Author: Admin
Tajikistan Joining the Customs Union of Russia, Belarus and Kazakhstan: Pros and Cons
Authors: I.A. Densiova, A.M. Malokostov, and N.A. Turdyeva, CEFIR
In this brief we summarize the results obtained in a CEFIR research project on the economic impact of Tajikistan joining the Customs Union of Russia, Belarus and Kazakhstan conducted for the Eurasian Development Bank in 2013 (EBD, 2013). We argue that integration has to be comprehensive to be mutually beneficial: indeed, trade effects are marginal, and the highest stakes are at migration regulation in the CU member-countries and the investment opportunities in Tajikistan.
Academic Inbreeding in Ukraine
In Ukraine, having a university degree only provides a noisy signal of one’s productivity, which means social ties and personal relations play a relatively more important role in the Ukrainian economy in general. Therefore it should not come as a surprise that inbreeding is very common in Ukrainian academia; for example, about 50% of faculty obtained their university degree from the university that employs them. Given the absence of clear “quality signs” for fresh university graduates, inbreeding can be viewed as a second-best option for hiring decisions. Our econometric analysis shows that inbred faculty does not differ in its (observable) quality from non-inbred faculty. At the same time, ceteris paribus, inbred faculty has somewhat lower salaries. We also find that the extent of inbreeding is slightly higher in universities with a “national” status and lower in very small universities (of less than 1000 students).
Academic inbreeding is the practice of universities hiring their own graduates to academic positions. Inbred faculty is thus faculty employed at the same university from which they graduated. Inbreeding implies a low level of competition for faculty vacancies possibly resulting in low quality hires. However, inbred faculty can be cheaper, reduce the chance of a mismatch between university and faculty member, and can be better “tailored” to the needs of a certain university or discipline. For some specific narrow disciplines inbreeding can be the only way to hire faculty (for example, if only one university in a region provides courses in a certain discipline, teachers of that discipline most probably will be inbred). In research, inbreeding can help to pass on tacit knowledge but it can also prevent “fresh blood” and new ideas from entering into the university. In developed countries, universities usually try to limit inbreeding in order to first, “disseminate” their graduates and earn a good reputation, and second, hire the best graduates on the market through an open competition. In less developed countries, inbreeding is more common because of the higher role of personal relations in hiring decisions in general.
Although very widespread, academic inbreeding in Ukraine has received little or no attention from researchers or policy makers. Data on inbred faculty is similarly scarce. There is only one recent exception – in the summer of 2013, the Centre for Social Research surveyed about 400 university professors. The survey contains information on a wide range of aspects of faculty employment, such as working hours, publications, participation in conferences, income size etc., including the question on whether a person works at the same university from which (s)he graduated. We used this data to do an econometric analysis of the factors that determine inbreeding and the impact of inbreeding. We complemented the survey data by data from an online questionnaire we distributed among KSE graduates whom we know work in academia, their acquaintances and among the network of KSE partners who work in academia (a total of 59 responses).
Causes of Inbreeding
Besides providing a person with knowledge and skills necessary for a white-collar job, education has several other functions. One of them is signaling, i.e. people who successfully graduate from an educational institution should have higher abilities (ceteris paribus) than those with lower grades or dropouts. This function of education is almost entirely lost in Ukraine because of widespread corruption. In Ukraine, good students can obtain good skills and knowledge together with good grades. However, “bad” students can obtain the same grades for money: besides paying professors for exam grades, students can buy a course paper, a diploma thesis and even a doctoral dissertation. Cheating and plagiarism are also very widespread; not only in students’ work, but also in academic research. Hence, based on the diploma alone, a potential employer will have difficulties telling apart a “good” student from a “bad” one. Therefore, other screening mechanisms are relatively important in Ukraine.
Many private-sector employers, for example, will pay more attention to previous work experience and personal recommendations than formal education. For example, the ULMS-2007 survey shows that from 48% to 68% of people found a job through relatives or friends, which is comparable to the extent of inbreeding found by this study in academics (48.6% in the CSR-2013 survey, 68% in our online survey). This situation pushes students, who do not expect to be hired by relatives or friends, to find a full-time job already in the first or second year of studies, providing them with both incentives and funds to “buy” a diploma. This creates a “vicious circle” – the low value of a diploma makes employers looking at previous work experience, and the need to gain that experience further devalues diplomas.
For universities, “previous work experience” is the student’s performance during their studies. Hence, by inbreeding their own students, universities reduce uncertainty, which they would be facing if they looked for needed candidates on an open market. As the academic career of a person develops, (s)he can develop additional signals of his/her “quality”; first of all, scientific degrees (Candidate of Sciences, Doctor of Sciences) and/or ranks (Docent or Professor) and connected to them publications in Ukrainian and foreign journals (with the last ones being much more valuable). Therefore, as we show, younger and less distinguished faculty (with shorter teaching experience and without a Doctor degree or Professor rank) is more likely to work at a university from which they graduated.
Estimation Results
Our econometric estimation showed that the extent of inbreeding does not depend on the quality of a university as measured by its rank in Ukraine. Inbreeding is less common in very small universities (of less than 1000 students), and is independent of the university size after this threshold. Universities with a “national” status have slightly higher level of inbreeding.
We also show that inbred faculty does not differ in “quality” (measured as the number of publications in Ukrainian and foreign journals and the probability to get a foreign fellowship) from other faculty, although, ceteris paribus, inbred faculty do get lower salaries.
Results from both the CSR-2013 survey and our online questionnaire indicate that personal connections are very important both for entering a university and for further promotion. Usually an academic career starts when a person begins his/her Ph.D. studies; at the same time, (s)he starts working as an assistant or a lecturer (when admitting students to Ph.D. studies, universities prefer their own MA graduates). To move up the career ladder, a person should earn scientific degrees or ranks, have certain duration of teaching experience and a minimal required number of publications (all the formal requirements for certain academic positions are stipulated in a Decree of the Cabinet of Ministers). According to the law, currently there is no tenure system, and faculty is hired with one- three- or five-year contracts (the longest contracts can last up to seven years, but only in the universities with a “national” status).
Hiring Procedures at Universities
When a vacancy is open (e.g. a contract expires), a university should make an announcement in a pedagogical journal and/or on its website; then candidates should be interviewed at a chair meeting, and a selected candidate should be approved by the faculty dean. A candidate should have a required teaching experience and publications. There are about 1500 journals on the list of Higher Attestation Commission (the body that organizes the dissertations defense), which means that practically all universities issue at least one journal, and very few of them are refereed. This means that publishing in the home university’s journal is the cheapest and easiest way for a faculty member to get the needed number of publications. Therefore, publications are very often of very poor quality and do not contain any real research, especially in social sciences. To mitigate this problem, the Ministry of Education and Science introduced a new requirement for scientific degrees – since 2013, 20% of publications should be in foreign-refereed journals.
When hiring, all formal requirements and procedures are typically observed – a competition is announced, the chair meeting held, the candidate has the required duration of work experience and the number of publications (their quality is discussed above). However, in reality there is very often just one candidate “for” whom the vacancy is opened, and outside people, even if they apply for a vacancy, are ignored. Usually a chair meeting supports the opinion of a chair head, but either way, a dean could overturn a chair meeting decision, so despite seemingly open procedures, in reality a person’s employment depends on his/her relations with a chair head and/or a faculty dean. Studying at a university is the most common but not the only way to establish these relations. A person can get acquainted with a chair head or a faculty dean at a conference, be his/her relative or friend, or be recommended by his/her relative or friend.
Such a widespread reliance on personal connections is a legacy from the Soviet times when personal ties replaced market mechanisms, and students were allocated to their first workplaces rather than hired on a competitive basis. Since universities were situated in cities, staying at a university implied a better living environment, and salaries were also good. Therefore many students tried to stay at their alma mater by establishing good relations with a chair head or a faculty dean. Nowadays, university salaries are not competitive so students staying at universities are not necessarily the best ones. However, they are not the worst ones either because otherwise they would not be offered a position.
Concluding Remarks
In Ukraine, academic inbreeding provides universities with a relatively cheap and well-prepared workforce. On the other hand, it also fosters isolation of universities and conservation of existing “traditions” – whether good or bad. Given low academic mobility of both students and professors, this situation prevents dissemination of knowledge and lowers competition, which necessarily leads to degradation.
Currently, inbreeding is not on the agenda of either researchers or policy makers. In fact, no one seems to have considered it as a problem. Perhaps, it will not be discussed as a problem any time soon because there are many other “bigger” problems in Ukrainian higher education. To name a few, these are:
- high centralization and insufficient level of university autonomy;
- low salaries and high teaching workload of professors;
- low extent of university research and very low quality of the existing research, especially in humanities and social sciences;
- high corruption and low standards of studying and research work (ubiquitous cheating and plagiarism);
- low sensitivity of educational programs to the needs of modern economy.
Perhaps, introduction of formal limits on inbreeding (setting a quota for both MA graduates admitted to Ph.D. programs and for Ph.D. graduates hired to teaching positions at the same university) could bring some “fresh air” into the system. This measure would extend the pool of candidates available to a university and introduce an element of competition between them. It would also create incentives both for universities to improve their Ph.D. programs and for students to put greater effort into studies.
References
- Bilyk, Olga and Iuliia Sheron (2012) Do Informal Networks Matter in the Ukrainian Labor Market? EERC Working paper No 12/11E.
- Coupe, Tom and Hanna Vakhitova (2010). Recent Dynamics of Returns to Education in Transition Countries, KSE/KEI Working paper.
- Osipian, Ararat (2009). Corruption and Reform in Higher Education in Ukraine, Canadian and International Education, vol. 38, pp. 104-122.
- Shaw, Marta, Chapman, David and Nataliya Rumyantseva (2011). The Impact of the Bologna Process on Academic Staff in Ukraine, Higher Education Management, vol. 23, pp. 71–91.
- Stephens, Jason, Romakin, Volodymyr and Mariya Yukhymenko (2010). Academic Motivation and Misconduct in Two Cultures: A Comparative Analysis of US and Ukrainian Undergraduates, International Journal for Educational Integrity, vol. 6, pp. 47–60.
