The Financial Meltdown: Where were the Economists?

“Like a good novel, each phase in economic history has its villains, heroes, and defining moments. Often, it is only with hindsight that we can identify them” (Borio and Whiter, August 2003).

At The inaugural conference of the Mosakowski Institute for Public Enterprise, Clark University which took place on November 13-14, 2008, The Honorable Michel Dukakis, former Governor of Massachusetts and currently a professor of Political Science, Northeastern University, gave Clark University President’ lecture: “Reality based Leadership: Putting ideas into action”. Given that the conference theme was “University Research and the American Agenda: Discovering Knowledge, Enabling Leadership”, it was more than befitting to gain insight about leadership from someone who held a leadership position as the governor of Massachusetts for three terms.

The talk was thought provoking to put mildly. Addressing an audience of students, faculty, and administrators as well as invited conference participants, governor Dukakis spent the better part of his speech talking about his administration accomplishments. And, while doing so he saw fit to chastise the “Academy” for its complacency in addressing national needs, social as well as economics. He described the Academy’s activities as given rise to “national failure” along the line one may ascribe to the market the concept of market failure associated with public sector provision of the public good. He forcefully pointed out that the learning experience at US colleges and Universities neither prepares students to participate in the public sector arena, nor instruct them about issues that affect theirs and their fellow citizens’ lives. He reserved his harshest critique for universities’ researchers in general and economists in particular.

Alluding to the US ‘financial meltdown’ he asked: Where were the economists while the financial storm was brewing? How come that few if any saw it coming, or voiced any warning about the implications of the assets price bubbles on the real economy? Why did those economists outside of the “liberal” stream acquiesce with the hands off the market policy pursued by politicians and their appointees during the 8 years tenure of the Bush administration? The “invisible hand” of the market is now very visible, with a near collapse of the financial sector and a slowdown in economic activities mimicking that of the “Great Depression”.

This harsh critique is well earned. One need not agree with governor Dukakis harsh critique of the Academy to acknowledge the academic failure in not making the contributions’ of its members heard, and heard not by fellow colleagues and students but by the community at large. If there is a failure, it is not a failure in teaching or research but rather in dissemination. But dissemination of finding outside the university gates is costly, both in time and money. Communications have benefits as well as costs, and the market for dissemination of information is imperfect to say the least (more on that in a follow up blog).As an economists among others in the audience, although not particularly welcoming Governor Dukakis harsh critique of the Academy (his full remarks are posted at the Mosakowiski Institute web page), I appreciated the concern eloquently expressed for the social needs of those who have fallen out of the “social net”.

Without touting one’s horn, I have always believed and acted upon the view that education must serve the public as well as the private interest. Throughout my academic career I have been fortunate enough to carry out this task, not only as a member of the Academy but also as a participant in research institutions whose function is to disseminate information to a wide audience as well as participate if not shape debates about the nation, economic policy. Institutions like the Brookings Institution, the American Enterprise Institute are most often identified as the Academy where public debates on issues originate and information about policy impact is disseminated. Researchers in these institutions are members of those colleges and universities for whom the governor directed his criticism. The fact that faculty members do not run to the State House or the halls of Congress to testify does not mean that they do not contribute to shaping public policy or inform their fellow citizens about the merits as well as the pitfalls of such policies. One should not loose sight of the fact that the ‘Academy’ is the store of value as well as the generator of these values. A look at who is who in the public sector, how policy is formulated, aired out and sometimes “killed” paint the full picture of the Academy. Indeed today there are more institutes that you can count on hands and feet compared to forty years ago. Institutes have replaced the Academy narrowly defined as referring to colleges and universities as the instrument for effective engagement in public policy debates. This development for the most part reflects the cost of dissemination of knowledge, both the time is required for the activities and the money needed to for effective delivery. The new Mosakowski Institute is an example as to why only at that level a member of a college and or a university can be heard, as it reduces the personal cost of participation.

