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Papers on Evaluating Policy Interventions

18 Friday Nov 2016

Posted by paragwaknis in economics and governance, policy

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black markets, fuel subsidies, India, NREGS, smartcards, SSP

  1. Building State Capacity: Evidence from Biometric Smartcards in India by Karthik Muralidharan, Paul Niehaus, and Sandip Sukhtankar

    Abstract

    Antipoverty programs in developing countries are often difficult to implement; in particular, many governments lack the capacity to deliver payments securely to targeted beneficiaries. We evaluate the impact of biometrically authenticated payments infrastructure (“Smartcards”) on beneficiaries of employment (NREGS) and pension (SSP) programs in the Indian state of Andhra Pradesh, using a large-scale experiment that randomized the rollout of Smartcards over 157 subdistricts and 19 million people. We find that, while incompletely implemented, the new system delivered a faster, more predictable, and less corrupt NREGS payments process without adversely affecting program access. For each of these outcomes, treatment group distributions first-order stochastically dominated those of the control group. The investment was cost-effective, as time savings to NREGS beneficiaries alone were equal to the cost of the intervention, and there was also a significant reduction in the “leakage” of funds between the government and beneficiaries in both NREGS and SSP programs. Beneficiaries overwhelmingly preferred the new system for both programs. Overall, our results suggest that investing in secure payments infrastructure can significantly enhance ‘state capacity’ to implement welfare programs in developing countries.

  2. Curbing Leakage In Public Programs With Direct Benefit Transfers: Evidence From India’s Fuel Subsidies And Black Markets by Prabhat Barnwal
Abstract:

Pervasive corruption and evasion often undermine the provision of public programs. I focus on a large in-kind subsidy program in India that provides fuel subsidies to households for do- mestic cooking. This subsidy to households, when combined with taxes on commercial usage of the same fuel, gives rise to a black market. In this setting, fictitious “ghost” beneficiaries are often used to divert the subsidized fuel from beneficiary households to the commercial sector. This paper studies the impact of a major policy change in welfare administration, which enabled direct transfers to the bank accounts of verified beneficiaries. I use unique data from admin- istrative records for 23 million fuel purchase transactions and distributor-level fuel sales, and conduct a survey that allows me to infer black market prices. My empirical strategy exploits two quasi-experiments: (a) the phase-wise policy roll-out across districts, and (b) its unexpected termination. I find that directly transferring subsidies to households’ bank account significantly reduced domestic cooking fuel purchases, suggesting a reduction in subsidy diversion via “ghost” beneficiaries to the commercial sector. Once the policy is terminated, black market prices went down drastically, that indicates policy-termination led to a positive supply shock in the black market with increased supply of diverted subsidized fuel. Finally, in response to the lower black market prices, commercial firms reduced fuel purchases through formal channels and re-entered the black market for fuel. In sum, this paper illustrates that investment in enforcement capacity can significantly strengthen the state’s ability to target program beneficiaries and reduce leakage.

 

So Raghuram Rajan decides to go!

18 Saturday Jun 2016

Posted by paragwaknis in economic reforms, economics and governance, inflation, monetary policy, politics, RBI

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raghuram rajan, RBI Governor, Rexit

So finally what I feared about RBI Governor’s term renewal has come true! Raghuram Rajan put all the speculation about his second term to rest through a letter to his colleagues in the RBI announcing his return to academia at the end of his term. Here is the link to his letter. What stands out of all in the letter is the following statement clearly indicating the role of the government in his exit:

While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016.  I will, of course, always be available to serve my country when needed.

It is really unfortunate that Rajan will not be continuing as he brought about a lot of positive changes in the financial system, contained inflation, established a new monetary policy framework and took firm stand on issues often ruffling feathers of the Modi government. Hopefully, the new RBI governor will continue many of the reforms he initiated. The academic world should be happy as he continues contributing brilliant research papers in future.

Debating MNREGA!

25 Tuesday Nov 2014

Posted by paragwaknis in economics and governance, politcal economy

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Ashok Kotwal, Bhagwati, MNREGA, Panagariya

In an article in support of Mr. Modi’s decision to limit MNREGA to only 200 poorest districts, Bhagwati and Panagariya  argue the following:

To appreciate fully how inefficient NREGA is at transferring income to the poor, consider the following. Existing data show that on average 30% of NREGA expenditures are incurred on materials and 70% on wages. Assuming daily NREGA wage to be Rs 130, this requires an expenditure of Rs 186 to employ one worker per day.