Increasing Resources for Families with Children Through the Tax System: Recent Reform Proposals from Poland
This brief discusses the consequences of a recent reform proposal that aims to redistribute resources to low-income families with children through the income tax system in Poland. The proposed reform replaces the current child tax credit with additional amounts of the universal tax credit, and by changing the sequence in which tax deductions are accounted for, it increases resources of low-income families with children by about 1.7 billion PLN per year (0.4 billion EUR). The brief examines four possible ways of additional tax system modifications that would make the reform package neutral for the public finances, and presents distributional implications of the reforms.
The level and structure of financial support for families with children has become an important policy focus in Poland; a country that faces high levels of child poverty and one of the lowest fertility rates in Europe (Immervoll et al., 2001; Haan and Wrohlich, 2011; Eurostat, 2013). In this brief, we outline recent tax reform proposals that aim to increase financial support for low-income families with children through the tax system. A range of such potential reforms has been examined in Myck et al. (2013b); a report prepared for the Chancellery of the President of the Republic of Poland. One of the options became the key element of the President’s family support program Better climate for families proposed in May 2013. Below we discuss its main features and various options for financing the proposals.
The proposed modification of financial support for families would replace the current child tax credit with additional amounts of the universal tax credit conditional on the number of children, and increase tax advantages for families by changing the sequence in which tax credits are accounted for in a way that is favorable for families with children (Chancellery of the President of Poland, 2013). The main beneficiaries of this reform would be low-income families with children whose income is too low to take full advantage of the current child-related advantages. The overall cost of the reform would amount to about 1.7 billion PLN (0.4 billion EUR). In the final section of the brief we discuss potential ways of making the reform budget neutral.
The analysis has been conducted using CenEA’s micro-simulation model SIMPL on reweighted and indexed data from the 2010 Household Budget Survey (HBS) collected annually by the Polish Central Statistical Office (see Morawski and Myck, 2010, 2011; Myck, 2009; Domitrz et al., 2013; Creedy, 2004).
Financial Support for Polish Families in 2013
In Poland, financial support for families with children depends on the level of family income and the demographic structure of the household. The system consists of two main elements – family benefits on the one hand, and tax preferences for families with children on the other. Following Myck et al. (2013a), we define financial support for a family j (FSFj) as the sum of family benefits received by the family (FBj), and tax preferences that families with children collect in the PIT system is defined as the difference in the level of tax liabilities and health insurance contributions paid by the family (PITHIjD0 – PITHIjDn) supposing they have no children (D0) and on condition them having n number of dependent children (Dn):
FSFj = FBj + (PITHIjD0 – PITHIjDn) [1]
Figure 1a presents the current level of the financial support for single-earner married couples and Figure 1b presents the same for single parents with one and three children in relation to the level of gross earnings.
Family benefits
Family benefits, which include family allowance with supplements, childbirth allowance and nursing benefits, are means-tested and related to the number and age of dependent children in the family and specific family circumstances. Family benefits are granted only to low-income families and are subject to point withdrawal once the family crosses the income eligibility threshold (539 PLN of net income per person). For example, the stylized married couples in Figure 1 lose family benefits when their monthly gross income exceeds 2,060 PLN if they have one child and 3,435 PLN if they have three children (for single parents these thresholds equal 785 PLN and 1,825 PLN respectively).
Figure 1. Monthly level of financial support received by families with one and three children dependent on their age and family gross income in 2013 (PLN/month) (a) Married couple with one spouse working b) Single parent working
Note: FB – family benefits; CTC – child tax credit; joint taxation preferences: UTC – additional amount of universal tax credit; IB – shift of tax income bracket. In case of the single parent alimonies from the absent parent are assumed at the median value from 2010 data, which is 410.50 PLN for 1 child and 724.67 PLN for 3 children. Gross income of the single parent includes income from work only. Alimonies are taken into account for FB income means testing. Source: Myck et al. (2013a).
Tax preferences
Taxpayers with children can deduct a non-refundable child tax credit (CTC) from the accrued tax, with the maximum values of the CTC related to the level of universal tax credit available to all tax payers (UTC is 46.37 PLN per month). For each of the first two children in the family, taxpayers can deduct up to two values of the UTC (92.67 PLN per month), for the third child up to three values (139.00 PLN per month) and for the fourth and following children up to four values of the UTC (185.34 PLN per month). The CTC is not available for high-income parents with one child (whose annual taxable income exceeds 112,000 PLN per year).
Further tax advantages are available for single parents through joint taxation, which translates into substantial gains in particular for high-income parents. As Figure 1 shows, single parents whose gross income exceeds the second tax income bracket (15,745 PLN per month) gain up to 1,044.19 PLN per month if they have one child and 1,368.54 PLN if they have three children. With the same income levels, the system grants nothing to married couples if they have one child and 324.34 PLN if they have three.
In the current system, the CTC can be deducted from the accrued tax only after the full amount of UTC and the tax-deductible part of health insurance (HI) contributions have been exhausted. As a consequence, there is a large group of low-income families whose income is too low to take full advantage of the CTC. As Figure 2 illustrates, the higher the number of children is in a family, the lower is the proportion of families who take full advantage of the credit. Although the percentage of those using the full CTC is 76.1% for families with one child, it decreases to 67.6% for those with two children and is as little as 30.8% for families with three or more kids. Over 40% of the latter use only half of the CTC they are entitled to.
Figure 2. Use of maximum amount of CTC by number of children
Recent Reform Proposals
In a recent report for the Chancellery of the President of Poland, we have analyzed several options for the reform of the family-related elements of the tax system (Myck et al., 2013b). One of these has become the key element of the presidential reform proposal (Chancellery of the President of Poland, 2013). The reform assumes that the CTC is replaced with the amounts of the Universal Tax Credit conditional on the number of children in the family in such a way as to maintain the current maximum advantages offered to families through the CTC system. The main purpose of the reform is to reverse the tax deduction sequence so that tax advantages related to having children are deducted from the accrued tax before considering credits related to health insurance contributions. Such construction would enable low-income families to make greater use of child-related tax advantages, while leaving the situation of higher-income families unchanged.
Figure 3. Monthly tax advantages from the reform among families with 1-4 children (PLN/month) 
Figure 3 presents monthly levels of tax advantages resulting from the proposed reform conditional on the number of children in the family and the level of gross income. We note that families with children gain from the reform if their income exceeds 735 PLN per month. Tax advantages resulting from the proposed modifications are exhausted at different levels of gross income depending on the number of children (from 2,630 PLN for families with one child to 8,010 PLN for those with four children). The higher the number of children is, the greater is also the potential maximum gain – for example, families with four children and income of 4,010 PLN per month would gain up to 311.35 PLN per month.
The results of the analysis show that, overall, 2 million households with children would benefit from this reform (below referred to as System 1). The total annual change in households’ disposable income (equivalent to the total cost for public finances) would amount to 1.69 billion PLN (see Table 1 below).
Table 1. Average annual change in households’ disposable income by number of children in Systems 1-5 (billion PLN)|
No children |
1 child |
2 children |
3+ children |
Total |
|
| System 1 |
0,00 |
0,39 |
0,60 |
0,70 |
1,69 |
| System 2 |
-0,45 |
-0,20 |
0,04 |
0,55 |
-0,08 |
| System 3 |
-0,65 |
-0,09 |
0,17 |
0,59 |
0,02 |
| System 4 |
-0,66 |
-0,15 |
0,23 |
0,59 |
0,01 |
| System 5 |
-0,86 |
-0,04 |
0,31 |
0,63 |
0,04 |
Table 1 shows that most of the resources would be beneficial for families with three or more children (0.7 billion PLN per year), while families with one or two children would benefit about 0.39 billion PLN and 0.6 billion PLN per year, respectively.
The distribution of total income gains by income deciles is presented in Figure 4. The gains are clearly focused in the lower part of the income distribution. For example, families with children in the second income decile would receive a total of 0.4 billion PLN, while those in the bottom and third decile would recieve approximately 0.25 billion PLN. Only 0.04 billion PLN of the total cost would be distributed to families in the top income decile.
Figure 4. Distribution of total annual gains in households’ disposable income by deciles: Systems 1-5 (billion PLN) 
Potential Ways of Financing the Reform
Concerns about the state of public finances naturally imply questions related to the potential ways of financing any additional tax giveaways. Myck et al. (2013b) presents four alternative modifications of the tax system that make the entire package of reforms neutral for the public finances. These are:
- System 2 – CTC reform + limitations on joint-taxation preferences for married couples (both with or without children) and single parents;
- System 3 – CTC reform + reduction of tax income threshold from 85,528 to 68,000 PLN per year;
- System 4 – CTC reform + reduction of tax revenue costs from 1,335 to 475 PLN per year;
- System 5 – CTC reform + reduction of tax-deductible part of health insurance from 7.75% to 7.45%.
The overall total outcomes of these proposals for household disposable income are illustrated in Table 1 and Figure 4. The implications in terms of the redistribution of the packages – with losses among childless households and gains among those with children – are clear under all of the proposed packages, although all of the reform combinations imply small losses also for families with one child. Total disposable income of childless households falls by 0.45 PLN per year under System 2 and by as much as 0.86 billion PLN under System 5. By shifting the majority of the costs to households without children, the latter is simultaneously the most generous for families with children since income of those with two children grows on average by 0.31 billion per year, while of those with more children see a growth of 0.63 billion PLN per year.
Figure 4 illustrates that in all of the revenue neutral reform packages, the households from the highest two deciles are the biggest losers. That the financing of the shift of resources to low-income families falls on households from the top income decile is particularly evident in the case of Systems 2 and 3 where total disposal income for these households fall by 1.64 billion PLN and 1.52 billion PLN, respectively. Since changes to revenue costs and deduction of HI contributions apply to almost all taxpayers, Systems 4 and 5 are less favorable for households from the lower deciles and generate losses for the upper part of the income distribution. However, a large part of cost is also born by households from the tenth decile (0.26 and 0.39 billion PLN, respectively).
While the combinations of tax changes presented above would be neutral with respect to the current system of taxes in Poland, it is worth noting that the policy of tax increases through the tax-parameter freezing implemented in 2009 has increased taxes by far more than the cost of the Presidential reform proposal. As we showed in Myck et al. (2013c), this policy increased taxes by 3.71 billions PLN per year, of which 2.21 billions was paid by families with children. The recent proposal could thus be thought of as a way of redistributing these resources back to families with children.
