On Decentralization

Andrew Batson has a nice post out about an essay in the Palladium magazine. The theme of both the essay and the blog post is decentralization in China.

Dylan Levi King has a nice essay out in Palladium on the history of decentralization in China, opening with the assertion that “the most significant reform carried out in China after 1978 was one of systematic decentralization.” It is difficult to disagree with this. As the best China scholarship of the last few decades has made clear, local initiative played a central role in the country’s growth miracle–see for instance Jean Oi’s book on local state corporatism, or Xu Chenggang’s classic article on “regionally decentralized authoritarianism”.

https://andrewbatson.com/2021/11/29/the-consensus-on-centralization/

The essay is a reflection on how decentralization has evolved (and retreated) under the various leaders who have been in charge of the central Chinese government, beginning with Mao, and ending with Xi Jinping. As always, please read the whole thing.


The essay makes the rather unsurprising point that under Xi’s leadership, China is becoming ever more centralized. But the interesting (if not entirely surprising) nugget is that the attempt to increase the degree of centralization began about thirty years ago – Xi is the first leader since then who’s been very successful at it.

Well, so far, at any rate. See this thread, for example:

But the essay helps us think about a question which should be of interest to a student of economics: what is the appropriate level of decentralization? I mean this to be a one-size-fits-all question: for any organization, institution or level of governance, how should we think about the appropriate level of decentralization?

Think about the answer to this question in regard to your own college/school, for example. Who do you need to approach for permission in order to hold an event in your college? Does any prof have the ability to give permission, or are they likely to pass your question up to the head of the department? What about the head of the department? Are they likely to take the decision, or will they pass the question up to the principal or the director? In other words, how much decision-making authority is vested in the lower levels of hierarchy? And how much decision-making authority should be vested in the lower levels of hierarchy?


It is a question with far reaching implications: a centrally driven decision making system retains all the power at the centre, and everybody knows who to go to for getting approval. On the other hand, this is likely to make the system rather inflexible, with very little decision-making authority at lower levels.

Here’s a very simple example: let’s say you’re fifteen minutes late while checking out of a hotel. Should you be charged a fine or not? Should this be up to the clerk who is helping you check out, or should the clerk just blindly follow the “rule” with zero decision-making authority? If you (the guest) then kick up a ruckus, should the clerk call their superior? Should the superior call their superior? And on and on…

Management consultants agonize about this, as do politicians and bureaucrats. But so do government officials, professors in universities and even parents! What is the appropriate level of decentralization is an important question in literally any organization!


So how do we go about building a model in our heads to think about this issue?

Here’s one way to think about it:

Let’s assume that we’re seeking to optimize for the long term growth and stability of the organization in question. That is, to me, an entirely reasonable assumption. Concretely, the management consultant in charge of instituting check-out processes in the hotel is charged with creating a process that will optimize for the long term growth and stability of the hotel chain.

Should the management consultant vest, then, the clerk with the power to waive off the late fee? Under what circumstances? To what extent? With what amount of leeway given for mitigating circumstances? Maybe the clerk can waive off the late fees only for a certain number of times per month? Can HR track which clerks waive off fees the least across the year, and decide bonuses accordingly? Or should clerks be rewarded for building out customer loyalty by waiving off late fees by default for a period of up to an hour beyond the checkout time?

What about re-evaluation requests for semester-end examinations? What about disciplinary committees for deciding upon the punishment for low attendance? The decision to sell land in order to meet revenue requirements by local governments? As you can see, once you start to think of hierarchies and organizations, this can get very complicated very quickly.


And within the field of economics (at least for a specific context), the Oates Theorem is a good starting point to think about this analytically:

Many years ago in Fiscal Federalism (1972), I formalized this idea in a proposition I referred to as “The Decentralization Theorem.” The basic point is that if there are no cost advantages (economies of scale) associated with centralized provision, then a decentralized pattern of public outputs reflecting differences in tastes across jurisdictions will be welfare enhancing as compared to a centralized outcome characterized by a uniform level of output across all jurisdiction

Oates, Wallace E. “On the evolution of fiscal federalism: Theory and institutions.” National tax journal 61.2 (2008): 313-334.

