Knowledge and Incentives in Policy: Using Public Choice and Market Process Theory to Analyze Public Policy Issues - Rilegato

Stefanie Haeffele

Rilegato

ISBN 10: 1786603977 ISBN 13: 9781786603975

Casa editrice: Rowman & Littlefield, 2018

Riassunto

The relative effectiveness of various institutions, such as the market or government, is based on the ability for individuals to access and use dispersed knowledge in society and the incentives that steer their actions. Market process theory emphasizes the effectiveness of the price system to consolidate and transmit knowledge in the marketplace.

Together this framework provides new insights on the capability of individuals to cooperate and improve society, and the limits to government interventions in society. The original research in each chapter uses this economic way of thinking to analyze a variety of public policy issues, examining the incentives responsible for and the factors that contribute to the creation and effectiveness of the policies. These chapters, authored by public policy practitioners and researchers, tackle such pressing issues as public education, the process for approving medical devices, tax policy, and land use regulation.

Su questo libro

Informazioni sull'autore

Stefanie Haeffele is the Deputy Director of Academic and Student Programs and a senior fellow for the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University.

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Knowledge and Incentives in Policy

Using Public Choice and Market Process Theory to Analyze Public Policy Issues

By Stefanie Haeffele

Rowman & Littlefield International, Ltd.

Copyright © 2018 Stefanie Haeffele
All rights reserved.

ISBN: 978-1-78660-397-5

Contents

Introduction, vii, 
Part I: International Policy, 
1 Can Governments Create Bureaucratic Structures That Overcome Knowledge and Incentive Problems?: An Analysis of the Millennium Challenge Corporation Rosemarie Fike, 3, 
2 The Political Economy of Intervention in the Conflict against ISIS David Wille, 39, 
Part II: Federal Policy, 
3 FDA Effectiveness Standards: Helpful or Harmful? Anna Rivers, 79, 
4 Exit, Voice, and Incentives: An Institutional Analysis of Urban Public School Districts Rachel Reese, 97, 
Part III: State and Local Policy, 
5 Firm-Specific Tax Incentives: The Bad and the Ugly Adam N. Michel, 131, 
6 A Better Tomorrow: Policy Reform and the Limitations of State-Led Targeted Economic Development Courtney Michaluk, 167, 
7 The Political Economy of Casino Licensing: A Case Study on Maryland ' s Experience Candace McTeer Mottice, 187, 
8 The Political Economy of DC School Choice: An Institutional Analysis of the Opportunity Scholarship Program Allison Kasie, 207, 
9 Stifling Urban Development with Land-Use Regulation: A Case Study of Redevelopment in Tysons Corner, Virginia Emily Hamilton, 243, 
Index, 271, 
Editor and Contributors, 289, 

CHAPTER 1

Can Governments Create Bureaucratic Structures That Overcome Knowledge and Incentive Problems?

An Analysis of the Millennium Challenge Corporation

Rosemarie Fike

Since Adam Smith, economists have been fascinated with understanding what accounts for disparities in the levels of wealth of different nations. Smith ([1776] 1976) argues that the path to economic prosperity is through the increases in productivity that arise out of a highly specialized division of labor combined with trade openness and a government that does not burden its citizens with predatory taxation. P. T. Bauer (1984, 2000) echoes Smith's emphasis on engaging in both small- and large-scale trade, and both Smith and Bauer stress the importance of private property in order to accomplish this.

These ideas have fallen in and out of favor with the economics profession throughout the years. The growing prestige of the international development aid community has resulted in a massive amount of research for alternative causal explanations for the disparity in the wealth of nations. For instance, Sachs (2001, 2003) and Sachs and Warner (2001) argue that geographic location is a factor in why some nations remain poor. Alternatively, La Porta et al. (2004); La Porta, Lopez-de-Silanes, and Schleifer (2008); and Glaeser and Shleifer (2002) argue that the legal origin of a country determines the differing levels of economic development. Additionally, Acemoglu, Johnson, and Robinson (2001, 2002) argue that a nation's level of wealth today is a result of the types of institutions, either productive or extractive, that were set in place at the time of colonization.