Conclusions
Financial support for families with children is an important element of government policy with implications for child poverty, labor-market participation among parents, as well as fertility (Immervoll et al., 2001; Haan and Wrohlich, 2011). In this brief, we outlined the results of a recent analysis of direct financial consequences of modifications in the Polish system of support for families through the tax system with the focus on a reform proposal presented by the Polish President in the program Better climate for families. The reform would benefit lower-income families with children at the cost of about 1.7 billion PLN. As a result, annual income of the families from the three bottom deciles would grow by 0.93 billion PLN. A high proportion of the gains (0.7 billion PLN) would go to families with three or more children.
We also presented four additional modifications of the tax system that would make the CTC reform revenue neutral. Reform packages that withdraw joint-taxation preferences and decrease the threshold of the income tax to a higher rate would be most effective in ensuring redistribution of support for low-income households. It is worth noting though, that the recent approach of the Polish government to the tax system has implied substantial increases in the level of income taxes through the freezing of income tax parameters, and these alone would be more than sufficient to finance the proposed tax changes.
▪
References
- Creedy J. (2004). Reweighting Household Surveys for Tax Microsimulation Modelling: An Application to the New Zealand Household Economic Survey. Australian Journal of Labour Economics 7 (1): 71-88. Centre for Labour Market Research.
- Domitrz A., Morawski L., Myck M., Semeniuk A. (2013). Dystrybucyjny wpływ reform podatkowo-świadczeniowych wprowadzonych w latach 2006-2011 (Distributional effect of tax and benefit reforms introduced from 2006-2011). CenEA MR01/12; Bank i Kredyt 03/2013.
- Chancellery of the President of Poland (2013). Dobry klimat dla rodziny. Program polityki rodzinnej Prezydenta RP. (Better climate for families. Family support program of the Polish President.)
- Eurostat online database 2013 – epp.eurostat.ec.europa.eu. Date of access: 28.11.2013.
- Haan P., Wrohlich K. (2011) Can Child Care Encourage Employment and Fertility? Evidence from a Structural Model. Labour Economics 18 (4), pp. 498-512.
- Immervoll H., Sutherland H., de Vos K. (2001). Reducing child poverty in the European Union: the role of child benefits. In: Vleminckx K. and Smeeding T.M. (eds.) Child well-being, Child poverty and Child Policy in Modern Nations. What do we know? The Policy Press: Bristol.
- Morawski L., Myck M. (2010).‘Klin’-ing up: Effects of Polish Tax Reforms on Those In and on Those Out. Labour Economics 17(3): 556-566.
- Morawski L., Myck M. (2011). Distributional Effects of the Child Tax Credits in Poland and Its Potential Reform. Ekonomista 6: 815-830.
- Myck M. (2009). Analizy polskiego systemu podatkowo-zasiłkowego z wykorzystaniem modelu mikrosymulacyjnego SIMPL (Analysis of the Polish tax-benefit system using microsimulation model SIMPL). Problemy Polityki Społecznej 11: 86-107.
- Myck M., Kundera M., Oczkowska M. (2013a). Finansowe wsparcie rodzin z dziećmi w Polsce w 2013 roku (Financial support for families with children in Poland in 2013). CenEA MR01/13.
- Myck M., Kundera M., Oczkowska M. (2013b). Finansowe wsparcie rodzin z dziećmi w Polsce: przykłady modyfikacji w systemie podatkowym (Financial support for families with children in Poland: examples of modifications in the tax system). CenEA MR02/13.
- Myck M., Kundera M., Najsztub. M, Oczkowska M. (2013c). Ponowne „mrożenie” PIT w kontekście zmian podatkowych od 2009 roku (PIT freezing in the context of tax reforms since 2009). Komentarze CenEA: 06.11.2013.
________________________________________________________________________________________________
* This brief draws on recent research at the Centre for Economic Analysis in the projects financed by the Chancellery of the President of the Republic of Poland and the Batory Foundation (project no: 22078). The analysis has been conducted using CenEA’s micro-simulation model SIMPL based on the 2010 Household Budget Survey data collected annually by the Polish Central Statistical Office (CSO). The CSO takes no responsibility for the conclusions resulting from the analysis. Any views presented in this brief are of the authors’ and not of the Centre for Economic Analysis, which has no official policy stance.
Integration Formations in the Monetary Sphere: the Possibility and the Necessity for Monetary Integration in the Post-Soviet Region
This policy brief addresses the possibility of monetary integration in the post-Soviet region. It provides a short overview of the literature devoted to the formation and development of the monetary unions, and argues that, based on this literature and real-world experiences, monetary integration can be of substantial value for the CIS states. However, such monetary union is not feasible in the near future due to weak economic integration of the national economies of the CIS countries, significant difference in their development level, and imbalances in allocation of bargaining power between the states. This policy brief suggests that a first step towards monetary integration could be an adoption of a supranational unit of account on the territory of the Customs Union between Russia, Belarus and Kazakhstan.
The modern world has observed formation of a number of economic and monetary integration communities. Their performance varies greatly: some of them are developing successfully, others, on the contrary, are stagnating. Questions concerning the possibility of economic and monetary integration in the post-Soviet space are constantly addressed both by policymakers and by academic economists. Taking into account theoretical concepts and international experience, this brief addresses the possibility and desirability of the integration of the monetary sphere of the post-Soviet region. Based on Luzgina (2013a,b), this brief proposes a form of representation of monetary integration on the early stages of its development. In this case, an early form of monetary integration may be achieved via adoption of a single supranational unit of account on the territory of (a subset of) countries; the national currencies would continue to coexist with the new supranational currency. This approach to integration would allow preserving the independence of economic policy for the involved member states. At the same time, countries would benefit from a reduction in transaction costs and increasing convergence of national economies.
Background: Theoretical Concepts and World Experience of Monetary Integration
Ideally, the monetary union should have the form of an optimum currency area (OCA), a territory of one-currency domination with high level of integration and unification in different economic spheres. Modern economic science provides two main approaches considering the possibility of constructing an optimal currency zone on the territory of several states. The first suggests that optimality should be determined on the basis of implementing a specific group of criteria by countries. Among the main criteria, freedom of goods movement, labor and capital, openness and diversification of the economy, the synchronization inflation rates as well as integration in the financial sector can be mentioned. The second approach is based on a comparison of the benefits and costs in terms of the monetary union formation of the country with the highest economic potential. In practice, when studying the effectiveness of monetary integration, a synthesized approach is used. It includes evaluating by criteria, as well as taking into account costs and benefits that a country accrues in case of entering a particular monetary group. The main benefits of a monetary union include a reduction of transaction costs, trade relations enlargement, improving the discipline in the monetary sphere, and a reduction of the rate of international reserve sufficiency for every country-member. At the same time, there are some negative aspects of deep integration, such as loss of monetary policy independence, economic imbalances in case of weak convergence of national economies, loss of (part of) seigniorage income, and a possible negative public reaction to the adoption of a single currency.
When discussing the concept of monetary integration, it is important to understand the distinction between a monetary union and an optimum currency area. A monetary union is one of the most developed forms of a currency area, which implies a rigid anchor of national currencies to each other with a possible further transformation into the currency of the leading country, or to a single supranational currency (as in the case of the European Union). In this case, a monetary union can be formed of asymmetrical economies. Instead, the optimum currency area requires mandatory implementation of the main convergence criteria, and thereby, more symmetry/alignment among the members. Thus, a monetary union does not necessarily have to be an optimum currency area, while the optimum currency area has every opportunity to be transformed into a full-fledged monetary union [1].
Historically, there have been several examples of monetary union formations. The Italian monetary union (1862-1905), which was formed through the merger of disparate Italian lands, is among them. We can also identify the Scandinavian Monetary Union, which united Norway, Denmark and Sweden (1875-1917). The Austro-Hungarian monetary union existed in the period from 1867 to 1914. Currently, we observe formations of monetary unions in Africa, Latin America and the Arab states.
Despite the implementation of a number of integration projects within the various groups of countries over the past century, only the European states were able to achieve the highest form of monetary integration. It took them more than 50 years to do this, and the integration processes in the economic and monetary fields are continuing with new Member States joining the European Union. However, despite the detailed development plans for the implementation of a monetary union, the Eurozone countries face a number of difficulties and obstacles on the path of economic development. European monetary integration brings not only benefits, but also some costs. For example, the loss of independence of monetary policy creates obstacles in regulations of economic processes.
This discussion suggests that an assessment of the potential formation of a monetary union – that is, of desirability, feasibility and level of monetary integration within a particular group of countries – should be based on relating theoretical concepts and features of the countries in question, as well as a in-depth research of the experience of other currency unions.
Integration Processes in the Post-Soviet Space
At the territory of the former Soviet Union, integration projects have been implemented for more than 20 years. After the collapse of the Soviet Union, such integration formations as the Commonwealth of Independent States and the Eurasian Economic Community were created. Belarus, Kazakhstan and Russia have built a Customs Union (CU) and a Common Economic Space (CES). There is also a possibility of making a transition to the highest form of integration – a monetary union. However, this raises a number of questions: which CIS countries should join a monetary union, when should this be done, and what is the optimal form of monetary union for integrating countries.
Luzgina (2013b) shows that, within the framework of the CIS countries, that there are significant differences in many of the macroeconomic indicators. Countries differ in terms of GDP and the growth rates of investment and prices. For example, Belarus has the highest inflation in the post-Soviet region. The source of growth also differs: for example, a number of countries, such as Azerbaijan, Russia and Kazakhstan, owe a significant part of their economic growth to the availability of natural resources, but this is not universally true within the CIS. Dynamics of population income is also significantly different among the countries. Here, Russia occupies the leading position with its average wage at the beginning of 2012 reaching 780 USD. At the same time, in Tajikistan, the average wage amounts to only 110 USD.
Another concern is that the formation of an economic and monetary union implies free movement of labor and capital. However, at this stage of development, it can lead to some negative consequences. Free movement of labor could involve a massive flow of labor from depressed areas to regions where incomes are much higher. This may create pressure on health and social services in the latter regions. In turn, free movement of capital may cause speculative attacks on the financial markets. At the same time, the CIS countries, except Russia, Kazakhstan and Ukraine, do not have large gold reserves. Therefore, the free movement of capital flows without additional support may cause a crisis within the national financial systems. Out of all the gold reserves of the CIS countries, more than 85% of the total volume is owned by Russia. In the case of an abolition of restrictions on capital flows, countries that are exposed to speculative attacks are likely to ask Russia for help. Such a situation would require Russia to use its own financial resources, which would create an additional pressure on its international reserves.