In English, what this means is that so long as centralized provisioning doesn’t have any “bulk” benefits, lower levels of hierarchy will always know more about “local” tastes and preferences, and therefore decision making ought to be as decentralized as possible.

Put another way, a one-size fits all rule won’t be as optimal for the hotel chain as letting the clerk in question decide on a case-by-case basis.


So as a thumb rule, the more one decentralizes, the better. Alas, decentralizing decision-making also has the knock-on effect of decentralizing power, and that tends to not go well with those who, well, have power.

And so while effective decentralization has economic benefits, it also has political consequences. Which is why it makes sense to ask what one is optimizing for. And occasionally, it behooves all of us to ask what one should be optimizing for.

The answers are often wildly different, and more’s the pity.

Dr. Strangelove and the Doomsday Machine

We’re very much in “if you haven’t watched it already, please do” territory, but Dr. Strangelove is an absolute must watch. And given the article about MAD earlier this week, Sunday’s video clip wasn’t a difficult choice.

Were The Farm Laws a “1991 Moment”?

As with everything that happens in the world today, so also with the farm laws: a lot of heat, and hardly any light. Reams have been written about how the farm laws were good (or bad), about their introduction being a much needed thing (or not), and their withdrawal being a disaster for take-your-pick-from-Modi-BJP-India (or not).

I have neither the desire nor the energy to get into any of these debates. Here’s my simple take as a student of economics: markets almost always work. Where they don’t work, identify the reasons why they don’t work, and either correct those causal factors, or have the government step in until (and only until) those factors are corrected.

Things get tricky when you begin to ask pesky questions along these lines:

  • How do you define markets not working? Bench-marked against what standard? Who decides?
  • How do you correct these causal factors? How do you judge that they have been corrected? Are you sure they won’t return? On what basis?
  • To what extent should government step in? How are you sure this will make things better in all markets at all points of time? Using what framework?

But that is precisely what makes the study of India’s political economy so very interesting! And this is true of agriculture as well, not just in India, but in other places too.


For the moment, let’s take as a given the fact that government had to be present in agricultural markets in India these past decades. That may or may not be true, but for the purposes of this blog post, let us assume that there was a confluence of factors in India’s agricultural markets that necessitated the active presence of the government as a participant, not just as a regulator.

Now, if markets almost always work, and if government was present in agriculture, then we have to figure out a way for government to eventually not be present in agriculture. (Note, again, that your opinion may be different from mine. But play along with me for the moment, please.)


Yamini Aiyar and Mekhala Krishnamurthy argue in an HT article that in the case of the three farm laws, what the government missed out on was the word “eventually”. They argue that it was the suddenness of the move that was problematic, not the move itself.

There’s a political angle to the sudden withdrawal, and the authors refer to it in their piece. There’s a regulatory angle to the sudden withdrawal, and that is also covered by the authors. But there also is an institutional (and therefore economic) angle to it, and that is what I would like to focus on:

Consider this. The protesting farmers from Punjab, Haryana and western Uttar Pradesh are locked into a system where State intervention, driven by the logic of Minimum Support Prices (MSP) and the Agricultural Produce Marketing Committee (APMC) mandis, dominates. The State is not a benign actor. It has created and sustained local elites with vested interests – traders, middlemen and moneylenders, each of whom extracts to control market power. This undermines competition and compromises farmer interests in different ways. But farmers have learnt to negotiate these relationships of extraction. And the state through MSP and mandis has served as insurance that gives them bargaining power. Any attempt to break this system will inevitably, as the protests amply demonstrate, unleash anxieties.
In this context, the move towards genuine competition will not be viable without the State demonstrating its willingness to protect farmers interests and gain their trust.

https://twitter.com/AiyarYamini/status/1464452741325996032/photo/1

What is the point? The point is that the current system isn’t perfect, and it isn’t sustainable. As the authors point out, the farming sector isn’t competitive.

