Economics Nobel 2019: why Banerjee, Duflo and Kremer won

Economics Nobel 2019: why Banerjee, Duflo and Kremer won

Arnab Bhattacharjee, Heriot-Watt University and Mark Schaffer, Heriot-Watt University

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2019 (commonly known as the Nobel Prize for Economics) has been awarded to Abhijit Banerjee, Esther Duflo and Michael Kremer “for their experimental approach to alleviating global poverty”. Through the award, the Nobel committee recognised both the significance of development economics in the world today and the innovative approaches developed by these three economists.

Global poverty continues to be a massive challenge. The award follows Angus Deaton, who received it in 2015 for his contributions to development economics – the field that studies the causes of global poverty and how best to combat it – particularly, his emphasis on people’s consumption choices and the measurement of well-being, especially the well-being of the poor.

Well-developed theory can highlight what causes poverty and, based on this, suggest policies to combat it. But it cannot tell us exactly how powerful specific policy measures will be in practice. This is precisely where the contributions of Banerjee, Duflo and Kremer lie. The Nobel citation gives several examples of their impact, including how their research has helped education, health and access to credit for many in the developing world, most famously in India and Kenya.

Consider, for example, child mortality and health – issues of immense significance in the developing world. Theory can tell us that women’s empowerment is important for child health and mortality outcomes, but cannot tell us which policy will be most effective in combating this. It could be a focus on educating mothers, or access to healthcare, or electoral representation, or marital age legislation.

Perhaps, more importantly, theory cannot tell us how large and significant the impact will be of these various policies. And this is where the significance of the Nobel Prize this year comes in.

A new, experimental approach

The fundamental contribution of Banerjee, Duflo and Kremer was to develop an experimental approach to development economics. They built a scientific framework and used hard data to identify causes of poverty, estimate the effects of different policies and then evaluate their cost effectiveness. Specifically, they developed randomised control trials (RCTs) to do this. They used these to study different policies in action and to promote those that were most effective.

Starting in the mid-1990s, Kremer and co-authors started a series of RCTs on schooling in Kenya, designing field experiments to evaluate the impact of specific policies on improving outcomes. This approach was revolutionary. The experiments showed that neither more textbooks nor free school meals made any real difference to learning outcomes. Instead, it was the way that teaching was carried out that was the biggest factor.

Studies by Banerjee and Duflo, often together with Kremer and others, followed. They initially focused on education, and then expanded into other areas, including health, credit and agriculture.

Banerjee and Duflo were able to use these studies to explain why some businesses and people in less developed countries do not take advantage of the best available technologies. They highlighted the significance of market imperfections and government failures. By devising policies to specifically address the root of problems, they have helped make possible real contributions to alleviating poverty in these countries.

Banerjee, Duflo and Kremer also took significant steps towards applying specific findings to different contexts. This brought economic theories of incentives closer to direct application, fundamentally transforming the practice of development economics, by using practical, verifiable and quantitative knowledge to isolate causes of poverty and to devise adequate policy based on behavioural responses.

The impact of these developments upon real world development outcomes are immensely significant. Their work, and substantial amounts of research that followed it, established evidence on fighting poverty in many developing countries. And they are continuously expanding their horizon of contributions, which now also includes climate and environmental policy, social networks and cognitive science.

Diversity issues

The 2019 Nobel Prize for Economics is also significant for reasons of inclusivity. The impact generated by Banerjee, Duflo and Kremer’s approach has come about very quickly – actually, in less than two decades. This explains why, at the age of 47, Duflo is the youngest-ever recipient of the economics Nobel. She is also only the second woman to be awarded the prize (after Elinor Ostrom in 2009). Banerjee, who is also her husband, is the third ever non-white recipient (after Arthur Lewis in 1979 and Amartya Sen in 1998).

In a recent issue of the journal Nature, Göran Hansson, head of the Royal Swedish Academy of Sciences that awards the Nobel, highlighted measures to address the imbalance in gender and ethnicity among winners. He said “we are making sure to elect women to the academy” from which the prize-awarding committees for the chemistry, physics and economics Nobels are drawn.

The pipeline to this achievement is important. The first woman to win the John Bates Clark Medal for top economists under 40, an important indicator of who will be awarded the economics Nobel in the future, Susan Athey, only did so in 2007. Esther Duflo was the second winner in 2010. Since then, women winners of the Clark medal have been more frequent. Of course, award decisions are made strictly on significance of contributions. But, based on this evidence, perhaps Athey, Amy Finkelstein (who won the medal in 2012) and Emi Nakamura (who won it in 2019) will not be far behind.

