Poor Economics

by Abhijit Banerjee

  One of the most vocal critics of Collier’s proposal is, predictably, William Easterly.12 The central problem, he rightly points out, is that it is easier to take over a country than to know how to make it run well. The disastrous effort of the United States to institute a market-friendly democracy in Iraq is just one recent example.13 But more generally, one size does not fit all. Institutions need to be tailored to the local environment, and therefore any top-down attempt to change them would probably backfire. Reform, if possible at all, must be gradual, and must recognize that existing institutions are most likely there for a reason.14

  This mistrust of outside experts leads Easterly to be very skeptical not only of foreign takeovers but of foreign aid in general, in part because aid typically comes with an attempt to influence policies often at the cost of actually worsening the politics by continuing to spend aid even when leaders are corrupt.15

  Easterly is not pessimistic, though. He believes that countries can find their own way to success, but they need to be left alone to do so. Despite his aversion to experts and his claims that there are no “on-esize-fits-all” solutions, Easterly has one piece of expert advice—freedom. Freedom means both as much political freedom as possible and economic freedom, “the most underrated of human inventions,” that is, free markets.16 This is part of his notion that we need to let the “7 billion experts” take charge of their destiny.17 Free markets will give would-be entrepreneurs opportunities to start their ventures and create wealth if they are successful. As a committed demand wallah, Easterly also wants governments to stop pushing education and health care on an indifferent populace but rather allow them the freedom to find ways to get themselves educated and healthy, through their own collective action.

  Of course, there are many instances where people within the society may feel that the complete free market outcome may not be the ideal one. First, as Easterly points out,18 the poor may not be able to participate in the market, and they need to be helped until the market finds a way to reach them. Second, some rules are necessary for markets and society to function. For example, people who don’t know how to drive may nevertheless want to drive their car. But society feels that it is better if they don’t, because of what it means for the rest of us. A free market in driver’s licenses obviously cannot solve this problem. The problem is that if the state is weak or corrupt, the free market will tend to naturally reemerge via bribes and corruption. A study of the allocation of driver’s licenses in Delhi showed that knowing how to drive did not really make it more likely that someone would actually get a driver’s license, but being willing to pay more to get it fast did.19 Delhi effectively has a free market in driver’s licenses, and that’s exactly what we do not want. The challenge is how to get the state to do the job when avoiding the free market outcome is precisely the goal.

  So governments are necessary, to provide basic common goods and enforce the rules and norms that the market requires to function. According to Easterly, democracy will help provide the bottom-up feedback to hold governments accountable. The next question, then, is how will free market institutions and democracy emerge? Easterly is consistent: He points out that freedom cannot be imposed from outside, otherwise it would not be freedom. These institutions, then, have to be homegrown and emanate from the bottom up. All that can be done is to campaign for the ideals of individual equality and rights.20

  The main lesson from Acemoglu and Robinson’s historical analysis, however, is that bad institutions are very persistent, and there may be no natural process to eliminate them. We share their skepticism both about the danger of a strategy to impose institutional change wholesale from outside and about the hope that things will eventually fix themselves if we leave people alone. Where we part with them is in continuing to be optimistic: In practice, we do see a lot of significant institutional changes happening, at the margin, in the absence of an outside invasion or a full-scale social revolution.

  Indeed, we feel that this entire debate is missing something basic about the definition of institutions: Institutions define the rules of engagement. This certainly includes the INSTITUTIONS that have been the focus of much of the analysis, at least by economists and political scientists, and still dominate the debate: democracy, decentralization, property rights, the caste system, and so on. But every INSTITUTION at this level is realized, on the ground, through many specific local institutions. Property rights, for example, are constituted by a combination of a whole range of laws—about who can own what (Switzerland, for example, restricts foreign ownership of chalets), what ownership means (in Sweden people have the right to walk everywhere, including on other people’s private land), how the combination of the legal system and the police acts to enforce those laws (jury trials are common in the United States, but not in France or Spain), and much more. Democracies have rules about who is eligible to run for what office, who can vote, how campaigns should be run, and legal protection systems that make it more or less easy to buy votes or intimidate citizens. For that matter, even autocratic regimes sometimes leave some limited space for citizen participation. We have seen it over and over in this book: Details matter. Institutions are no exception. To really understand the effect of institutions on the lives of the poor, what is needed is a shift in perspective from INSTITUTIONS in capital letters to institutions in lower case—the “view from below.”21

  CHANGES AT THE MARGIN

  Acemoglu and Robinson’s pessimism comes in part from the fact that we rarely see successful drastic regime change from authoritarian and corrupt to well-functioning democracy. The first thing the view from below allows us to see is that it is not always necessary to fundamentally change institutions to improve accountability and reduce corruption.

