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How to assess the needs for aid? The answer: Don't ask

The aid community is awash in plans, strategies, and frameworks to meet the very real needs of the world’s poor, complete with cost estimates of “the need for aid.” This paper contends these exercises only make sense in a central planning mentality in which the answer to the tragedies of poverty is a large bureaucratic apparatus to dictate quantities of different development goods and services by administrative fiat. The planning mindset is in turn linked to previously discredited theories, such as that poverty is due to a “poverty trap,” which can only be alleviated by a large inflow of aid to fill a “financing gap” for poor countries. The aid inflow is of course administered by this same planning apparatus . . . 
William Easterly, New York University

The Political Economy of Nominal Macroeconomic Pathologies

Recognizing that inflation and the macroeconomic policies that affect it can emanate from distributional conflicts in society, we examine the deep determinants of several nominal pathologies and related policy variables from a distributional perspective. We develop new instruments and use well-established existing instruments for these deep determinants and find that two deep determinants-- societal divisions and democratic institutions --have a powerful and robust causal impact on nominal macroeconomic outcomes. Surprisingly, given the widespread attention accorded to the effects of populist democracy on inflation, democracy robustly serves to reduce inflation over the long term . . . 
Shanker Satyanath, New York University; Arvind Subramanian, IMF

Social Cohesion, Institutions and Growth

We present evidence that measures of ‘social cohesion’, such as income inequality and ethnic fractionalization, endogenously determine institutional quality, which in turn causally determines growth . . . 
William Easterly, New York University; Jozef Ritzen, Office of the President, Maastricht University; Michael Woolcock, Development Research Group, The World Bank, and Kennedy School of Government, Harvard University

Noncompliance Bias Correction Based on Covariates in Randomized Experiments

We propose some practical solutions for causal effects estimation when compliance to assignments is only partial and some of the standard assumptions do not hold. We follow the potential outcome approach but in contrast to Imbens and Rubin (1997), we require no prior classification of the compliance behavior. When noncompliance is not ignorable, it is known that adjusting for arbitrary covariates can actually increase the estimation bias. We propose an approach where a covariate is adjusted for only when the estimate of the selection bias of the experiment as provided by that covariate is consistent with the data and prior information on the study. Next, we investigate cases when the overlap assumption does not hold and, on the basis of their covariates, some units are excluded from the experiment or equivalently, never comply with their assignments. In that context, we show that a consistent estimation of the causal effect of the treatment is possible based on a regression model estimation of the conditional expectation of the outcome given the covariates. We illustrate the methodology with several examples such as the access to influenza vaccine experiment (McDonald et al (1992) and the PROGRESA experiment (Shultz (2004)).
Yves Atchade and Leonard Wantchekon

Political Institutions and Economic Performance: The Effects of Accountability and Obstacles to Policy Change

Numerous analyses have been conducted on how political institutions affect economic performance. In recent years the emphasis has been on a causal logic that emphasizes institutional obstacles to policy change, such as those presented by multiple veto points. This has especially been the case when it comes to the important question of how political institutions influence governments’ responses to exogenous economic shocks. We make the case for a substantial broadening of focus and show that when it comes to a major type of exogenous shock, a forced exchange-rate devaluation, variations in the breadth of accountability of the chief executive are more robustly associated with the post-shock growth recovery than variations in obstacles to policy change . . . 
Shanker Satyanath, Allen Hicken, and Ernest Sergenti

On the Informational Content of Advice: A Theoretical and Experimental Study

This paper examines the market for advice and the underlying perception that advice is useful and informative. We do this by first providing a theoretical examination of the informational content of advice and then by setting up a series of experimental markets where this advice is sold. In these markets we provide bidders with a demographic profile of the “experts” offering advice . . . 

