Why doesn't the World Bank's growth commission admit that experts don't have all the answers?

Bill Easterly suggests (here) that the recently published report of the World Bank growth commission (here) answers the question of how to promote high growth rates by saying something like: “we do not know, but trust the experts to figure it out”.

Does the report really say or imply that? The report identifies some of the distinctive characteristics of high growth economies and asks how other developing countries can emulate them. It talks of the importance of: bringing in ideas, technologies and knowhow from the rest of the world; international trade and specialization; structural transformation through microeconomic processes of creation and destruction; and high national savings rates. The report also notes that an important characteristic of high growth economies is “an increasingly capable, credible and committed government”. It discusses the need to rely on markets to allocate resources efficiently, the role of market and regulatory institutions that underpin mature market economies, the need for investment in infrastructure, education and health, the need for social safety nets to protect the losers from economic change and the need for a commitment to equality of opportunity to give everyone a fair chance to enjoy the fruits of growth.

It would seem from this brief summary that the World Bank growth commission - with its 21 world leaders and experts, an 11-member working group, 300 academic experts, 12 workshops and a budget of $4 m - has actually come to some conclusions about how to promote economic growth. Arguably, there is not much advance here on what the World Bank was writing in the 1990s about “the east Asian miracle” or, for that matter, on what Adam Smith wrote in “Wealth of Nations” in 1776 - but findings about the characteristics of more successful economies are probably worth re-stating from time to time.

So, is Bill Easterly mistaken? Not at all. He makes the point that only two of the 13 high growth episodes the commission studied were ongoing. Yesterday’s growth failures are today’s successes (e.g. India) and yesterday’s successes (e.g. Brazil) are today’s failures. And he points out that much of this volatility is inexplicable and unpredictable.

The World Bank growth commission comes close to acknowledging their own ignorance of the art of policy making when they note that some countries have sustained high growth for quite long periods without the deep institutional underpinnings that define property rights and enforce contracts in mature market economies. Consider the following odd sequence of sentences: “Indeed, an important part of development is precisely the creation of these institutionalized capabilities. Even without them, growth can occur, and these institutions can co-evolve with the economy as it expands. However, we do not know in detail how these institutions can be engineered, and policy makers cannot always know how a market will function without them” (p 4).

All the authors of the report needed to add, before putting “the art of policy making” in the too hard basket, was some comment to the effect that the best advice an economist can give policy makers is to consider the incentives that their policies are likely to create.

However, the commission could not acknowledge that it does not have any expertise in advising the governments of developing countries about “the art of policy making”. It couldn’t resist making inane comments like: “Bad policies are often good policies applied for too long” (p 6).

Rather than trying to imagine what might have been going on in the minds of the experts who signed off on that particular pretence of knowledge, readers would be better served by pondering the following quote from Friedrich Hayek:

If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants. ... The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society - a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals. (Nobel prize lecture given in 1974, available here).

Can beliefs about inequality make people unhappy?

In recent posts I have been considering whether some of the findings by Arthur Brooks in “Gross National Happiness” apply to countries other than the United States (see: here, here and here). In this post I continue that theme and focus particularly on the effect of political beliefs on the extent to which people are made unhappy by income inequality.

Brooks observes that levels of happiness, beliefs about inequality and income mobility, and political allegiance tend to go together. Americans who think that income differences are too large (about half the population) are a lot less likely to believe that there is a great deal of upward mobility in the United States. Political liberals are a lot less likely than conservatives to believe that there is a lot of upward income mobility in America. Surveys also show that pessimists about income mobility are a lot less likely to be very happy than are optimists.

There is some evidence from published research relating to other countries that political views tend to influence the extent that inequality of income makes people unhappy. Research by Alberto Alesina, Rafael Di Tella and Robert MacCulloch suggests that in Europe the poor and those on the left of the political spectrum tick down their happiness scores when inequality is high, but in the United States the happiness of the poor and those on the left is largely uncorrelated with inequality. Rafael Di Tella and Robert MacCulloch also report the results of a 36 country study based on the World Values Survey which suggests that low income has less of an adverse effects the happiness of low-income people if it is accompanied by a belief that poor people have a chance of escaping from poverty in the country in which they live. (See: Di Tella and MacCulloch in ‘Some uses of happiness data in economics’, Journal of Economic Perspectives, Winter 2006, p 42).

In earlier posts I have noted that in most countries the happiness of lower income people tends to be closely related to the happiness of middle and upper income people in the same countries (here) and that the gap in happiness between upper and lower income people is not related in any clear and obvious way to differences in the extent of income inequality among different countries (here). I now want to report on some research in which I have attempted to assess whether political views influence the proportion of lower income people who are satisfied with life.

The research involved use of multiple regression to explain the proportion of lower income people who are satisfied with life in terms of: the proportion of upper income people who are satisfied with life, self-positioning on the political spectrum; differences in self-positioning on the political spectrum between upper and lower income people; the proportion of the population who believe that it would be a good thing if there was less emphasis on money; differences between upper and lower income people in the proportions who believe that it would be a good thing if there was less emphasis on money; an indicator of religious service attendance and a measure of income inequality (gini index). (Data used in the study were for 66 countries for the year 2000 and have been sourced from “Human Beliefs and Values” by Ronald Inglehart et al.)

