Inclusive economics

Action for Economic Reforms (AER) will soon commemorate its 25^th year. It was incorporated as a non-stock, non-profit organization in November 1996. Since the pandemic will not go away soon, AER has opted to do away with the fanfare for its silver anniversary. Instead, it has opted to have low key but meaningful activities.

In this regard, AER fellow Bertie Lim has proposed a review of AER’s branding. He wondered whether different actors have the same perception or thinking about what AER is. This stems from the fact that AER is able to cooperate with a diversity of organizations and personalities across civil society, business, and government.

So, AER has set in motion the branding exercise, guided by Bertie’s son Laszio and Laszio’s wife Kankan. Laszio and Kankan run Invictus, an agency that helps companies or organizations develop strategic communications based on inspired learning.

The exercise begins with a review of AER’s vision and goals. We have had a series of discussions, asking fellows and staff what they think define AER. The gamut of topics includes AER’s core values, archetypes, distinct traits, audiences, and specific messages for each advocacy. The exercise, despite its length and seriousness, is refreshing and inspiring.

A most interesting segment of the exercise is going over the AER’s vision statement. This is the original statement: “A dynamic national economy characterized by sustainable development, equitable distribution of income, robust and fair trade relations, and democratic governance.”

While it says all the right things, we find the statement cluttered. And we think something is missing: Inclusion.

To elaborate, equitable distribution is about an outcome, but the model or approach to achieve this outcome can be top-down. The elite can allow instances of progressive taxation and spend for the underprivileged like what US President Joe Biden intends to do. But this alone will not change the reality that the ordinary workers and the ethnic minorities are far underrepresented from decision-making.

Democratic governance is basically majoritarian. But majoritarian rule can marginalize or disenfranchise the minority. This explains the phenomenon of illiberal democracy.

The concept of inclusion thus ties up democratic process, civil rights, and economic outcomes. Inclusion increases and strengthens the voice and representation of the poor and vulnerable. The exercise of their rights enables them to get an equitable share of the overall economic gains.

The AER’s discourse on inclusion has led me to study further what Rohini Pande, a professor of economics at Yale University, calls “inclusion economics.” Her championing of inclusion economics stems from her experience in her younger years.

She narrated her story to the International Monetary Fund’s F&D magazine (Summer 2021). Then an economics undergraduate student, Pande argued against affirmative action that guaranteed government jobs to the lower-caste Indians. Espousing the conventional economic argument, she thought that jobs should be rewarded based on merit, not through accommodation and decree.

Two years later, despite her credentials as a scholar at Oxford and a product of India’s elite education, she found herself in a similar situation faced by lower-caste citizens. At Oxford, she saw “a distinct hierarchy between those from the United States and those from Asia and Africa.” She said: “Scholars from poorer countries came to Oxford for a high-quality education not available in their home country, while for many American scholars it was just a two-year break before they returned to elite US universities.”

This experience made her re-examine fairness. Having seen the perspective of being disadvantaged, she understood and internalized the plight of India’s lower castes.

Pande, together with Charity Troyer Moore, has embarked on a program headquartered at Yale called Inclusion Economics. F&D describes this new initiative as using “data-driven approaches to work out ways for the poor to increase their influence and claim their fair share of growth.” Pande says that the work done by economists on inclusion must be “intentional.”

Inclusion economics inescapably addresses institutions. To quote Pande: “There’s a vicious circle of rising inequality and weakening institutions — particularly democratic institutions — which is going to be exacerbated by planetary limits on growth.”

Pande’s work on institutions is trailblazing. She enriches the discourse and the literature on institutional economics by doing data-driven studies on institutions at the national or local level.

She follows Douglass North, the father of new institutional economics, by answering the questions he raised by doing specific empirical studies. North’s abstraction of institutions shaping economic performance was likewise drawn from his specific studies in different settings.

Among the questions are: Under what conditions do institutions predict long-term economic performance. Under what conditions do institutions lead to reversals? In what ways do informal rules (or de facto, not de jure, institutions) shape economic development? How do the formal and informal rules interact?

But Pande also breaks from North’s neoclassical growth framework. For she makes growth constrained by inclusion. To quote her:

“Economics has a lot to say on how to have intentional policies that reach the poor and vulnerable, but I think we need to put it center stage and not assume that it will follow automatically from say, free trade or just opening up markets. It has to be something maybe intentionally recognized that we want to see the wellbeing of some of the poorest, most disadvantaged individuals improve. And that requires us to, very often, specifically put in place policies that don’t increase growth, that may not lead to less regulated freer markets, but serve the very specific purpose of ensuring inclusion.”

Further, a paper she co-authored with Christopher Udry titled “Institutions and Development: A View from Below” (2005), shows the limits of studies that depend on cross-country regression data and the attendant use of fancy instrumental variables (IV).

Specifically, relying on cross-country data does not have the ability “to disentangle the effects of specific institutional channels on growth or to understand the impact of institutional change on growth.”

They explain why this is so. First is the coarseness of the selected variables, given the wide range of variables and the large number of omitted or unobserved variables. Second is the bias for the formal and urban sectors of the variables for institution. Third is the paucity of IVs. Related to this is the domination of IVs (e.g., geography and pre-colonial and colonial history) that have persistent institutional effects. In the process, these IVs attenuate the estimates of the effect of any institutional change along the way.

To address these problems, Pande and Udry argue that the research on institutions and growth can be advanced henceforth by examining more micro-data relating to specific institutions and contexts within countries.

The implication of all this for AER is the necessity of doing data-driven work at the local or national level. It is exciting to make inclusion a new anchor of AER’s program. And it is challenging to do the advocacy where inclusion, economic institutions, and political economy intersect.

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.