In theory, that should mean, to a student of economics, that they are not efficient. That, in turn, means that we should expect that producers aren’t producing as much as they could have, and whatever they produce is being produced at a higher cost than would otherwise have been the case. We should expect that procurement, storage and distribution are also potentially riddled with inefficiencies. We should expect divergent quality of produce, and we should expect consumers to be paying higher prices, potentially for a lower variety of goods.

We should also anticipate a whole host of things due to the fact that the farming sector isn’t competitive: prices aren’t transparently determined, there isn’t free entry and exit, certain sellers are likely to get a better deal, transaction and search costs are high, and on and on and on. This is microeconomics 101 in practice.

(A quick note to students of economics: ask yourself if you’re able to relate what you’re learning in your microeconomics courses to the two paragraphs above. If you disagree with my assessment, ask yourself what is it that is causing you to disagree. Can you frame your disagreement in the context of microeconomic theory? Secondly, irrespective of whether you agree or not, can you think of what data points you might need to empirically verify or disprove my arguments? Where might these data points be available? What models (economic and econometric) can we use to settle this debate? Finally, why stop at agricultural markets – which other markets can you analyze this way?)

And for all of these reasons and more, reform is needed. It cannot possibly be anybody’s argument that the status quo in India’s agriculture must persist forever.


Which then, in turn, gives rise to two separate questions:

  1. If reforms are to be introduced, how?
  2. However they are to be introduced, how fast should we proceed with their implementation?

Again, the question isn’t one of the desirability of reforms, or their appropriateness. Rather, the question is about whether the reforms should be a top-down, one-size-fits-all initiative, or a more locally driven approach. And second, should reforms be introduced all at once, or slowly and gradually, one step at a time.

And I would like to argue that at least in this one regard, we should be looking at China. Not for the specifics of their reform and a CTRL-C CTRL-V hit job. But for their approach, beginning in the late 1970’s.


When I first proposed the household responsibility system (HRS), I was criticized as follows: Chairman Mao had been dead only a few years. Supporting the HRS, a system he opposed, meant forsaking his principles. This was the severe environment that reform faced at first. Our support of the HRS, of institutional innovation, and of transformation of the agents of the rural microeconomy would inevitably involve adjusting a number of interests. To avoid risk, it was necessary to carry out trials first. Also, the HRS could not move ahead on its own. It had do so in connection with other institutions and be realized in the course of reforming the institutional environment as a whole. But this institutional reform is not something that could be accomplished in one fell swoop. To carry out reform, a strategy of gradual advance was unavoidable.

http://ebrary.ifpri.org/utils/getfile/collection/p15738coll2/id/125214/filename/125215.pdf (Emphasis added)

That’s Du Runsheng, the author of a short publication called The Course of China’s Rural Reform. He did, um, some other things besides.

In the publication that I have excerpted from above, there are some points that I am going to summarize that I think help me make my point better:

  1. Resistance to the introduction of market based reforms was anticipated in China back then, and was in some sense inevitable. Three measures were conceived of to reduce this resistance:
    1. “First, the reform would not initially call for abandoning the people’s communes, but rather would implement a production responsibility system within them. This approach enabled many who would have opposed the change to accept it.”
    2. “Second, the responsibility system could take a number of forms, among which the populace could choose. One did not impose one’s own subjective preference on the populace but respected its choice.”
    3. “Third, the reform began in a limited region, where it received popular support, and then widened step by step.” (Emphasis added)
  2. “In 1980, after the central leadership was reorganized on a collective basis, the top central leaders, including Deng Xiaoping and Hu Yaobang, consistently supported allowing different areas to adopt different forms of the agricultural production responsibility system. It was then proposed to divide them into three types of areas: impoverished areas would carry out the HRS; advanced ones would adopt specialized contracts with wages linked to output; and intermediate regions could freely choose.”
  3. Or, as Ajay Shah and Vijay Kelkar put it in their book:
    “The heterogeneity of economic and social development, across the regions of India, generates heterogeneity in the public policy pathways desired by different groups of people. A policy position that is well liked in Uttar Pradesh may not be liked in Kerala, and vice versa. This creates conflict in a centralized public policy process.”
    Kelkar, Vijay; Shah, Ajay. In Service of the Republic . Penguin Random House India Private Limited. Kindle Edition.
  4. Finally, there’s a lot to pick at and think about here when we get down to the specifics. I’m not suggesting that China in the late 1970’s had the exact same problems that India does today. Nor am I suggesting that India do today exactly what China did back then. I am making three points:
    1. I agree with Yamini Aiyar and Mekhala Krishnamurthy when they say that one of the problems was the suddenness of the proposed reforms, both in terms of their scope, and in terms of their geographical spread. I also agree with them when they say that the introduction of the reforms ignored the ground realities of the both the sociology of agricultural markets, and their institutional complexity (note that I am paraphrasing here, these are not their words).
    2. But having read their article, one must ask: if not the pathway that we have now left behind us, what else? That is, for better or for worse, the three farm laws now stand withdrawn. Is the status quo desirable? Should we seek to perpetuate it, or change it for “the better”? (Inverted quotes because better means different things to different people.) My opinion is that we should seek to change it for the better, and maybe yours is the same.
    3. But that gives rise to the next question: how? And that is where Du Runsheng and his write-up is of limited help. Learning how other nations did it is a good place to start if you are a student of economics, India or public policy, and post-Mao China holds some valuable lessons for us.

