A week of applied microeconomics

It has been a great week of recognition for the field of applied microeconomics, especially for people working in the intersections of development economics and political economy. Yesterday, it was announced that Melissa Dell, an applied microeconomist, was awarded this year’s John Bates Clark Medal for her work on the role of the state, institutions, and history on economic development and wellbeing.

I have been following and inspired by many of Dell’s work. There are three papers of her that I consider to be some of my favourites. The first paper is “Nation Building Through Foreign Intervention: Evidence from Discontinuities in Military Strategies” by Dell & Querubin (2018), which estimated that American bombing increased the military and political activities of the communist insurgency, weakened local governance, and reduced non-communist civic engagement in South Vietnam. While being primarily interested in how principles and tools of economics are used to engage with questions of state building and history, this paper admittedly touches upon my own personal history and emotions of being a product of Vietnam’s civil war. In fact, as I write this, it’s the April of 30th and the 45th anniversary of the end of that war. This paper nevertheless contributes (or confirms) with relevant insights for more effective counter-terrorism, and state building during conflicts and post-conflict periods more generally.

The second paper is “The Historical State, Local Collective Action, and Economic Development in Vietnam“, co-authored by her with Lane & Querubin (2018). This study traces the historical differences in modes of governance between rulers in northern and southern and monitors their impacts on various economic outcomes over 150 years. It found that areas more exposed to the modes of centralised and more institutionalised village governance, typical of the rulers of Dai Viet (northern Vietnam), achieved better economic outcomes overall than areas in southern Vietnam, which were more typically run by the modes of informal patron-clientism with little village intervention (in those days, the village formed the present-day “state”). This paper is a reminder that strong institutions that should underpin any modern state today are not built over-night. Present-day state building may partly require countries to have a substantial “persistent history” of such efforts. But unlike determinism, persistence does not imply that changes can’t take place. In the case of Vietnam, the historical modes of governance in the northern parts seem to have played out positively for it’s present-day strong state power and governance.

Speaking of persistence in history, the third paper, which is one of her most cited works, is “The Persistent Effects of Peru’s Mining Minta” (2010). From Mita, a forced labour mining system in place in Peru and Bolivia between 1573 and 1812, this study found and estimated its lasting impacts on child stunting, land tenure, and public goods provision among people from districts subjected to the system. The impacts were largely detrimental. As the study also found that subjected districts “remain less integrated into road networks and their residents are substantially more likely to become subsistence farmers” even till this date, it seems that Peru is a case study where historical persistence go hand-in-hand with determinism, unfortunately.

I have yet to dig into her most recent paper, co-authored with Olken (2020), which looks at the impact of colonial-motivated infrastructure on the long-run economic development of the island of Java in Indonesia, where I currently work: “The Development Effects of the Extractive Colonial Economy: The Dutch Cultivation System in Java” (2020). I look forward to scrutinise its findings and conclusions. If interested in the role of history for economic development, I recommend reading the following two papers by the economist Nathan Nunn: “The Importance of History for Economic Development” (2010) and “The Slave Trade and the Origins of Mistrust in Africa” (2011).

The majority of economics scholars that I look up to happen to be applied microeconomists. The main reason why I am most attracted to applied microeconomics is because I have found it to be the most adventurous field within economics to this date. In recent decades, it has emerged to become relatively more open-minded than most other sub-fields of economics, more specifically in terms of:

  • Curiosity and drive to explore and address questions that bear great societal relevance, yet often ignored in neo-classical economics.
  • (Growing) willingness to engage with and incorporate insights from other fields, especially political science, sociology, psychology and history.
  • Courage to transcend the cultural barriers within the economics field in order to eventually turn economics to become a lot more innovative and relevant to the public.

The “credibility revolution” starting from the late 1980s, in which empirical data were analysed in order to con(test) assumptions about agents and their preferences behind the (previously dominant) theory-heavy models, emerged precisely from applied microeconomics. This trend eventually gave birth to new sub-fields in economics: network economics, information economics, behavioral economics, and so forth. One of the economists who pushed for the credibility revolution from its earliest days, the late Alan Krueger (1962-2019), wrote the following in his last book “Rockonomics: A Backstage Tour of What the Music Industry Can Teach Us About Economics and Life“:

“You can’t understand markets or the economy without recognizing when and how the jazz of emotions, psychology, and social relations interfere with the invisible hands of supply and demand.”

p.7 in Rockonomics (2019)

Apart from Alan Krueger’s reputation for his unfettered analytical abilities and commitment to survey methodology, data, and statistics, he was the typical applied economist who made economics look so versatile through his applications of relevant principles from economics into addressing questions across disciplines and sub-fields: psychology, labour economics, environmental economics, economic growth theory, …, and indeed rockonomics. Unless I become an academic myself, Alan Krueger is certainly a model of a civil servant that I look up to and aspire to become in the future. In June 2019, Brookings held a memorial workshop for him that neatly summarised much of his contributions to economics and the social sciences overall.