With my partial response to Governor Dukakis critique out of the way, a bit of economics is in order. Putting the current crisis in historical perspective, one need not go further than the Nixon era. During Nixon’s tenure (1968- 1974), the phrase was coined “we are all Keynesian now”. Keynesian economics was named after John Maynard Keynes’s The General Theory of Employment, Interest and Money (1936). The Great Depression of the 1930’s convinced the majority of economists that the emphasis on the efficiency of “unfettered” markets is misplaced. Keynes argued that the source of economic fluctuations is aggregate demand and that active stabilization policy—government tax reductions and spending increases, are needed to stabilize the economy.

In the 1960’s, there was near consensus about Keynesian economics. This consensus however faltered in 1970’s with the emergence of the “New Classical Macroeconomics”. The New Classical economists argued for replacing Keynesian economics with “Macroeconomics” theory based on market efficiency, and that it should be grounded in microeconomics, that economic agents (you and I and our company)act in the economy in our best interest i.e. optimize.

The new Classical Macroeconomics was challenged and a new stream of developed by a school of thought referred to as the “New Keynesians. The major tenets of the new theory are: that fluctuations in nominal variables like money supply influence real variables like GDP and, that economic fluctuations are the product of market imperfections such as wage and price rigidities. Theoretical developments about sources of fluctuations, how policy monetary and fiscal affect the real economy, whether governments should pursue active policy (manipulating monetary aggregates and budget posture) or follow passive policy, like Milton Friedman fixed 3% monetary rule or John Taylor interest rate rule, and so on . The macro economics landscape had become so convoluted that most economists especially those teaching the undergraduate macro, unable to inject all these new developments (often highly mathematical) in the course materials to explain the phenomenon of economic fluctuations. Those of us who taught graduate macro had to run not only to catch up with developments in the field but also to figure out which side of the debate one has to declare oneself. Macro economics was comingled with monetary economics, high power modeling and empirical analysis. The central issue of fluctuations was debated and what to do about it depended on the model of the time. In short macro economics lost its innocence. We needed to know a lot more than we did during the phase of Keynesian macro economics.

What implications had these developments for the conduct of policy? Most significant perhaps, are the proliferations of innovations that had taken place in the financial markets some of which have barely been digested in the literature and or in policy debates. Ideology about the efficiency of the market still remained supreme; hence a laissez faire attitude prevailed at least among many in the economic profession. Today financial woes may in part reflect unshaken faith in the superiority of market outcomes. What went wrong is a complicated and lengthy scenario that would require as big a volume as the General Theory (I am confident that some economist will come up with an opus magnum on it like the one by Friedman and Schwartz: Monetary History of the US).[1] For now, and to answer the question posed earlier: where were the economists, let me emphasize that they were there, perhaps more so in print than in any other media.

Since the mid 1990’s economists have written about changes in the macro economy, especially about changes in the monetary transmission mechanism and especially about financial innovations such as securitization, the rapid growth of derivative markets and financial liberalizations.(see Federal Reserve Bank of New York Conference on monetary transmission, April 5-6, 2001, also papers in the Federal Reserve Bank of Kansas City’s Symposium on Monetary policy and Uncertainty: Adapting to a changing Economy, August 28- 30, 2003) just to name a few. Several papers dealt with the impact of financial innovations on the real economy as well as the liberalizations on the financial sector in general and the banking sectors in particular. There were many warnings of about dangers ahead but went unheeded.

The paper by Borio and White “Whither Monetary and Financial Stability? The implications of Evolving Monetary Regimes” is of particular interest. The authors make the following points:

• Financial liberalization both within and across national borders which began in the mid 1970’s were virtually completed in 1990’s. For all intent and purposes, this produced a shift from a government-led to a market- led international financial system (p.140). The result is a rise in competitive pressures and easier access to external funding.
• Advances in information technologies led to a wider spectrum of tradable instruments, in particular the rapid development of derivatives markets facilitated by the unbundling of risk into its constituent components (p. 143).
• Increased focus of Central Banks on price stability. This shift implied a grater willing to accept volatility in short run interest rate.

Their conclusion in a nutshell is that: “changes in the financial and monetary regimes may have potentially increased the scope for financial imbalances to grow during expansionary phases. This makes the economy more vulnerable to boom and bust cycles (p.149). In a liberalized financial environment, the risk of episodes of financial instability is higher than in a more controlled system. The incidence of banking crisis was much more limited during the post war, a period where the financial system was much more regulated.