MADDER

If you are even an amateur fan of game theory, you must have come across the term “MAD”:

Mutual assured destruction (MAD) is a doctrine of military strategy and national security policy in which a full-scale use of nuclear weapons by two or more opposing sides would cause the complete annihilation of both the attacker and the defender (see pre-emptive nuclear strike and second strike). It is based on the theory of deterrence, which holds that the threat of using strong weapons against the enemy prevents the enemy’s use of those same weapons. The strategy is a form of Nash equilibrium in which, once armed, neither side has any incentive to initiate a conflict or to disarm.
The term “mutual assured destruction”, commonly abbreviated “MAD”, was coined by Donald Brennan, a strategist working in Herman Kahn’s Hudson Institute in 1962. However, Brennan came up with this acronym ironically, to argue that holding weapons capable of destroying society was irrational.

https://en.wikipedia.org/wiki/Mutual_assured_destruction

As with most theoretical concepts, it has its fair share of exceptions and limitations. Reading the Criticism section of the Wikipedia article is a great way to depress yourself, for example. But today, we depress ourselves a little bit more, by thinking about an article whose cheerful title is “The Math is Bad for MAD“:

Alarmingly, the current modernization of nuclear-missile arsenals by both Russia and China exposes a simple mathematical flaw in the assumptions underlying continued reliance on MAD. Despite our having ~1,400 deployed strategic nuclear warheads, they are postured such that a surprise attack by approximately 70 – 100 Russian or Chinese missiles—a fraction of their total nuclear forces—could soon undermine our “assured” retaliatory capability.

https://www.realcleardefense.com/articles/2021/11/08/the_math_is_bad_for_mad_802552.html

The rest of the article explains how China and Russia could, quite conceivably, undermine the US’ “assured” retaliatory capability. And when I say “quite conceivably”, I am not exaggerating. The authors, Norman Haller and Peter Pry lay out with implacable logic how China and Russia might think through all of the moves in this most dangerous of games, and reach the conclusion that America’s ability to “assure” retaliatory capability is not, in fact, assured. I will not excerpt anything to defend my argument, please read the entire article.

So what, one might ask, is to be done? The authors lay out seven things that America could conceivably do, and evaluate each of them in turn. Again, read the whole thing, it is in your interest to do so. I will, however, excerpt their concluding paragraph:

Finally, U.S. decision-makers should tune out minimalists who ignore the math and advocate replacing the Triad with either a Diad (bombers and submarines only) or, even worse, a Monad (submarines only). Tuned out as well should be MAD proponents who are inattentive to the math and insist that an undefended America is a positive asset.

https://www.realcleardefense.com/articles/2021/11/08/the_math_is_bad_for_mad_802552.html

You may agree with that paragraph, you may not. But you should, as a student of game theory, ask yourself if you can frame your agreement (or otherwise) in game theoretic terms. It is a useful (albeit depressing) exercise in your journey as a student of game theory.

