What is the role of government in society?

There is a huge debate in politics, and in economics, about the role of government in society. How far should the government go to ensure the rights of individuals?

In economic models, we sometimes use the notion of a 'benevolent dictator' or a 'social planner' to show how centralized planning can, sometimes, bring about the best outcome. However, at times, we also believe that the government can bring in unnecessary complications in the lives of people. The other case is ensuring that the role of the government is as limited as possible, or none at all.

Government is important in the proper functioning in society. It helps to uphold the rule of law, and enforce property rights. There is a large literature in economics that shows the relationship between strong institutions and economic growth. Private individuals may have motives that may not be conducive to others in society. For example, stealing from others can enrich the thief, at the expense of those whose items have been stolen. The roles of government here are (i) to ensure that resources owned by individuals are protected from theft and malicious damage, and (ii) if they are damaged or stolen, the government can prosecute the culprits, after all the evidence has been placed. These protections encourage individuals to accumulate wealth and enrich society as a whole. Even the staunchest libertarians (those how believe that the role of government should be as limited as possible), even believe that governments should exist to ensure property rights and enforce institutions.

The other important role of government is to provide some degree of social safety nets to the citizens. It could be in the form of subsidized education, relief for those in poverty, government support to the elderly, subsidized healthcare, and so on. It is this role of government that creates wide contention among people. Of course, certain actions of the government are justifiable, like the ban on cocaine, because even though the individual may think they have a right to the drug, it creates a whole lot of social problems that can negatively affect society. However, others, like providing free/subsidized healthcare, or assistance to those in poverty are highly contentious. The major reason behind this is that it makes the government too big and cumbersome, establishes too much red tape, and increases taxes on citizens.

Is there an optimal size of the government? There may not be a definite answer for that, and the answer depends upon what the people wants. If the people wants a society that provides free healthcare and education for its citizens, they will come up with ways to ensure that. If the people wants a laissez faire government, they will want the government to act accordingly. The size and role of the government therefore, is probably not dictated by economics, but by what the people mandates it to be.

Income Divergence in the US

The United States has a strong tradition of favoring hard-work and meritocracy - if someone works hard, or is meritorious, then that person can live the 'American Dream.' Recently, a number of analysis have questioned that the US is not as economically mobile as previously thought. Wage inequality has been rising the past 3 decades. Consequently, the rich is getting richer, and the poor is getting poorer.

Recently, a paper I authored was published in the journal Social Indicators Research, and it highlighted this phenomenon using a metric of measuring wage disparity called the generalized means.

The generalized means is a way of aggregating income of a population, shown by Foster and Székely (2008). The formula of calculating generalized means is as follows: 

where, the x's are the incomes of each individual/family, n is the total number of individuals/family in the region, and α is an integer. If α=1, then the equation is a simple arithmetic mean of income in the region. If α is greater than 1, then it places more weight on the incomes of richer individuals, and if α is less than 1, it places more weight on the poorer individuals in the region. 

For example, let a certain region have three individuals, and their incomes are 100, 200, 300. If α=1, then according to the generalized mean formula above, the generalized mean is 200. If α=2, then the generalized mean is 216.024. If α=3, the value is 228.94. The higher the level of α=2, the higher is the generalized means. Similarly, if α=-1, the generalized means is 163.62, while it is 148.46 when α=-2.

Thus, if we have the income levels of all the individuals in a region across time, we use different values of α to see how the incomes of different sub-groups of the population are evolving over time. The figure below shows how the generalized means has been evolving in the US for different values of α:

The data has been obtained from the March CPS dataset, that is collected by the Census Bureau. This graph is also in the paper I authored

The figure summarizes the findings of my paper. Over the period 1975-2010, the US economy has been growing, except for a few instances of short recessions. However, we see that most of the income growth happened to those who are the top income earners in the US. The ones who earned low incomes did not enjoy the fruits of economic growth to the maximum extent. Economic growth in recent years mainly benefited the rich in the US, and those earning low incomes in the US did not get much benefit out of the growth.

As a policy implication, more needs to be done to ensure that those who are earning the bottom of the income distribution are able to move upwards. This can be done by helping to improve the skills and technical knowledge of those who are in the bottom. 

Why invest to attract foreign tourists? Perspective from Bangladesh

At present, the government is heavily promoting the natural wonders of Bangladesh to potential foreign tourists. A number of tourism-related magazine and websites have touted that Bangladesh is the next big destination to visit in the coming years. Of course, it sounds very rosy when we are marketing ourselves as the next big must-see destination. However, it also begs the question, why are we so keen on attracting foreign tourists? Can’t this money be better spent somewhere else?