Table 1. International reserves in the CIS countries, (million US dollars)|
Country |
2008 |
2010 |
2012 |
|
Azerbaijan |
6467,2 |
6409,1 |
11277,3 |
|
Armenia |
1406,8 |
1865,8 |
1799,4 |
|
Belarus |
3063,2 |
5025,4 |
8095 |
|
Kazakhstan |
19883,1 |
28264,7 |
28299,4 |
|
Kirgizstan |
1225,1 |
1720,4 |
2066,7 |
|
Moldova |
1672,4 |
1717,7 |
2515 |
|
Russia |
426278,8 |
479222,3 |
537816,4 |
|
Tajikistan |
163,5 |
403,1 |
630,7 |
|
Ukraine |
31543,3 |
34571,3 |
24552,8 |
Russia is leading among the CIS countries in terms of population and territory, with other countries lagging substantially behind. For example, Belarus owns less than 1% of the total territory of the CIS countries and less than 4% of the population.
Relying on the above quantitative indicators it is natural to expect that in case of a formation of a monetary union with a single emission center, the distribution of votes in the decision-making of the development and implementation of monetary policy is likely to be unequal. The leading role would likely belong to Russia, which has the largest economic potential. However, other countries in this case may be in a less advantageous position as Russia’s decisions may lead to undesirable consequences for the economies of other countries, given the lack of a sufficient degree of synchronization of national economic systems.
Thus, a weak degree of economic integration of the national economies of the CIS countries, different levels of development, as well as the superiority of the economic potential of Russia over the other states gives reason to argue for a non-feasibility of monetary integration within the CIS countries in the short term.
On the other hand, it may be reasonable to consider the possibility of integration in the monetary sphere on the basis of the most economically integrated countries, namely Russia, Belarus and Kazakhstan. These countries have created a Customs Union and are implementing a project of forming a Common Economic Space. There are plans of creating the Eurasian Economic Union. In addition, based on the experience of European countries, it might be easier to start the integration within a limited number of participants, which satisfy the required convergence criteria. Later, more countries may enter the monetary union.
Prospects for Monetary Integration of Belarus, Kazakhstan and Russia
Taking into account the experience of the European Union, we note the need for close trade and technological relations, as well as a market type of economy, and unification of the legislation in the economic sphere. Some of these elements of monetary integration are observed within the CU. After the collapse of the Soviet Union, economies of the former Soviet states switched to paths of market reforms. In addition, the CU countries have rather close trade relations; they have restored the old and created new means of communication. At the same time, there is a weak degree of diversification of exports and imports. A large part of export and import are represented by raw materials.
The second important point of the monetary integration is the comparability by size of the emerging economies. In the framework of the Customs Union, Russia is the only leader. Harmonization of relations between the alliance partners would be easier in the case of smaller countries coordinating their efforts, which would allow them to defend their interests along with the large member-states.
Finally, obligatory condition of monetary integration is the fulfillment of convergence indicators (certain values of macroeconomic indicators) by all association members. In Luzgina (2013b), we compare a range of such indicators, as based on the experience of the European Union. We use indicators such as the inflation rate, public debt, budget deficit, and the dynamics of exchange rates for comparison. The study reveals that the main differences lie in the monetary indicators, namely the rate of inflation and exchange rate. In addition, there are certain differences in the structure of the economy and the share of private ownership in GDP.
Figure 1. Exchange Rate (average for a year), as % of the previous year
Figure 2. Industrial Producer Price Index (average for a year), as % of the previous year
Source: Data of the Interstate Statistical Committee of the Commonwealth of the Independent State
The persistence of significant differences in the values of convergence indicators at the macro level makes a full-fledged monetary union highly unlikely in the short term, even within the framework of the three most economically integrated states. At the same time, it is appropriate to consider the option of monetary integration in its mild form, i.e. in the form of monetary integration on the basis of a single unit of account. A single unit of account is usually calculated on the basis of the basket of national currencies, and is mostly used for international payments and credits.
The attractiveness of monetary integration in the form of monetary union on the basis of a supranational unit of account is motivated; first of all, by the preservation of the economic sovereignty of all countries. Circulation of the unit of account would take place in parallel with national currencies. Member states would retain the possibility of implementation of independent monetary and fiscal policies. Furthermore, the unit of account may fulfill the role of a training tool. The supranational payment unit can be used on the national level. Using this unit of account, legal entities may carry out transactions and individuals may hold their savings. It can also be actively implemented in the inter-state calculations. A part of gold and forex reserves of member countries can be held in the supranational unit of account. Inter-state loans can be issued in this unit as well. This type of monetary union would reveal the feasibility of further deepening of integration in the monetary sphere and determine the timing of the formation of a full-fledged monetary union. In case of serious problems, the dismantling of the currency union will not cause major adverse changes in national economies, unlike in the case of a collapse of a monetary union with a single currency. In addition, the operation of a single unit of account allows for the anticipation of potential problems associated with the functioning of economies under a single monetary system, and a solution before the introduction of a supranational currency.
Last, but not least, this form of integration seems to be a relatively feasible option as the process of convergence on the territory of the CU countries in the monetary sphere has already begun. There is an increased use of national currencies in bilateral trade, harmonization of national legislation is taking place in the monetary sphere, and international agreements in the monetary sphere are ratified. These activities are gradually building a base for the realization of the monetary integration project of the union countries.
Conclusions
Economic and monetary integration allows the countries to get the maximum benefit from mutual cooperation. However, the deepening of the integration process is usually accompanied by certain difficulties. Convergence of economic systems requires transformation of economic institutions, changes in legislation and principles of management, all of which are costly to achieve. The better the preliminary harmonization is performed, the easier the process of adaptation of national economies to function within a particular economic and monetary union will be.
The post-Soviet countries are implementing several projects of economic integration. However, their economies have major differences according to a number of macroeconomic indicators. The greatest degree of convergence is reached only by three CIS states, namely Belarus, Russia and Kazakhstan. Rather high level of economic integration, as well as a continuation of the process of unification and harmonization of national economies allows us to study the feasibility of realizing the lightweight form of a monetary integration based on a single supranational unit of account on the territories of Belarus, Kazakhstan and Russia.
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References
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Can Public Enforcement of Competition Policy Increase Distortions in the Economy?
Authors: Vasiliki Bageri, University of Athens, Yannis Katsoulacos, Univeristy of Athens, and Giancarlo Spagnolo, SITE.
Competition law has recently been introduced in a large number of developed and emerging economies. Most of these countries adopted the common practice of basing antitrust fines on affected commerce rather than on collusive profits, and in some countries caps on fines have been introduced based on total firm sales rather than on affected commerce. Based on recent research, this policy brief explains how a number of large distortions are connected to these policies, which may facilitate competition authorities in their everyday job but at the high risk of harming the consumer and distorting industrial development. We conclude by discussing the possibility to depart from these distortive rules-of-thumb opened by recent advancements in data availability and econometric techniques, as well as by the considerable experience matured in estimating collusive profits when calculating damages in private antitrust litigation.
Competition policy has become a prominent policy in many developing economies, from Brazil to India. Indeed, the available evidence suggests that in countries where law enforcement institutions are sufficiently effective, a well designed and enforced competition policy can significantly improve total and labor productivity growth.
It is already well known that the private enforcement of competition policy can give rise to large distortions: since competition law is enforced by Judges and not by economist, it is easy for firms to strategically use the possibility to sue under the provision of competition law to protect their market position rather than the law being used to protect competition.
It is somewhat less known that a poor public enforcement of Competition Law by publicly funded competition authorities can also end up worsening market distortions rather than curing them. In the reminder of this policy brief we explain why, according to recent research, a mild and suboptimal enforcement of antitrust provisions – in the sense of fines that are too low to deter unlawful conduct (horizontal agreements and cartels in particular) and fines which are based on firm revenue rather than on the extra profits generated by the unlawful conduct, could significantly harm social welfare, even if we abstract from the direct cost the public enforcement of competition law imply for society.
Current Practice in Setting Fines
A very important tool for the effective enforcement of Competition Law is the penalties imposed on violators by regulators and courts. In this policy brief, we uncover a number of distortions that current penalty policies generate, we explain how their size is affected by market characteristics such as the elasticity of demand, and quantify them based on market data.
In contrast to what economic theory predicts, in most jurisdictions, Competition Authorities (CAs), but also courts where in charge, use rules-of-thumbs to set penalties that – although well established in legal tradition and in sentencing guidelines and possibly easy to apply – are hard to justify and interpret in logical economic terms. Thus, antitrust penalties are based on affected commerce rather than on collusive profits, and caps on penalties are often introduced based on total firm sales rather than on affected commerce.
A First Well Known Distortion Due to Legal Practice
A first and obvious distortive effect of penalty caps linked to total (worldwide) firm revenue is that specialized firms which are active mostly in their core market expect lower penalties than more diversified firms that are also active in several other markets than the relevant one. This distortion – why for God’s sake should diversified firms active on many markets face higher penalties than more narrowly focused firms? – could in principle induce firms that are at risk of antitrust legal action to inefficiently under-diversify or split their business to reduce their legal liability.
In a recent paper published in the Economic Journal, we examine two other, less obvious, distortions that occur when the volume of affected commerce is used as a base to calculate antitrust penalties.
A Second Distortion: Poorly Enforced Competition Law May Increase Welfare Losses from Monopoly Power
If expected penalties are not sufficient to deter the cartel, which seems to be the norm given the number of cartels that CAs continue to discover, penalties based on revenue rather than on collusive profits induce firms to increase cartel prices above the monopoly level that they would have set if penalties were based on collusive profits. Intuitively, this would be done in order to reduce revenues and thus the penalty. However, this exacerbates the harm caused by the cartel relative to a monopolized situation with similar penalties related to profits, or even relative to a situation with no penalties due to the distortive effects of the higher price and, in comparison to a situation with no penalties, the presence of antitrust enforcement costs.