Arnab Bhattacharjee, Professor of Economics, Heriot-Watt University and Mark Schaffer, Professor of Economics, Heriot-Watt University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Libra: Facebook’s cryptocurrency will not help the billions of people currently excluded from banks

Libra: Facebook’s cryptocurrency will not help the billions of people currently excluded from banks

‘It’ll never catch on!’
NIKS ADS
 

Kamini Gupta, King’s College London

When Facebook unveiled its new digital currency libra, it explicitly said the initiative was intended to address the problems faced by the world’s unbanked: the 1.7 billion people without a bank account. As well as facing inconvenience, these people generally pay over the odds for financial services like bank transfers or overdrafts.

This is a pretty big potential market for Facebook so it’s not surprising that it would target the opportunity. But could libra really transform access to financial services for those who are currently excluded? There are reasons to raise serious doubts.

Across the world, the main reasons people give for not holding a bank account is that they don’t have enough money, don’t see the need for an account, find it too expensive, or another family member already has one. Not having the right documentation is also a barrier, as is distrust in the financial system.

Mo’ money mo’ problems.
Zilverlight

But the specific barriers to financial inclusion vary significantly by region and are usually a combination of social and economic factors. For instance, while cost is a big barrier in Latin America, lack of documentation is the big issue in Zimbabwe and Philippines.

This makes it difficult for any one intervention to be a solution to this huge group of people. Worryingly, the Facebook “white paper” that outlines libra does not really engage with these problems or say how it plans to overcome them.

Trust and financial literacy

People’s trust in institutions can be very important in influencing the extent to which they use their services, as I have found from my own work into microfinance, which I have presented at conferences but is yet to be published in an academic journal.

I have found that people are more likely to choose something familiar over something novel. Since libra will be a new currency relying on digital wallets and built on blockchain online ledger technology, it is not short of novelties. Inspiring trust is therefore likely to be a major challenge.

And simply signing someone up to an account – be it a bank account or a digital wallet – is only part of the financial inclusion challenge.

In India, 190m people still do not have bank accounts, but the percentage of the population who do have accounts has steadily increased to 80%. In 2017, however, nearly half of all bank accounts in the country had seen no activity over the whole of the previous year. One of the reasons is financial literacy, which remains low both in India and many other developing countries. Many people in India have said they are simply unaware of the different benefits of a bank account, such as overdraft facilities or credit schemes.

As many as 62% of the world’s unbanked have received only a primary-level education or less, and in poorer countries the proportion is almost certainly going to be higher. Expecting such people to make complex currency conversions into a new virtual currency is asking a lot.

Services rendered.
Riccardo Mayer

In the first place, there is a need for financial literacy measures and initiatives aimed at motivating them to use the services available. Without this additional support, there is a strong risk that Facebook will boast large numbers of sign-ups but very low rates of transactions from the people who are most in need.

Big world

Only a few days since Facebook’s announcement, libra has faced strong pushback from regulators and policymakers around the world. There is much concern about this proposed shift of power from central banks to a private corporation.

But aside from questions about the ethics of data privacy or the creation of a supranational currency, libra faces an important practical question. On the one hand, it is not clear how a model such as libra, where there will presumably be little or no physical presence in many countries, would interact with and adhere to local regulations.

On the other hand, if it does conform to the local standards of each country, it is unclear how it will overcome challenges like signing people up and strict documentation requirements. Will it really be able to serve the unbanked better than local providers who are used to the challenges in that specific market already?

Entrepreneurs and businesses can either start with a problem and think of the best way to solve it; or they can start with a solution and find the biggest and best problem it might solve. I’m not convinced that libra is a good move in either direction. Facebook either has a huge amount of work to do to adapt its solution to fit the problem better, or it needs to redefine the problem that it is trying to fix.The Conversation

Kamini Gupta, Lecturer in International Business and Comparative Management, King’s College London

This article is republished from The Conversation under a Creative Commons license..

China’s ‘Silk Road urbanism’ is changing cities from London to Kampala – can locals keep control?

China’s ‘Silk Road urbanism’ is changing cities from London to Kampala – can locals keep control?

File 20190327 139380 1qnb43p.jpg?ixlib=rb 1.1
View of Kampala.
Shutterstock.

