Secret Ways : Character Building

Does economic theory provide anything like a concrete set of reliable policies for creating sustained economic growth in a middle-income country? Some contemporary economists believe that it is possible to answer this question in the affirmative. However, I don't find this confidence justified.

One such economist is Justin Yifu Lin. Lin is a leading Chinese economist who served as chief economist to the World Bank in 2008-2012. So Lin has a deep level of knowledge of the experience of developing countries and their efforts to achieve sustained growth. He believes that the answer to the question posed above is "yes", and he lays out the central components of such a policy in a framework that he describes as the "new structural economics". His analysis is presented in New Structural Economics: A Framework for Rethinking Development and Policy. (The book is also available in PDF format from the World Bank directly; link.)

Lin's analysis is intended to be relevant for all low- and middle-income countries (e.g. Brazil, Nigeria, or Indonesia); but the primary application is China. So his question comes down to this: what steps does the Chinese state need to take to burst out of the "middle income trap" and bring per capita incomes in the country up to the level of high-income countries in the OECD?

So what are the core premises of Lin's analysis of sustainable economic growth? Two are most basic: the market should govern prices, and the state should make intelligent policies and investments that encourage the "right kind" of innovation in economic activity in the country. Here is an extended description of the core claims of the book:

Long-term sustainable and inclusive growth is the driving force for poverty reduction in developing countries, and for convergence with developed economies. The current global crisis, the most serious one since the Great Depression, calls for a rethinking of economic theories. It is therefore a good time for economists to reexamine development theories as well. This paper discusses the evolution of development thinking since the end of World War II and suggests a framework to enable developing countries to achieve sustainable growth, eliminate poverty, and narrow the income gap with the developed countries. The proposed framework, called a neoclassical approach to structure and change in the process of economic development, or new structural economics, is based on the following ideas:

First, an economy�s structure of factor endowments evolves from one level of development to another. Therefore, the industrial structure of a given economy will be different at different levels of development. Each industrial structure requires corresponding infrastructure (both tangible and intangible) to facilitate its operations and transactions.

Second, each level of economic development is a point along the continuum from a low-income agrarian economy to a high-income post-industrialized economy, not a dichotomy of two economic development levels (�poor� versus �rich� or �developing� versus �industrialized�). Industrial upgrading and infrastructure improvement targets in developing countries should not necessarily draw from those that exist in high-income countries.

Third, at each given level of development, the market is the basic mechanism for effective resource allocation. However, economic development as a dynamic process entails structural changes, involving industrial upgrading and corresponding improvements in �hard� (tangible) and �soft� (intangible) infrastructure at each level. Such upgrading and improvements require an inherent coordination, with large externalities to firms� transaction costs and returns to capital investment. Thus, in addition to an effective market mechanism, the government should play an active role in facilitating structural changes. (14-15)

So a state needs to secure the conditions for well-functioning markets; and it needs to establish an industrial strategy that is guided by a careful empirical analysis of the country's comparative advantage in the global economic environment. In practice this seems to amount to the idea that the middle-income economy should identify the leading economies' declining industries and compete with those on the basis of labor costs and mid-level technology. Lin also emphasizes the important role of the state in making appropriate infrastructure investments to support the chosen industrial strategy. This is a "structural economic theory" because it is guided by the idea that a developing economy needs to incrementally achieve structural transformation from a given mix of agriculture, industry, and service to a successor mix, based on the resources held by the economy that give it advantage in a particular set of technologies and production techniques. Here is a representative statement:

Countries at different levels of development tend to have different economic structures due to differences in their endowments. Factor endowments for countries at the early levels of development are typically characterized by a relative scarcity of capital and relative abundance of labor or resources. Their production activities tend to be labor intensive or resource intensive (mostly in subsistence agriculture, animal husbandry, fishery, and the mining sector) and usually rely on conventional, mature technologies and produce �mature,� well-established products. Except for mining and plantations, their production has limited economies of scale. Their firm sizes are usually relatively small, with market transactions often informal, limited to local markets with familiar people. The hard and soft infrastructure required for facilitating that type of production and market transactions is limited and relatively simple and rudimentary. (22)

Some common development strategies fail to conform to these ideas. So, for example, import substitution is a bad basis for economic development, because it subverts the market and it distorts the investment strategies of the state and the private sector; it fails to guide the given economy on a path pursuing incremental comparative advantage (18).

One reasonable way of thinking about the most fundamental goal of international economic development is to increase the level of human happiness in all countries, and to reduce the degree of inequality of happiness within and across countries. But, as Aristotle asked several millennia ago, what is happiness? And how can we measure it, either in a given individual or in a population? Utilitarians and economists chose to avoid the problem of measuring subjective happiness, and the associated problem of comparing utilities across persons, by substituting preference satisfaction for subjective happiness. And worries about the challenges of measuring subjective happiness led philosophers like John Rawls and economists like Amartya Sen to prefer to focus on the objective prerequisites of life satisfaction -- primary goods, in the case of Rawls, and capabilities and functionings, in the case of Sen.

