„The New Development Economics: We Shall Experiment, But How Shall We Learn?“ D.Rodrik (2008)

1. „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

2. Outline • Introduction • Divergence of research strategies • Cross-Section Analysis • Survey Analysis • Randomized Experiments • Convergence of Policy Mindsets • Conclusion • Discussion presented by C. Blachut & E.Niendorf

3. Which debates do we face today in DE? • 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 • 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 presented by C. Blachut & E.Niendorf Far away from any consensus ???

4. good news and bad news for development economics • Micro dev. economists • Macro dev. economists • substantial convergence in policy mindsets of micro-evaluation enthusiasts and growth diagnostics presented by C. Blachut & E.Niendorf • methodological divergence

5. Give Bednets out for free? Research strategies • Cross-Section econometrics – macro- specfication • Survey – qualitative research • Experimental Approach – randomized evaluation presented by C. Blachut & E.Niendorf

6. Give Bednets out for free? Research strategies • Cross-Section econometrics – macro- specfication (1) Yit = α Pit + ∑jβj PitXit + ∑jγj Xit + Di + Dt + εit • Pros: broad coverage, control for at least some of the background conditions • Cons: identification presented by C. Blachut & E.Niendorf

7. 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 presented by C. Blachut & E.Niendorf

8. Thought excursion: Experimental Approach in development economics • MIT Poverty Action Lab (A. Banerjee & E. Duflo) • „hard evidence“ vs. „soft evidence“ • Randomized experiment or natural experiment • Ask counterfactual question: How would an individual have performed in the absence of the program? • Treatment and control group chosen randomly • Strong candidates for the application of this methodology: • sanitation, local government reform, education and health  programs directed at individuals or local communities presented by C. Blachut & E.Niendorf

9. 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 presented by C. Blachut & E.Niendorf

10. 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) presented by C. Blachut & E.Niendorf

11. Give Bednets out for free? • Experimental Approach – randomized evaluation • Pros: identification • Cons: moral concerns, problem of „external validity“ presented by C. Blachut & E.Niendorf

12. 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 presented by C. Blachut & E.Niendorf Sound inference requires both !!

13. MACRO DE AND CHANGING POLICY MINDSETS 15.10.2014 • 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 presented by C. Blauchut & E.Niendorf 13

14. YESTERDAY & TODAY 15.10.2014 presented by C. Blauchut & E.Niendorf 14

15. THE GOOD NEWS 15.10.2014 • 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 presented by C. Blauchut & E.Niendorf 15

16. WHAT DOES IT MEAN TO BE A MDE AND EXPERIMENTALIST AT ONCE? 15.10.2014 • 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 presented by C. Blauchut & E.Niendorf 16

17. CHINA: EXPERIMENTATION UNDER HEIRARCHY 15.10.2014 Crossing the river by feeling the stones • Core: public action should be based upon evaluations of experiences with different policies (Experimental). Ravallion (2008) • Chinese example as the crowning achievement of the method of experimentation and evaluation presented by C. Blachut & E.Niendorf 17

18. CHINA: EXPERIMENTATION UNDER HEIRARCHY 15.10.2014 • 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” presented by C. Blauchut & E.Niendorf 18

19. CHINA: A REAL WORLD EXAMPLE 15.10.2014 • 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 presented by C. Blauchut & E.Niendorf 19

20. What do we need? Changes on both sides ! Conclusion • Macro dev. economists • Micro dev. economists • recognize distinctive advantages of experimental approach • recognize that randomized evaluation is restricted by narrow and limited scope • focus more on the external validity of their studies presented by C. Blachut & E.Niendorf Not let methodological differences overshadow what micro- and macro- economists have in common !!

21. 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.... presented by C. Blachut & E.Niendorf  NEW DEVELOPMENT ECONOMICS