Jonathan Silver, University of Sheffield and Alan Wiig, University of Massachusetts Boston

A massive redevelopment of the old Royal Albert Dock in East London is transforming the derelict waterfront to a gleaming business district. The project, which started in June 2017, will create 325,000 square metres of prime office space – a “city within a city”, as it has been dubbed – for Asian finance and tech firms. Then, in 2018, authorities in Kampala, Uganda celebrated as a ferry on Lake Victoria was unloaded with goods from the Indian Ocean, onto a rail service into the city. This transport hub was the final part of the Central Corridor project, aimed at connecting landlocked Uganda to Dar es Salaam and the Indian Ocean.

Both of these huge projects are part of the US$1 trillion global infrastructure investment that is China’s Belt and Road Initiative (BRI). China’s ambition to reshape the world economy has sparked massive infrastructure projects spanning all the way from Western Europe to East Africa, and beyond. The nation is engaging in what we, in our research, call “Silk Road urbanism” – reimagining the historic transcontinental trade route as a global project, to bring the cities of South Asia, East Africa, Europe and South America into the orbit of the Chinese economy.

By forging infrastructure within and between key cities, China is changing the everyday lives of millions across the world. The initiative has kicked off a new development race between the US and China, to connect the planet by financing large-scale infrastructure projects.

Silk Road urbanism

Amid this geopolitical competition, Silk Road urbanism will exert significant influence over how cities develop into the 21st century. As the transcontinental trade established by the ancient Silk Road once led to the rise of cities such as Herat (in modern-day Afghanistan) and Samarkand (Uzbekistan), so the BRI will bring new investment, technology, infrastructure and trade relations to certain cities around the globe.

The BRI is still in its early stages – and much remains to be understood about the impact it will have on the urban landscape. What is known, however, is that the project will transform the world system of cities on a scale not witnessed since the end of the Cold War.

Silk Road urbanism is highly selective in its deployment across urban space. It prioritises the far over the near and is orientated toward global trade and the connections and circulations of finance, materials, goods and knowledge. Because of this, the BRI should not only be considered in terms of its investment in infrastructure.

It will also have significance for city dwellers – and urban authorities must recognise the challenges of the BRI and navigate the need to secure investment for infrastructure while ensuring that citizens maintain their right to the city, and their power to shape their own future.

London calling

Developments in both London and Kampala highlight these challenges. In London, Chinese developer Advanced Business Park is rebuilding Royal Albert Dock – now named the Asian Business Port – on a site it acquired for £1 billion in 2013 in a much-criticised deal by former London mayor Boris Johnson. The development is projected to be worth £6 billion to the city’s economy by completion.

Formerly Royal Albert Dock, now Asian Business Port.
Google Earth.

But the development stands in sharp contrast with the surrounding East London communities, which still suffer poverty and deprivation. The challenge will be for authorities and developers to establish trusting relations through open dialogue with locals, in a context where large urban redevelopments such as the 2012 Olympic Park have historically brought few benefits.

The creation of a third financial district, alongside Canary Wharf and the City of London, may benefit the economy. But it remains to be seen if this project will provide opportunities for, and investment in, the surrounding neighbourhoods.

Kampala’s corridor

The Ugandan capital Kampala is part of the Central Corridor project to improve transport and infrastructure links across five countries including Burundi, the Democratic Republic of the Congo (DRC), Rwanda, Tanzania and Uganda. The project is financed through the government of Tanzania via a US$7.6 billion loan from the Chinese bank Exim.

Under construction: the Chinese-funded Entebbe-Kampala Expressway.
Dylan Patterson/Flickr., CC BY-SA

The growth of the new transport and cargo hub at Port Bell, on the outskirts of Kampala, with standardised technologies and facilities for international trade, is the crucial underlying component for Uganda’s Vision2040.

This national plan alone encompasses a further ten new cities, four international airports, national high speed rail and a multi-lane road network. But as these urban transformations unfold, residents already living precariously in Kampala have faced further uncertainty over their livelihoods, shelter and place in the city.

During fieldwork for our ongoing research into Silk Road urbanism in 2017, we witnessed the demolition of hundreds of informal homes and businesses in the popular Namuwongo district, as a zone was cleared 30 metres either side of a rehabilitated railway track for the Central Corridor required.

As Silk Road urbanism proceeds to reshape global infrastructure and city spaces, existing populations will experience displacement in ways that are likely to reinforce existing inequalities. It is vital people are given democratic involvement in shaping the outcomes.The Conversation

Jonathan Silver, Senior Research Fellow, University of Sheffield and Alan Wiig, Assistant Professor of Urban Planning and Community Development, University of Massachusetts Boston

This article is republished from The Conversation under a Creative Commons license.

