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Uncategorized

What’s new in econometrics?

The 2nd International Conference on Modern Econometric Tools and Applications (EC2015) is currently taking place at the Higher School of Economic Campus in Nizhny Novgorod (pictured), some 500km east of Moscow.

Svetlana Bryzgalova from Stanford University presented a quite impressive and sophisticated approach to estimate the consumption risks both of bonds and stocks. Dean Fantazzini from Moscow State University had a closer look on the reasons for the recent sharp decline in oil prices. 3 Factors are usually held to account: First of all, there was too much oil in the market. Shale oil production in US is at a peak level, although the oil companies are making losses and accumulating a lot of debt (indicating that shale oil production is just not efficient, but anyways). A short break in the civil war in Libya resulted in an unexpected additional inflow of oil on the market. And Saudi Arabia decided not to cut supply. Secondly, demand for oil turned out to be lower than expected. This was mainly due to economic slow-down in Europe and Asia. On top of that there was a strong dollar, which further put pressure on the oil price. But beyond these commonly stated factors, Dean showed that there is some variation left. He proposed a bubble detection strategy; including a decomposition of a variable into its components. He finds evidence on bubble behavior; apart from basic economics this bubble behavior puts additional pressure on the oil market.

In the spatial econometrics sessions Olga Demidova, from Higher School of Economics, and her co-authors investigated unemployment clubs in Russian Regions. This is relevant because the Federal concept of Regional Development until 2020 asks for a balanced socio-economic regional development and a reduction of interregional disparities. In the same session I present a paper on Performance Gaps, Peer Effects and Innovative Behavior in Public Sector Organizations. I develop a model in which managerial actions result from spillover due to pure learning or strategic mimicry and a cost-benefit calculus of instrumental benefits vs. reputational costs of innovation adoption. Propositions are tested against participation data in a Swedish benchmarking exercise.

Also interesting from a policy-perspective was that – using time series analysis – Rajarshi Mitra and co-authors find that foreign aid has a significantly negative effect on personal income in Bangladesh in the 1971-2001 period. Seemingly overseas development assistants (ODA) was not very effective has rather harmed than benefited Bangladesh. A “bad policy-environment” is considered to be an explanation for this finding.

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Uncategorized

Metro 2020

Today I took note of the plan for Moscow Metro in 2020 (external link: m24.ru/infographics/3428; M24 is for москва24, a broadcaster). In Russian words my response was: вот ето да, maybe something like OMG, or so. 64 new metro stations will be constructed in the 2015-2020 period; and 14 additional new ones have been finished between 2011 and 2015. Most interesting to me was that they intend to build an additional circle line which parallels the Moscow Automobile Ring Road (МКАД). MKAD once used to coincide with the administrative boundaries of the capital, but Moscow grew beyond in recent years (mainly due to an acquisition of municipalities in the South West in 2012). Anyways, it will take you about 100 kilometers to circle Moscow on the ten-lane MKAD. And the new circle line will probably have a similar radius of some 16km.

The existing circle line (each line has its color; the circle line is the brown one) is rather important within the capital’s transportation infrastructure, because all other lines together are organized like a spider web. Everything is concentrated towards the center. It is easy to get from the outer parts to the inner city. But travelling from one tail, e.g. in the South-West, to another in the South is not. The existing circle line fills this gap below the ground. Above the surface, the spider-web is complemented by public buses and trams. The existing circle line has another major advantage compared to most other lines: Air-conditioned railcars. And this is something you will adore both in summer and winter times.

Most of the newly planned metro stations will be located outside of MKAD. Note that the first metro station beyond MKAD was opened only in 2002. Beside the new circle line the already existing yellow line will be heavily extended towards the west and south-west of Moscow. The light green line will also see nine new stations in the north.

Two major questions arise, the first being how to manage the underlying procurement process, and the second being what spatial economic spillover effects will result from this investment in public transportation infrastructure.

Thirdly I am looking forward to new inspiring public architecture. One of my pet stations is still Vorobyovy Gory (pictured, while the train halts, you can enjoy a beautiful view over Moscow river), but this means almost nothing in a city where each metro station is a marvelous location.

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Innovation

When and why public administration innovates (pt. 3)

(c) Tim Jaekel

This is part 3/3 of my talk that I delivered a HSE Open Day 2015 in Gorky Park in Moscow.