A Third Distortion: Firms at the Bottom of the Value Chain May Pay a Multiple of the Fine Paid by Firms at the Top for an Identical Infringement
Firms with a high revenue/profit ratio, e.g. firms at the end of a vertical production chain, expect larger penalties relative to the same collusive profits that firms with a lower revenue/profit ratio would get. Our empirically based simulations suggest that the welfare losses produced by these distortions can be very large, and that they may generate penalties differing by over a factor of 20 for firms that instead should have faced the same penalty.
Note that this third distortion takes place also when at least for some industries fines are sufficiently high to deter cartels. This distortion means that competition is only enforced in industries that happen to be in the lower end of the production chain, and not in industries where the lack of competition is producing larger social costs. Note also that our estimation is based only on observed fines, i.e. on fines paid by cartels that are not deterred. Since cartels tend to be deterred by higher fines, this suggest that if we could take into account the fines that would have been paid by those cartels that were deterred (if any), the size of the estimated distortion would likely increase!
Concluding remarks
We argue that if one wants to implement a policy, one must be ready to do it well otherwise it may be better to not do it at all. This is particularly relevant for countries with weaker institutional environments where it is likely that political and institutional constraints will not allow for a sufficiently independent and forceful enforcement of the Competition Law.
It is worth noting that – in particular in the US but also increasingly so in the EU – the rules-of-thumb discussed above do not produce any saving in enforcement costs because the prescribed cap on fines requires courts to calculate firms’ collusive profits anyway. Furthermore, the distortions we identified are not substitutes where either one or the other is present. Instead, they are all simultaneously present and add to one another in terms of poor enforcement.
Where there are sufficient resources to allow for a proper implementation and where enforcement of Competition Law is available, developments in economics and econometrics make it possible to estimate illegal profits from antitrust infringements with reasonable precision, as regularly done to assess damages. It is time to change these distortive rules-of-thumb that make revenue so central for calculating penalties, if the only thing the distortions give us is savings in the costs of data collection and illegal profit estimation.
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Entrepreneurship in Latvia and Other Baltic States: Results from the Global Entrepreneurship Monitor
This policy brief summarises the results and implications of an upcoming Global Entrepreneurship Monitor (GEM) 2012 Latvia Report: a study on the entrepreneurial spirit and the latest trends in entrepreneurial activity in Latvia. The results suggest that Latvia is a rather entrepreneurial country (it rates second out of all EU countries by the share of population in early-stage entrepreneurial activity). GEM also finds that Latvian early-stage entrepreneurial activity is counter-cyclical. Early-stage entrepreneurship and self-employment have been important supports for those who were hit by the crisis in 2008-2009. Latvian entrepreneurs are measured to have strong international orientation and growth ambitions. The majority of them are young and middle-age males; in turn, females and the older age group (55-64) represent an “untapped entrepreneurial resource” potential to be addressed by policymakers.
Managed Competition in Health Insurance Systems in Central and Eastern Europe
This policy brief summarizes common trends in the development of health care systems in the Czech Republic, Slovakia, and Russia in late 1990s–early 2000s. These countries focused on regulated competition between multiple health insurance companies. However, excessive regulation led to various deficiencies of the model. In particular, improvements in such quality indicators of the three health care systems as infant and under-five mortality are unrelated to the presence of multiple insurers or insurer competition.
A number of transition countries in Central and Eastern Europe and the former Soviet Union introduced health care systems with compulsory enrollment, obligatory insurance contributions unrelated to need and coverage according to a specified package of medical services. This so-called social health insurance (SHI) model (Culyer, 2005) is regarded as a means for achieving universal coverage, stable financial revenues, and consumer equity (Balabanova et al. 2012; Gordeev et al., 2011; Zweifel and Breyer, 2006; Preker et al., 2002). While most transition countries chose to only have a single health insurance provider on the market, the Czech Republic, Slovakia, and Russia allowed competitive (and often private) insurers in the new system. However, the evidence from the three countries shows excessive regulation of health insurers and limited instruments for insurer competition within indebted post-reform health care systems (Naigovzina and Filatov, 2010; Besstremyannaya, 2009; Medved et al., 2005). Consequently, the three countries may have been over-enthusiastic in putting large emphasis on market forces in the reorganization of health care systems in economies with a legacy of central planning (Diamond, 2002).
This brief addresses the results of Besstremyannaya (2010), which assesses the impact of private health insurance companies on the quality of health care system. While various performance measures reflect different goals of national and regional health care systems (Joumard et al., 2010; Propper and Wilson, 2006; OECD, 2004; WHO, 2000), aggregate health outcomes directly related to the quality of health care are commonly infant and under-five mortality (Lawson et al., 2012; Gottret and Schieber, 2006; Wagstaff and Claeson, 2004; Filmer and Pritchett, 1999). Consequently, Besstremyannaya’s (2010) analysis regards mortality indicators as variables reflecting the overall quality of health care system.
The estimations employ data on Russian regions in 2000-2006. The results indicate that regions with only private health insurers have lower infant and under-five mortality. However, given the low degree of competition on the social health insurance market in Russia, we hypothesize that this effect is mostly driven by positive institutional reforms in those regions. Indeed, incorporating the effect of institutional financial environment, we find that the impact of private health insurers becomes insignificant.
Development of a Social Health Insurance Model in the Czech Republic, Slovakia, and Russia
At the beginning of their economic transition, the Czech Republic, Slovakia, and Russia established a model for universal coverage of citizens by mandatory health insurance (Balabanova et al., 2012; Medved et al., 2005; Sheiman, 1991). The revenues of the new SHI system came from a special payroll tax and from government payments for health care provision to the non-working population. The main reason for combining certain features of taxation-based and insurance-based systems was the desire to establish mandatory health insurance as a reliable source of financing in an environment with unstable budgetary revenues (Lawson and Nemec, 2003; Preker et al., 2002; Sheiman, 1994). The insurance systems instituted in the three transition countries correspond to the major SHI principles implemented in Western Europe: contributions by beneficiaries according to their ability to pay; transparency in the flow of funds; and free access to care based on clinical need (Jacobs and Goddard, 2002).
The Czech Republic, Slovakia, and Russia placed emphasis on regulated competition, decreeing that SHI should be offered by multiple private insurance companies with a free choice of the insurer by consumers. Managers of private insurance companies were assumed to perform better than government executives (Lawson and Nemec, 2003; Sinuraya, 2000; Curtis et al., 1995), so an intermediary role for private insurance companies was seen as a key instrument for introducing market incentives and improving the quality of the health care system (Sheiman, 1991).
However, the activity of health insurance companies in the three countries was heavily regulated, since the content of benefit packages, size of subscriber contributions, and the methods of provider reimbursement were decided by government, and tariffs for health care were frequently revised (Lawson et al., 2012; Rokosova et al., 2005; Zaborovskaya et al., 2005; Praznovcova et al., 2003; Hussey and Anderson, 2003). In particular, Russian health care authorities enforced rigid assignments of areas, whose residents were to be served by a particular health insurance company (Twigg, 1999) and imposed informal agreements with health insurance companies to finance providers regardless of the quality and quantity of the health care (Blam and Kovalev, 2006). As a result, the three countries experienced an initial emergence of a large number of health insurance companies, followed by mergers between them, resulting in high market concentration (Sergeeva, 2006; Zaborovskaya et al., 2005; Medved et al., 2005).
In Russia, the Health Insurance Law (1991) specified that until private insurers appeared in a region, the regional SHI fund or its branches could play the role of insurance companies. Therefore, several types of SHI systems emerged in Russian regions in the 1990s and early 2000s: the regional SHI fund might be the only agent on the SHI market; the regional SHI fund might have branches, acting as insurance companies; SHI might be offered exclusively by private insurance companies; or SHI might be offered by both private insurance companies and branches of the regional SHI fund (Figure 1). The variety of SHI systems reflects the fact that many regions opposed market entry by private insurance companies (Twigg, 1999). Indeed, the boards of directors of regional SHI funds usually included regional government officials (Tompson, 2007; Tragakes and Lessof, 2003) who were reluctant to reduce government control over SHI financing sources (Blam and Kovalev, 2006; Twigg, 2001). The controversy with health insurance legislation created a substantial confusion at the regional and the municipal level (Danishevski et al., 2006).
Figure 1. Health insurance agents in Russia in 2000-2006, (number of regions) 
This context suggests that Russian regions provide an interesting study field to address the impact of private health insurance companies on the quality of health care system. In particular, the wide variety of SHI systems across Russian regions, as well as the gradual introduction of the health insurance model in Russia provide a sufficient degree of variation in practices and outcomes to allow for a well-specified empirical analysis.
Data and Results
In our analysis we use data on Russian regional economies between 2000 and 2006 (as based on data availability). Our measures of health outcomes are given by the pooled regional data on infant and under-five mortality. Our key explanatory variable is the presence of only private health insurers in the region. Arguably, the coexistence of public and private health insurance companies does not enable effective functioning of private health insurers owing to their discrimination by the territorial health insurance fund. Therefore, in the empirical estimations we focus on the presence of only private health insurers in the region, regarding it as a measure of effective health insurance model. The analysis also employs a variety of important socio-economic and geographic variables influencing health outcomes (per capita gross regional product (GRP), share of private and public health care expenditure in gross regional product, share of urban population, average temperature in January).
The results of the first set of our empirical estimations demonstrate that the presence of only private health insurers in a region leads to lower infant and under-five mortality. Furthermore, an increase in the share of private health care expenditure in GRP leads to a decrease in both mortality indicators. The result is consistent with numerous findings about the association between personal income and health status in Russia (Balabanova et al., 2012; Sparling, 2008).
Prospective reimbursement of health care providers is associated with a decrease in infant and under-five mortality. The finding suggests the existence of a quasi-insurance mechanism in the Russian SHI market. Operating in an institutional environment where provider reimbursement is based on prospective payment, private insurance companies in effect shift a part of their risk to providers (Glied, 2000; Sheiman, 1997; Chernichovsky et al., 1996).
Table 1. Factors leading to decreased infant and under-five mortality in Russia
Although our analysis shows that the presence of only private health insurers is statistically associated with improvements in infant and under-five mortality, we believe that the influence is indirect. Namely, the overall positive institutional environment in the region may result in both a decrease of mortality indicators and a lower coercion of regional authorities towards the presence of private health insurance companies.