There is also a constant back-and-forth in academia about the effect foreign aid assistance has on the development progress of recipient nations. Overwhelmingly, the failure of the aid community to achieve any significant results after 60 years and billions of dollars leads one to believe that, at best, their efforts are a wash.

While economists have come to somewhat understand what does not cause economic development, there has been little progress in finding a panacea for what will. Mostly, this is because a panacea does not exist. William Easterly (2002a, 2002b, 2003, 2006) pleads with the aid community to stop looking for such a "magic bullet." Each impoverished nation is unique in the factors responsible for their present conditions. What unites many of these nations in their plight, however, is an institutional context that is not conducive to economic development and that does not protect the institutions of private property that are praised by Smith and Bauer.

North (1990, 1991) notes that a society's institutions, both those that are formally codified and those norms and traditions that remain informal, provide the rules that govern human interaction. When these rules favor a specific group over another or are exogenously introduced in such a way that does not meld with the culture and attitudes of the indigenous people, as is often the case with foreign aid reform policies, the result is often worse (Boettke, Coyne, and Leeson 2008).

Certainly, there are some institutions that appear to be conducive to growth in almost every situation. The mantra of the Washington Consensus Era development community, "stabilize, privatize, and liberalize," was one of the aid community's coordinated attempts to provide a prescription for economic growth (Rodrik 2006). Formalized property rights, as emphasized by Hernando De Soto (2000), for example, have been widely recognized by aid agencies and policy makers as providing individuals with both the incentive to improve on their situations through investing time and labor into what they own and the means to access credit markets using their titles as collateral. In some underdeveloped nations, however, formal property rights may not align with local traditions, may allow for easier expropriation by the state, or at best may be unnecessary.

For much of the 1990s, academics analyzing the efforts of foreign aid agencies focused on empirical questions regarding the relationship between development aid and economic growth. Burnside and Dollar (2000, 2004) were among the first to study this relationship. Their initial analysis finds that foreign aid is positively correlated with economic growth in situations where there exist good institutions. This postulation spurred a series of replies over a decade of regression, attempting to either confirm or overturn their initial finding. Easterly, Levine, and Roodman (2004) took the first step toward challenging Burnside and Dollar's results. Using the same data set extended further into the future, their results show that, at its best, aid does nothing in the way of economic growth but, at its worst, can often impede economic progress. Other research examines the effectiveness of foreign aid, controlling for the quality of various sets of institutions (Gwartney, Holcombe, and Lawson 1999; Knack and Keefer 1999; Brautigam and Knack 2004; Knack 2001, 2004). For development aid policy, the major takeaway is that aid may have a slight positive effect when placed in the right institutional context.

The recognition in foreign aid policy of the importance of institutions in economic growth was a by-product of the empirical investigations and has indirectly led to a shift in the conversation concerning foreign aid. The focus on the institutional contexts in which aid is most effective has turned the conversation toward reforming aid distribution to improve results. This possibility has brought hope about aid's effect on its recipients and its usefulness for economic growth.

Still, researchers recognize that there have been few examples of what can be clearly labeled as aid success stories. Massive investment in development programs in Latin America in the 1990s brought disappointing levels of economic growth, while the Asian miracle that occurred during the same decade resulted from promoting economic freedom, not foreign aid assistance. The instances in which aid efforts have had positive effects, such as the frequently cited green revolution in India, are rare. However, the quest to influence economic growth through assistance is still of primary concern for economists and policy makers alike.

This chapter examines one of the most recent attempts for the United States to improve on the performance of foreign aid agencies: the creation of the Millennium Challenge Corporation (MCC). The next section articulates some areas of consensus and disagreement on the effect of foreign aid. Section 3 discusses the creation of the MCC, its founding legislation, and why one would expect this agency to be successful (or unsuccessful) at achieving effective aid reform. Section 4 looks more closely at some of the areas in which the MCC potentially suffers from knowledge and incentive problems as a result of the organizational structure. Section 5 concludes by asking important questions regarding the future of foreign aid policy.