Obstacles to innovative behavior

You might think: Fair enough. There are so many examples of best practices out there, but why not in my home town? Why do I have to wait hours and hours to file a form? Why are bureaucrats still impolite?

A lack of innovative behavior in some administrations is due to the lack of competition in the public sector as a whole. Performance is not linked to the survival of units; public organizations have the property of “semi-immortality” (Choi and Chandler 2015 Lead & Gov, p. 144). Max Weber, a famous researcher from Germany, and researchers from the progressive era in the US, wrote about how public administration should look like (normative approach). Others including Barnard (1938), Simon’s classic ‚Administrative Behavior‘ from 1947, and March and Simon’s ‚Organizations’ from 1958, asked “what motivates bureaucrats to behave as they do?”. This was the „behavioral revolution in the study of organizations“ (Kenneth J. Meier and George A. Krause. 2005. The Scientific Study of Bureaucracy: An Overview. George A. Krause and Kenneth J. Meier (eds). Politics, Policy, and Organizations: Frontiers in the Scientific Study of Bureaucracy. University of Michigan Press, 1-19. P. 3). If we think of public administrations as utility maximizers, which I think makes sense, it is rational for them to maximize budgets, reputation, and hopefully also the public interest. In any case, maximizing the public interest will not be their only goal. Reason one.

Some elected officials do not adopt a new practice because they intend to protect their managerial autonomy. Two strategies are available for public organizations, the first one being to innovate and to identify new opportunities; and the second one being to use existing knowledge. There is a strategy of exploration of new knowledge and a strategy of exploitation of existing knowledge. Innovative organizations may witness a failure trap and a success trap. Failure trap means that reform and change occurs to frequently in public bureaucracies. Decision makers do not wait until a prior reform has been implemented and works. They start something new because they don’t see any benefits from recent reforms; they have lost sight of the fact that the potential benefits are long term. Reason two.

Two questions arise from what I said so far: How to spread innovation in Public Administration? And what does that mean for Moscow, the City we are living in?

First, how to spread innovation beyond frontrunners and change agents? One idea might be a patent system for the public sector. There is a gap between taking the risk to innovate and realizing the benefits from them, because new ideas, programs or processes, i.e. innovations, are considered as public value (Choi and Chandler 2015 Lead & Gov, p. 142). In contrast to the private sector there is no patent system that secures the claims of an innovative individual. How can we make that a best-practice becomes the industry-standard in the sector? Which is similar to the question: How to facilitate knowledge-transfer and information spillover? I consider two basic approaches: The first one is the Chinese approach. China has a long tradition of policy-experiments in its provinces, the equivalent to the Russian Regions. A pilot is tested in a number of municipalities or provinces. If it works it is spread all over the country and implemented in other administrations. This is a centralized approach to knowledge transfer. (Charlotte Lee and Xiaobin He. Development and Change 42(2) 329-352. Heilmann 2008. The China Journal 59.). This might work. Accidents on the job are common in China. Not because there is a lack of regulation, but because of corruption. But recently central government has adjusted the performance indicators that are used to assess whether a bureaucrat will be promoted. Now, the number of accidents at work in a given jurisdictions contributes to performance assessment. Guess what happened: The number of industrial accidents sharply decreased.

On the other hand there is a fiscal federalism approach. The approach is based on the notion that voters are (i) mobile and (ii) sensitive to performance differentials. Both approaches claim to contribute to improvement of public service delivery. But they reflect two views of the world. This can be seen from the following quotation from a former Chief Executive of a large English Local authority from an interview that I conducted in 2013: (This and much more quotations from a set of some 50 interviews can be found in a forthcoming book, Tim Jäkel: Benchmarking in der öffentlichen Verwaltung: Ein europäischer Ländervergleich, Speyrer Forschungsberichte. Speyer 2015).

„One thing … local government is really good [at is that] we learn by a whole variety of ways which is best [idea] and this becomes industry standard. … [This is] an approach that a top-down centrally led approach by central government would never be able to do.“

So, one question is how ideas develop and spillover to others. But even more interesting is the question how learning and knowledge transfer impact organizational performance. These are some of the questions I am currently doing research on at the HSE School of Public Administration. And these are the things you will probably hear about in one of my classes.

