Development Economics

One of the highlights of the MPA course at the Lee Kuan Yew School was the module on Development Economics. I found myself quite often feeling a sense of wonder and exhilaration in the class that I didn’t feel in any other class and that I didn’t expect to feel in a classroom. 

It is hard to pin down where the feeling came from. I think it was the approach and worldview of economics, applied to areas that I was particularly interested in, like education and health. As I got from the course, the approach was to try to get at human behaviour in these situations and figure out what a rational individual would do to maximise their well-being. Then try to capture that in equations and you got a working model of the world. Get data from the real world and see how well things seem to fit. 

For example, in education: the basic way of looking at it is that education is a way to improve your earning capacity. So you invest now in education in order to improve your later earnings. Then it becomes an optimisation problem: how many years of education should you invest in now (and forgoing current earning opportunities too) so that your overall life-earnings are maximised. Then you can start adding complexity to the model: the situation varies from person to person - some people get more out of their education so the returns from education have to be parameterised by a person-specific co-efficient. And then you get into why education increases your earning capacity - could be through direct increase in your capability to create wealth or could be through a ‘signalling’ effect, where the fact that you’ve passed some exams etc. shows that you have some intellectual capacity. And more such stuff.

On the empirical side, many people have looked at how average incomes of large groups of people vary with education. One study in the US arrived at a figure of a 7% increase in earnings for every additional year of schooling. 

In health it works like this: health is something you invest in, in time (with its opportunity cost) and money. It also depreciates on its own every year. Good health lets you earn more, and enjoy leisure more, thereby contributing to your utility/well-being. And there are competing demands on your money other than health - like daily consumption, leisure activities etc. So again its an optimisation problem of how much you invest in it in order to maximise your utility. 

This modelling also, in theory, shows the role of public policy. People do what they do to maximise their personal utility. However there are externalities to health and education and government wants people to have more of them. So government needs to intervene in these equations :-) , in the appropriate way so that people consume more of these goods than they otherwise would. 

We also looked at other things like agriculture and credit markets. For example, the landlord/tenant relationship in agriculture can be of different types: landlord can pay for part of the cost of raising the crop, he could get a fixed amount each crop irrespective of the actual profits, or there could be profit (and loss) sharing arrangements. Its possible to model these and theoretically arrive at conditions where different types of contracts are preferred. There are some nice papers that show that the theory seems to hold in practice. 

Another highlight of the course for me was the paper reproduction exercise. Good academic papers nowadays are accompanied by an upload of the actual data and the software code used to analyse the data. So its possible to reproduce the data analysis done in the paper and see if you get the same results. There are levels of complexity to this:

• you can run exactly the same code using the same data. Of course that’s not too much fun 
• you can fiddle with the code a bit and try to do slightly different things 
• in special cases you could collect the data yourself and reproduce the results from scratch. There’s a celebrated case in academia of a famous papers’ results being proved wrong in this way.  This article nicely describes that : http://www.bbc.com/news/magazine-22223190 

I chose to do a paper on water that was co-authored by the very well-known economist at J-PAL , Esther Duflo. It was a very fulfilling exercise and I found some minor discrepancies too, which was a big kick. 

The original paper is here: https://www.dropbox.com/s/4u37kptdcdjrund/%2BDuflo_2012_Happiness%20on%20tap.pdf?dl=0 

My report on the replication is here: https://www.dropbox.com/s/jcv96iatph8ze9r/Paper%20Reproduction%20Report.docx?dl=0 

Yvonne Jie Chen was the teacher, and her enthusiasm for the material was infectious. 

The course textbook was “Development Economics” by Debraj Ray. Well-written, erudite as hell and an enjoyable read but pretty uphill going for me atleast because of the intellectual level of the subject matter. I finally read less than 10% of the book, but it was still pretty good! 

Notes, Further Reading:
For a compilation of resources on studying public policy in general and at the LKY School, see: http://despoki.blogspot.in/p/studying-public-policy-and.html