From the analysis they posit that: The policy challenge would be to put in place mutually supportive safeguards in the financial and monetary spheres to insure the necessary degree of financial and monetary stability.

With policy makers being hasty to rescue and bail out the financial sector and or the beleaguered auto industry, they should take a deep breath and see where their policies fit in light of the imposing changes in the financial structure and the transmission mechanism of monetary policy. They would do well to read Borio and White’s timely analysis.

One final note: Early on I have indicated that if there is a failure at the Academy it is in the transmission of the fruits of research. I believe this view is shared by many whose research is in the public interest yet it lacked public hearings. Good news on this front. A new publication in accessible format was launched October 2008: Economists Voice, www.bepress.com/ev. The objective is to make the economist’s views on current issues, events and policy heard in a format accessible to a wide audience I applaud this effort and hope that many members of the Academy follow suit.

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[1] Friedman & Schwartz, A Monetary History of The United States, 1867-1960. Princeton: Princeton University Press (for the National Bureau of Economic Research), 1963.

“No, No, We Won’t Go”: Why Some African Presidents Refuse to Retire.

The phrase “No, No, we won’t go” was chanted back in the 1960s. It came to mind as I read a piece in the Economist (March 15-17, 2008) about debates currently taking place in Cameroon on Presidential Term limits. The title of the piece is “Another President who won’t go” (p. 49-50). The Economist reported that on February 24th and 25th violent protests broke out in Douala, Cameroon commercial capital in response to Cameroon’s President, Paul Biya’s hint that “he might stay on for a third term of another seven years.” President Biya has presided over Cameroon for 25 years. A new constitution which came into force in 1996, limits the President to only two terms. For the 75 years old President “not to go”, the constitution will have to be changed to allow him to stay.

Aside from reporting about the Mayhem that followed the President’s hint and about the weakness of the opposition parties challenging the ruling party nothing is said to enlighten readers about why the President of Cameroon won’t go. This phenomenon is not endemic to Cameroon.[1] To understand this phenomenon, the hold on power, one has to put it in the proper context.

Old men of Africa, most of whom are in their late seventies or in their eighties have ruled for over two decades. Most of these Rulers have come to power on the heel of independence with the blessing of their citizens. Having one of their own with no clear tie and in opposition to the colonial power that ruled the country was hailed by one and all. Expectations ran high. Rulers and subjects had great hopes for their countries and at the beginning it looked that way. But then the hope dashed, the expectations were not fulfilled. What went wrong?

To be “scientific” one need to examine a country by country experience. This clearly is not the place. Two excellent books. “The Fate of Africa, From the Hopes of Freedom to the Heart of Despair: A History of 50 years of Independence” (2005) by Martin Meredith and “A Continent for the Taking: The Tragedy and Hope of Africa” (2004) by Howard W. French provide a clear picture and documentation of many a tragedy.

In this space what may be instructive is to show that the “hold” on power is to be expected. Data compiled by Banks[2] gives information on the ruler’s tenure for almost all countries in the world over the period 1815-1999. When this data is combined with the Freedom House rating of freedom over the period 1973-2006 (a range from 1 to 7: 1 is free and 7 is not free) a clear picture emerges. Consider the following nine African countries: Botswana, Cameroon, Ghana, Kenya, Mauritius, Mozambique, South Africa, Uganda and Zimbabwe. Botswana is rated as FREE with a score of 2.0; since 1980 it had two turnover of rulers. Cameroon has a rating of 6.0 (not free) with one turnover of power since 1980; Ghana gets the FREE label (score 1.5) with two turnover of tenure in 1981, 1984 although no change in tenure for 1990-1999. Kenya as classified as partly free with a score of (3.0) although it shows no change in tenure since 1978. Mauritius id FREE with 2.0 score and since 1980 had experienced two turnovers in rulers, in 1982 and in 1999. Mozambique is given the score of 3.5 as partly free with turnover in 1986, but no change in the period 1990-1999. South Africa gets a score of (2.0) with three turnovers over the period 1980-1999. Uganda is classified as partly free (4.5) with no turnover in ruler’s tenure over the period 1990-1999 although it shows four changes from 1980-1989. Zimbabwe had one change in 1980 and Mugabe’s tenure is 28 years and counting.