Application to Moscow

What does all that mean for Moscow, the City we are living in? Moscow is large, and (ii-iii) for sure has a large body of skilled professionals. And a lot of them have been hired from outside. Sobjanin is the most prominent example. (iv) There are internal performance management structures, though they have to been further developed (see Barabashev 2014). I suggest to give more managerial and fiscal autonomy to the cities boroughs and its districts. This will allow launching policy experiments within defined ranges. The big asset is that City Government is willing to listen to demands from citizens, and to fix reported problems.

This is why I am confident that there will be – maybe small – but steady improvement. A last picture shows a recent change that fueled my confidence. There is an old-school but still common timetable for public buses.

Fahrplanalt

It is odd, because it indicates intervals between single buses. But when the bus will eventually arrive is unpredictable. Now, this looks much better.

FahrplanneunahThe bus line 119 is expected to arrive at 8.09. Good. People can now monitor whether public transportation is on due time. At the end of the day they can hold bureaucrats to account. On Gorod.Mos.ru.

— End

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Innovation

When and why public administration innovates (pt. 2)

Photo: Alexandra Selivanova // Селиванова Александра Владимировна

(Featured photo: Alexandra Selivanova //  Селиванова Александра Владимировна)

This is part II of a talk that I delivered at HSE Open Day 2015 at Moscow’s Gorky Park on Sept 9:

In my last post I gave some anectoal evidence on public sector innovation from the OECD-world. But what is the empirical evidence – what drives innovation in Public Administration? Research has identified some patterns: An innovative local public sector organization has the following internal properties:

(i) it is large, in terms of organizational, staff or population size.

(ii) It features a significant share of highly-educated professionals that can focus on adopting and implementing new ideas without adversely affecting daily working routines.

(iii) An innovative organization’s staff includes externally hired professionals. Managers that have been hired from outside the organization positively affect the supply side of innovation; job mobility is a relevant source of policy entrepreneurs.

(iv) Innovative agencies posses an internal Performance Management system that allows for internal risk sharing techniques and establish a risk-taking culture.

(v) An innovative organization ensures a high level of employee empowerment by offering knowledge and skill training. This empowerment practice increases encouragement on innovative behavior, i.e. “recovering quickly from errors, learning from those discoveries, generating innovative proposal for redesigning processes and products.” (Fernandez and Moldogaziev 2013 JPart).

(vi) Apparently decision makers tend to innovate in “good times”, though we would expect new ideas after things went wrong. Pallesen (2004 Governance) found that relative fiscal leeway and wealth enables communities to take the risk to privatize community assets. The implication is that innovation adoption is “the politics of good times”.

While these items are uncontroversial, the impact of performance gaps and peer effects is not. Therefore is will discuss the role performance and peer effects on innovative behavior a little bit more.

(vii) Innovative organizations do experience performance gaps, i.e. gaps between aspiration levels for salient goal variables and current performance On the one hand poor relative performance has been found to result in problemistic search processes, organizational learning efforts and innovative activity among members both of private and public sector organizations. On the other hand Public Choice theory tells us that organizations with performance shortfalls tend to avoid innovative behavior. They have an incentive to provide a baseline level of performance. But they will not go for the extra-mile. In my own research I found that large cities in Germany that have a high level of public debt tend to avoid performance comparisons, an innovative practice in public management.  Researchers from Sweden found that highly indebted Swedish municipalities in Sweden are more likely to stick to performance evaluation. Almost the same variable, but opposite effect.

(Viii) Innovation organizations learn from, strategically interact with and mimic innovative peers.  There are good arguments that decision makers have a look at their neighbor before they choose themselves. Has my neighbor adopted the innovation? The mechanism for improvement is competitive learning, that is, policy-transfer because public authorities compete for investments, voters, and taxpayers by performing well on performance scores (yardstick competition approach, Besley and Case 1995 AER). Voters are sensitive to the performance of the incumbent relative to those observed in neighboring jurisdictions; performance indicators act as a yardstick, i.e. a benchmark to inform their voting-decision.

