1/n How should economic policy be formulated?
Particularly in developing countries that have limited resources and lot of uncertainty about what should be prioritized and what works?
IMHO, the key is *iterative smart-policy design* (ISD)
Particularly in developing countries that have limited resources and lot of uncertainty about what should be prioritized and what works?
IMHO, the key is *iterative smart-policy design* (ISD)
ISD has three steps.
i) Formulate policy using best available information but be very clear about which specific problem the policy is solving (this is the S in ISD)
ii) Define success & the information you would collect to measure progress (this is the D in ISD)
i) Formulate policy using best available information but be very clear about which specific problem the policy is solving (this is the S in ISD)
ii) Define success & the information you would collect to measure progress (this is the D in ISD)
iii) Learn from the information you have gathered in step ii and *iterate*, i.e. go back to step i and make adjustments to your policy.
this is the I in ISD & the most important step
China has followed the ISD principle
this is the I in ISD & the most important step
China has followed the ISD principle
I'll explain this further using an example from Pakistan.
How should credit subsidies by designed and targeted to boost exports?
For a conceptual framework for this question, read @ErnestLiuEcon
scholar.princeton.edu/sites/default/…
How should credit subsidies by designed and targeted to boost exports?
For a conceptual framework for this question, read @ErnestLiuEcon
scholar.princeton.edu/sites/default/…
The government has historically given tons of money in subsidies to encourage firms to make long term investment in the export sector.
Most recently, another 100B Rs package was announced
Any exporting firm, up to a limit, can get a subsidized loan if it wants to buy machinery
Most recently, another 100B Rs package was announced
Any exporting firm, up to a limit, can get a subsidized loan if it wants to buy machinery
This is step i.
Unsurprisingly, firms love to avail this opportunity, but does it work?
Even after decades of credit subsidies, we have absolutely no idea because no government followed the ISD principle.
Unsurprisingly, firms love to avail this opportunity, but does it work?
Even after decades of credit subsidies, we have absolutely no idea because no government followed the ISD principle.
Under ISD, the government would set up the research infrastructure to answer the following question:
Does the credit subsidy lead to investment that otherwise would have happened? Or are we simply handing over subsidy to cash-rich firms that would have invested anyways?
Does the credit subsidy lead to investment that otherwise would have happened? Or are we simply handing over subsidy to cash-rich firms that would have invested anyways?
If a dedicated effort was made to answer this question, we could have iteratively improved the policy design to make it more effective, to ensure that only the most-productive & most-constrained firms benefit from policy.
But such disciplined thinking is missing. We need ISD.
But such disciplined thinking is missing. We need ISD.
Ughh ... i should have said above, "Does the credit subsidy lead to investment that otherwise would NOT have happened?"