  Although wholesale democratic reforms are few and far between, there are many instances where democracy has been introduced, to a limited extent and at the local level, within an authoritarian regime. Electoral reforms have even taken place in otherwise authoritarian states such as Indonesia under Suharto, Brazil during the military dictatorship, and Mexico under the Institutional Revolutionary Party (PRI). More recently, local elections have been introduced in Vietnam in 1998, Saudi Arabia in 2005, and Yemen in 2001. The reforms have typically been met with skepticism in the West: The elections are often rigged, and the elected officials have very limited powers. Yet there is compelling evidence that even very imperfect local elections can make a substantial difference in how local governments are run. In the early 1980s, village-level elections were progressively introduced in rural China. Early on, the Communist Party still decided who was allowed to run. The Communist Party branch continued to operate in the village, with its appointed secretary. Ballots were not always anonymous, and the ballot boxes were reportedly often stuffed. Despite these shortcomings, a study22 found a surprisingly large effect of this reform, suggesting greater accountability to villagers. After a village starts holding elections, the village chiefs are more likely to relax unpopular central policies, such as the one-child policy. The reallocation of farmland, which happens from time to time in Chinese villages, is more likely to benefit “middle-class” farmers. Public expenditures are more likely to reflect villagers’ needs.

  Similarly, fighting corruption appears to be to some extent possible even without fixing the larger institutions. Relatively straightforward interventions, such as the newspaper campaign successfully implemented by the Ugandan government, have shown impressive success. Another interesting story comes from Indonesia, which remains quite corrupt even after the fall of Suharto. In 2010, it ranked 110th out of 178 countries in Transparency International’s corruption perception index. Corruption was evident in a government program, funded by the World Bank, that provided money to villages to build local infrastructure, including roads. The easiest way for the community leader to skim some of these funds is to over-invoice for materials and to report wage payments that have never been made. Our colleague Benjamin Olken hired teams of engineers to excavate a tiny
bit of road in 600 or so villages to figure out how much material had actually gone into the road’s construction. The cost estimate was then compared with what was reported. Another team interviewed some of the people who were reported to have worked on the project about how much they had actually been paid. Theft was rife: 27 percent of the wages reported to have been paid had somehow vanished, and so had 20 percent of the materials. To make matters worse, the money was only one part of the waste. The roads that were built were still the same length (otherwise the theft would be too obvious) but the missing materials meant that they were built less well, and therefore more liable to be washed away by the next rains.23

  In an effort to fight corruption, government officials in charge of the program told the village leaders that the building programs would be audited, and the results would be made public. The government did not hire especially honest auditors—they worked within the existing system. Yet, Olken showed that the threat of audits reduced the theft of wages and materials by one-third, compared to the villages where audits were not conducted (the villages where audits were conducted were randomly selected).

  In the Indian state of Rajasthan, we worked with the police department and sent “mystery shoppers,” or “decoys,” to police stations with instructions to try to get the police to register some made-up petty cases—stolen cell phones, a case of “Eve-teasing” (the expression that Indians use to describe harassing women in the streets), and such similar cases.24 Indian police stations are evaluated on the basis of the number of unsolved cases, that is, the more unresolved cases, the worse the evaluation. Therefore, an easy way to get better evaluations is to register as few cases as possible. In our first set of decoy visits, only 40 percent of the cases actually got to the point where the police were willing to register them (at which point our decoys were required to reveal that it was just a test). It is therefore no surprise that the poor rarely attempt to report any petty crimes to the police.

  The police in India represent a near-perfect example of a persistent colonial institution. Despite the fact that they were originally designed to protect the interests of the colonists, there was no attempt to reform the Indian police after Independence. The Police Act of 1861 is still in effect! Since 1977, a succession of Police Reform Commissions have recommended wide-ranging changes, but implementation, so far, has been very limited. Yet the system is nowhere near as sclerotic as this history would suggest.

  At the end of each decoy visit where the case was about to get registered, the decoys revealed their ploy: The police therefore figured out that there were these decoys running around, trying to register petty cases. Despite the fact that the data from the visits were explicitly not shared with their bosses, and not linked to any sanction, the registration rate went from 40 percent at the first visit to 70 percent by the fourth. They had no way to identify the decoys (they were just a set of local people who had been fed the stories), so registration rates must have increased for all such cases: The fear of decoys was sufficient to lead the police to do their job better.

  Top-down monitoring is not a particularly new idea. But audits and decoys seem to be effective, presumably because once the information is out there, there is some chance that it will be used to punish the offenders. A few people within the system who believe in fighting corruption may be enough.