However, the role of peer effects in innovation diffusion has been doubted. Diffusion of innovation might not result from competitive or pure learning but from a search of legitimacy. Some agencies just adopt a policy to gain a reputation premium. But they do not implement it. Public organizations may also adopt an innovation to comply with external regulation or in search of legitimacy but without fully implementing the new routine. There might be mimicry and copycatting, but no improvement of organizational performance.

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Uncategorized

When and why public administration innovates (pt. 1)

Today I delivered a talk at HSE Open Day 2015 in Moscow Gorky Park (pictured). Here is Part I of what is said:

Moscow is an innovation-driven city, according to the Innovation Cities Index 2014 (which ranked Moscow 63 out of 445). Or as The Economist recently put it – partly jealously, partly admiring – “Russia’s great strength throughout the centuries has been that its people can seemingly adapt to any conditions”.

No doubt, innovation is a top priority in Moscow. There are seven technology parks, young researchers are awarded and the city intends to further develop its innovation and research structure.

But this is private sector innovation. Infrastructure investments result in innovation in the private sector. An example is yandex.taxi. Using geospatial information from the Open data portal of Moscow the quality and quantity of taxi services has improved significantly throughout the last four years. Good. What about innovation in the Public Sector and Public Administration?

Innovative behavior means “to seek out new and better ways of doing things” (Fernandez and Moldogaziev 2013), and some public authorities try to improve citizen’s well-being by doing so. Aforementioned Yandex.taxi application builds on open Data. Moscow’s Open data portal (data.mos.ru) and its bigger sister, the Our City website (gorod.mos.ru) are public sector innovations; e-government innovations.

gorodmosruPlakat

Both sites have a potential to improve the public interest. Making administrative data publicly available creates transparency. It is a tool to hold people to account for their actions. Open data portal is not very popular (10,000 visits per day) so far compared to Our City Website (2,000,000). Nonetheless, it is a contribution to hold bureaucrats to account for their actions and the resulting outcomes. Even when the number of clicks is low, it sets incentives to achieve at least a baseline level of performance. Our city is the place where people complain, but also receive public services. It is a source to identify self-reported problems, and to fix them. People complain there, and monitor the implementation of requests. Posted photos show results from actions that were taken to address a reported problem (a broken skid, a pothole, a pile of rubish). A new feature is a reporting tool for excessive pricing in pharmacy. Such innovation is driven by latent demand. I experienced such excessive pricing myself. And seemingly other people did as well. The new innovative reporting tool responds to such latent demand. It makes life better a little bit. I feel better when I have the feeling that somebody takes note of daily-life problems. By doing so Our city increase my personal well-being.

Put generally, an innovation is an idea, a program or a policy, which is new to the organization adopting it, regardless of the number of prior adoptions in surrounding peer units. This is the seminal definition of Walker 1969 which has been replicated since then.

E-Government and e-services are typical examples of innovative behavior in public administration. Several municipalities and government agencies in the US have implemented such e-services. Submitting your tax declaration or booking an appointment online is getting common also in Germany. One-stop agencies (products and service innovation, Bhatti 2004) are another innovative practice. Municipalities in Denmark and England have introduced such citizen’s centers. Tewkesbury Borough Council established a one-stop agency, or customer service center (in Dec 2014). North Somerset has established a similar multi-agency citizens portal. East Riding of Yorkshire and Scarborough Borough Council has a ‚virtual customer service centre‘ since 2012. The London Borough of Croydon has a customer service center reported in Jan 2015 (‚Access Croydon‘). Customer service centers normally work like this: On arrival you will be met and shown where to go. You are able to book appointments in advance, online. All of this will reduce waiting time. The objective is twofold; to tailor public service delivery to citizen’s need; and realize efficiency savings. In England such innovative behavior is clearly driven by the deepest spending cuts in recent history. The Spending Review 2010 asks for severe budget cuts, particular in local council’s budgets. At the same time, central government restricts councils‘ autonomy to raise council taxes. For local councils that means “to seek out new and better ways of doing things”.

Another interesting example of innovative behavior from England is the YouChoose budget tool, a simulator to engage citizens in budget cuts; which was first applied by London Borough of Redbridge. It’s a web based simulation: Regular people, like you and I, adjust spending levels of a basket of functions, see the consequences for service delivery (example from demo: reduced frequency of street cleaning), but budget need to be balanced and council tax cannot be raised by more than 5\%- these are the rules of the simulation. If so you can submit your propositions to the local council.