And finally, for your reading pleasure, a further selection of cheer inducing books by one of the authors.

As my favorite bloggers like to say at the end of posts that are as optimistic as this one, have a nice day.

On the Etymology of Risk

I often like to begin classes on statistics by talking about the etymology of the word average, and it is such a lovely story:

Everybody associated with transporting goods by sea had to deal with the chance that only a part of the consignment would actually reach the intended destination. There was always the chance that a part of the consignment would go bad, or needed to be jettisoned, or some such. Who bears the loss of this part of the total consignment? Should it be the sending merchant, the receiving merchant or should it be the captain of the ship?

Thus, when for the safety of a ship in distress any destruction of property is incurred, either by cutting away the masts, throwing goods overboard, or in other ways, all persons who have goods on board or property in the ship (or the insurers) contribute to the loss according to their average, that is, according to the proportionate value of the goods of each on board. [Century Dictionary]

https://www.etymonline.com/word/average

The latter half of that excerpt above is nothing but “sigma x by n” – the total losses divided by the number of people involved. This, of course, is nothing but the formula for average. But the word itself comes from the word loss, but in Arabic – awargi, or awariya. Or as I like to tell my students, you’re really speaking Arabic when you’re saying “average”.


Psyche.co has a lovely essay on both the etymology of, and the emergence of the concept of, risk. Authored by Karla Mallette, it is a lovely little rumination on both the meaning of the word, and how it has evolved over time.

The first known usage of the Latin word resicum – cognate and distant ancestor of the English risk – occurs in a notary contract recorded in Genoa on 26 April 1156. The captain of a ship contracts with an investor to travel to Valencia with the sum invested. The contract allocates the ‘resicum’ to the investor.

https://psyche.co/ideas/how-12th-century-genoese-merchants-invented-the-idea-of-risk

This is entirely speculative on my part, because I know next to nothing about Latin, but a simple Google search for the meaning/etymology of resicum tells me that it means “that which cuts, rock, crag”. If one agrees with the notion that ship voyages at the time must have been fraught with risk, then the etymology of risk begins to make eminent sense – the entirety of the prospective profit from such a voyage can end up being cut down to zero. One could earn all of it, or one could get none of it – that, of course, is the risk involved in such a structure.


The essay remains of interest beyond just this point:

Before the innovation of the resicum, captain and crew took on the risks of the journey alone: only they would shoulder the burdens (and pocket the profits). But resicum shared out potential profit and loss among a broader community. It put a number on contingency, and in so doing it rationalised risk.

https://psyche.co/ideas/how-12th-century-genoese-merchants-invented-the-idea-of-risk

In this context, one needs to realize that the author is talking not about the original meaning of the word resicum. Rather, she is implying that resicum has a modern, institutional meaning now – the idea that resicum (or risk) is being diversified. The captain doesn’t bear the risk alone, although he does bear part of it (typically 25% in those times). Somewhat analogous to what we could call sweat equity these days, I suppose. The rest of the risk, or resicum, is parcelled out to investors who are willing to stump up the cost of the voyage. If the captain comes back empty handed, they lose their investment. If the captain comes back from the voyage, his ship laden with precious cargo, then the investors reap the benefits of having funded the voyage.

This arrangement was called resicum, and it seems to have meant an arrangement which had the ability (but not the guarantee) to provide sustenance.

Historians believe that resicum derived from an Arabic word, al-rizq. The Arabic rizq is Quranic. It refers to God’s provision for creation. This verse, for instance, uses the noun and a verb derived from the same lexical root, and refers to the sustenance that God provides for all of creation: ‘And how many a creature does not carry its own provision [rizq]! God provides for them and for you: he is the All-Hearing, the All-Knowing.’ During the Middle Ages, the word was used to name the daily subsistence pay given to soldiers. In the dialect of al-Andalus (Arab Spain), it referred to chance or good fortune. Rizq, it seems, bounced from port to port around the Mediterranean, until it landed on the worktable of a scribe in Genoa recording a strategy used to share out the risk of trans-Mediterranean trading ventures by betting against catastrophe.

https://psyche.co/ideas/how-12th-century-genoese-merchants-invented-the-idea-of-risk

So from providing for, to meaning good fortune, to our modern understanding of the word risk, the word has been on quite a journey, and is in fact a good way to understand all of what risk means.