And yet the idea of happiness, or life satisfaction, is too important to dispense with. New efforts have been made to develop survey tools and methods that permit assessment of the average level of life satisfaction for groups of people in different countries. Among others Jeffrey Sachs has played a lead role in conceptualizing and furthering this project. The result is a series of World Happiness Reports, beginning in 2012 (link), which can be seen as a counterpart to the World Development Reports (link) and the Human Development Reports (link). Here are some orienting thoughts from Jeffrey Sachs's introductory essay in the 2012 report.

Most people agree that societies should foster the happiness of their citizens. The U.S. Founding Fathers recognized the inalienable right to the pursuit of happiness. British philosophers talked about the greatest good for the greatest number. Bhutan has famously adopted the goal of Gross National Happiness (GNH) rather than Gross National Product. China champions a harmonious society.

Yet most people probably believe that happiness is in the eye of the beholder, an individual�s choice, some- thing to be pursued individually rather than as a matter of national policy. Happiness seems far too subjective, too vague, to serve as a touchstone for a nation�s goals, much less its policy content. That indeed has been the traditional view. Yet the evidence is changing this view rapidly.

A generation of studies by psychologists, economists, pollsters, sociologists, and others has shown that happiness, though indeed a subjective experience, can be objectively measured, assessed, correlated with observable brain functions, and related to the characteristics of an individual and the society. Asking people whether they are happy, or satisfied with their lives, offers important information about the society. It can signal underlying crises or hidden strengths. It can suggest the need for change.

Such is the idea of the emerging scientific study of happiness, whether of individuals and the choices they make, or of entire societies and the reports of the citizenry regarding life satisfaction. The chapters ahead summarize the fascinating and emerging story of these studies. They report on the two broad measurements of happiness: the ups and downs of daily emotions, and an individual�s overall evaluation of life. The former is sometimes called �affective happiness,� and the latter �evaluative happiness.� (6)

Sachs reports that the research team preparing the ground for a World Happiness Report finds that life satisfaction is affected by a number of intangibles -- for example, "community trust, mental and physical health, and the quality of governance and rule of law" (7). The contributors emphasize that GNP per capita is a component, but not the most important component, of variations in life satisfaction across countries and regions.

What has always been challenging in prior discussions of promoting happiness is the problem of measurement. How do we assess an individual's level of happiness or satisfaction? And how do we assess the level of these goods for a population or group? The second large task, once the measurement problem has been addressed, is to uncover the social factors that account for variations in satisfaction and happiness levels. This problem is a more familiar one, since it can be treated using epidemiological and statistical tools to identify the factors most strongly correlated with positive or negative variations in satisfaction levels.

The World Happiness project relies on value-survey instruments to measure population life satisfaction. Existing surveys include the Gallup World Poll, the World Values Survey, and the European Social Survey and European Values Survey. The primary instrument used in the 2012 report is the Gallup World Poll (GWP). GWP uses a 0-10 scale and asks adults to place their current quality of life on this scale (the Cantril ladder).

In the Gallup World Poll respondents are asked (using fresh annual samples of 1,000 respondents aged 15 or over in each of more than 150 countries) to evaluate the quality of their lives on an 11-point ladder scale running from 0 to 10, with the bottom rung of the ladder (0) being the worst possible life for them and 10 being the best possible. (11) 

Here are distributions across the Cantril Ladder for the world and for several regions:




As the researchers recognize, there is a serious question here of how to calibrate and interpret the responses offered by thousands of Brazilians, Finns, and Thais for this question. What justifies us in thinking that a respondents' ratings of 5 in Brazil and Thailand mean that Brazilians and Thais are about equally happy? Similarly, what justifies us in thinking that a 0 ("worst possible life I can imagine") means the same in the two countries? Hypothetically, if a Brazilian can imagine a quality of life that includes arbitrary incarceration and torture, whereas a Canadian cannot, doesn't this imply that the Canadian's score of 5 reflects a higher level of absolute life satisfaction than the Brazilian? Intuitively it seems that possibilities like these (cultural or circumstantial differences in worst and best life circumstances in different countries) imply that cross-national comparisons of satisfaction levels based on this kind of survey are suspect.