To test this hypothesis, we use financial risk in a region as a measure of institutional environment and incorporate it in the analysis through an instrumental variable approach. (We measure financial risk by an expertly determined rank ordered variable by RA expert rating agency; this variable reflects the balance of the budgets of enterprises and governments in the region, with lower ranks corresponding to smaller risk.)
In line with our hypothesis, the results suggest that the presence of private health insurance companies now becomes insignificant in explaining infant and under-five mortality.
Discussion
The existing literature suggests that the improvement in infant and under-five mortality in the Czech Republic, Slovakia, and Russia can be attributed primarily to an increase of health care spending (Gordeev et al. 2011; Besstremyannaya, 2009; Lawson and Nemec, 2003) rather than being an effect of the social health insurance model with multiple competing insurers. It should be noted that insufficient government payments for the non-working population and a decline of the gross domestic product in the early transition years left SHI systems in the three countries indebted (Naigovzina and Filatov, 2010; Sheiman, 2006; Medved et al., 2005), which undermined the development of the managed competition in the health care provision.
In Russia (and also in the Czech Republic and Slovakia) there is little competition between insurers, and surveys show that the main factors causing consumers to change their health insurance company are change of work or residence, and not dissatisfaction with the insurer (Baranov and Sklyar, 2009). The fact that law suits on defense of SHI patient rights are rarely submitted to courts through health insurers (Federal Mandatory Health Insurance Fund, 2005) may also be evidence of the failure of Russian health insurance companies to win customers on the basis of their competitive strengths.
Summary and Policy Implications
The above findings as well as the other mentioned literature suggest that improvements of infant and under-five mortality in the Czech Republic, Slovakia, and Russia are not associated with the positive role of managed competition in the social health insurance system. In particular, in Russia the decrease in infant and under-five mortality is likely to be related to financial environment, rather than the existence of insurance mechanisms or competition between health insurance companies. One possible explanation of this absence of effect may come from the excessive regulation of the private insurance markets, as well as the insufficient competition between insurers. Importantly, the health insurance reform, implemented in Russia in 2010, both addressed underfinancing (by raising payroll tax rates) and took a step towards fostering provider competition, by allowing private providers to enter the social health insurance market (Besstremyannaya 2013). However, insurance companies are still not endowed with effective instruments for encouraging quality by providers, which may greatly undermine their efficiency.
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Decomposition of Economic Growth in Belarus
During the last decade Belarus was one of the leaders of growth in the CEE region. Kruk and Bornukova (2013) have analyzed the sources of growth and found that capital accumulation was the main contributor to growth. The contribution of total factor productivity (TFP) to growth was, on the contrary, quite modest. On the sectoral level, capital accumulation was not always accompanied by the increases in TFP. Hence, the new growth policy, modernization, with the bottom line “more capital” may not be the best option for enhancing productivity-based growth. The competitive advantages of Belarus lie in the resource-based and non-tradable sectors, while the majority of the manufacturing sectors are lagging behind in productivity. Belarus has symptoms of a Dutch disease without the trade surplus, and the devaluation of 2011 did not cure it.
During 2003-2012, Belarus had an average growth rate of 7.1%, and during the ‘fat years’, i.e. 2003-2008, it was even higher – 9.5%. Intuitively, this prominent growth is questionable, as it was achieved in the context of dominating state ownership, centralized allocation of resources, government’s control at the factor and goods markets, as well as poor infrastructural reforms (for instance, according to the indices of the EBRD). The Belarusian case challenges the mainstream paradigm of growth in transitional countries, which assumes that the progress in market reforms is the key factor for high and sustainable growth.
The simplest and most widespread explanation of the Belarusian phenomena is based on ‘non-standard’ gains in productivity. This approach assumes that productivity is the engine of growth (World Bank (2012); Demidenko and Kuznetsov (2012)). To a large extent, these gains in productivity are seen as “artificial”, resulting from Russian injections into the Belarusian economy: cheap gas, specific schemes of oil trade, and preferences in access to the Russian markets (Kruk (2010)). However, under this approach, decomposing the growth in productivity by ‘natural’ and ‘artificial’ parts is hardly possible, as the impact of these factors is already hidden in the available data.
The IMF (2010) gave a substantially different explanation of Belarusian growth. They claimed that the average growth of 8.3% over the period of 2001-2008 was mainly capital-based with a contribution of 4.8 percentage points, while the contribution of productivity growth was only 3.0 percentage points (the rest of growth was explained by labor and cyclical factors).
The main reason behind the substantial difference in the explanation of growth factors is the statistical data on capital used during the growth accounting exercise. Belarusian official statistics reports the data on capital stock based on a direct survey of capital assets according to both gross and net (wealth) capital concept. However, the growth rates of capital are reported only for the gross stock of capital. These growth rates are questionable as they demonstrate ‘unnatural stability’ – they fluctuate around 2% for the last 20 years, despite the fact that investments during this period has displayed huge and volatile growth. Statistical offices in other CIS countries have reported similar dynamics of the capital stock. Voskoboynikov (2012), and Bessonov and Voskoboynikov (2008) show that this trend is a consequence of the statistical methodology used in Russia (which the Belarusian methodology is very similar to). In particular, the trend is driven by biased capital investments deflators (which are overestimated) from the periods of high inflation (1990-s and early 2000-s).
If official data is used as the capital input for the growth accounting exercise, the contribution of TFP to growth will be overestimated. Hence, in the studies of the World Bank (2012) and Demidenko and Kuznetsov (2012), the leading role of TFP may be due to the use of the official data on the capital stock.
Motivated by this concern, we use two different methods to evaluate the value of capital inputs (see Kruk and Bornukova (2013) for more details). The first alternative to using the data from direct capital survey is to exploit a perpetual inventory method (PIM): the historical assessment of initial capital stock is further adjusted by the flow of investments and depreciation. However, if there is a bias in deflators within the sample, the series will also be distorted. This problem may be eliminated if the initial stock will be selected at the moment when there is no bias in investment deflator, in the period of moderate inflation. We call this approach PIM-backward.
The second approach to constructing capital series exploits the concept of productive capital and the data on the flow of capital. It assumes that the productive capacity of a capital good depends on its age. The productive stock of a capital good (i.e. the gross stock adjusted by the age-efficiency profile) generates a flow – capital services. The latter is the productive stock adjusted by the user cost of the individual capital good. For the total output of an industry (or economy) one should aggregate the inputs by different capital goods, which in contrast to the net (wealth) concept depends not only on the value of capital goods, but also on their user costs. This approach has solid theoretical foundations, which is the reason it is prioritized in productivity studies.
From the view of available data in the case of Belarus, this approach has a number of powerful advantages. First, we use individual deflators for individual capital goods, which are expected to be less biased than total deflators for the industry. Second, we use heterogeneous depreciation rates for each capital good in each industry based on actual data of ‘accounting depreciation’, while we would have to use homogenous assumptions for each industry in the case of net (wealth) concept. Third, we can exclude residential housing from our measure of capital input.
There are, however, also disadvantages. First, data of newly employed capital goods (in direct surveys of capital assets) and data on capital investments differ rather substantially. Traditionally, the data on capital investments is treated as more reliable, but based on the direct surveys of capital assets we have to use the series of newly employed capital goods as a flow variable when running PIM. Second, we use exogenous real interest rate for computing unit user costs, but the results are very sensitive to our assumptions on the real interest rates across industries. Third, the necessity to exclude residential housing from the data (because of ‘mixed historical prices’) may be interpreted as a loss of information. Given the strengths and weaknesses of the approach, we prioritize it on the industrial level, but prefer the PIM-backward approach for an aggregate economy analysis.
Based on the PIM-backward measure for the total economy (see Figure 1), we may argue that the contribution of TFP to growth was more modest during the last decade than what was reported in the majority of previous studies on Belarusian growth. This finding is of fundamental importance for the growth agenda: only productivity-based growth may be treated as sustainable, since capital growth will slow down as the capital approaches its stationary value. We argue that only the policy directed to promotion of productivity is vital for growth prospects.
Figure 1. Contribution of Production Factors and TFP to the Growth of Gross Value Added (PIM-Backward Approach) 
The dynamics of productivity divided according to industries (see Table 1) display that the leaders in productivity growth are either industries that produce non-tradable goods (communications, finance, construction) or those that have a chance of ‘artificial productivity gains’ (chemical and petrochemical manufacturing, and fuel).
Table 1. Initial Level and Growth Rates of Productivity in Major Industries 
However, the theory suggests that the leaders in productivity growth should be the industries producing tradable goods. . This contradiction may be interpreted in two ways. First, one may argue that a more competitive environment and larger share of private ownership (which are seen in the financial industry, trade and catering) are the core reasons for high productivity level and growth rates in ‘domestic industries’. Second, an attractive position of ‘domestic industries’ may reflect a high level of domestic prices rather than ‘natural’ productivity. The base year for our computations is 2009, in which both the real effective exchange rate of the national currency and income were relatively high. The devaluation of 2011 fixed the problem only temporarily, since the inflation in 2011-2013 quickly eroded the benefits of the devaluation. Therefore, the indicators, in terms of 2009 prices, may capture the changes in nominal values as the main component of the productivity gains, while from a longer-term perspective it would be seen as mainly price movements without substantial progress in productivity. In our view, the second explanation is the main reason for the non-standard disposition of productivity levels and growth rates among industries.
If that is the case, the bigger picture looks as follows. Industries producing tradable goods suffer from the lack of progress in productivity, i.e. lose their competitive advantage; enhancements in total productivity are mainly due to industries with ‘artificial productivity gains’. The latter allows domestic prices to grow, making a productivity illusion of domestic industries. All together these symptoms are quite similar to the Dutch disease.
One more finding from the productivity analysis at the national level is the lack of productivity gains from reallocation of resources from less productive industries to more productive ones. A scatter-plot between capital accumulation growth rates and TFP growth rates (see Figure 2) demonstrates no clear relationship between them.
Figure 2. Growth Rates of Capital Input vs. TFP Growth Rates in Manufacturing Branches, 2006-2010. 
Notes: The sizes of the circles correspond to industry shares in value added.