A little postscript: I came across this article via The Browser. And second, if you haven’t read it, Against the Gods: The Remarkable Story of Risk by Peter Bernstein is a good introductory book to read about the topic.

The Economist on Year Three of the Pandemic

(Note: this was written and scheduled for posting before the world found out about Omicron. I have not changed a single word, except for the two sentences in these brackets)

‘Tis that time of the year, and we will soon be inundated with reflections on the year gone by, and the year to come. The Economist has come up with its list, and today, we will be focusing on one from among this series: What To Expect in Year Three of the Pandemic.


  1. The key takeaway is that the world as a whole will be better off because of the vaccines that become widely available in 2021, but…
  2. Vaccine inequity, already unfortunately visible, will become starker still. And this will have obvious ramifications on health (that much is obvious), but also on economic outcomes.
    “A disparity of outcomes between rich and poor countries will emerge. The Gates Foundation, one of the world’s largest charities, predicts that average incomes will return to their pre-pandemic levels in 90% of advanced economies, compared with only a third of low- and middle-income economies.”
  3. Distribution difficulties and vaccine hesitancy will also play (unfortunate) roles in the continuing saga, and a glut (imagine!) is not impossible to imagine in late 2022
  4. This is a chart well worth staring at. I encourage you to stare at it:

5. Vaccines will become better, more broad based, and supply chains will ease out in part because of technological advancements, such as freeze-dried mRNA vaccines.

6. But the larger point that I personally take away from the article is this: it’s going to be better, the article says than both 2020 and 2021, but it won’t be over in 2022. Variants will emerge, hesitancy will remain, and inequity will persist.
There will be, in other words, progress, but not as much as one would have liked, not as fast as one would have liked, and with complications that are bound to emerge, but impossible to currently specify.
Better, in short, but not by much, and with real risks to boost.

7. But all that being said, given the year that went by, I suppose we should take what we get.

Joanna Stern, Trapped in the Metaverse

What might a day – literally twenty-four hours – in the metaverse look like?

So far, on the basis of this video, ’tis not for me!

India and China’s GDP Components Over Time

This should go without saying, but ask yourself if you are able to recreate these charts given the data sources mentioned in the tweet. You needn’t use DataWrapper necessarily (although if you’re considering journalism or a related field, learning it will help) – but do see if you can create the chart!

Tim Harford on The Ease of Doing Business Report

But before anything else, let’s take a moment to acknowledge the title of the article – if you haven’t seen the movie, please do. One of my favorite Judie Dench movies.

You may have heard of the problems associated with the Ease of Doing Business report. (The reason I have linked to the Wikipedia page rather than the original page is because it wasn’t opening for me. Your mileage may vary.)

Even a spreadsheet can become a victim of its own success. Just ask the World Bank’s Doing Business report. While many worthy publications from the World Bank are never downloaded, Doing Business has been a smash hit for years. No longer. Amid an ugly scandal about data manipulation that has left the head of the IMF, Kristalina Georgieva, fighting for her career, Doing Business has been cancelled.
The power struggle at the top of the fund involves: a three-way tussle for influence between the US, Europe and China; rivalry between Georgieva, former chief executive at the World Bank, and the current, Trump-nominated bank president David Malpass; and domestic US politics. (Democrats have long disliked the Doing Business report’s low-regulation tone.)
The accusation is that in 2017 the World Bank’s leadership, including Georgieva, pressured the Doing Business team to improve China’s ranking in order to keep the Chinese government happy. The case for the defence is that Georgieva’s team were merely double-checking a sensitive number, that China’s ranking barely moved (from 85th to 78th), and anyway China is now ranked far better (25th) than when Georgieva was at the bank. The fight is as fascinating as it is unedifying.

https://timharford.com/2021/11/notes-on-a-statistical-scandal/

By the way, if you want to learn how to write columns well, you could do a lot worse than reading these three paragraphs.

