It has been my tradition at this blog to take a break from current events in late August. Instead, I offer a series of posts about economics, academia, and and editing, focusing on comments or themes that caught my eye in the last few months.
Back in 2008, the World Bank published the report of the Commission on Growth and Development, consisting of 19 policymakers and a couple of Nobel prize-winning economists. The Growth Report : Strategies for Sustained Growth and Inclusive Development still rewards reading today. Here, I focus on what Michael Spence, chair of the Commission, later referred to as probably the most popular section of the report–a two-page discussion just called “Bad Ideas.” The Commission wrote (pp. 68-69).
Debates help clarify good ideas, subjecting them to scrutiny and constructive criticism. But debates can also be infected by bad ideas. This poses two difficulties for policy makers. First they must identify bad ideas, because specious proposals can often sound promising. Then, they must prevent them from being implemented. An illustrative list of “bad ideas”, which are nonetheless often brought into the debate and should be resisted, is offered below. We hasten to add that just as our recommendations for good policies are qualified by the need to avoid one-size-fits-all approaches and to tailor the policies to country-specific circumstances, our list of bad policies must also similarly be qualified. There are situations and circumstances that may justify limited or temporary resort to some of the policies listed below, but the overwhelming weight of evidence suggests that such policies involve large costs and their stated objectives—which are often admirable—are usually much better served through other means.
- Subsidizing energy except for very limited subsidies targeted at highly vulnerable sections of the population.
- Dealing with joblessness by relying on the civil service as an “employer of last resort.” This is distinct from public-works programs, such as rural employment schemes, which can provide a valuable social safety net.
- Reducing fiscal deficits, because of short term macroeconomic compulsions, by cutting expenditure on infrastructure investment (or other public spending that yields large social returns in the long run).
- Providing open-ended protection of specific sectors, industries, firms, and jobs from competition. Where support is necessary, it should be for a limited period, with a clear strategy for moving to a self-supporting structure.
- Imposing price controls to stem inflation, which is much better handled through other macroeconomic policies.
- Banning exports for long periods of time to keep domestic prices low for consumers at the expense of producers.
- Resisting urbanization and as a consequence underinvesting in urban infrastructure.
- Ignoring environmental issues in the early stages of growth on the grounds that they are an “unaffordable luxury.”
- Measuring educational progress solely by the construction of school infrastructure or even by higher enrollments, instead of focusing on the extent of learning and quality of education.
- Underpaying civil servants (including teachers) relative to what the market would provide for comparable skills and combining this with promotion by seniority instead of evolving credible methods of measuring performance of civil servants and rewarding it.
- Poor regulation of the banking system combined with excessive direct control and interference. In general, this prevents the development of an efficient system of financial intermediation that has higher costs in terms of productivity.
- Allowing the exchange rate to appreciate excessively before the economy is ready for the transition towards higher-productivity industry.
The list above is illustrative and not exhaustive. Individual countries will have their own list of practices that appear to be desirable but are ineffective. Relentless scrutiny of policies should be an essential element in rational policy making. This due diligence needs to be doubled for policies of the type listed above.
I sometimes like to say that the most important role of economics in practical policy-making may not be in choosing the best option. There may be several options that work pretty well, and choosing the “best” may be a matter of opinion. But economics can help identify and rule out the worst options, and the gains from avoiding the truly awful choices can be quite substantial.