CONSENSUS AND DISAGREEMENT IN THE FOREIGN AID LITERATURE

In the current foreign aid debate, both advocates and critics of aid agencies agree about the industry's past failures; there is a lack of results and a number of areas in which improvements are possible (Easterly 2006). In short, lack of success is due in large part to several reasons, including (1) unclear missions for aid organizations that are difficult, if not impossible, to attain; (2) no accountability for poor results; (3) little ex post evaluation of projects; and (4) no cohesive plan among different, often competing, aid agencies.

First, aid organizations have lofty and unclear missions that are difficult, if not impossible, to attain (Easterly 2003). When aid agencies are created, there are broad and vague goals set in place. These goals include such grand ambitions as providing sustainable development or empowering women. The MCC's goals, for instance, are to provide US assistance for global development in a manner that promotes economic growth and the elimination of extreme poverty and strengthens good governance, economic freedom, and investments in people (Millennium Challenge Act of 2003, section 602). In spite of its merits, this mission is both broad and vague and so is open to several interpretations. The problem with these broad missions is that there is no clear path to achieve them and no obvious mechanism to evaluate performance. If the stated goals of an organization were narrower (e.g., to provide vaccinations to 30 percent of children in Nairobi), it would be easier to determine how the organization is performing. Currently, aid agencies have not made an effort to transition to more narrowly defined goals and instead continue to operate under vague value statements that allow them to become involved in a wide variety of programs without appearing to have drifted from their mission. This is why many aid agencies are involved in projects seemingly unrelated to economic development.

Second, there is no ownership over implemented projects or accountability for poor results with either donor or recipient governments (Radelet 2006; Svensson 2006). Recipients of aid have little say in the process of designing aid programs. Donor countries usually provide aid with a number of strings attached, and often in these cases, there is no flexibility in the permitted uses of aid. Aid organizations have been largely ineffective at achieving sustainable policy changes in developing countries. These agencies are slowly realizing that imposing policy and institutional changes externally via aid conditionality is not always ideal. There is the overwhelming attitude among aid agencies that donors know more about achieving economic growth than the recipients, simply because they are in the position of providing aid in the first place.

However, as the money that funds development projects is often obtained via taxation, aid bureaucracies suffer from extensive principal-agent problems. The principal-agent problem is a common incentive-compatibility problem that occurs when agents are selected to make decisions and act on the behalf of the "principal," who is in turn directly affected by these actions. Those affected by the decisions of the agent cannot always observe their behavior and cannot guarantee that the agent will always act in their best interest. The taxpayer (i.e., the primary donor) may actually disagree with the aid and be unwilling to give it if given the choice. Additionally, donor governments and recipient governments face different incentives. As such, official aid may come with many conditions attached to it in order to better align recipient behavior with the wishes of donor governments. Aid, for instance, may be dependent on the acceptance of technical assistance and commercial supplies from the donor country; it may be conditional on adopting policy changes and implementing institutional reforms that do not conform to the recipient's own preferences; or it may supply goods and services that do not conform to the recipient's own standards. In any case, the goals of the donor government predominantly drive the terms of any aid agreement.

Furthermore, Martens (2005) models aid transactions as a dissonance-reduction model in which donors transfer resources to the recipient in return for a reduction in dissonance in the donor's mind. Martens claims that satisfaction in aid donations can only be achieved if the transfer changes the recipient's situation in line with the donor's expectations. In other words, if the recipients respond to aid in the way that donors wish, then the process will be satisfying to donors. If the donor has incorrect expectations about the recipient's response to the gift or if donors overlook the importance of cultural norms or potential unintended consequences associated with a particular donation, they may observe outcomes that are different from what is expected. In these cases, the donors will not be satisfied with aid allocation. Martens emphasizes that donors and recipients should have closely aligned preferences concerning the use of the transfer in order to successfully satisfy both donor and recipient. The lack of accountability or the ability to cut off programs that do not achieve intended results contributes to the lack of positive outcomes in foreign aid.