However, budget cuts in England also drive innovative search activities, which have unintended side effects for local residents. This is called pay-as-you-go government. Public administrations (and elected governments) are charging higher fees for public services to fill budget gaps. By doing so they avoid raising taxes, which is associated with the political risks of losing public support and votes. In principal to charge people for a service avoids overconsumption and prevents free-riding. But in some cases the charge of a service now exceeds its costs; the charge becomes a tax (The Economist, Pay-as-you-go government, August 29th-September4th 2015). Public Administrators became too innovative.

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Uncategorized

On Migration Policy: let them learn and let them earn

On migration policy: Let them learn and let them earn

Four bits of information on migration to Europe and Germany in particular called my attention last week: An article in the latest issue of the economist (“Let them in and let them learn”, August 29th-September 4th 2015); a news header in the Frankfurter Allgemeine Zeitung (FAZ), a German Newspaper; an interview with the head of the German national office for migration broadcasted at Deutschlandfunk, the German equivalent to the BBC, and a phone call with a relative in Potsdam, a mid-sized city nearby Berlin (most famous for Park Sanssouci, the German Versailles, and the Potsdam Conference in 1945).

The FAZ-newspaper article first: The secretary of education in the German state of Thueringen intends to stop letting children of refugees families to go school. So far, there is compulsory school attendance for every infant aged 7+ on German soil. This is a bad idea. To leave the most vulnerable in society behind, is foolish for their personal well-being, but also for an aging education based society.

This is also the reason why, as “The economist” points out in the aforementioned article, a “bigger welcome mat would be in Europe’s own interest”. The United States have benefited from the continuous inflow of migrants, both skilled (Silicon Valley) and unskilled ones (farming and service sector). Seemingly there are potential payoffs for Germany, as well, but this prospect subject to some condition. The first one: Migration policy in Germany needs a migration law. There is none in Germany, yet. Setting standards is helpful in any case. The second condition: The procedure for granting the right of asylum in German has to be (i) more firm and (ii) more rapidly. As the Economist puts it, “Syria is a hellhole; Albania is not”. To say no has to be potential outcome of the procedure for granting asylum. The procedure has to be more rapid, both for the sake of the refugees and German taxpayers. In Germany it takes 5 months to arrive at a conclusion in an asylum seeking procedure, on average. In Switzerland and Norway the number is 48 hours. German decision makers should book their tickets to Oslo, or more cheap, to Bern, and identify the reasons for performance gaps. Performance Benchmarking is a good idea.

The third condition: Refugees have to become integrated in real terms. Clustering them in refugee camps first and later in suburban boroughs is another foolish policy. The city of Potsdam seeks out a better way of doing things, as my phone call informed me. As new refugee arrives, he and his family will be accommodated in an apartment in state-owned housing blocks which are common in Eastern Germany and lack any notion of run-down second class accommodation. Regular German people live next door. And the other next door. This is quite different from stuffing a dozen of families into a former casern. And the refugee’s children will have their first day at school on next Monday, as kids from the other regular peoples’ family will do. Integration triumphs over clustering and its unintended negative side-effects. Best-practice.

So let them earn, let them learn and take a decentralized approach to accommodation.

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Teaching

Definition and Scale of the Public Sector

In a recent lecture I told my students that ‚the public sector‘ encompasses anything that fits into Norman Flynn’s definition as  „those parts of the economy that are in state ownership, or under contract to the state, plus those parts that are regulated and/or subsidized in the public interest.“ (Norman Flynn, 2007. Public Sector Management. London: SAGE, p. 2). 

And this is quite a lot in most countries.

General government expenditures accounted for some 45 per cent of GDP on OECD-31-average in 2011 (still impacted from economy-boosting measures after the crisis), up from 42  per cent in 2001, according to the latest data in the 2013 OECD Government at a glance volume. Denmark and Sweden are and have always been a big spenders (57.6 and 51.2 per cent, respectively). The UK are slightly above OECD-31 average, but remember this is 2011 data, for the moment local governments in England are facing sever budget cuts, in particular. In Russia general government expenditures as a percentage of GDP are at some 38 per cent, down from 42.3 % in 2001. The scale of the public sector in China grew from roughly 18 % of GDP  in 2001 up to roughly 24 % of GDP in 2011.