However, if there was a free allocation of resources, more productive industries would accumulate more capital. Moreover, the same indicators under the PIM-backward approach demonstrate clear negative relationship. A ‘soft’ interpretation of this phenomenon assumes that the lack of reallocation of capital restrains the development of total productivity. A ‘tighter’ interpretation assumes that at least in some industries there is a trade-off between capital accumulation and productivity gains. For instance, in Kruk and Haiduk (2013) it is shown that spurring capital accumulation through the practice of directed lending leads to losses in efficiency through a number of channels. Hence, the simplest way to increase aggregate productivity is to depart from the centralized allocation of capital and unblock capital inflows to more productive industries and vice versa.
Figure 3 documents the mobility of labor markets across the manufacturing industries in Belarus. While one can expect that labor flow into more productive industries, it is not completely true for the Belarusian manufacturing sector.
Figure 3: Labor growth and TFP growth in industries of Belarusian manufacturing, (capital services approach). 
Notes: The sizes of the circles correspond to industry shares in value added.
Two distinct trends emerge in the labor market. On the one hand, some industries exhibit textbook behavior: increases in TFP are associated with increases in the number of people employed. The best example here is the fuel industry, which experiences TFP increases due to preferential oil prices. However, there are industries that gain TFP and lose labor at the same time. The chemical industry, machinery manufacturing and woodworking are examples of this pattern. These industries have experienced rapid capital accumulation, which, coupled with high gains in TFP, should have contributed to the increases in labor productivity. Surprisingly, though, these industries did not attract more labor. A possible explanation for this counterintuitive pattern is the excessive employment at the beginning of the period in question. In this case, a decrease in the number of people employed may have contributed to the increases of TFP.
Indeed, Figure 4 confirms our hypothesis: labor was flowing from the industries with lower labor productivity to the industries with higher labor productivity in general. Industries in which TFP increased and which were accompanied by a labor decrease, featured low labor productivity in the beginning of the period in consideration, more precisely in 2005. Only the chemical industry exhibited the unexpected behavior: it lost labor despite high initial productivity. By getting rid of excessive employment they were contributing to an increase in TFP.
Figure 4: Labor shifts into the sectors with higher labor productivity. 
Notes: The sizes of the circles correspond to industry shares in value added.
How is Belarus doing relative to other countries? We have compared Belarusian TFP to the TFP of the leader of transition, the Czech Republic, and to the regional leader, Sweden. The Czech Republic is more developed than Belarus (in 2010 Czech GDP per capita (PPP-corrected) was 1.73 times higher than in Belarus), and, theoretically, it should be much more difficult and costly for it to continue approaching the technological frontier. However, our findings suggest that the Czech Republic is catching up with Sweden in terms of TFP, and doing it faster than Belarus (see Figure 5).
Figure 5: TFP of Belarus and the Czech Republic relative to TFP of Sweden, (PIM-backward approach).
Over the last 10 years, Belarus has closed only 5 percentage points of the gap with Sweden. The Czech Republic, where the contribution of TFP to growth was more substantial, has managed to close 8 percentage points of the gap.
In absolute numbers (in ‘international’ dollars of 2010), aggregate TFP in Belarus in 2010 was 2.92 versus 4.66 in the Czech Republic and 9.38 in Sweden (according to the PIM-backwards method). However, the aggregate picture does not reflect the situation in the sectors of the economy and industries of manufacturing.
Table 2: Comparative advantage of Belarusian industries: winners and losers (capital services approach) 
Table 2 documents the comparative advantages and disadvantages of the Belarusian economy in 2010 according to the capital services approach. Both the capital services approach and the PIM-backwards approach produce the same winners and losers list with the only difference being that the PIM-backwards method has the construction sector among winners. It is not surprising to see resource-based industries among the winners (mining and quarrying mainly reflects the extraction of potash, while the chemical industry benefits both from potash and from preferential process for Russian oil). Food manufacturing is among the winners mostly due to the price scissors in agriculture: food producers buy their inputs at very low prices. The non-tradable sectors are among winners, and the majority of the manufacturing sectors are among the losers. Again, this is similar to the symptoms of the Dutch disease. It is ironic that Belarus has symptoms of a Dutch disease without the trade surplus. Instead, the desire of the government to inflate wages combined with the preferences for Russia led to the development of the same diagnosis.
Belarusian economic growth is less TFP-led than is commonly believed. While the labor market proves to be relatively successful in its reallocation of employees and its contribution to aggregate increases in efficiency, the capital market is distorted by government interventions. Capital accumulation does not necessarily lead to increases in TFP, and the new modernization policy with the bottom line of “more capital” may not be the best option for enhancing growth. Our conclusion is that Belarus should find new sources for TFP-led growth.
▪
References
- Bessonov, V., Voskoboynikov.I. (2008). “Fixed Capital and Investment Trends in the Russian Economy in Transition.”, Problems of Economic Transition, 51(4), pp. 6-48.
- Demidenko, M., Kuznetsov, A. (2012). “Ekonomicheskiy rost v Respublike Belarus: factory i otsenka ravnovesiya” (Economic Growth in Belarus: Factors and Equilibrium Assessments), National Bank of the Republic of Belarus, Working Paper No.3.
- IMF (2010). “Sources of Recent Growth and Prospects for Future Growth”, IMF, Country Report No.10/16.
- Kruk, D., Bornukova, K. (2013). “Belarusian Economic Growth Decomposition”, unpublished manuscript.
- Kruk, D., Haiduk, K. (2013). “The Outcome of Directed Lending in Belarus: Mitigating Recession or Dampening Long-Run Growth?”, BEROC Working Paper Series, WP No.22
- Kruk, D. (2010). “Vliyanie krizisa na perspectivy dolgosrochnogo ekonomisheskogo rosta v Belarusi” (The Impact of Crisis on the Perspectives of Long-term Growth in Belarus), IPM Research Center Working Paper Seies, WP/10/07.
- World Bank (2012). “Belarus Country Economic Memorandum: Economic Transformation for Growth”, Country Economic Memorandum, Report No. 66614
- Voskoboynikov, I. (2012). “New Measures of Output, Labour and Capital in Industries of the Russian Economy”, Groningen Growth and Development Centre, Research Memorandum GD
Some More Reflections on RCTs
In preparation of next year’s elections, the Swedish government chose recently to replace the Minister for International Development Cooperation. During her long mandate, former Minister Gunilla Carlsson championed the importance of aid evaluation and result focus, and managed to move aid from a quiet consensus to become a hotly debated topic. She also closed down the aid evaluation agency SADEV, following the publication of critical reviews about the work of the agency. Now, an expert group is in charge of rethinking and redesigning development policy evaluation and planning. One of the tools under consideration is randomized control trials (RCTs). This is an area in which Swedish development cooperation has no previous experience. Here are some reflections on RCTs.
In recent years, the methods of development economics have been crucially altered by the introduction of randomized control trials (RCTs). The idea behind RCTs is that development policies can be evaluated similarly to clinical trials in medicine, where subjects are randomly assigned to receive a treatment or to function as a reference or control group. The main benefit of this approach is that the random assignment allows for an estimation of the effect of the treatment (that is, the policy in question), while avoiding unobservable confounding factors or selection issues (see more about the advantages of the method in Banerjee et al. (2008)).
The diffusion of experimental methods in development economics has undoubtedly been a revolution in the academic and, if not yet fully, in the policy world. In the blogosphere there has even been talk of awarding Sveriges Riksbank’s Prize in Economic Sciences in Memory of Alfred Nobel, informally called the Nobel Prize of Economics, to the MIT couple Banerjee – Duflo. Due to their young age and the closeness in time of their contribution, this would be a ”shock” prize meant to give a strong signal. Their creation, the Abdul Latif Jameel Poverty Action Lab (J-PAL), stands for a new approach to both scientific and policy work in development that is a fantastic contribution, and definitely has the connotation of seminal.
However, it might be too early for the profession to sanction a method that has much good to show for, but also potentially undesired consequences. In the camp of critics there are heavy weights such as Angus Deaton and Dani Rodrik of Princeton, and the World Bank’s Philip Keefer and Martin Ravallion. The core of their position is of course not to deny the merits of RCTs, but to advocate their use in the right way and, in particular, as one tool among many others, with important complementarities to the others.
Some points in this context are often made, well understood and widely accepted: the limits of the approach per se, in particular the problem of external validity (the question of how generally applicable are the findings from such studies); the conflict between short-run and long-run implications, especially with respect to some policy areas (support to institution-building among others), and the incentives of policy actors. Another brief in this series by Anders Olofsgård spells out these points very clearly and references to further readings for those interested.
One aspect I find to be missing in the debate is a reflection on what impact this new method has on the three main actors involved, namely the researchers and practitioners in development and their way of working, and the people living in the countries and regions where these studies take place. This will therefore be the focus of this brief.
The Impact on the Scholarly Profession
The creation of experimental infrastructures and the popularity of the RCT methodology have rubbed off on the rest of the empirical practice in development economics and beyond, with ever-increasing demands and expectations on the econometric identification of new studies. However, when it comes to what is possibly the main weakness of RCTs as compared to most observational studies, namely external validity, the corresponding demands and expectations on how this is dealt with seem to fall behind. As pointed out in Rodrik (2008), it is enough to compare the number of pages spent on describing the identification in an average observational study to that on external validity in an average RCT-based paper. If the purpose is to learn “what works in development”, as opposed to “what worked once for a set of 25 primary schools in Uttar Pradesh faced with high drop out rates” [1], it is natural to expect the researcher that really wants to serve this purpose to provide for a desired generality of her findings. With no generality, the findings may be of limited practical use to politicians and practitioners who need to choose a policy tool or make a decision in conditions, which are likely to differ from the exact setting of the study.
During a recent presentation by one of the most active and prominent RCT researchers, the researcher clearly stated at some point that: “[t]his intervention was never thought for scaling up as a policy.” That made me pause. But what is the purpose, then? In my meaning, these studies should fit into a “bigger-picture” understanding, or at least hypothesizing on how development works, what the binding constraints and open challenges are, what might contribute to overcoming them, and how do we proceed from there. Once some candidates are identified, RCTs might, depending on the setting, be used to evaluate and compare before and after the preferred policy is implemented. Unfortunately, this attitude is far from common, beyond what has become the standard of the ‘Introduction paragraphs’.
