approach

Not let methodological differences overshadow what micro- and macro- economists have in common !!

CONCLUSION

CONCLUSION

Rather than proving the superiority of one research strategy over the other: How can different approaches complement each

other? A significant opportunity that could allow for the re-unification of micro and macro

economic development theory and the progression from universal (presumptive)

approaches to contextual (experimental) based

is presenting itself....

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NEW DEVELOPMENT ECONOMICS