These examples highlight one of the fundamentals behind the “no go” phenomenon. FREEDOM with all its ramifications is the most significant factor in determining the staying power of a ruler. Freedom is much more than simply conducting an election. It involves the guarantee of political rights (electoral process, political pluralism, and participation) and civil liberties (free and independent media, freedom of assembly and open public discussion, rule of law and individual rights). Few of these rights have been met in many Sub-Saharan Africa countries despite the fact that elections are held, opposition parties participate but the outcome somehow is seen to be preordained. The present Ruler either “win” not “fairly” and squarely the opposition either attacked, silenced or jailed (see Howard French).

One needs to give details about what goes on before and during an election many African countries. There is a saying that “power corrupts”. This is true when one looks at executive tenure in undemocratic regimes as well as in some of the world democracies. The election for the office of President in the US, runs in the billions and more often than not it costs the contender millions of dollars in out-pocket, (not to mention the wear and tear the candidate undergo). Look no further than the rate of return on the investment reaped by Presidents and ex-Presidents. This return is much valued when a ruler is transformed from the status of an ordinary citizen with modest means to the status of a “mogul” with the nation’s wealth under his/her sole control. It is ironic that the Governors and ex-Governors would show no indignation at the outright “abuse” and “blunder” of the wealth by a ruler in a state where the phrase “no, no we won’t go” is heard. Exposing this abuse by insisting that the “net worth” of a ruler be revealed for his/her admission in the world community would go a long way in changing the behavior of those rulers who wouldn’t go.
[1] Remember what happened in the presidential election in Kenya and now it is Robert Mugabe of Zimbabwe to orchestrate a win in the run off election for President.
[2] Cross-National Time-Series Data Archive, Copyright (c) 2001 Arthur S. Banks.

The Biggest Dilemma: How to Reduce America Health Care Costs and “Ensure” An Affordable High Quality Health Care for All?

The Biggest Dilemma: How to Reduce America Health Care Costs and “Ensure” An Affordable High Quality Health Care for All?

This blog is not written to enter the debate currently been waged in the Presidential race between Senators Obama and Clinton about their respective health plans. Rather, the purpose is to raise some issues that have been overlooked in both plans.

The Obama webpage gives a well “researched” outline of his plan: “Barak Obama’s plan for A Healthy America” www.barakobama.com/issues/healthcare/ (number of pages 14). I say well researched judging by the number of references (65) used as documentation. To an economist’s eye, especially those of us who at one time or another engaged in research and analysis of the delivery of health care in the US and the UK, the piece is a scholarly one.[1]

The Clinton plan: “The American Health Choices Plan: Ensuring Quality, Affordable Health Care for All Americans,” (www.hillaryclinton.com/feature/healthcareplan/Americanhealthcarechoicesplan.pdp) is an 11- page write up with 21 references. But unlike the Obama’s plan, Clinton backs up some of the plan provisions with data supporting the financial needs for health reform (p.11). The estimates are welcomed not only because they make scrutiny of the plan easier but also they shed light on the credibility of the proposal. The plan gives detailed provisions that if implemented would secure for the American people the elusive universal coverage and the quality of care that we all hope for but we seldom encounter.

As both plans are accessible with a click of the mouse, I shall not reproduce here all of their features. What I will attempt to do is to put the main features of both plans in the context of the current status of American health care system and raise few questions that are left unanswered. Let me first begin with a few statistics. [2]
· The US spends some 2 trillion dollars per year on medical care (US Consensus Bureau Health 2007). This amounts to $6,644 per capita.
· There are 46 million Americans who lack health insurance coverage (of which 9.7 million are children) (National Health Expenditures 2007).
· Over the period 2000-2006 Health Insurance premiums have risen four times more than wages (Kaiser Family Foundation 2006).
· 90,000 Patients die from medical errors in hospitals every year.[3]
· Spending on preventative care amount to less than 4 percent of health care spending. (Lambrew, J.M. The Hamilton Project Brookings 2007).
· Administrative costs as a percent of medical expenditures amount to 27% of Medicare/Medicaid and 16% of private insurance (The Prometheus Fact book/Health use).
· One in six uninsured person lives in a family with an increase between $50,000 and $75,000 (Ibid).
· Per capita health care cost in the US is twice as high as that of Canada, France, and Japan and 2.6 times that in the UK (OECD Health Statistics).

