As part of our interview series, we ask renowned experts in the field about the future of research in development economics, and for their advice for young researchers. For this interview, we got the opportunity to talk to Prof. Claudio Ferraz.
Claudio Ferraz is a Professor of Economics at the Vancouver School of Economics, University of British Columbia. His main research area is economic development, political economy, and public economics.
ETRM: Could you tell us what inspired your interest in studying governance and accountability in developing countries?
Claudio: My story is a little bit random. I’ve always been interested in understanding why some countries are poor, while others are not, and what we can do about it. I ended up going to Berkeley for a PhD to study development and environment economics there. I took the first course of the development sequence, which was taught by the Agricultural Economics Department. The second course of the sequence was supposed to be taught by the Economics Department. But the professor who was supposed to teach it, Ted Miguel, was in Princeton that year on leave. The department asked James Robison, a political science professor that arrived the past year, if he could teach it instead. Jim said ‘Yes, but I will teach what I do’. The department didn’t have any bargaining power and accepted. As you know, Jim is focused on the political economy of development and for me, that was a revolution. Every single class was so interesting. It was the first time in the PhD where someone was asking us to read books from political scientists, a completely different perspective on how to think about development in economics, bringing institutions, bringing politics. I never thought about development again in the same way. After you start thinking about institutions and politics, it’s hard to think about it in any other way. That was my introduction to political economy.
ETRM: What do you see as the most exciting or critical frontier areas of research in public policy?
I think the political economy of it is still one of the most exciting areas. We now have 20 years of work in micro development, RCT’s, impact evaluation with modern econometrics using microdata from many developing countries. Of course, we know more in some areas than others, but we have a body of evidence about which things work. The big question is: “Why are policy makers not adopting things that we know would improve the lives of people?” And there are two answers to that. One is they don’t know those things are the good things to do — they don’t know the policies — and some people are working on that. My former student Diana Moreira with Gautam Rao and Jonas Hjort have a nice paper on that. They provide information to mayors that would help them to improve some policies and see if they are going to adopt them. In their paper they show that they do, and they are willing to pay for the evidence, but adoption is not universal.
The other potential answer, which I think is more interesting and speaks more to reality, is that politicians are not always going to have the incentives to adopt better policies. They have to adopt policies that not only are going to be good, but policies that voters are going to reward them for.
A big question is: “How do we think about the good policies, while bringing in the political economy constraints”. I think we understand very little of the political economy constraints, the settings that politicians are in and the incentives they have to adopt policies, such as those that will improve people’s lives in the short run but are not helpful in the long term. The literature in political economy has moved towards documenting some of the failures in developing countries but we haven’t moved towards understanding the other side of it: what are the political economy constraints that incentivize the adoption of the good policies? This doesn’t just apply to developing countries. Stefano DellaVigna has a recent paper that’s called “Bottlenecks for evidence adoption”, where he tries to understand why the in U.S, governments trial certain policies with an RCT, showing they work, and yet many of those policies get discontinued, or they don’t get adopted. It gets magnified in developing countries and I think we still have a long way to understand how we go from showing that something works to scaling it up and then convincing politicians to adopt those policies.
ETRM: Which advice would you give to young researchers that want to know how to approach to politicians or government institutions?
Claudio: Sometimes being a member of an institution or having an advisor with connection works. Sometimes, you just need to get lucky. For the study on mayors in Brazil, the researchers knew about a conference run by a confederation of municipalities that twice a year bring these mayors to a locality. They realized they could go to this place where there would be 2,000 mayors around and interview them.
I think the most important thing is to understand the context that you’re working on. You need to understand the country, how policies are made, who makes decisions, the actors, and the constraints. If you don’t understand, you lose out on a lot of opportunities. The good work to do by young people is making connections and, if possible, going to the country, talking to the institution, organizations, state actors, like a minister or a secretary.
ETRM: You showed that public procurement can alleviate demand constraints of small and medium enterprises and promote their growth (Ferraz et al., 2021). On the other hand, there is an emergence of politicians promoting government size reduction through budget cuts or dissolution of ministries. In that context, which alternatives are available to overcome demand constraints affecting small and medium firms?
Claudio: I think public procurement is always going to exist. The question is whether they are useful or not. There are two separate questions in there. One is: are demand constraints even there? When we started that paper, it was not obvious. No one had really estimated that effect. The fact that public procurement can make firms grow beyond the contract that you get was a pretty novel result. Now other papers have looked at that and even documented that if a firm gets a government contract it can alleviate their constraint beyond what the government is doing.
Number two is: if you have a well-functioning private sector, you don’t need the government to alleviate market frictions or constraints in principle. The whole idea of procurement as alleviating constraints is because in many developing countries these frictions are magnified. It is hard for a firm from a small place to sell in another place, because of communication, reputation, and other reasons. In that sense, if you believe that in the U.S, for example, procurement is important, then, in developing countries, it gets magnified. If you start cutting some of the procurement, then of course, you are going to magnify the problem.
The other part of the discussion that people are having right now has to do with industrial policy. The fact that you showed that the demand effects from procurement is positive doesn’t mean that is homogeneously good or it is always going to be good. As a government, you can design purchases that you don’t need, or you can spend too much on procurement. For example, if I buy 100 chairs and there is a small firm that grows because of the contract, that doesn’t mean buying 100 chairs was efficient or necessary. These those two discussions must come together: what is the government spending on? What does the government need and how can go about procurement that generates positive spillover to the rest of the economy.
ETRM: Throughout your research, you have shown that government performance could be improved with relatively mechanisms such as campaign spending limits or sharing government performance with voters. Implementing these mechanisms might not be straightforward in developing countries where corruption and clientelism are pervasive. Which strategies do you think are available for policymakers who want to implement these mechanisms?
Claudio: One challenge is the order that you implement reforms. If you think about the setting that we were studying, it was a setting of relatively high state capacity. Political science separates between vertical accountability, accountability coming from the voters to politicians and horizontal accountability, which comes from different units of the government or institutions. To have some of these institutions, you need state capacity. You can have horizontal accountability in many middle-income countries, like Brazil or Mexico, that have an important and well-functioning audit agency. In some very poor countries that state capacity doesn’t exist. If you have overall corruption in the government and you are trying to implement a policy like that, it is not going to work.
The question is how do you do it and in which order? If you wait to generate state capacity then you might wait forever. Do you first try to improve the state or do you create something like an NGO, outside of the government, to do transparency interventions, for example. Maybe in some countries this is the solution: non-government organizations that can foster accountability through some information and work with the media. India is an example: it has interesting experiences of NGOs that have fostered transparency or community monitoring because the government was not doing it.
ETRM: Thank you so much for having the interview with us today!