Monitoring Works: Getting Teachers to Come to School

In the rural areas of developing countries, teacher absence is a widespread problem. This paper tests whether a simple incentive program based on teacher presence can reduce teacher absence, and whether it has the potential to lead to more teaching activities and better learning. In 60 informal one-teacher schools in rural India, randomly chosen out of 120 (the treatment schools), a financial incentive program was initiated to reduce absenteeism . . . 
Rema Hanna, Wagner School of Public Service, New York University; Esther Duflo, Department of Economics, MIT

An Identity Crisis? Examining IMF Financial Programming

The IMF uses its well-known “financial programming” model to derive monetary and fiscal programs to achieve desired macroeconomic targets in countries undergoing crises or receiving debt relief. This paper considers under what conditions financial programming would work best, and then tests those conditions in the data. The key restrictions of financial programming are assumptions about exogeneity of some components of identities with respect to others, and the assumption of stable and “reasonable” parameters for some very simple behavioral relationships. In at least the literal applications of the framework, financial programming does not do well in forecasting the target variables, even when some components of the identity are known with certainty.

The Last Instance: Are Institutions the Primary Cause of Economic Development?

Following North, neo-institutionalists claim that institutions are the ”primary” cause of economic development, ”deeper” than the supply of factors and methods for their use, what Marxists would call “forces of production.” Yet while the conclusion is different, the historical narratives differ little across these perspectives. How, then, are such conclusions derived? Can anything be said to be ”primary”? I conclude that “causal primacy” is an answer to an incorrectly posed question. Institutions and development are mutually endogenous and the most we can hope for is to identify their reciprocal impacts . . . 

Politically Generated Uncertainty and Currency Crises: Theory, Tests, and Forecasts

While it is widely acknowledged that political factors contribute to currency crises there have been few efforts at using political variables to improve crisis forecasts. We discuss ways in which political factors can be incorporated into theoretical models of crises, and develop testable hypotheses relating variations in political variables to variations in the probability of a currency crisis. We show that the incorporation of political variables into diverse crisis models substantially improves their out-of-sample predictive performance . . . 
By David Leblang, University of Colorado; Shanker Satyanath, New York University

Information, Social Networks and the Demand for Public Goods: Experimental Evidence from Benin

This paper empirically investigates the effects of memberships in information and social networks on the demand for public goods. The data originate from a unique …field experiment that took place during the …first round of the 2001 presidential elections in Benin. Randomly selected villages were exposed to "purely" redistributive or "purely" national public goods electoral platforms, while the remaining villages were exposed to standard mixed platforms. We …find that individuals who are exposed to media or who are members of local associations have higher demand for public goods, while voters who are more involved in political discussions demand less. Ceteris paribus, demand for public goods is higher among voters who have ethnic ties with a candidate, are more educated or female, but we fi…nd no modifying effect of religion or socio-economic status.
Leonard Wantchekon and Christel Vermeersch

What Can the Rule of Law Variable Tell Us About Rule of Law Reforms?

The recent resurgence of optimism regarding the role of legal reforms in promoting development seems to be based in part upon cross country statistical analyses that purport to show causal relationships between variables measuring characteristics of legal institutions and variables measuring levels of various kinds of development. However, the persuasiveness of these analyses is limited by the quality of the legal data upon which they rely. As it turns out, many of the variables that are commonly used to measure respect for the rule of law, enforcement of property rights and contracts do not capture information capable of shedding light upon the potential impact of purely legal reforms . . . 
Kevin Davis, School of Law, NYU

What did structural adjustment adjust? The association of policies and growth with repeated IMF and World Bank adjustment loans.

Analysis of adjustment loans often overlooks their repetition to the same country. Repetition 10 changes the nature of the selection problem. None of the top 20 recipients of repeated adjustment 11 lending over 1980–99 were able to achieve reasonable growth and contain all policy distortions. 12 About half of the adjustment loan recipients show severe macroeconomic distortions regardless of 13 cumulative adjustment loans. Probit regressions for an extreme macroeconomic imbalance indicator 14 and its components fail to show robust effects of adjustment lending or time spent under IMF 15 programs. An instrumental variables regression for estimating the causal effect of repeated 16 adjustment lending on policies fails to show any positive effect on policies or growth . . .