These statistics paint a picture not unfamiliar to Americans. Almost every one knows that we spend a significant proportion of gross national income on medical care (14.44 % in 2007), that patients die in hospitals due to errors, that nursing homes residents are abused more often than not, that malpractice suits are prevalent and costly and that health insurance premiums, deductibles and the cost of drug therapy and testing are rising much faster than the core inflation rate and/or the wage rate. Yet, there has not been sufficient indignation over the status of the US health care system to compel policy makers to address rising cost, the lack of universal coverage and most of all the “quality” of health care. Some of this may be explained by the fact that physicians and patients as well as the public at large, for the most part are convinced that universal medical care coverage would lead to nationalization of the health care system (a la British and the Canadian systems), a system that would limit medical care resources and constraint patient choices.

In this election cycle, something seems to be happening on the health care front. Interest in the Presidential race, especially the selection of the Democratic Party nominee has opened a window for the candidates to press for universal health coverage. The hope is that voters’ interests in a candidate can propel him/her to secure their support for a universal health plan.

Since health care is at the top of the Democratic candidates agenda, let us focus on what they offer, what their plans have in common and where they differ.

· Coverage: expand insurance coverage to the uninsured. Private insurers would be required to offer policies to everyone, regardless of medical history.
· Choice: offer all Americans an enhanced choice in the selection of insurance coverage through a mix of private and public plans including the Federal Employees Health Benefit Program (FEHBP).
· Affordability: make insurance affordable to low-income Americans.
· Quality: improve quality through monitoring of services and modernizing the system.

These salient features notwithstanding the “devil” is in the details. Take coverage for example: Hillary Clinton envisages a system that offers coverage for all (universal coverage), achieved by mandating that everyone have insurance. The question of affordability comes later. Barack Obama does not see the need for mandates (although he mandates coverage for children) on the ground that by making the plan affordable, the uninsured will buy coverage. This clearly is a point of contention not only between the candidates but also among health economists (see Krugman, P., NY times, op. Ed. March 4, 2008). The bottom line seem to be: if you want universal coverage, mandates is the way to go. Making insurance affordable does not guarantee purchase.
The question that arises is: “if insurance is affordable, why wouldn’t the uninsured buy coverage?” The answer is simple. Why buy coverage if there is a “third party payer”. Currently some uninsured persons receive medical care through the “uncompensated care pool”. Insurance companies shift the cost of providing this care to those who buy insurance by raising their premium. The same is true for auto insurance (it is estimated that 14% of drivers do not buy insurance). Despite the mandates, most auto insurance plans include provisions (with additional premium) to cover damages by uninsured motorists. The bottom line then is that mandates may not assure universal coverage but it is likely to reduce the cost to third party payers compared with a plan without mandates.

Aside from mandates, Clinton envisages a health care system that is not too different from the existing system…a private/public system, although the plan may end up expanding the public component if many Americans (currently insured and the uninsured) move to opt for coverage under the Federal Employee Health Benefit plan (FEHBP).[4] The Obama plan favors a bigger role for the government in the medical care market through the creation of a “new public insurance program” offered to those who neither qualify for Medicaid or SCHI, nor covered by employers’ plans. His plan also calls for a “National Health Insurance Exchange.” This organization is envisaged to be a ‘watchdog’ for the private insurance market protecting those who want to buy. Insurance and facilitates enrollment in the newly established public plan.