Here is an OECD research report that directly addresses some of the issues raised by the life satisfaction survey methodology; link. This report focuses on several methodological issues, including this comment on the effects introduced by alternative question wording:

In contrast, Helliwell [one of the authors of the 2012 report] and Putnam (2004) examined the determinants of responses to both a global happiness and a life satisfaction question in a very large international data set (N > 83 500), drawn from the World Values Survey, the US Benchmark Survey and a comparable Canadian survey. They found that, although the main pattern of results did not differ greatly between the two measures, the life satisfaction question showed a stronger relationship with a variety of social indicators (e.g. trust, unemployment) than did the happiness question. However, in this work happiness was measured on a four-point scale and life satisfaction was measured on a ten-point scale; it is thus not clear that question wording, rather than scale length, produced this difference. (70)

Helliwell and Wang respond to this concern about question wording in the report:

The bottom line of our comparisons among life evaluations is that when life satisfaction, happiness and ladder questions are asked about life as a whole, they tell very similar stories about the likely sources of a good life. The information base for these comparisons is still growing, however, so there may be some systematic differences that appear in larger samples. (15)

Helliwell and Wang also address the questions of reliability (consistency across measurements of the same variable at different times) and validity (accurate correspondence to the unobservable variable under scrutiny). Their strongest case for the validity of these survey-based attempts at measurement of satisfaction is the fact that it is possible to demonstrate that variations in life satisfaction measures are largely correlated with a small number of factors that are plausibly relevant to the creation of life satisfaction.

As will be shown in the next chapter, more than three-quarters of the cross-country differences in national average measures of happiness can be explained by variables already known through experimental and other evidence to be important. (17)

Perhaps more credible than international comparisons are within-country comparisons of satisfaction levels. We might feel more confident in thinking that Canadians share a conceptual space of worst and best outcomes with each other, and this shared framework means that their assessments of their personal situations along the Cantrel ladder will be comparable. But even here, it seems likely that there are cultural and circumstantial differences within a country that might lead to the same kinds of inconsistencies. Are Brazilian favela dwellers likely to identify the same worst and best outcomes as residents of the elite neighborhood of Botafogo? Helliwell and Wang make a brief reply to this kind of concern (19), but more needs to be said.

I've just spent several interesting days at the second science and humanities conference of the Mexican Academy of Sciences in Mexico City (link). My thanks to Dra. Rosario Esteinou, Chair of the Social Sciences Section of the Mexican Academy of Science, for inviting me to participate.

This forum is a very interesting effort to bring together researchers across the spectrum of the sciences and humanities in useful dialog with each other. Biologists, physicists, biologists, astronomers, sociologists, and humanists from Mexican universities and institutes (along with a handful of international visitors) interacted intensively through a series of panels and plenary talks, with animated conversations taking place in the common areas throughout the days of the conference. Speaking for the Academy in the opening session, organizers set high and convincing expectations about the value of interdisciplinary and international collaboration. I attended sessions on nano-materials, plant evolutionary history, and economic development goals, and I found all the presentations to be of high quality and interest. And more significantly, I witnessed a real intellectual engagement by physicists, biologists, and social scientists around each of these topics.

Particularly interesting for me was a session on well-being and development for poor and disadvantaged populations in Mexico. This season was chaired by Ren� Mill�n and included presentations by Gonzalo Hern�ndez Licona (Director of the National Council for the Assessment of Social Development Policies � CONEVAL), Rodolfo de la Torre (Director del Programa de Desarrollo Social con Equidad, CEEY), and Gerardo Leyva (Deputy Director General for Research of INEGI). Key themes included human development, the status of indigenous people, the situation of rural women, and the challenge of extending opportunities for all Mexicans.

Speakers showed a real and committed involvement in the importance of poverty reform that really works in Mexico, with an emphasis on creating greater equity and opportunity for all Mexicans. Each speaker took Amartya Sen's theory of capabilities and functioning as given; disagreements turned on how this basic theory might be supplemented to incorporate empirical studies of perceived well-being and how to create policies that worked to broaden social inclusiveness.

Gerardo Leyva framed his presentation around new interest in "happiness" as a goal of development, referring to the United Nations World Happiness Index Report 2016. The heart of his presentation was a report of a study conducted by INEGI on life satisfaction in Mexico, the BIARE survey (link). It turns out that Mexican citizens have an average level of satisfaction of about 8 on a ten-point scale. Of course the absolute level of the average response to the question, how satisfied are you with your life currently?, is not very meaningful. More interesting than the aggregate were the disaggregated results Leyva reported for specific segments of Mexican society, and an analysis of the separate factors that appear to bring down life satisfaction. Here is a snapshot of satisfaction reports by age for Mexico as a whole:


There are not large differences across age groups, but it is interesting to see that 18-29 year-olds report the highest level of satisfaction. In particular, it seems to suggest that young people have a favorable view of their futures in Mexico.

My overall impression is that the sciences are robust in Mexico today, and that there are energetic efforts underway to solve Mexico's most pressing social problems.