India’s Microcredit Sector Faces Collapse From Defaults

Former DV409 students will be aware of the tepid academic evaluation literature on the effects of microfinance. Now an alarming article in today's New York Times raises further questions...

Analogies, social contracts, and teaching

As many of you now know, I like to use analogies in lecture to illustrate concepts that may seem abstract and technical in the original context, and my favourite analogies often draw on our everyday social lives. These stories may seemingly have little to do with economic development policy, but this week I'm feeling kind of vindicated and pleased with myself (!). An article in the Economist Magazine (on, oddly enough, sociopaths) made the very interesting point that our brains are hard-wired to instinctively comprehend social contracts, so abstract problems redefined in social- contract-space will be much easier to solve and understand. So, now all I have to do is figure out how to map instrumental variable estimation into a love triangle scenario!

The Gold Standard

My, nothing like a prolonged recession/economic crisis to bring back out all the fringe ideas into more general discussion! Why is that? Yesterday I discussed growing calls for trade repression, and today NPR ran a short piece on calls to return to the gold standard.

Popular rhetorical resistance to freer trade from all sides

How much of the suspicion and complaints about harm from trade are due to actual net harm from trade, and how much due to political economy - the ideological, political and psychological issues - some of which we reviewed last week?

As we have been discussing the last few weeks, trade can impact an economy through a variety of channels and depending on the underlying conditions, these mechanisms (either for good or for bad) will be more or less important in the net final outcome. This does not mean that the outcome is arbitrary, however - and for the most part, most of the theory and evidence suggest that freer trade should in most cases be beneficial, especially in the longer run. I have certainly never seen a convincing case that all or most countries would generally be hurt from fewer trade barriers (in goods).

However the chorus of anti-trade rhetoric is growing, and it seems to be growing on all sides. At least in the corridors of ID, I hear complaints that the WTO and international trading system is biased in favour of rich industrialised nations "who wrote the rules." Many people in the rich countries, however, believe exactly the opposite, that the current trading system is biased against them in favour of developing countries - and this view is gaining ground, as described in this recent op-ed in the New York Times. Each view sounds plausible (a view or idea must sound plausible to become so widespread -- so among all widespread ideas, plausibility is not actually much evidence of veracity, however), but I find it highly unlikely that both arguments could be correct.

Thus perhaps paradoxically, I personally find the increasing complaints about the effects of trade from all sides to be increased evidence not so much of any actual harm of trade, but more for the political and psychological explanations for trade resistance. What do you think? DV409 students must be hearing a variety of perspectives in their classes so comments welcome!

Economic policy and "picking winners"

Today in the Science Times section of the NYT there is a good op-ed piece about the underlying rationale for subsidizing basic research. I found it interesting that the discussion about the impact of 'picking winners' here mirrors at least part of the arguments surrounding the practice (for manufacturing firms) in trade policy. Note in this article we are talking about the first best policy of subsidies, while the trade protection recommendation is a second best policy when direct subsidization is not politically or financially feasible (it is much easier to stealthily make a diffuse group of consumers pay the costs). Nevertheless, elements of the intuition are strikingly similar.

Smoking and dementia - but is it True?

I am as strong an anti-smoking fundamentalist as they get, but a recent story in the New York Times about a study that found a relationship between smoking and dementia (which I am naturally primed to accept, given my dislike of smoking) caught my attention as a perfect example of how DV409 students can put their analytical tools to work.

There are several things to think about here. First, this is a cross-sectional study on a time-series issue. Are people who smoke now a good proxy for the future of someone who currently doesn't smoke but might take it up? Second (related to the first), the authors included some control variables (the NYT does not list them but provides a link to the actual paper), but are these sufficient to control for all the characteristics that differentiate smokers from non-smokers and that might also be correlated with dementia? Finally, could the relationship be the result of reverse causality? Could people prone to dementia have related neurological issues for which smoking provides some relief, so that smoking is a form of self-medication? This is not necessarily as much of a 'high tide and full moon' (i.e. very low probability) possibility as you might think; there is evidence that many of our behaviours, from smoking to drinking to chocolate-eating (my particular vice!) have at least some element of self-medication to them.

The answers to these questions must be derived from our knowledge of biology and behaviour, but the fact that we pose them in this way at all is a result of our methodological understanding.

Ideas on how to change the world

Here is an interesting article by another DV409 household name, Abhijiit Banerjee, on how to introduce more rigour into social policy. The rest of the site has other great articles on how to change the world. So that you keep your dissertations in perspective and start thinking about the real challenges ahead! Otherwise...