Quite often RCT studies are extremely precise and accurate on “the impact of X on Y”, even in cases of very small effects, and can be perhaps a bit vague or face bigger uncertainties on the ‘bigger’ question. This means that many, more general (and very relevant) questions are not addressed by development economists just because a RCT is not feasible. An example mentioned in a recent keynote lecture by David Laitin is the BetterBirth Project. This is a WHO program that seems to be making a big difference for infant and maternal health in India’s poorest states through a list of 29 easy, low-cost, low-technology and well-known practices. The main lesson drawn by observers at the Harvard School of Public Health is that people follow the list more accordingly when it is spread through ”human contact”. No mass media advertisement campaign, no punishment or incentive schemes, just ”nice” people visiting, explaining, and demonstrating the list, while – in the words of an interviewed nurse – ”smiling a lot”. At first sight, this seems like something that could be randomized. However, the treatment is so diffuse and fuzzy that the practical implementation would be very challenging. If it is the case that the person meeting the clinics’ personnel and spreading the information has to be somewhat of a mentor in order for the transition to happen, to be kind and pedagogic, repeat the visits indefinitely to make sure that the practices have been adopted, and do whatever else it takes to make them learn, this is very hard to observe with precision. To simply define X as ”presentation of the list in person”, to be compared to, for example, the ”diffusion of the list through an information campaign” would probably run the risk of severely underestimating the impact. This would be because it would bundle together different types of informers and different levels of human interaction. This means that there would be a high risk of zero or insignificant results from such a study. A RCT would need to be complemented by other investigations, for example surveys, in order to find out if there really was an effect and how it came about. All of the above is likely to undermine the publication chances for an academic paper on the issue, thereby discouraging development scholars to study this program.
There are two main ways of augmenting the RCT methodology in the direction of generalizability and external validity: the elbow-grease approach of replication and the resuscitation of the concern for theoretical mechanisms. Replication studies are not very appealing in the perspective of a scholar that aspires academic publications. Besides completely new clever designs that establish a link of causation in a specific case – and possibly for each of these corresponding studies that establishes the absence of such a link in different settings – journals have little interest in publishing more variations on the same theme. Replications with small variations should instead be highly attractive for development institutions and practitioners, precisely for the reason, mentioned above, that they want to learn about effectiveness of alternative strategies in as many different specific contexts as possible. [2] In an ideal world, development institutions and aid bureaucracies would work in close cooperation with universities and academic institutions, involving young researchers before their career-concern-stress phase (perhaps Ph. D. students?) in the design and evaluation of as many of their planned interventions as possible. Moreover, in an ideal world this would be enough reward for the young researchers. This wealth of replications would then favor the possibility of “taking stock” and really learning about some general truth. I do not, however, have a good recipe for making this happen.
Luckily, some scholars are in the meanwhile working on making the pendulum swing back from the purest empiricism to the involvement with theory. Here is a list of possibilities that are important to reflect about, starting from a given RCT:
– The macro problem. How does the found effect compare to the “bigger issue”, the one that most likely set the scene in the ‘Introduction paragraph’ of the study? Few studies go back to this point, after presenting their results. Numerical simulations or structural estimation of theoretical models might help answering this question. (See some examples in Buera et al. (2011) and Kaboski et al. (2011)).
– The alternative hypothesis. What is the particular intervention compared against? If the set of circumstances or policy-relevant parameters that might be varied are too big or too dense for replications, maybe a theoretical model can help to vary them in a smooth and continuous way?
– The strategic reaction. How are the involved economic agents likely to respond in case of an expansion in space, time or both, of the intervention? How would they have responded in the absence of the intervention?
The Impact on Development Practices
As stated above, RCTs may be a powerful tool for the learning and decision-making in development institutions, public or private. However, this assumes a seldom-questioned willingness to learn and change practices on their part. Brigham et al. (2013) show, through a RCT, that these organizations might be subject to confirmation bias. Brigham et al. sent out an invitation to microfinance institutions, offering partnership to evaluate their programs, randomly accompanying it with a survey of previous studies finding positive impact of microcredit, or a survey of studies finding no impact. The second treatment elicited barely half as many responses as the first one, which suggests that at least this type of organizations might not be so interested in learning whether what they do is effective or can be improved. Coupled with the mentioned publication bias, this might skew the distribution of reported, published and established findings even further.
The Impact on the Local Context
Individual studies can of course be affected by the so-called Hawthorne effect or experimenter effect. The phenomenon, by which the act of being experimented upon changes a subject’s behavior, was first observed and got its name in the 1920s in industrial psychology. Although it is clearly hard to establish, it has for decades been a central criticism of the ”participant observation” methodology in anthropology and ethnography. Also behavioral economists, that more recently started using experiments both in labs and in the field, are explicitly careful about it.
Depending on the definition of causality that the researcher has in mind, the fact that having knowledge about being treated impacts outcomes, might not be an issue at all for the measurement of the overall effect of an intervention. The overall effect should include also the (optimal) reaction of the agents (for example a change in behavior, the adoption of other complementary inputs, etc.) and this is actually considered one of the advantages of the method. However, this raises problems for the interpretation of the size of the effect and the analysis of the channels that bring it about. This point is made very clearly by Bulte et al. (2012), who compare a double-blind RCT with a regular one. If all or most of the effect simply comes from the participants knowing to be ”treated” and reacting to it, is the effect still going to be there when the intervention becomes a regular policy? The majority of both authors and critics mostly ignore this important question.
Beyond the perspective of a single study, a different concern comes to mind when considering how a substantial number of RCT studies are clustered geographically. The map below shows a snapshot of the J-PAL interventions in Africa and Asia, which are only a fraction, albeit substantial, of the total.
Figure 1. J-PAL Interventions in Africa and Asia
Reading study after study set in Kenya, or some Indian state, I wonder if people there are starting to get used to private organizations going around giving away assets, or used to temporary local government programs with funky benefit schemes. To my knowledge, no study has yet reflected upon the aggregate impact of experiments and randomized interventions in an area that has many. Might it be the case that exposure to many conditions eventually results in ”experimental fatigue”, or practice effects, which may influence the results of the studies and make the interpretation of the findings difficult?
Even more worrisome, given the frequency of and the resources involved in these interventions, perhaps we should expect an impact on the local political economy. As a parallel, I think about the agrarian reform and the later establishment of the welfare state in post-war Italy, and how they gave major local actors the ability to uphold their clientelistic systems. The newly established rights and entitlements, the various benefits and redistribution programs, were ”filtered” by the local elites and channeled through the traditional ties of family, kinship, friendship and neighborhood. According to comparative analyses of European welfare regimes, clientelism exists, in different forms and intensities, in all Mediterranean welfare states, and it appears to be linked to the process of political mobilization and the establishment of welfare state institutions in these nations.
A recent study by Ravallion et al. (2013) finds that unemployed fail to act on information about the National Employment Guarantee Scheme (NEGS) in India. They hypothesizes that the bottleneck lies with the local government institutions (Gram Panchayats). The GP are supposed to receive the applications and apply for central government resources for planning and implementation of projects, so as to guarantee 100 days of work per year to all adults from rural households who are willing to do unskilled manual labor at the statutory minimum wage. But perhaps – argue the authors – given the strict controls on corruption, the GP officials do not find anything in it for themselves, and hence do not proceed. Of course this is just one of the possible explanations, and moreover the NEGS is not a RCT. But in general the involvement of local official or unofficial power structures in contexts where this type of interventions are increasingly common could be interestingly related to the hypothesis on the ”Mediterranean welfare state” outlined above. The idea definitely deserves investigation.
Conclusions
The popularity of RCTs among development scholars is finally spreading to practitioners. This is mostly good news, there is much to gain and learn from this approach, especially in contexts where it is grossly underexploited, as has been the case in Sweden. However, a near-monopoly of this approach is though not granted, given its non-negligible limitations, often belittled in light of its numerous strengths. Spurring development “one experiment at a time” might take unnecessary extra time and efforts, and bring about other undesirable consequences. Both development scholars and practitioners should not forget the other arrows in their quiver.
References
- Bannerjee, A. and E. Duflo (2008), “The Experimental Approach to Development Economics”, NBER Working Paper 14467.
- Brigham, Matthew, Michael Findley, William Matthias, Chase Petrey, and Daniel Nelson. ”Aversion to Learning in Development? A Global Field Experiment on Microfinance Institutions”. Technical Report, Brigham Young University March 2013.
- Buera, F. J., J. P. Kaboski, and Y. Shin (2011). ”The macroeconomics of microfinance.”
- BREAD working paper.
- Bulte, E., Pan, L., Hella, J., Beekman, G. and S. di Falco (2012). ”Pseudo-Placebo Effects in Randomized Controlled Trials for Development: Evidence from a Double-Blind Field Experiment in Tanzania.” Working Paper.
- Kaboski, J. P. and R. M. Townsend (2011, July). ”A structural evaluation of a large-scale quasi-experimental microfinance initiative.” Econometrica 79, 1357–1406.
- Olofsgård, A. ”What Do Recent Insights From Development Economics Tell Us About Foreign Aid Policy?” FREE Policy Brief Series, October 3, 2011.
- Ravallion, M., et al. ”Try Telling People their Rights? On Making India’s Largest Antipoverty Program work in India’s Poorest State.” Department of Economics, Georgetown University, Washington DC (2013).
- Rodrik, D. (2008). ‘The New Development Economics: We Shall Experiment, but How Shall We Learn?’. Harvard Kennedy School Working Paper No. RWP08-055.▪
[1] The example is fictitious. Any resemblance to real studies is unintended and purely coincidental.
[2] At least in theory – this point is discussed more in the next section.
The Customs Union Between Russia, Belarus and Kazakhstan: Some Evidence from the New Tariff Rates and Trade Flows
Author: Arevik Mkrtchyan, European University Institute.
This brief addresses the Customs Union between Russia, Belarus and Kazakhstan that was established in 2010. It argues that the external tariff schedule reflects a compromise between the interests of its members rather than simple expansion of Russian influence on the CU partners, and that the reduction in trade costs due to elimination of internal borders, benefits both the members of the CU and their external trade partners. Moreover, the impact of alleviated non-tariff trade costs on trade flows is strong and significant, while the tariff impact is insignificant for all members.