Prosperity Unbound

Education provides an interesting case of institutional reform.  The administration of education requires no overarching agenda.  Reforms can be done piecemeal, tackling one particular problem at a time with reforms accumulating on top of each other in layers …. The means of achieving education improvements tend to contradict each other.  Incentive structures breakdown under complex arrangements of competing agendas.  Sometimes intended incentive structures for reaching high education standards are never established.

The public – at large – feels inadequate to tackle the how’s of education.  Sensing a lack of expertise in the area parents leave the agenda setting to the suppliers of education.  The suppliers of education are represented by teachers’ unions.  Teachers’ unions come with their own set of priorities which are often counterproductive to improving education process (i.e. tenure and job security, resisting performance-based initiatives).

Educational reform pays very minimal dividends for a politician.  A politician needs positive outcomes of reforms to be visible before the next election cycle comes around.  However, a president does gain points by claim to undertaking educational reform during his term.  So while the fundamentals and substance of the reform may not be visible for a decade’s time, the fact of having instigated any semblance of reform gains him higher approval ratings among the public.  Thus, we find education reform guided by the interaction of these two key forces: teachers’ unions and the executive branch.  With each bringing their contravening reform agendas, reform outcomes increase capacity (i.e. more schools, more teachers, and more computers) which is positive for all, and neglect to restructure incentives to improve quality and efficiency, which threaten teachers’ job security.

In the 1990s over a dozen Latin American countries underwent educational reform.  While the objectives of the reforms were to improve quality and efficiency as well as capacity, the reforms generally improved capacity and decentralized administration but failed to make any significant improvements in quality and efficiency of education.  The region, as a whole, scores very poorly on international standard tests, particularly in reading and mathematics.  Major efforts were poured into the educational reforms throughout the 1990s, and presidents across the region could boast of their achievements on the campaign trail.  Twenty years later, we’re recognizing that the reforms haven’t substantiated improvements of quality and content in the process of learning.

Educational reform, then, is an area that very much benefits from Reality Check Analysis.  To disregard existing institutional arrangements, broken incentive structures, layers of reform agendas piled on top of each other, combined with the expectations of making concessions to the parties present at the negotiating table will engender superficial adjustments with outcomes that fall far short of intentions.  But by the time outcomes are realized, a former president might be finished writing his memoirs.

Effective educational reform requires policy entrepreneurs and a reform team combining all the elements affected by education (which might not always be brought to the table) including: parents, administrators, teachers, other regional power players and the executive branch leading the reform.  Step one is to corporately create a vision for where the country wants to be in ten, twenty years.  Looking into the future, it is generally fairly easy to come to a consensus of direction: “we want to improve math and reading skills, to be on par with East Asia”, for example.  Starting from this point effectively commits all parties to the reform team to finding a way to achieve these ends.  It brings a common agenda to the interests of all key players: “we all want to achieve the same ends, bettering our children’s education”.

Secondly, it builds trust among the parties to reform.  For instance, teachers are reassured that the government’s goal is not simply to find a new source of revenue to redirect elsewhere in the budget by cutting teachers salaries, or that administrators want to find an excuse to fire their educators.  The goal instead is to help make teachers the best teachers they ca be.

Third, following Reality Check Analysis, the team must dig into the relevant legislation and explore the nuances of all relevant state and local educational institutions.  the proposed reforms must take the interaction of these power players, their desires to maintain a ‘place at the table’, and discretionary powers.  The goal is two-fold: either replace existing legislation with an entirely new system, or encompass existing regulations into the reform plan.  Secondly, work together to find a win-win situation for everyone.  Teachers’ unions will be more likely to make concessions if they’re given the opportunity to negotiate behind closed doors as part of the reform team than confronted with a completed ‘take it or leave’ reform agenda.

Innovative approaches are possible.  In Washington D.C. Chancellor of D.C. schools Michelle Rhee tried to take on the tenure issue, with an opt-out for teachers: you can either 1) keep your tenure at same pay, or 2) opt out of tenure and agree to performance reviews, with the opportunity to almost double your salary.  The problem: the teachers union would not even let the teachers vote on it.  The union fears the consequences and resulting diminished power of the union.  Maybe a reform team approach, using Reality Check Analysis could help bring consensus to improve the quality of education in our nation’s capital.

Guest Contribution by Rachel Beach

Microcredit and property rights reforms, how do they connect? The Panel Group was first asked to connect the dots between financial services to the poor and security of property in discussions with organizations such as the World Bank, Gates Foundation and International Trade Agency (ITA). The exercise brought to light a multiplicity of connections, and in the process we discovered that this is actually a very relevant and necessary discussion to promote. Indeed, it is a relationship whose identity is increasingly touched upon in current development debates.