For me public sector research further includes all the managerial and political processes that keep this machine running. It is important to include issues of public management and public administration (this is the administrative and organizational science perspective), the politics of decision making (the political science perspective, ‚Will the Tory City Mayor eventually provide us with a new kindergarten within walking distance‘), and decision making theories in general, so that behavioral economics, psychology and sociology come into play (Why do decision makers take the actions they take?). Institutional and public economics have been major contributions to our understanding of ‚the public sector‘ as well.

That is also quite a lot stuff.

The main functions of government can be seen from the COFOG-classification of the OECD (OECD (2013), “Classification of the Functions of Government (COFOG)”, in Government at a Glance 2013, OECD Publishing.http://dx.doi.org/10.1787/gov_glance-2013-58-en). There a 10 1st level main functions:

General public services
Defence
Public order and safety (see below)
Economic affairs
Environment protection
Housing
Health
Recreation, culture and religion
Education
Social protection (see below)

and additional 2nd level sub-items; 81 functions in total.

030 Public order and safety
0301 Police service
0302 Fire protection services
0303 Law courts
0304 Prisons
0305 RandD Public Order
0306 Public Order n.e.c

Table: 2nd level Cofog classification Public order & safety

100 Social Security
1001 Sickness and disability
1002 Old age
1003 Survivors
1004 Family and Children
1005 Unemployment
1006 Housing
1007 Social exclusion
1008 RandD Social protection
1009 Social protection n.e.c

Table: 2nd level Cofog classification social security

 

To further structure this, it is helpful to have a look at who provides what, i.e. which level of government accounts for what kind and chunk of public spending. I am especially interested in the relevance of local authorities for public service delivery. For instance central government accounted for 99.8 per cent of total government defense expenditures in 2011. (no surprise). For housing the central:local ratio was 73.0 :  27.0 in 2011. (There are no states as in Germany, so data are absent „-„)

Function/Sector       Central  |  State   | Local | Social security
General services       86.5 — 13.5 —
Defence                      99.8 — 0.2 —
Public order              57.5 — 42.5 —
Economic affairs      69.5 — 30.5 —
Environment            42.7 — 23.3 —
Housing                     73.0 — 27.0
Health                        100.0 — 0.0 —
Recreation, culture  55.4 — 44.6 —
Education                  55.6 — 44.4 —
Social protection      79.7 — 20.3 —

United Kingdom: Expenditures by function (COFOG) and level of government/sector, as a percentage of total government expenditure, figures for 2011; Data Source: OECD 2013.

 

References and further readings:

OECD (2013), “Classification of the Functions of Government (COFOG)”, in Government at a Glance 2013, OECD Publishing.http://dx.doi.org/10.1787/gov_glance-2013-58-en

Flynn, N. (2007). Public Sector Management. London: SAGE.

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Public Service Delivery

The street washer

Small scale street washer in Myasnitskaja ul.

My first-hand experience with public service delivery in Moscow started when I headed to my first round of job talks at Vyshka (the regional dialect for HSE) in early 2014.

I took a citizens perspective. I recognized that a large truck with a high pressure spray nozzle was approaching from behind. It turned out later on that this is a common scheme to clean the streets from dust in the summer and from mud in springtime. The sideeffect – which I anticipated much quicker – however, is that a significant chunk of this melange of dust and dirt splashes onto the sidewalk. It is clear to the reader what followed. At least I was able to prevent the worst, good, because I only had one suit with me in Moscow. I was not the only one suffering, other locals shared my situation; a fact that put my mind at ease, because it was not the foolish mistake of an excited foreign who does not watch his steps.
Since then I keep respectful distance from what I call the nozzle machines. It is a common scheme in Moscow. In early May they first spray a first truck sprays special shampoo, a second trucks spray water. This is called general cleaning. In more narrow street, e.g. in backyards and sidestreets, the job is done by small scale tractors.

I a 70ies book from Richard Scarry on „Cars and Trucks and things that go“ (or so), one of my sons favorites books, I recognized a similar nozzle machine. It is called the street washer (not pictured, due to potential copyrights violations). So it seems to be not a Russian thing.

The job talks were succesful, by the way.