A short, interesting sentence to begin the column, followed by an easy to read first paragraph that explains what the problem is. The next two paragraphs provide context, give additional details, and bring the reader up to speed, so that Tim Harford can get to the points that he wants to make regarding the whole issue. And contrast that with what I have managed to do so far: four paragraphs, one lengthy excerpt, and two tangential points, one of which is meta. Ah well.


But all of that aside, take some time out to read Tim Harford’s column before reading what follows.

  1. What was the report optimizing for?

    Originally, it seems to have been an attempt to help interested entities understand how easy (or not) it was to do business in a particular country. This helps entrepreneurs (domestic and international) understand some of the potential impediments to starting a business. The report lays out the processes involved in starting a business, and speaks about the length of time required to complete those process. That is surely a good thing, correct?
  2. Is a report not the same as a ranking?

    What matters more to you as a student when it comes to examinations? Are examinations a way for you to reflect upon how much you’ve learnt and what remains to be learnt, or are examinations a way to understand where you are in the pecking order? The problem with the Ease of Doing Business report wasn’t the report itself, it was the rankings that were generated on the basis of the reports.
    As Tim Harford says in his column: “But Klein has one regret: the original decision to publish an overall ranking of which countries were the best and the worst in the world for doing business. Such aggregate rankings make little sense, but they are ubiquitous because they are clickbait. The Doing Business aggregate ranking was no exception. Without it, the report would never have received so much attention. But without the ranking, it is doubtful anyone would have cared enough to try to manipulate the data.”
    And of course the inevitable followed: the rankings became more important than the report itself.
  3. A rare point of disagreement. Here is the quote from his column: “This newspaper recently celebrated the demise of the Doing Business indicators, complaining that countries were “expressly changing policies to score better”. That is a strange objection. Unless the indicators are valueless, when countries try to score better that is a feature, not a bug.”

    When Tim Harford says “this newspaper”, he is referring to the Financial Times, where he happens to be a columnist. I’m unable to access the original FT article from where this point was excerpted, but I happen to agree with excerpt above, and therefore disagree with Tim Harford. That being said, I certainly do wish that the original FT article had been worded better in the case of the sentence that we’re able to read.
    Think about that phrase up above: ““expressly changing policies to score better”.
    I think what they wanted to say was this: countries should ideally have been trying to figure out how to change policies so that in reality, on the ground, it became easier to do business. This should then have been reflected in the rankings. That would have been Utopian. Instead, policymakers and politicians in some cases tried to change the policies so that the ranking improved, without there being much change on the ground. That word, “expressly”, is doing a lot of lifting in that phrase – because all of what I have written is what I think they were trying to get at.
    Put another way, the indicators are not valueless, unless they’ve become the target. And that, really, is all that the FT was trying to say: the indicators did, in fact, become the target. Countries were more focused on the outcome (the ranking) rather than the process (has it actually become easier to do business?), and that is never a good idea.
  4. Consider this quote: “The Doing Business aggregate ranking was no exception. Without it, the report would never have received so much attention. But without the ranking, it is doubtful anyone would have cared enough to try to manipulate the data.”

    It is a question we should all be asking ourselves repeatedly: what are you optimizing for?
    In this case, was the World Bank optimizing for drawing attention to the report? We live in a world in which signaling matters, Goodhart’s Law is real and status is the name of the game. So if the World Bank was optimizing for publicity, it should have acknowledged that all of what eventually happened was a very real risk.
    But if the World Bank was optimizing for preparing a good report that stood up to scrutiny, then it should have acknowledged that the opportunity cost of such a strategy is that hardly anybody would ever read it. But such, alas, is life.

“What Are You Optimizing For?”, The International Macro Edition

It is one of my favorite questions to ask whenever students come to me with doubts about “what to do next” in terms of either further education or a job.