An increasing number of articles and platforms address the importance of securing wealth bound up in physical real estate, small entrepreneurial activity and intellectual property as incentive for further investment and economic growth.  In a recent profiling by Fast Company, June Arunga – celebrated by the magazine as one of this year’s 100 Most Creative People – is asking a very common question but coming up with an answer at once banal and profound:

‘Why is Africa so poor?’ says the Kenyan, from her current home in Ghana… ‘What should be encouraged is the fundamental right of people to own land and the products of their labor, which are then recognized by courts, and can be exchanged at the market.” Asking for aid, she says, is part of the problem. “I doubt there is a parent that raises their child to become a beggar,” she says. “Gain respect. Keep your promises.”

Security and legal recognition of property for the poor is something development agencies are slowly waking up to. It is something De Soto recognized and has been both praised and vilified for – tapping into the wealth of the poor. One side criticizes him for finding another brilliant way to extort the poor, “formalizing their wealth” so it can be taxed by the government and their property sold to developers. The other side recognizes something elemental in development: access to credit and securing of property (i.e. not simply physical real estate but all forms of wealth) are essential. Between these two elements are a host of incentives. And their interplay entertains many fields of study: the psychologies of security and self-improvement, incentive to invest, the dynamic of trust and credibility between a State and its citizens, hope.

The connection between the credit-access and property-security is not merely curious, it is fundamental to development. In fact, it is a symbiotic relationship. Without a reasonable guarantee that property will be protected both from expropriation or theft, the acquisition and maintenance of investments and other assets in a given economy is illogical, as many an African dictator’s holding of properties abroad (read: securer states) and Swiss bank accounts will attest to. On the other side, without access to credit, the ability to invest is severely restricted.

Capitalism has struggled to find meaningful ways to bring the poorest brackets of society (and those operating in the “extra-legal” sectors due to any number of structural and financial barriers) into the market economy. Financial services for the poorer sectors look very different than the services to the wealthy. However, the risks they face, the way they operate, and types of basic services needed should not be treated as an exception to the standard middle-class or wealthy citizen’s fundamentals of wealth management and financial services. Indeed, the middle-class and wealthy are the minority in this world we live in.

Micro-credit is not simply a well-meaning, social business enterprise that should be patted on the back and politely applauded while we go about our business in the real world. Micro-credit is the type of financial service needed for a great majority of the world’s population. It is more than finding creative ways to “help the poor”. Micro-credit allows the impoverished to slowly rise out of a cycle of poverty. Securing of property rights for these small enterprises and private citizens gives owners legal, socially-recognized protection of their newly acquired parcels of wealth, however minute. Any high-school lecture about compound interest will attest to the benefits of savings and investment, however small one’s start. This creation of wealth then slowly builds on itself.

Neither Peru nor Bangladesh are anecdotes (as Peter Shaefer seems eager to claim in his Foreign Policy article). Yunus’ Grameen bank is expanding operations on five continents, including successful start-ups in the United States and the birth of one in Italy. Our work at Panel Group explores insecurity of property rights around the world – as Elena did in Peru during the 1990s – partnering with municipalities and governments to strengthen, streamline, and even create socially, legally recognizable ownership of physical property (i.e. real estate) where none existed before. Without the dual-expansion of financial services for the poor and security of their assets, the poor will remain in a cycle of poverty.

Guest Contribution by Henry Musa Kpaka

President Obama’s speech in Ghana outlined his commitment to sub-Saharan African economic and social development (see the Economist article, Barack Obama and Africa: how different is his policy). His message was to usher in a new strategy for development assistance from the U.S. and perhaps the rest of the West.  The debate over ending poverty and bringing economic and social development to sub-Saharan African has exhibited an increasing number of facets in recent years.   One stemming from the rather dismal results from the heavy use of aid, encouraged development agencies such as the World Bank to turn their attentions to the promotion of trade liberalization, macroeconomic and monetary stability, and privatization, all embodied in the structural adjustment programs aka “Washington Consensus”.  Following the poor results and frequent failures of this strategy, a new line of thinking emerged, one with a lot of potential to lift the continent out of poverty: institutional reform.  President Obama was quick to echo this in his Accra speech: “Africa does not need strongmen, it needs strong institutions”.

The focus on institutions as a means to lasting prosperity for all in sub-Saharan Africa has been around far longer than the Obama administration, but this administration is giving it some steam, and rightly so.  A few economists and development practitioners have written about the impacts of institutional reform in sub-Saharan Africa.  In criticizing traditional foreign aid in her book, Dead Aid, Dambisa Moyo observes that aid impairs African institutions. One implication she gives: public revenue/tax collecting institutions are largely absent because African leader build their budget with revenues coming mostly from aid.  Elena Panaritis also spends some time in her work, Prosperity Unbound talking about institutional reform in developing countries.  Panaritis, whose work focuses on transforming the informality of property and property right systems into formal legal systems in developing countries, describes the importance of institutions.  In her words, “institutions structure incentives in human exchange, whether political, social or economic. In other words, they hold together and protect the social contract by enforcing contracts and laws and providing a sense of certainty in human exchange”.

