Just as I prepare for Policy Making 2.0, I wonder if we are not missing something important there. I am as fond of technology, science-based modeling and data-powered approaches as the next guy. And yet, the technology, the modeling and the data crunching are just the glazing of the policy making cake. The dough beneath it, orienting the deployment of our technological wizardry, is the policy maker’s world view – and that is in bad need of an overhaul.
Let me explain. I find that the vast majority of policy makers – regardless of their political preferences – subscribe to a linear model of policy. An issue is detected; it works its way into the political discourse; an approach is found to tackle it and validated by democratic vote; leaders make it into regulation; such regulation is then enacted by the executive branch, to the desired effect. The linear model may sound reasonable end even “evidence based” if the process leading to crafting the response includes data processing. But it holds only if society is like a machine: relatively simple and tractable, with no second-order effects. If you believe this to be an acceptable approximation of reality, you’ll like the linear model just fine. Traditional economics does: I have sat in classes where optimal policy is computed by maximizing a social welfare function, itself the result of aggregating each individual’s utility function. If your economy is not at the maximum, you should (and you can, in principle) push it there by manipulating the price system (through taxes and subsidies), the level of economic activity (through tweaking taxes and spending) and financial constraints on economic agents (through interest rate fixing, quantitative easing, reserve requirements etc.) and regulation (like standard setting).
If you, like me, believe you are living in a highly nonlinear world, resembling an ecosystem much more than a machine, and better understood by a complex systems approach, then the linear model will not work for you. Neither will its tools – taxes, subsidies, spending, monetary policy, regulation – be reliable.
It’s not a just a matter of not working. I am becoming convinced that deploying these tools can be downright harmful. In trying to correct for a perceived distortion, the state applies some pressure to try to offset the distortion. But, all too often, the economy reorganizes as individuals try to take advantage of the state’s intervention. An example with regulation: to contrast the proliferation of short-term employment, a government might make it more expensive to hire on a temporary basis. And companies might respond more or less forcing would-be employees to start one-man businesses, so as to transform employees into suppliers. Result: even more insecurity for the people in question. Another example, this one with spending: a government decides to encourage R&D spending by funding joint research projects between companies and universities. Problem is, when companies see a business opportunity, they will typically not wait for public funding, but just go ahead with the project. Later, they might apply for funding to pay what they have already done – shifting the burden of paying for the R&D to the taxpayer while not generating any additional new product. Final result: much application forms writing, many projects (with high overhead) funded, but very few new products.
Both these things – give or take some important technicalities – have happened in Italy. The distortion of a local economy by massive public spending is visible to the naked eye: you talk to smart, entrepreneurial young people in Italy’s Mezzogiorno, and chances are they will be aware of the main programmes funded by the European Social Fund, the European Regional Development Fund and their national counterparts. A discouraging amount of their time goes into second-guessing funding agencies and writing applications with all the right buzzwords. And why not? It’s the biggest game in town. Italy’s Strategic National Framework allocates 125 billion euro to economic development over the 2007-2013 period (source, p. 236). That’s a lot of money. To give you a benchmark, World Bank lending commitments worldwide for the same period amount to less than 200 billion euro (source – the page, as I can’t seem to reference the graph directly).
Of these, 101 are concentrated in four regions in the Mezzogiorno (rightly) perceived as lagging behind. Regions are the main spending agencies in Italy: this allocation of resources means that the four regions in question need to juggle the administrative workload of funding, in an accountable way, an average of 3.5 billion euro per year on regional development projects alone – whereas the remaining 15 regions “only” allocate an average of 200+ million per year to the same end. Since money This results in chronic underspending by the least developed regions, who struggle to manage this flood of money.
This accounts for the distortion in incentives I mentioned above. While a great majority of public spending ends up going through traditional channels – incumbents and old boys networks, like everywhere – many of the best and brightest people in Italy’s Mezzogiorno end up spending a lot of time thinking on how to get a piece of the action. Recently, my friend Tiago Dias Miranda spent some time in Basilicata and reported:
[…] one of the first things that struck me was the fact everyone kept on talking about bandi, which at first I thought it had to do with music bands. Little did I know bandi means “competitions” [public sector tenders and calls for proposals]. […] unless there is an elephant in the room that I haven’t seen— this territory is highly subsidised, just like developing country receiving donations from the wealthy families.
Most people, within government and without, are aware of this effect of spending, but see it as a necessary evil. “We have to do something for lagging regions – they say – This way of doing things may be inefficient, but it does move things in the right direction, bringing about more work and opportunities.” But here’s the catch: this argument only holds if you accept the linear model. If the economy is complex enough, self-organizing effects begin to show. People on the ground try different things (in Basilicata many people have been exploring tourism services, for example), tinkering with their lives and economic activities. Some selection mechanism functionally similar to natural selection for evolution rewards the successful strategies and eradicates the unsuccessful ones. The former get imitated by more and more people, while the latter go extinct. This gives the system a measure of self-healing, of bouncing back – unless, that is, an injection of public spending keeps the attention of innovators on goals set by the funding agencies and off the tinkering-then-selecting activity.
Tiago’s observation that “everyone is talking about tenders” in Basilicata implies that, in a different situation, the same people would be talking about something else. Maybe they would start companies; maybe they would migrate; maybe they would squat abandoned buildings. But they are not doing those things, and this is actively harming the local economy and society, pushing it into a spiral of dependency. In medicine, this would be called iatrogenics; physician’s actions that harm the patient, despite the best intentions.
Per se, these observations are not new – Dambisa Moyo and others have eloquently argued that too much public spending – no matter how well meaning – can hurt a local economy. But they are counterintuitive, and they never made it into the mainstream. In Italy, certainly, the political discourse is all about how much money you can amass behind which goal; so, the point bears repeating.
More interestingly, I am thinking hard about ways to do two things to operationalize these ideas:
- diagnose when it is that local economies are complex enough to find an adaptive path towards improvements. This is harder than it sounds, because you have to choose an appropriate level for the analysis, and whichever level you choose you will likely have winners and losers within that level. For example, Italy is definitely big and complex enough to do interesting stuff, but historically it has tended to concentrate the action in the north, with southern regions lagging behind. If you look at the level of a small region, you are almost sure to find, again, areas that are quite dynamic and areas that are not.
- suggest tools that lend themselves well to a “do no harm” approach, that assumes you are doing public policy on a complex adaptive system, not on inert matter or on a simple machine.
These will be the subject of forthcoming posts.