The results suggest that the most significant variables explaining the proportion of lower income people who are satisfied with life are:

• the proportion of upper income people who are satisfied with life (by far the most important);
• differences in self-positioning on the political spectrum between upper and lower income people;
• the proportion of the population who believe that it would be a good thing if there was less emphasis on money; and
• differences between upper and lower income people in the proportions who believe that it would be a good thing if there was less emphasis on money.
  
  

These results support the view that the impact that inequality has on the happiness of low income people is influenced by their political beliefs and their beliefs about the importance of money and material things.

(Research presented on this blog – as on any other blog - should be viewed with more caution than peer-reviewed research presented in academic journals. For quality assurance purposes I am prepared to make detailed results of research available to anyone who wants them and the data available to anyone who wants to replicate studies.)

What is the best predictor of the happiness of low-income earners?

The most obvious answer would be average income level. However, the probability of happiness can vary markedly among countries with similar income levels. This is apparent when we look at the extent to which average income levels in different countries influence the chances of happiness of those on lower, middle or upper incomes. For example, although lower income Australians have about the same probability of reporting that they are satisfied with life as might be expected on the basis of their income levels (70 percent), the probability of lower income Mexicans reporting that they are satisfied with life is about 34 percent greater than expected (75 rather than 41 percent) and the probability of lower income Japanese reporting that they are satisfied with life is about 21 percent lower than expected (46 rather than 67 percent). (These results were obtained by use of regression to fit an equation relating the probability of people on lower incomes being satisfied with life to per capita income level. Life satisfaction data was for 66 countries for 2000 and obtained from: : Ronald Inglehart et al, Human Beliefs and Values, Siglo XXI Editores, Mexico, 2004, A 170).

Some might suggest that measures of income inequality could be used to predict the happiness of low-income people. However, there is no clear evidence that happiness inequality is related to the extent of income inequality (see here).

It turns out that the happiness of those on higher incomes in individual countries is a good predictor or the happiness of low-income people in those countries. Lower income people tend to be less happy than those on higher incomes but the margin is fairly consistent across countries – if those on upper incomes are happy, those on lower incomes also tend to be happy. There are some exceptions. For example, data for 2000 indicates that lower-income Armenians were much more satisfied with life and low-income South Africans were much less satisfied with life than would be predicted on the basis of the happiness of those with higher incomes.

In general, however, a very large proportion of the variation in the probability of people on lower incomes claiming to be satisfied with life can be explained simply in terms of the proportions on middle incomes who claim that they are satisfied with life.

Do your political views make you unhappy?

In his book, “Gross National Happiness”, Arthur Brooks cites compelling evidence that Americans who label themselves as conservatives are nearly twice as likely to say they are very happy as those who label themselves as liberals. This gap which has persisted for 35 years cannot be explained by income differences and apparently can only be explained in part by demographic factors such as religion and marriage.

As indicated previously (here) I am interested in the question of whether this finding also applies to other countries.

The gap between the happiness of those on the left and right of the political spectrum does not seem to be as large in Australia as in the United States. Data from the World Values Survey for 1995 (obtained by using the excellent facility available here to obtain cross-tabs online) suggest that those who self-positioned themselves on the left of the political spectrum in Australia (codes 1 to 4 on a 10 point scale) in that year were about 4 percentage points less likely to report being satisfied with life than the rest of the population (75 percent rather than 79 percent).

However, there is some evidence that political views are associated with substantial impacts on the probability of happiness in many countries. A study that I have undertaken covering 69 countries involved calculating a political index and assessing to what extent this index was capable of explaining differences in the proportions of the populations were are satisfied with life. The political index was calculated for each country from published data on percentages who self-position themselves on the left (assigned a value of 1) centre (assigned a value of 2) and right (assigned a value of 3). The index values range from 1.5 to 2.6 with an average of 2.1. Multiple regression was used to explain the percentage who were satisfied with life in terms of this political index and two control variables (per capita income level and percentage who attend religious services once a month or more). (Data were for the year 2000 and have been sourced from “Human Beliefs and Values” by Ronald Inglehart et al.)

The results suggest that an increase of 0.1 in this political index ( e.g. from the level in Britain of 1.9 to 2.0 – the same as for Australia) would be associated with an increase in percentage of people satisfied with life of about 2 percentage points (i.e. an increase from 73 to 75 percent of people being satisfied with life - sufficient to halve the gap between Britain and Australia in the percentage of people who are satisfied with life).

What are the implications of the finding that people who self-position themselves on the left of politics tend to be less satisfied with life than other people. In one sense it is hardly surprising that lefties should profess to be less satisfied with life than others. After all, their dissatisfaction may provide a motive for them to propose radical change. At the same time, however, it seems likely that those who self-position themselves on the left may have beliefs and frames of mind that cause them to have different feelings about objective circumstances. In my next post I will look at some evidence about the effect of self-positioning on the political scale on responses to income inequality.

(Research presented on this blog – as on any other blog - should be viewed with more caution than peer-reviewed research presented in academic journals. For quality assurance purposes I am prepared to make detailed results of research available to anyone who wants them and the data available to anyone who wants to replicate studies.)