The credibility revolution also paved the way for other more traditional sub-fields to be “re-born” again in terms of gaining more academic publications and public relevance: development economics, political economy, economic history, institutional economics, and personnel economics. My passion are found in the the intersections of these “re-born” sub-fields, especially development economics and political economy. I do also have my own fair share of admiration for scholars outside economics that I look up to, particularly in political science. Prior to my growing awareness for the imaginary space that applied microeconomics offers compared to the rest of economics, I had for many years (and at times still remain) found myself at the crossroads in terms of my academic orientations. Do I want to become an economist or political scientist? Are my questions “economics” enough? Are my questions “political science” enough? Am I good enough for either?

In 2014, I graduated as a macroeconomist, but quite disinterested in the entire discipline. There was minimal exposure to applied economics papers and exercises. The microeconomics content that I was taught was extremely heavy of theory, though partly because I chose to take classes alongside master degree students. On the other hand, during my time studying political science at the LSE, a time in which I initially had treated to be a “temporary break” from economics, I had a hard time of producing works that were “politics-oriented” enough. By my professors, I was repeatedly reminded that I had to write under the terms of political science.

Nevertheless, my “crossroad moments” have fortunately become less important kind of questions as time goes. Economics and political science are gradually converging toward each other, though more so from the direction of political science toward economics if judging solely by cross-disciplinary journal citations (a summary article is available here). During a very precious office hour meeting while at the LSE with Tim Besley, an applied microeconomist, he took his time to listen to my crossroad concerns regarding my future path. After explaining, I shyingly asked if my curiosity for the question of whether and how democracy fosters development is “economics enough”. To my delightful surprise, he gently asserted: “Of course”. This was such a stark contrast to some of the rather unfortunate cultural aspects that persist within economics even till this date: “Is this really economics?” or another infamous one: “Why should we care about these findings if the data comes from country X (except the US)?“.

Tim continued by asking me if I had read the paper: “The Value of Democracy: Evidence from Road Building in Kenya” by his colleagues. I answered “of course“, too. It’s one of my favourite papers. Tim Besley is known for his works on the role of democracy for development, where he advocates for understanding the role of democracy for development more greatly through the lenses of factors that strengthens state capacity, including fiscal and legal capacity, beyond elections. He has recently also become more engaged in civic culture (or what he calls “cultural capital”) as a factor for improving state capacity. Together with Torsten Persson, a Swedish economist and giant in political economy, he also recently released a new edition of the book “Pillars of Prosperity: The Political Economics of Development Clusters“.

Beside fiscal and legal capacity as part of forming overall state capacity, I would also like to add the importance of the gradual re-birth of personnel economics, a sub-field that contributes to the study of public administration. The political scientist, Francis Fukuyama, has in many of his works emphasised civil service reform for state building, and argued that poor government services in the US is traceable to the steady decline of interest into the study of public administration, especially among economists in recent decades. He laments this trend as a “crisis in public administration as a field”. The Bloomberg columnist, Noah Smith, argues that “economists focus almost exclusively on incentives and markets, neglecting the details of building efficient government organisations”. The ongoing Covid-19 pandemic has further fueled calls for a shift in focus towards improving the competence and efficacy of public administration across the world. These observations have also been acknowledged by academic economists, most of them being applied microeconomists. To quote from a paper on plumbing in economics by the economist, Esther Duflo:

“Those who implement policies, often government workers, are humans too. They may suffer from the same limitations as the final subjects of the policy, and their incentives are not necessarily to work very hard or in the best interests of the citizens they serve. (…) These problems have received fairly little attention in economics until relatively recently. (…) Indeed, the decisions on how to hire, fire, and reward government employees creates the basic environment in which government work is happening”.

p. 16 in “The Economist as Plumber” (2017)

There are two papers that I would like to share, as they reflect the return of interest among economists into the study of public administration. The first paper is “Losing Prosociality in the Quest for Talent? Sorting, Selection, and Productivity in the Delivery of Public Services” by Ashraf et. al. 2020, whose final version was made available from this week. I read this paper last year, when it was still in a working paper version. Performing a nationwide randomised controlled experiment, this important study investigated how Zambia’s public health sector could recruit the most skilled civil servant applicants, as well as how variations in the framing of career schemes affected the pro-social motivations of the applicants and hired candidates. The second paper is “The Personnel Economics of the State” by Olken et. al. (2015), which underscores the importance of the state and individuals directly involved in the provision of public services on economic development, based on findings from household surveys of 32 countries around the world. One of the co-authors behind the first paper provides a succinct summary of its findings:

In ending our conversation, Tim suggested that I consider a career route into public policy, regardless of whether I pursue this route as an academic or a professional civil servant. This route may give the needed space for me to walk between the trails of economics and political science whenever “crossroad” moments hit me from time to time. It’s also a field where I still have the chance to observe the intersections of development economics and political economy in action on the ground, therefore maintaining a desired balance between theory and practice. Let’s see! This week certainly reminded me of keeping up my passions and staying true to myself.

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