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Development

Making Informed Investment Decisions in an Uncertain World

Nidhi Kalra's picture

“The most calamitous failures of prediction usually have a lot in common.  We focus on those signals that tell a story about the world as we would like it to be, not how it really is. We ignore the risks that are hardest to measure, even when they pose the greatest threats...We abhor uncertainty even when it is an irreducible part of the problem we are trying to solve.” (Silver 2012)

Each year governments invest billions of dollars towards long-term development. Yet their investment decisions are engulfed in deep uncertainty – about long-term demography, economic growth, technological developments, cost of energy, the impact of climate change, and a host of other factors. Deep uncertainties are difficult to acknowledge, understand, and manage. We are more comfortable facing risks we can quantify and solving problems for which we have familiar, well-honed tools. Compounding the problem, analysts and decision makers routinely face pressure to demonstrate that a decision is risk-free. Political and cultural expediency presses them to ignore rather than acknowledge uncertainty and present their decision as advantageous and certain. Such thinking can keep us in the dark about the real threats to our decision, and may lead us to make brittle decisions that fail when the future surprises us.

Do our minds play tricks on us?

Karla Hoff's picture

The following post is the first in a series exploring 'mind and culture: pathways to economic development,' the theme of the World Bank's upcoming World Development Report 2015.

Try to guess the answer to the question:

How many seven -letter words of which the sixth letter is “N” (_ _ _ _ _ N _) would you expect to find in four pages of a novel in English (about 2,000 words)? 

Now guess the answer to another question:

How many seven-letter words of which the last three letters are “ING” (_ _ _ _ ING) would you expect to find in the same four pages? 

If you are responding as most people have, then your estimate is several times greater for ING words than for _N_ words.  This violates logic. With some reflection, it’s easy to see that every ____ING  word is also an _____N_ word.  The mistake is famous and so is its explanation.    _ING words are a standard category, _N_ words are not, and standard categories shape how we think.  We confuse what it is easy to think of with what is frequent. This bias, called the availability bias, is just one of a multitude of biases that appear to be universal.

Poverty reduction at the forefront of development

Punam Chuhan-Pole's picture

The Millennium Development Goals (MDGs) put the fight against poverty at the center of the international development agenda.  And progress has been noteworthy - so much so that it is now fueling more ambitious goals on poverty reduction. But this also brings new demands for better data to measure progress.

 UN Secretary General Ban Ki-moon recently called the MDGs “the most successful global anti-poverty push in history.” With their mutually reinforcing linkages, they committed the world to reducing extreme poverty to historically low levels, while also improving education, health, nutrition, and other development prospects for hundreds of millions of the world’s poorest people. There is no doubt that since their announcement in 2000, the MDGs have raised the profile of poverty reduction in national development strategies, aid discussions and allocation, and the international development discourse. Systematic cross-country monitoring of simple to understand targets proved to be an effective tool in raising this profile.

Amartya Sen on India and China

Merrell Tuck-Primdahl's picture

'Why is China Ahead of India? Implications for Europe and the US,' was the topic of a talk yesterday at the World Bank by Nobel winner Amartya Sen which was chaired by Kaushik Basu. In the span of just under two hours, Sen managed to pinpoint India's main Achilles Heel (primarily related to the low overall quality of education, poor health care and skewed energy and other subsidies), while weaving in references to Kido Takayoshi, Mao Zedong, David Hume, Mahatma Gandhi, Adam Smith, Jon Stuart Mill, Milton Friedman, Keynes, Marx and other thinkers and influencers. 

Amartya's talk coincided with the publication of a New York Times op ed titled 'Why India Trails China' in which he stressed that one cannot wait to fix health and education only after reaching some modicum of overall prosperity. Indeed, proper health and education, which foster human capabilities, are an essential precondition to sustainable growth and the ability to compete successfully in an integrated world. India still needs to take these East Asian lessons fully on board.  

Ending Extreme Poverty In Our Generation

Kate Dooley's picture

It sounds impossible.  Unthinkable.  A world free from extreme poverty.  A world in which no child is born to die, no child goes to bed hungry, every child lives a life free from violence and abuse and has quality health care, nutrition and learns in school. This has long been Save the Children’s vision but could now be a shared global vision, and by 2030 perhaps, a reality.

On  May 30, 2013, a special panel of world leaders handed in their recommendations to the United Nations (UN) Secretary General on the future of global sustainable development and they, too, believe this can be our reality.