Brexit with brie? Common Market 2.0 proposal explained – through the import and export of cheese

Brexit with brie? Common Market 2.0 proposal explained – through the import and export of cheese

Stuart MacLennan, Coventry University

Amid the ongoing Brexit standoff, one proposal that has been gaining traction and which MPs will now vote on in a series of indicative votes in parliament, has been the cross-party plan for a “Common Market 2.0”.

Superficially, the plan resolves a number of the challenges posed by Brexit, including the thorny issue of the Irish border and the UK’s future trading relationship with the EU. But the plan – also known as Norway+ because it has similarities with the EU’s relationship with Norway – involves the UK compromising on a number of its current red lines, while at the same time requiring a fundamental revision of one of the EU’s existing free trade agreements.

One way to understand how a Common Market 2.0 might work – and how it would differ to other options on the table – is to look at one type of good that might move between countries. Say, cheese.

First, it’s important to establish the difference between a free trade agreement and a customs union. As a rule, tariffs are applied on the basis of where goods originate from. The EU’s free trade agreement with Canada, for example, means that you can import Canadian Avonlea cheese into the EU free from tariffs. However, the EU’s lack of an free trade agreement with the US means that American Monterey Jack cheese is charged at €221.20/100kg. If you first export Monterey Jack to Canada, and then from Canada to the EU it will still be chargeable, as the goods originated in the US. Under a free trade agreement, checks on where good originated – known as “rules of origin” checks – are still required.

A customs union is a more advanced form of trading relationship, where you agree not only to remove any tariffs on each other’s goods, but also to apply the same tariffs on goods originating from third countries. This means, for the purposes of the EU customs union, that Monterey Jack will be treated the same whether it is imported to Belgium or Bulgaria. Within a customs union it’s unnecessary to check from where goods originate when they cross a border as they will already have received the appropriate customs treatment.

Back to the 1990s

The Common Market 2.0 idea is an attempt to reverse engineer the previous 25 years of EU integration, reverting the UK’s participation in the EU to the position before the Maastricht Treaty was agreed in 1992.

Under the plan, the UK would rejoin the European Free Trade Association (EFTA) of which it was a founding member prior to joining the European Economic Community. The UK would also accede to the European Economic Area (EEA) agreement with the EU. This is a two-pillared agreement between the EU, as well as three of the four EFTA members: Iceland, Liechtenstein and Norway, but not Switzerland. This is often known as the “Norway model”.

Under Common Market 2.0, the UK would be the only state outside of the EU to participate in both the EU customs union and the single market. The lack of a red line bisecting Ireland is the reason why a customs union is so attractive.
Dr Stuart MacLennan

Such an approach would result in the UK adopting EU-EEA measures relating to the internal market, including the free movement of goods and services, and competition law. But the UK would no longer be subject to the direct jurisdiction of the Court of Justice of the EU, which would be replaced by the jurisdiction of the EFTA Court.

Under this approach, regulatory alignment is all but guaranteed, as standards would ultimately be agreed by the EU and EEA (of which the UK would be a member) – meaning that all cheese capable of being sold in the EU, be that French brie or Dutch edam, ought to be capable of being sold in the UK and vice versa.

What moves the Common Market 2.0 proposal beyond simply replicating the Norway model, however, is that it also involves the UK entering a customs union directly with the EU, thereby removing the need for rules of origin checks on the Irish border between Northern Ireland and the Republic of Ireland. Checks on cheese moving between Norway and Sweden are rare – but they do happen. By entering into a customs union with the EU such checks along the Northern Irish border would never be necessary.




Read more:
Brexit: why was the Irish border ‘backstop’ so crucial to Brexit deal defeat?


The major stumbling block with Common Market 2.0, however, is that under the EFTA agreement it’s not currently possible for member states to enter into a customs union with other states – whether the EU or otherwise. So Norway cannot enter into a customs union directly with the EU, or the US, for example. If the UK were to seek this, it would require special treatment not only by the EU, but by EFTA as well – the political difficulties of which have been largely overlooked.

Free movement question

The Common Market 2.0 arrangement would also, controversially for many, involve the UK continuing with the free movement of persons. The key piece of legislation providing free movement rights for EU and EEA citizens – directive 2004/38 – was incorporated into EEA law in 2007.

One saving grace for the UK might be the joint declaration attached to that 2007 EEA decision that it cannot be the basis for the creation of political rights, and that the directive does not impinge upon immigration policy. This reflects the fact that the primary focus of EEA law is on economically active migrants, rather than EU citizens.