(Side note: asking me what to do next probably isn’t a good idea, because my career has been gloriously unplanned. But that’s a whole separate story)

But one should be clear about what one is optimizing for: is it income, or free time, or job satisfaction, or rapid career growth – or something else altogether? And whatever it may be, optimizing for one will quite probably mean having to give up on some or all of the others.

And this applies to many more things than just the What To Do Next question, of course. In fact, relentlessly asking this question in many different contexts can take you a very long way in terms of understanding what seem like really difficult and complex topics.

Such as, for example, what China has been up to in terms of international trade, and what went so gloriously wrong.


The simple story of international trade (or trade in general for that matter) isn’t difficult to grasp. Bear in mind that reality is a little more complex, but it really boils down to comparative advantage.

As Michael Pettis points out at the start of this excellent Twitter thread, the so-called “China shock” *is* a shock, but it is not an indictment of the basic concept of international trade. China, as we’re about to find out, was playing a zero-sum game.

One of the most glorious things about economics is the fact that trade is a non-zero sum game. Both parties that have voluntarily entered into a trade with one another benefit for the trade having gone through, and so nobody loses. This is as true at your local chai tapri (you give ten bucks for a cup of chai, and both you and the chaiwala are happy with the trade) as it is in the context of international trade between the United States of America and China.


But beware overly simplistic stories, for they can trip up many a happy ending:

Isabella Kaminska, in an old but excellent article on FT Alphaville made a very similar point. I’ll get to that point in a bit, but may I also use this opportunity to urge the good folks at FT to make FT Alphaville free again?

Here’s the point from that old article:

What those who accused China of using its exchange rate to gain advantage probably misunderstood was that it wasn’t the currency which was being undervalued, it was the people. Stephen Roach, then chief economist of Morgan Stanley, explained this point in the Financial Times in 2003 (our emphasis):
“The Chinese phenomenon hardly amounts to grabbing market share from the rest of the world. It is more a by-product of the struggle for competitive survival by high-cost producers in the industrial world. Last year, a record $53bn of foreign direct investment flowed into China, making the country the largest recipient of such funds in the world.
These investments did not occur under coercion. A high-cost industrial world has made a decision that it needs China-based outsourcing to ensure competitive survival. Dismantling China’s currency peg would destabilise the very supply chain that has become so integral to new globalised production models in Japan, the US and Europe.
There are several other reasons why China should leave its currency unchanged. Contrary to widespread perception, China does not compete on the basis of an undervalued currency. It competes mainly in terms of labour costs, technology, quality control, infrastructure and an unwavering commitment to reform.

https://www.ft.com/content/d11a4c5e-d5fb-32f4-a606-e64d1483cea1 (Emphasis added)

This article was written in 2015, but it holds up very well. In fact, it is instructive to see how, in addition to labour costs and infrastructure, China has now centralized under government authority technology as well. It is also instructive to think about how (and in what direction) the “unwavering commitment to reform” has evolved, but that is a separate story.

To come back to the common thread between the old FT Alphaville article and the Twitter thread by Michael Pettis:

Stephen Roach, in 2003, spoke about how China was undervaluing its people. Isabella Kaminska in 2015 spoke about China competes (at least in part) on labor. And Michael Pettis in 2021 is talking about China competing by suppressing its wages (relative to productivity levels). But they’re all making the same point, and it is a point that merits greater emphasis:

The China shock needn’t have been a shock, in the sense that it is not as if economic theory stopped working once China started trading more with the rest of the world.

China, as it turns out, wasn’t optimizing for international trade. China was – and is – optimizing for an increase in her exports, and that over time.


That problem manifests itself in many different ways: The USA’s persistent trade deficit with China is just one glaring example. The Belt and Road Initiative is another (what the hell do you do with all those forex reserves, dammit?). And there’s many, many more.

But as Michael Pettis reminds us in this thread, the “China Shock” phenomenon becomes way more comprehensible when you ask a deceptively simple question: what is China optimizing for?


What is India optimizing for when it comes to international trade? What should India be optimizing for? In both cases, whatever your answer, why?


Critique this blogpost, and write your responses to the questions above. It is a great way to test yourself if you think you’re good to go in open macroeconomics or international trade.