The immediate economic benefit from efficient institutions as various economists have outlined is that it reduces transaction costs of all kinds (i.e. time, money, imperfect information).  Markets work well when there is a predictable and legitimate set of rules that governs doing business.  Well-functioning institutions also promote accountability and give a voice to the poor. The Obama administration’s efforts (making a speech and creating new policy directives are two different animals, the question is how much weight will he put behind the rhetoric) to endorse this approach is certainly a step in the right direction.  My only concern is that this approach has already become another “Washington Consensus” that wipes out all other ideas.

The question of what kind of reform should be promoted is addressed by Dani Rodrik: “The type of institutional reform promoted by multilateral organizations such as the World Bank, IMF, or the World Trade Organization is biased towards a best-practice model. It presumes it is possible to determine a unique set of appropriate institutional arrangements ex ante and views the convergence towards those arrangements as inherently desirable. This approach,” Rodrik continues, “encourages cross-national comparisons, benchmarking.” All of which he rightly claims are based on first-best mindset. He proposes a second-best approach where institutional reform is promoted in a case by case basis, where focus is placed on areas of quick wins and high impact results. Growing up in Sierra Leone, it was easy at first to reject a second-best approach for my continent. However, Rodrik’s idea makes a lot of sense.  Different countries, even in sub-Saharan Africa have different approaches in doing business and rely on unique arrangements of formal and informal institutions. A “one size fit all” approach may cut transaction costs in the short run but has high potential to fail.  The heavy reliance on institutional performance indicators, like the Good Governance Index, can easily misguide us, lead to waste, and subsequently to yet another retreat of a potent solution to the poverty problem in sub-Saharan Africa.  Institutional reform holds a lot of promise for development in sub-Saharan Africa if applied appropriately.

Guest Contribution by Rachel Beach

Judge Sonya Sotomayor may be sailing through the senate hearings given her highly qualified track record, a White House and Senate majority in her favor, and appeal as the first Latina judge, but one might find some relief in the expression of a few well-placed reservations.  In paradox to her background of civil rights service and concern for the constitutional protections afforded to all citizens, Sotomayor’s track record on property rights should register concern among the underprivileged and  politically weak.  Her highly controversial decision in the 2006 case of Didden v. Village of Port Chester ruled against land owners Bart Didden and Dominick Bologna whose property was condemned after they refused to pay a local developer’s extortion demands. Sotomayor’s decision went beyond the procedural grounds of the Supreme Court’s 2005 decision in Kelo v. City of New London, Connecticut, allowing the expropriation of private property for the benefit of other private interests.

Should Sotomayor reach the Supreme Court, it appears that expropriation and extortion for personal gain – if the party in question is politically-connected and affluent – can hope for federal backing.  If a developer can convince the city to rezone an area for redevelopment, and has legal ground to request condemnation of private property for his own gain then the disenfranchised should have great reason to fear her decisions.  Sotomayor’s decision exacerbates problems of the insecurity of property, and those whose property is most likely to be expropriated inhabit the lowest strata of American renters and home-owners: tenants in the ghettos.  They suffer from semi-“unreal estate”.

Here is the account of a lady who went from poor tenant to homeless to middle-class lady in Washington D.C. after struggling with the mayor’s office for years to gain the rights to purchase the condemned apartment she was renting.  Deborah was once one of those who inhabited “unreal estate”.  Her’s is one of the rare stories of the poor successfully fighting for their rights (using the right-of-first-refusal under D.C. property laws regarding tenants) and gaining ownership.  However, Sotomayer’s ruling would make  the struggles of homeowners like Deborah more difficult.  The logic of the ruling suggests that developers have the power to deny rights to tenants, not for public gain, but for the private gain of the developer over tenants.  Granted, we do not know all the details of the ruling or the case, but as the most probable soon-to-be Justice of the Supreme Court, Sotomayor’s decision seems rather discouraging,.

The current economic crisis is a property right issues (i.e. an unstable valuation of the real estate market), but a clear and established property right system especially for private individuals can be a way out of this current mess and prevents further crisis. Like in the case of Deborah, ownership of property motivates investment and entrepreneurial ingenuity which is much needed in today’s economy. Sotomayer’s ruling is indeed a red flag to such success stories as that of Deborah’s.

http://www.finreg21.com/homeTHE U.S. PROPERTY RIGHTS SYSTEM IS SEVERELY BROKEN: We need to treat this crisis as an opportunity not only to install a more rigorous regulatory regime for the financial sector…we need to overhaul the way property rights and property values are established in this country. We need a structural reform that establishes standards for how property is evaluated and how it is offered to the market.
Elena Panaritis, author, Prosperity Unbound: Building Property Markets with Trust