Read more:
Brexit: a Norwegian view on the Norway-plus model and why it wouldn’t be easy for the UK


The Common Market 2.0 approach is therefore unlikely to be viable. Not only would it enrage the right wing of the Conservative Party, it would require agreement from the EU, the EEA and Switzerland. Given the difficulties the UK has had agreeing a deal with one trading bloc, trying to win over three – the EU, the EEA, and EFTA, as well a domestic audience – looks near-impossible.The Conversation

Stuart MacLennan, Senior Lecturer in Law, Coventry University

This article is republished from The Conversation under a Creative Commons license..

A customs union would free the UK to strike trade deals – but it doesn’t solve every Brexit problem

Karen Jackson, University of Westminster and Oleksandr Shepotylo, University of Bradford

The debate around the UK’s level of involvement in the EU single market after Brexit may lead to a significant u-turn in government policy. Having initially said it would not seek a customs union with the EU after Brexit (after leaving the full, existing customs union), it looks as though the UK government’s position is softening. Given the alternatives to the single market that are available to the UK, a potential u-turn is welcome.

Leaving the single market but agreeing to a customs union doesn’t rule out the UK making its own trade deals. However, it should be careful what it wishes for. Freedom comes at a price. A customs union only covers trade in goods, so the UK would need an umbrella agreement to cover its other arrangements with the EU.

The World Trade Organisation (WTO) sets out the basics in Article XXIV of the General Agreement of Tariffs and Trade (GATT). In essence, a customs union is where tariffs are removed between members of the union, and the tariffs charged on imports coming from outside the union are harmonised across members of the union. This definition seems straightforward but when you dig deeper into Article XXIV, you find that while these rules apply to trade in goods, they say nothing about services – which are of course very important for the UK.

The text is also quite vague about the products that should be covered by the customs union, stating only that “substantially all trade” should be included. Of course, as soon as you start excluding products from your customs union, then borders with frictions, such as border checks, start to emerge. Therefore, the issue of whether any agreed customs union would be complete needs careful consideration. However, it’s clear that the WTO rules are too vague for anyone to claim that the UK cannot create an incomplete customs union if the EU agrees.

What we know is that an incomplete customs union, where product coverage is less than 100% or trade policies are not fully harmonised, could give the UK more freedom to sign its own trade deals. Turkey, an example of a country in an incomplete customs union with the EU, has a number of Free Trade Agreements with non-EU countries. However, if the UK steps outside the EU Customs Union and creates an incomplete UK-EU Customs Union, then embarks on signing new trade deals, there would need to be rules agreed regarding the coexistence of trade agreements. In simple terms, when the clauses in different trade deals start to conflict with each other, there will need to be a way to resolve these disputes.

Freedom at a price

Is all this freedom a good thing? It would take the UK further away from the complete customs union, which is the desire of Brexit supporters. However, signing even very simple trade deals will require considerable capacity and time, with the potential for significant delays even between signing and implementation. The EU also already has a long list of arrangements in place. Those with Japan and Mexico are the most recent examples. The UK is likely to find it harder to make deals when outside a large trade block. Furthermore, signing free trade agreements with non-EU countries would not compensate for losses due to new trade barriers against the EU countries.

Staying close to the EU may also protect the UK from the US government’s trade wars in crucial markets such as metals, fuels and chemicals. As the EU demonstrated in the case of the steel dispute, it can successfully negotiate exemptions from the new protectionist US tariffs. The UK, acting alone, may not have enough economic and political weight to do the same.

An incomplete customs union with the EU will be a step towards minimising the losses of Brexit, while giving opportunities to negotiate new free trade agreements related to particular goods. UK manufacturers selling final goods (transport, electrical equipment, computers, for example) to the EU, depend on the supply of intermediate goods (components for that electrical equipment and computers) from the EU in the first place. If even moderate tariffs are imposed, the flow of intermediate goods from the EU may come to a halt. If agricultural goods are excluded from the new UK-EU customs union, it opens up further possibilities for negotiating new free trade agreements with non-EU countries.

And since the customs union option doesn’t cover services, one option would be to have a broader umbrella agreement, perhaps an economic integration agreement, to also cover services.

A customs union in itself, and certainly one that gives the UK the flexibility to sign its own trade deals with non-EU countries, would not automatically solve the Irish border issue – a complete customs union (going further than even the WTO definition) would be a prerequisite for that. The political compromises, which are being discussed within the Conservative party, suggest a complete customs union is most unlikely. Therefore, even if a u-turn is forthcoming, many other challenges remain.

Karen Jackson, Senior Lecturer in Economics, University of Westminster and Oleksandr Shepotylo, Lecturer in Econoimcs, University of Bradford

This article is republished from The Conversation under a Creative Commons license.

 

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