But not all Rs 130 in wages amount to transfer. When accepting NREGA employment, the worker forgoes the opportunity to work elsewhere. Even assuming daily market wage to be a low Rs 80, net transfer under NREGA is only Rs 50. So we spend a solid Rs 186 to transfer a mere Rs 50.

Even though the opportunity cost argument might sound logical prima facie it may not hold much water when confronted with reality. In absence of productive work, the opportunity cost for the rural labor could be in fact zero. In that case the transfer is the total Rs. 130. So it really boils down to the number one chooses or the wage rate and probability of finding work the actual worker faces!

Secondly, as argued by Kotwal and Sen, the wage rate offered by MNREGA may have served as a reference rate for determining the market wage rate as demanders and suppliers of agricultural labor internalize this opportunity cost. So most likely, the opportunity cost logic works from MNREGA to the market for agricultural labor and not other way round. Dili Abreu et. al provide a more balanced critic of MGNREGA that is worth reading in this context.

Baba Ramdev and his unsound tax proposals!

20 Monday Jan 2014

Posted by paragwaknis in economics and governance, politics

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arthakranti, Baba Ramdev, bank transaction tax

Bad ideas driving good ideas out- that is what is happening with Baba Ramdev’s tax proposals. Tax harmonization in general is good idea. So there is a good argument for abolishing interstate custom duties creating a unified market for commodities. There is also a good argument for streamlining the income tax code to reduce distortion of consumption choices and making tax calculation easy. But to scrap all the taxes and replace it by one single bank transaction tax- bad bad idea!

One for starters, as far as you cannot observe and tax people’s ability, economic theory suggests there is an optimal mix of direct and indirect taxes. Secondly, by taxing bank transactions, we change the relative price of cash versus transactions routed through banks. It only means that transactions would be done more with cash than through banks. It also might be regressive in the sense that people who do not have access to off the book cash will benefit at the cost of people who have to route their transactions through banks.

It looks like Baba Ramdev has been infected by Arthakranti‘s misguided ideas based on very poor understanding of economics. For those who are interested can find my critique of Arthakranti Proposals here. But let me demonstrate the absurdity of these ideas in a few lines.

For example, Ramdev wants de-monetisation of currency notes of Rs 500 and Rs 1,000 to help ease inflation, improve employment generation and also lower corruption. True that inflation in the long run is a purely monetary phenomenon but that does not mean if some denominations of currency notes become unavailable inflation is going to be eased. In order to reduce inflation, in this case, would need a sustained decrease in overall money supply.

Now this would work if in fact inflation is just a monetary phenomenon for India. There is plenty of literature debating on what actually causes inflation in India and the consensus seems to be that supply side bottlenecks and rising demand for protein foods is causing it. I am not sure how making some denominations of notes unavailable is going to change that. Moreover we actually want people to eat more protein based foods rather than less and as incomes improve we should expect this demand to increase further. Eventually, production will respond and the rise in protein prices will be arrested. What actually might help stem inflation right now is not to institute the next few pay commissions and may be use that money to fund more roads, electricity and schools!

Simplistic ideas are many times just that- they are simplistic but might end up causing more damage than good. We should all be wary of those and remember that there is no shortcut to better economic performance but to invest in infrastructure, education and health.

Is Congress really secular and BJP really communal?

27 Tuesday Aug 2013

Posted by paragwaknis in diverse perspectives, economics and governance, politcal economy, socioeconomic perspectives

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communalism, election platforms, Indian politics, swing voters

Elections are around the corner and the political climate is really heating up in India. The current Congress led government has been a disappointment on many fronts including the economic one. People seem to be desperate to have a leader that seems decisive and unfaltering. Unfortunately none in the Congress seem to be fitting the bill. I think this vacuum was sensed well by BJP in portraying Narendra Modi as a prime ministerial candidate. For this the political strategists from BJP have to be lauded. As expected media is all over Modi’s credentials as a leader and has trudged up his role in the Godhra riots as a major factor in discrediting him. And I think it has only helped the BJP to stoke anti Muslim sentiments furthering its agenda of divisive politics. As a person who supported the saffron coalition once upon a time, I always wondered how much truth is it to the story of Hindu-muslim animosity. The more I read and thought, the more it was obvious that it was more of a political ploy than reality.  I think many people actually see that, which might include even the senior leaders of BJP. So why go by such divisive agenda?

