AEC 605QUANTITATIVE

DEVELOPMENT POLICY ANALYSIS (1+1)

TheoryUNIT I: Policy framework – Goals, Value, Beliefs and Welfare Maximization.Market – Policy and StateState vs. MarketFailure of PolicyFailure of MarketsRationale for Government Intervention. Role of Quantitative Policy Analysis.

UNIT I: Policy framework

Policy FrameworkA systematic model for examining policiesEvaluate the congruency of a policy within

the context of mission & goals—particularly as they relate to social welfare

Policies goals as the guiding principle for systematic analysis

Useful for making comparisons with existing policies

Copyright © Allyn and Bacon 2010

What is the Purpose of a Policy Framework?To provide the analyst with a model or set of questions for systematically analyzing a policy

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Components of a Policy Framework

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Fundamental Objectives of Policy Analysis

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Goal

Goals of policy analysis can range from pure research to providing information to legislators

Goals of Public Policy Equity or Equality Efficiency Security

Equity

There are different kinds of equality

These are based on The recipients of a public good The item that is being distributed And the process by which the

thing is distributed

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Efficiency What is efficiency? “Getting the most output for a given

input” “Achieving an objective for the

lowest cost” Efficiency is not an end goal; it is a

means to an end It is very difficult to measure

efficiency in the public sector or in politics in general

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The market is often held up as the paragon of efficiency

Thus, there are many calls for privatizing government

We often hear calls to run government like a

business.

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ValueProposition of Value Good/BadTakes a more evaluative position. Judges whether

something is good/bad, right/wrong, just/unjust, ethical/non-ethical, etc. We judge the worth of something.

Questions of ValueQuestions of Value address the relative merit (goodness

or badness) of a thing. Here you are usually asked to choose between things, ideas, beliefs, or actions and explain why you choose in the manner you did.

Which is more valuable, Love or Money? (Which and then why)

If you could retrieve one thing from your childhood, what would it be and why? (Which and why)

Is it better to work for a living or live for your work? (Which and why)

Laws and public policy originate from propositions of value.

Proposition of Policy Should/should notAdvocates a specific course of action.   In this class, propositions will include empowered

agencies (any group that has power to make policy), and needs to include the words “should/should not”.

Questions of PolicyQuestions of Policy ask the writer to explain what they

would do. The key word in these topics is usually "should" as in "what should we do....". The question asks the writer to create a plan of action to solve some sort of problem. The answer is a breakdown of the plan and a justification that it fixes the problem.

What should be done to combat the drug problem? (Plan and justify)

What can be done to slow the rise in teen pregnancy? (Plan and justify)

What should a freshman do to succeed as a student? (Plan and justify)

Beliefs

Welfare Maximization

Market

What characterizes a market?Voluntary exchanges of

things of valueBased on two kinds of

informationObjective information about

the price and quality of an item

Subjective information about preferences

Policy and State• The Role of the State and PolicyPre-World War II liberalism and neoclassical

development theory (Johnson, 1958) stressed the role of the market

Schools of thought that stressed the role of the state emerged during the 1960s and 1970s: dependency theory (Cardoso and Faletto, 1969), development economics (Hirschman, 1981), growth-with-equity (Adelman, 1975), and basic needs (Streeten, 1979).

State vs. MarketExhaustion of import substitution industrialization (ISI)

and the debt crisis in the 1980s induced a neoliberal critique of these strategies, calling for a descaling of the role of the state and attributing greater influence to market forces (Krueger, 1974).

In the 1990s, as many countries slowly emerge from the debt crisis through

successful stabilization and adjustment policies, a “new development economics” is also emerging.

Here the key role of market liberalization is well recognized, a scaled-down but essential strategic role is assigned to the state, and much greater importance is attributed to the developmental role of civil organizations, from the household to the community and to different forms of grassroots organizations and contractual arrangements (Stiglitz, 1985; Bardhan, 1988).

Failure of Policy

Example of Failed PolicyProhibition—1919Didn’t decrease crimeDidn’t lead to family stabilityInstead: encouraged the growth of

organized crime

Failure of MarketsGovernments have to step in when markets fail; i.e., when these assumptions lead to allocative inefficiency or gross inequity.

Examples

Correction of monopoly

Correction of problems of information

Problems of impacts on people who are not making the exchange.

Failure to provide collective goods (national defense, police)

Thus, government is often involved in

Alleviating the inefficiencies of the market

Providing goods inefficiently because there is no market way to do so

Imposing requirements for equity on the market, thereby introducing inefficiency.

Can Government every really look like a market?

Government often regulates the market, by

regulating who or what can buy or sell what products

Government often compels involuntary exchanges:

drafts labor for the army, taxes us for things we may not individually want, etc.

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Rationale for Government InterventionEfficiency Oriented Interventions1. Public Goods2. Externalities3. Economies of Scale4. Market Power5. Transactions Costs and Imperfect InformationNonefficiency Oriented Interventions1. Welfare: Poverty Reduction and Income

Distribution2. Sustainability and Intergenerational Equity3. Security: Food and Other Aspects

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Role of Quantitative Policy AnalysisIn policy analysis, there is a gap between the realm of

pure theory and the real world that policy makers face (Dervis, de Melo, and Robinson, 1982). Assisting the policy debate requires more than the qualitative insights given by pure theory; it requires quantification of the various mechanisms analyzed by theory. As it is easy to miss many of the complex indirect effects of a policy, empirical modeling can help reveal these effects. In addition, quantitative analysis allows running sensitivity tests to clarify the role of key behavioral assumptions and important parameter values. Quantitative modeling thus allows tracing back disagreements and differences on policy choices to specific behavioral assumptions and causal relations, empirical values given to parameters, and choices of normative objectives. With multiple objectives, including efficiency and non efficiency objectives as listed above, that cannot be aggregated in any uniquely acceptable welfare function, quantitative policy analysis enables quantification of trade-offs and better-informed policy debates leading to the choice of which policies to implement

THAN Q