Reading the lines and between the lines, it is clear that the Obama plan comes down on the side of public provision. The question is: will there be one public plan or several like those offered by FEHBP? And what agency will administer the plan? Will it be part of the HHS department or an independent agency? And what is the cost of administration and who bears the additional costs? Above all, why the need for a new public plan given that the Obama health plan also calls for extending FEHBP to non-government employees?

Two fundamental elements not adequately addressee in both Obama and Clinton plans had to do with “measurements of health outcomes” and the phenomenon of “cost shifting”. ‘Quality’ needs to be defined in terms of “long term outcomes” and in relation to cost, monetary and time costs across generations. In talking about quality neither plan gave adequate attention to patients “waiting time”, “quality of access” (which doctor, procedure or hospital), and to “medical errors” committed by physicians, radiologists and hospitals (even though some of these errors carry with them monetary payments through ‘malpractice suits’). What about access to catastrophic insurance and quality of access to nursing homes. Another related issue is the status of those covered by Medicare. Will Medicare subscribers have the option to opt out of Medicare (part B) and join another plan, especially in view of the fact that the Medicare premium paid is progressive (rises with income) and for most Medicare beneficiary private insurance is needed to supplement medical coverage?

We have gone down this road before (several reform proposals made in the 1980s and the 1990s). Two options are usually debated. Keeping the private/public mix but change this or that provision or junk the system and nationalize (one payer) medical care. Past experience suggests that a private/public system is the preferred system. Piece meal changes are the way to go. There is nothing wrong with this approach as long as the contemplated reform ushers in at least one improvement. No one denies that there are many elements that need fixing in the US Health care system. Let us hope that reforming America health care system gets a fair hearing and not falls by the wayside once the presidential election comes to a close.

[1] Ott A. and Gray W. The Massachusetts Health Pan: The Right Perception? (1988).
Ott A. Choice and Incentives in Health Care: A Comparison between the US and the UK (two conference papers, Institute for Economic Studies (IEPS), Clark University and the University of York, UK).
Ott and Lin J.H. Equality of Access to Health Care: A Comparison of the US and UK systems (1986), IEPS.
[2] Some of these Statistics are cited in Obama’s plan.
[3] As Dennis Cortes, President and CEO of Mayo Clinic puts it “this is the equivalent of two 747 planes crashing every two days”. Talk covered by CSPAN 2, March 21, 2008.
[4] Although FEHBP is a Federal government program, it does not entail public provision of services. FEHBP offers federal employees some 10 plans such as Blue Cross/Blue Shield with different levels of premiums, contributions, benefits and deductibles. It differs from private employers plans in the level of government contribution towards the purchase of the chosen plan. For details see: US Office of Personnel Management webpage.