  Information technology could help. Led by Nandan Nilekani, who used to run Infosys, one of the country’s largest software companies, India is in the midst of an unprecedented effort to give each resident a “unique ID” number, linked to people’s fingerprints and a picture of their irises. The idea is that any person registered in the system will be able to identify himself at any place equipped with the right finger-print-recognition equipment. Once this is done, it will be possible, for example, to require people to scan their fingerprints to take delivery of any subsidized grains from the government fair-price shops. This will make it much harder for the shop owners to sell off the grains at market prices and claim that they have sold to the poor. The fundamental flaws in the Indian institutional frame will remain. Despite that, there is a chance that this “technical fix” can actually contribute to making life significantly better for the poor (although we do not have evidence yet, as the system is still being put in place).

  DECENTRALIZATION AND DEMOCRACY IN PRACTICE

  Although there is scope for improvement in accountability and corruption even within the framework of generally “bad” INSTITUTIONS, there is, conversely, no guarantee that good INSTITUTIONS necessarily work well in practice. Once again, it depends on how they operate on the ground. At some level, this is a rather obvious point, and one that institutional pessimists agree with. What is not recognized as often, however, is how important the effect of seemingly very small modifications in the rules can be.

  There was a striking example of the impact of such a small change in Brazil. Brazil used to have a complex paper ballot. Voters had to choose one candidate from a long list, then write in the name (or the number) of the candidate they wanted to vote for on their ballot. In a country where roughly one-fourth of adults are not functionally literate, this led to the de facto disenfranchisement of a large number of voters. In the average election, almost 25 percent of the votes were invalid and not counted. In the late 1990s, electronic voting was introduced, at first in the largest municipalities, and then in all of them. A simple interface allowed voters to select the number of their candidate, and a picture of the candidate appeared on the screen before the voters validated their vote. This reform, introduced primarily to make it easier to tally the election results, had an unintended consequence: The number of invalid votes was 11 percent lower in the municipalities that introduced electronic voting than in very similar municipalities that had not yet converted to the new system. The newly enfranchised voters were poorer and less educated; the politicians they elected were themselves poorer and less educated; and the policies they chose were more likely to be targeted to the poor: In particular, there was an increase in public health expenditures and a reduction in the number of low-birth-weight babies among less educated mothers. A seemingly minor technical fix, involving no major political battle, changed the way in which the voice of the poor was taken into account in Brazil’s political process.25

  Power to the People

  Another example of the surprising power of small changes comes from the rules governing local political processes. The new ideology in a lot of international institutions is that we should hand the beneficiaries the responsibility for making sure that schools, clinics, and local roads work well. This is usually done without asking the poor whether they really want to take on this responsibility.

  In the face of the state’s clear failure to deliver public services to the poor, as documented in various chapters of this book, the logic of handing anti-poverty policy back to the poor is superficially irresistible. The beneficiaries are directly hurt by bad services, and they should therefore care the most; moreover, they have better information, both on what they want and on what is happening on the ground. Giving them the power to control the service providers (teachers, doctors, engineers)—either the ability to hire and fire them or, at least, the power to complain about them—ensures that those who have the right incentives and the right information are the ones making the decisions. “If the stakes are high enough,” the World Bank wrote in its 2004 World Development Report, devoted to the delivery of social services, “communities tackle the problem.”26 Moreover, the very act of working together on a collective project may help communities rebuild their social ties after a major civil conflict. The so-called Community Driven Development projects, in which the communities choose and manage collective projects, are quite the rage in post-conflict environments like those in Sierra Leone, Rwanda, Liberia, and Indonesia.

  However, in practice, the implementation of community participation and decentralization matters quite a lot. How exactly does the community express its preferences, given that differe
nt people often have different views? How can we ensure that the interests of the underprivileged groups (women, ethnic minorities, lower castes, the landless) are represented?

  The fairness and the outcomes of the decision process in such environments crucially depend on such details as project selection rules (a meeting? a vote?), who is invited to the meetings, who speaks, who is in charge of implementing the project on a day-to-day basis, how these project leaders are selected, and much more. If the rules operate to exclude minorities or the poor, it is not clear that this kind of decentralization will help them or that handing power to the locality will help maintain communal harmony. On the contrary, groups that now discover they are disenfranchised by their own neighbors may in fact become angrier.

  Take the example of the village meeting, an essential institution of local governance. This is where grievances are discussed, budgets are voted on, and projects are suggested and approved. The idea of a village meeting perhaps evokes quaint images of the yearly Town Meeting in Vermont, full of bonhomie and salty humor. But the reality of local government meetings in developing countries is much less attractive. The meetings of the Kecamatan Development Project (KDP) in Indonesia (a World Bank–funded project in which communities were given money to build or repair village infrastructure such as local roads or irrigation canals) had an attendance of about fifty, out of the several hundred adults in the village, and half of those were members of the local elite. Most people who attend do not speak: In the KDP meetings, an average of eight people actually said something, of whom seven were from the elite.