One reason is the politics of Congress. Congress’s political strategy has always involved wooing the swing voters who came in various forms. At times they were migrant communities or slum dwellers in cities like Bombay and yet at other times they were communities with lack of access to affirmative action or any kind of government support. All these groups lacked any political influence and hence made very good candidates for political machinations or sometimes plain simple exchange of votes for economic benefits. Unfortunately, Muslim community in various states forms the biggest of such swing voter communities that does not have access to any kind of affirmative action in spite of its socio-economic backwardness. So is Congress really secular- I think not! It is just playing the election game and has done so successfully for many years.

Now given that Congress caters to Muslims for political reasons, highlighting it becomes a really obvious and easiest political platform for an opposing party to contest elections on. That is where BJP’s politics comes into picture. Except briefly, in the post emergency period, Congress never had a real opposition till BJP shot to prominence after Lalkrishna Advani’s rathayatra in 1992. So whether we like it or not, polarization on communal lines seems to be the only way we could produce a viable opposition to Congress in the post independence period. This is as much of a reflection on Congress’s minority pandering politics as much it is on BJP’s divisive communal strategies. In reality, both of them are basically two sides of the same coin- they both engage in vote bank politics, rather than fighting on substantive election platforms.

The communal politics that both Congress and BJP excel in is also an acute reflection on the inability of the Indian polity to produce an alternative election platform that addressed the socioeconomic inequities. Unfortunately, in there also lies the failure of the Indian Left. Assuming that they truly understand and follow the Marxian philosophy, they should have brought the emptiness of Congress’s secular politics to people’s notice. But instead, in deciding to side with Congress to thwart BJP’s growth, the Left has done a big disservice by not allowing genuine societal reform to be an election platform. The philosophical void in the post cold war world has only added to its ineffectiveness. Even though there is lot to be desired of economic systems in delivering prosperity to common man, there does seem to be an overwhelming evidence in support of markets as an effective way of organizing economic activity.  But as a party that stands against capitalism, the Left is not able to provide an alternative election platform that delivered both on economic and social justice.

So that leaves us saddled with the communal parties of India. As a stop-gap arrangement I do hope that at least they are not be able to form a government on their own. Coalitions seems to be the Indian way of providing checks and balances in a political climate devoid of any vision for social and economic progress. However, that cannot really be a long term solution to the problem. We do need substantive political platforms and not just ones based on communal lines. For example, we need political parties debating the best way of achieving socio-economic justice for all or ways to improve the laggard and in some cases nonexistent public education system or whether the current public distribution system is the best way to ensure food security, or how do we ensure equal access to credit or to consistent electric supply or just simply to effective governance. These are the problems that are plaguing the Indian economy and society and holding the progress back or keeping it in the hands of few. Who is going to float a election platform based on these issues? I guess we will have to wait and see!

Politicians, Bureaucrats, and Governance

18 Thursday Oct 2012

Posted by paragwaknis in economics and governance, politcal economy, socioeconomic perspectives

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In the case where politicians have a very limited power to hire or fire a bureaucrat, is it possible that quality of politicians also affects the quality of governance? One would imagine that the answer to this question is no. But, politicians do seem to have some degree of influence on the bureaucracy through the process of reassignment and transfers even though they play a very little part in their hiring process itself. So it does seem likely that politicians shape the incentives for bureaucrats’ career advancement and hence the quality of bureaucracy is a response to these incentives. Iyer and Mani (2012) provide some  theoretical and empirical support for this proposition.

They develop a framework to empirically examine how politicians with electoral pressures control bureaucrats with career concerns and in turn how it affects the bureaucrats’ career investments. They find that the a change in the identity of the head of the state does increase the probability of bureaucratic reassignment. In a world where you cannot fire people, you just move them to a different state!

Given this increased probability, officers with higher initial ability do experience less frequent transfers and variability of importance of their posts. However, there is not much difference in the likelihood of being assigned to an important post between a high initial ability bureaucrat and the ones that is just loyal. This implies that skill investment is not the only route for career success and hence this affects the quality of bureaucracy in equilibrium. Analysis based on a unique data set on the career histories of 2800 officers in the Indian Administrative Service (IAS) support these theoretical implications. A good example of forward looking behavior on the part of a self interested economic agent!

Lakshmi Iyer and Anand Mani, Traveling Agents: Political Change and Bureaucratic Turnover in India, The Review of Economics and Statistics, August 2012, 94(3): 723-739.

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