Third, there is little ex post evaluation of projects or results-based management (Radelet 2006; Easterly 2003). When there exists a fixed amount of annual funding and pressure for agencies to show that they are initiating as many programs as possible, there is little incentive to evaluate what has already been done. The choice between evaluating an existing project and implementing a new project is simple for most aid agencies. Another new program increases the importance of the agency, while evaluation means agencies risk having to admit to failure, something that few aid agencies seem willing to do. Even when agencies commit to evaluation, that process is susceptible to selection bias, as the agencies themselves are choosing which programs to evaluate. It is in the interest of the individual aid agency to evaluate only their most promising projects. The lack of results-based decision making in the foreign aid industry contributes to the continuation of programs that are ineffective.

Fourth, there is no cohesive plan among different, often competing, aid agencies (Riddell 2007; Radelet 2006; Svensson 2006; World Bank 2003). The network of aid agencies is a complex web of involved parties. The World Bank (2003) estimates that each developing country works with at least 30 different aid agencies on projects that cover a wide range of sectors.

There are bilateral aid agencies that exist in virtually every developed nation. The United States now has two, the US Agency for International Development (USAID) and the MCC; Great Britain has one, the Department for International Development (DFID). Furthermore, there are multilateral agencies, such as the World Bank; the International Monetary Fund; the African, Asian, and Inter-American Development Banks; and various United Nations (UN) agencies, the UN Development Programme and the World Food Programme, that operate in much of the developing world. Each organization, though broadly defining their mission as combating poverty in developing nations, has different underlying political motivations and views on how to achieve economic development. As a result, determining the effects of a single program initiated by an entity in a particular country proves difficult without the careful collection of baseline data followed by ex post project evaluation.

There remains debate, however, over whether aid institutions can be transformed in order to improve outcomes. Several academics, most vocally those who have worked within the aid organizations themselves, remain unconvinced that better intentions and increased awareness of institutional shortcomings will necessarily translate to improved results (Easterly 2002a, 2002b, 2006; Shirley 2008). In an aid context, the common problems with bureaucracies are exacerbated. As mentioned previously, the goals of aid agencies are often unclear, rendering performance evaluation particularly difficult. Furthermore, the intended beneficiaries of programs (poor people, not their governments) typically have little opportunity to provide input into program design, and even if they are able to provide input, there is no effective sanctioning mechanism that indicates to aid agencies whether resources are being matched with need.

Easterly (2002a, 2002b, 2006) argues that well-intentioned bureaucracies create environments that define their output as money disbursed and produce many low-return observable outputs (e.g., reports) and few high-return outputs (e.g., ex post evaluation) and that agencies are structured in a way that allows for little learning from the past failures and successes. While Easterly remains unconvinced that such problems can be solved by the aid agencies themselves, he concludes that these problems are lessened in situations where aid efforts are more decentralized and allocated by searchers instead of planners. In his framework, aid might be improved if allocated in narrowly defined, piecemeal efforts.

Additionally, Shirley (2008) argues that foreign aid, as it is an external force, does little to inspire the type of sustainable institutional change within recipient countries that is necessary to achieve economic growth. Svensson echoes this view: "[I]f there is no strong commitment to these policy changes, they can, and likely will, be reversed at the end of the program" (Svensson 2006, 133). Individuals, such as the Center for Global Development's Steve Radelet (2004, 2006), are confident that the effectiveness of aid can be improved if the bureaucratic organizations pay close attention to the problems mentioned here. Radelet criticizes the overly optimistic views of prominent aid advocates that foreign aid has supported poverty reduction and growth in some countries and prevented worse performance in others (see Sachs 2004; Riddell 2007) and instead focuses on improving the ways in which aid is allocated.

(Continues...)

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Dettagli dell'edizione

• Editore: Rowman & Littlefield
• Data di pubblicazione: 2018
• Lingua: Inglese
• ISBN 10: 1786603977
• ISBN 13: 9781786603975
• Rilegatura: Copertina rigida
• Numero di pagine: 302
• Contatto del produttore: non disponibile
• Persona responsabile: gpsr@libri.de; gpsr@libri.de; ; Europaallee 1; Bad Hersfeld; 36244; Germania