Scenarios are not merely uncertain forecasts

Hans Timmer's picture

My previous blog ended with a question about the usefulness of anticipating the long-term future if that future is highly uncertain. Ever since the 1982 article on “Trends and random walks in macroeconomic time series” by Nelson and Plosser, there has been a debate about the long-term statistical properties of GDP and other macroeconomic variables. Nelson and Plosser could not reject the hypothesis of a random walk (with drift), which means that random shocks have a permanent impact on the level of GDP and that the uncertainty interval around forecasts becomes wider and wider with every year you try to peek farther into the future. The message seems to be: If next year’s world is already very uncertain, don’t even bother forecasting the world in 2030.

Others found that “macroeconomic time series are best construed as stationary fluctuations around a deterministic trend function”, if you allow for a few structural breaks in the trend. The consequences for long-term forecasting are huge because, in this case, random shocks are transitory, there is mean reversion, and it is in fact easier to analyze long-term trends than short-term fluctuations.

In the long run, we all want to be alive, and thrive

Hans Timmer's picture

Ninety years ago, in his A Tract on Monetary Reform Keynes famously wrote “In the long run we are all dead”. That observation recently stirred a lot of debate for all the wrong reasons, after Niall Ferguson obnoxiously claimed that Keynes did not care about the future because he was childless. Whether Keynes cared about the long-term future or not (and whether he had children or not) is completely irrelevant in this context, as many (e.g. Brad DeLong and Paul Krugman) have pointed out.

The actual context in which Keynes wrote this observation was a discussion about the quantity theory of money, which states that doubling the supply of money will only double the prices, but will have no consequences for other parts of the economy. This is the classical dichotomy between real and nominal variables. Keynes argued: “Now in the long run this is probably true”. But “In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”  So, Keynes’ point was obviously not that the future doesn’t matter. His point was that simple theories that might describe long-term relationships are just not good enough to deal with current issues. In the short run, changes in money supply can have all kinds of important consequences beyond the price levels. Economists will have to make their hands dirty and delve into the complicated dynamics of the here and now.

Two Goals for Fighting Poverty

Martin Ravallion's picture

It is widely agreed that eliminating extreme poverty in the world should take priority in thinking about our development goals going forward. The '$1 a day' poverty line is a simple metric for monitoring progress toward that goal. It was chosen in 1990 as a typical line for low-income countries (as explained in Dollar a day revisited). By this measure, poverty in the world as a whole is judged by a common standard anchored to the national lines found in the poorest countries. On updated data, the current value of this international line is $1.25 a day at 2005 purchasing-power parity. Today about 1.2 billion people in the world live in households with consumption per person below this frugal line. Thankfully, the world has made progress in bringing this count down; 1.9 billion people lived below $1.25 a day in 1990.

Notice that I say 'consumption' not income. A standard measure of household consumption is preferable as a measure of current economic welfare than income, and is typically measured more accurately than income. Fortunately, two-thirds of developing countries now have consumption-based poverty measures, although some regions, such as Latin America, are lagging in this respect.

Kaushik Basu, the world economy, humility, and jobs

Merrell Tuck-Primdahl's picture

At his Sabanci lecture yesterday on ‘Emerging Nations and the Evolving Global Economy’, Kaushik Basu predicted that sluggish growth will likely prevail overall for the next two years, as the baton of economic growth is handed over from industrialized countries to developing countries. He cautioned that countries have bought time with liquidity injections and other stimulus measures, but that will not do anything to fix deeper structural problems.

To hear his talk, along with his views on the recent austerity debate that reached a fever pitch over the past 10 days, listen to the audio of the full lecture and question and answer session here.

Kaushik elaborated on some of his ideas for getting the world out of the current ‘time-buying’ phase in an April 23 piece in Project Syndicate op ed ‘Two Policy Prescriptions for the World Economy.’ Dani Rodrik was especially taken with Kaushik’s opening line that “One thing that experts know, and that non-experts do not, is that they know less than non-experts think they do.” This pointed to the hard truth that the austerity debate has revealed that policy setting in today’s world is a highly uncertain business and that humility should be the order of the day.

Law and Development from the Ground Up: Bridging Health Care by the Sewa River

Margaux Hall's picture

In Sierra Leone's rainy season, the Sewa River, feared by many locals for its powerful currents, floods over its banks separating entire villages from basic services.  Konta health clinic in Kenema district operates near the shores of the Sewa, and during the six-month rainy season, five of Konta’s 17 dependent villages cannot access the clinic.  If women in those villages give birth during the rains, they entrust care to traditional birth attendants; if children fall ill, they turn to traditional medicine, stockpiled drugs, and, often, prayer.  As one woman explained during a recent community meeting in Konta, these are the only options, even if the all-too-frequent consequence is death.  Hearing her account, it’s difficult not to feel a strong sense of injustice, even in an incredibly resource-constrained country like Sierra Leone.  But is there a role for the law in remedying this situation?

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