To the proponents of tourism, foreign tourists spend a large amount of foreign currencies in Bangladesh, and this can help to generate economic activity in the services sector, create employment, and so on. This, compounded with the notion that Bangladesh is a beautiful destination to visit, encourages the tour operators and policy makers to attract foreign tourists into Bangladesh. After all, Bangladesh has the ‘world’s longest sea beach,’ Sundarbans, beautiful rural landscape, tea gardens, and the Hill Tracts that have the potential to attract tourists. All that Bangladesh has to do is to increase the number of tourists into the country to reap in the benefits. Thus, the government is spending to upgrade Cox’s Bazaar Airport to an international airport, creating an exclusive zone in Cox’s Bazaar, and spending heavily to brand and promote Bangladesh to foreign tourists..

My concern is, is this the best way to spend our resources? Is it a good idea to build infrastructure that will be used at most, 6 months out of the year? The Bangladesh Parjatan Corporation (the tourism authority of Bangladesh) says that the best time to visit Bangladesh is between September and March. It makes sense, because the months of April through August is not a favorable time to visit Bangladesh due to the monsoon season and excessive heat. If we get heavy tourist traffic between September to March, we can assume that the international tourism-related infrastructure (airports, hotels, entertainment facilities, etc.) would be used to their potential during that period only. The rest of the year, they will be lying idle. Employment in the tourism industry is cyclical, and thus, similar to the tourism-related infrastructure, there will be high employment of labor during the busy season, and low employment during the lean season. As there will not be a steady use of these facilities, I do not think that promoting tourism should be the way to go in a resource-poor country like Bangladesh.

There is also the issue of transportation and safety. Bangladesh has some of the most unsafe highways in the world. Without fixing the transportation network of the country, it may not be the best idea to promote tourism.

I would think that instead of promoting international tourism, the government should promote domestic tourism. The middle-class of Bangladesh is growing in number, and is also getting richer. They have the income to take a quick vacation to different parts of the country. The government can encourage domestic tourism by improving the road and rail infrastructure of the country. The private sector can create tourism facilities that cater to the local demand. Domestic tourism is not as fickle, and there will be a steady flow of tourists to those facilities year-round, even in the hot summer months, thus ensuring that those facilities have satisfactory utilization and employment generation. If foreigners would like to visit such facilities, so be it, but the country should definitely not go all out to create infrastructure geared solely for foreign tourists. 

The need for implementing innovative urban design

Every city has a different feel; however, many of them suffer from certain problems - the lack of an efficient public transportation system and a lack of proper housing. Infrastructure development has not kept up pace with population growth in cities. Cities in developing countries lack an efficient transportation system, while commuters to cities in North America are reliant on private transportation to commute to work. In most cities, rent can be so high that the poor are not able to afford a decent living space. All these create a number of negative externalities, like air pollution, traffic gridlock, and time wasted commuting to and from work.

Many solutions have been proposed and applied to cities to fix the urban transportation problems. Some are: paying tolls to use faster lanes, or tolls to enter the city center, or constructing metrorail/subway system in a city. There are some instances where cities were successful in overcoming the problems of a traffic gridlock. The city of Medellin in Columbia is a perfect example where a city created a network of sustainable public transportation network. The city government created an integrated transportation system that is a mixture of rapid bus transportation, cable cars, escalators and metro rail. A city surrounded by waterways can also add water buses transporting people and can integrate it in the public transportation system. 

Cities are also in short supply of land. Land in cities cannot be misused, and if there is abandoned property or infrastructure in a city district, creative methods can be used to make it a public space. The High Line in New York City shows how an abandoned rail line can be transformed into a public space. Through public-private partnerships, abandoned spaces in cities can be transformed into different kinds of useful areas with parks, housing and offices. Many downtown areas in US which used to have a lot of abandoned factories or warehouses are being re-developed to mixed-use areas with offices, apartments, restaurants and entertainment areas. The American Tobacco Campus in downtown Durham, NC is a great example where an abandoned factory has been transformed into an innovative urban space. 

Each city has a different set of problems and opportunities, so different solutions are needed to solve the problems using the opportunities available. One set of urban design cannot be applied to all cities. Instead of encroaching new lands for expansion and development, cities should focus on applying innovative ideas to create sustainable cities using their existing design and opportunities available. 

Development

Is there a perfect model that promotes development, or end poverty? Policymakers and articles have been promoting the export-led growth of China, or of other East Asian countries, like Singapore, Malaysia, or Vietnam. Consequently, other countries have been prescribed similar policies to promote growth.

Just an export-led growth strategy may not be the only way to promoting development; if that were the case, then countries that are commodity-exporters, like Angola, Nigeria or Gabon could have been wealthy countries by now. Along with promoting industrialization, countries need to invest the proceeds to improving human capital, infrastructure, and promoting rule of law.

Also, a country should not directly copy the development strategies of other countries, but should tailor it according to the needs and the resource availability of the country. For example, a developing country with poor healthcare and education facilities should not invest heavily to construct an 8-lane highway to connect the industrial center to the nearest port. A road with a smaller width can probably do the work, while the rest of the money should be used to improve education and healthcare. Resources are limited, so countries should take steps to ensure that they get the most 'bang for the buck,' and not simply undertake projects that are flashy and that garners only short-term gains.

Helping those in Extreme Poverty using "Targeting Ultra-Poor" Program

There is about a billion people who earn less than $1.25 a day, and these individuals are said to be living in extreme poverty. The absolute number of people in extreme poverty has been falling over the past 20 years, and there is a pledge to eliminate extreme poverty by 2030. This is a very ambitious task, and so far, there hasn't been any silver bullet that has been shown to eliminate poverty. Bringing people out of extreme poverty can be especially difficult because this group, even if they are out of poverty, are the most vulnerable to fall back into extreme poverty if some adverse economic shock afflicts them. Besides, programs and methods that have been proven effective in reducing extreme poverty in one area may fail to work in another region of the world.

One method that has been shown to be effective is the Targeting Ultra Poor program pioneered by BRAC, an development organization founded in Bangladesh. This program transfers an asset to a family in extreme poverty, and then provides them with training and cash support for the next 1.5 to 2 years. The cash transfer and training from the NGO gives the family support, while the family uses the asset for income generation. If the family is hit by an adverse economic shock in the early stage of the program, the cash support ensures that the family do not have to sell their asset to counteract the shock. After about two years, the family has sufficient financial resources to graduate from extreme poverty, and also reduce the probability of falling back into extreme poverty.

This project was originally implemented in the northern districts of Bangladesh, a region that is prone to extreme poverty. Analysis showed that the program not only increased cash income of those in extreme poverty, but also improved the overall well-being of the families. After it was shown to be successful in graduating most of the participants out of extreme poverty in the northern districts of Bangladesh, the program was replicated in other parts of the world. A recent article in the Economist magazine shows that it showed favorable results in other parts of the world too, like Ethiopia, Ghana, Honduras and India. The program, though labor-intensive, is cost effective.

Such an intervention can be safely assumed to be successful in reducing extreme poverty by a large extent. Development partners, and governments should think about adopting this program, besides microfinance, to help the extreme poor.

Free Higher Education?

The idea of free higher education, at least in public universities, is being promoted by certain circles. Is that a good idea? Education undoubtedly brings a lot of personal benefit to the life of the person receiving it, and, to some degree, also brings benefit to the community. Because of higher education, a person personally benefits by earning a higher income and leading a better standard of living. Society too benefits from having a better educated workforce, higher tax collection, less petty crime and better health.

If society gets more benefit than the individual receiving education, then it might make sense to subsidize education of that individual. However, this may not be true for all individuals. In many cases, the individual benefit from education can exceed the societal benefit. In that case, it may not be beneficial for society to fully subsidize the education of such individuals.

Lets look at an example to make it clearer. Suppose a poor state, in the hopes of having an educated workforce, makes higher education free for all the residents of that state. Now, every individual has an incentive to go for higher education. However, once they are educated, there is no bar that prevents them from moving to another state or country in search of higher pay. So, the poor state spent all its resources to educate the youth, but may not have enough sway to keep them in the state once they graduate.

What if the whole country instituted free higher education, at least in public universities. A much clichéd term in economics is "there is no such thing as a free lunch." If higher education is made free to students, someone needs to pay for it. The only way of doing it is by raising taxes, which may not be popular among the people. Besides, if something is given out for free, people may start perceiving that the quality is low (which may not be true). So, to signal that one is of higher caliber in terms of skills, students who believe they have the ability will go to private schools and pay the fee. If students believe that they have the potential to earn more if they attend a private university, they will continue to take loans and go to private schools, instead of attending the free public universities. 

Therefore, in theory, free higher education sounds good. But if implemented, there might be some negative consequence.