Good News for Africa: Another Day, Another Gain

In my last blog “Why do Governments Engage in Mass Killing, February 18”, I wished Kenyans well in their strive for democracy and restoration of their faith in democracy. Wishes sometimes come true. The Wall Street Journal (Friday February 22), brought the good news.
According to the associated press: “Kenya’s government tentatively agreed to create a Prime Minister’s post to be filled by the opposition moving the East African country a step closer to ending weeks of deadly clashes over the disputed presidential election” (p. A8). In my piece, I wished for a sharing of power, which would ultimately lead to the restoration of the presidential office to the true winner. In the meantime, this sharing of power may be enough to assure Kenyan citizens that their democracy is not fragile, that it will endure. A sad note accompanying this good news, is that the ‘ethnic grievances and violence have left more than 1000 people dead”. Kenya violent conflict unfortunately, has put it in the book as given rise to Mass Killings (see http://attiatott.blogspot.com/ February 18, 2008 for definition of mass killing).
Over the past two years, we at the Institute for Economic Policy Studies have made efforts albeit modest, given our volunteerism efforts and our own resources (no outside support) to put forth the idea that developing ‘human resources’ should be at the forefront in the design, execution and funding for development. Education is and should be the building block for improving the economic conditions for the people. The development strategy often has been devoted to bricks and motors, not to human development or the right human development. It is not enough to throw money on education infrastructure (aside of the fact of being minuscule, compared to other infrastructures), rather it is much more important to ‘know’ how to make use of education infrastructure. Africa may surely lack education infrastructure but they surely have educators who can if challenged and channeled properly effect development.
The title of my piece today, Another Day, Another Gain was motivated by President Bush recent announcement. (Two Routes to Building Africa: Bush Visit (to Liberia) Emphasizes Human Development; Wall Street Journal, February 22, p.A8). US and Western powers are urged to focus more on human development. President Bush went further by announcing that the “US will provide one million text books for Liberia in the next year.” Clearly a step in the right direction. One may ask what text books and for what educational level: elementary, secondary or tertiary? The paper did not say. I am sure the details are now being worked out at the Agency for International Development.
It is a good step no matter what books or at what level. I have been taught that all books no matter how bad are good books in that they will make you think, they will make you see and feel what otherwise could not have been seen or felt and that what education is all about.
I have always wondered about what to do with the surplus of books many of us in Academia, especially those of us with long carriers, who will no longer have needs of these books. Even in the age of the internet there is still something about the wholesomeness of books. Hopefully, the President’s effort of building the reading capacity of Liberia’s people would extend beyond text books, and by opening the door for all who have books to channel these books to Africa would be users, he will indeed have succeeded in promoting knowledge, a vehicle often overlooked as the first building block for development.
Some of my former PhD students in Economics and myself are educators. We believe that education and the use of educators generated knowledge have been overlooked by development institutions, universities and donors. To that end, the Institute for Economic Policy Studies is sponsoring a conference to address this issue. We are encouraged by the President statements. Perhaps the day has finally come to put development on a sound footing.

Why do governments engage in civilian killings?

In a paper published in the Journal of Defense and Peace Economics (2008, vol. 19(2)) by colleague Sang Hoo Bae and Attiat F. Ott, we have investigated theoretically and empirically the predatory behavior of government: the case of mass killing. As such journal papers go; the model and the empirical analysis are not for general consumption. Nonetheless, the story it tells is not difficult to follow and the conclusions it arrives at is worth highlighting.
Before I summarize our findings, I need to acknowledge a contribution to this topic made by Hugo Slim in his book: Killing Civilians: Method, Madness and Morality of War (Colombia University Press, 2008), reviewed by the Economist (February 16th, 2008, p.92). Although I have yet to read the book, the Economist’s review touches on a few of the issues we have addressed on our paper on mass killing. Our findings may go some way to answer the basic question raised: why kill civilians? Let me begin by citing few relevant statistics.
In the 20th century there were 109.7 million civilian killings by the state. This amounted to 4.35% of world population. In the 19th century, these were 19.4 million deaths or 1.65% of the world population, an increase of over 500 percent. According to the World Development Report 2005, most of the violent conflicts leading to civilian killings took place in low income developing countries, with 38% of these taking place in Africa.
Violent conflicts leading to mass killings of civilians fall into three categories: military conflict between states; between states and non-state groups; and between factions within a state. When we talk about civil war we are referring to the third category commonly referred to as “intra state” war. In this type, either the state (government) or a rebel group is the initiator. Examples of civil war include Angola civil war lasting 27 years with more than one million deaths, repeated wars in Sri Lanka with 500,000 deaths, Rwanda with over a million death to name a few. Mr. Slim gave reasons for civilian death including “a desire to exterminate an entire group of purportedly inferior beings; a lust for power and domination, necessity or plunder”, (The Economist, p.92). A student of violent conflicts especially civil wars can find not one but many causes for killing civilians. Sang Hoo Bae and myself being economists, we explain mass killings by the state by modeling the choice of a ruler of a country in which there are two distinct groups of populations (divided along ethnic, religion or other elements) by characterizing the decision as a three stage process. We investigate the ruler’s (assumed belonging to one group) options: engage in mass killings of the other group (initiate civil war); resolve the conflict by forming a coalition government; or do nothing.
Think of the current civil war in Kenya that started following the December 27 presidential elections. The ruler, President Mawai Kibaki is said to have lost the election to the opposition but refused to relinquish to Daila Odinga the presidency. The ruler, Mawai Kibaki options are those we have investigated in our paper. Our model solves for the optimal choice. We show that which option the ruler will choose depends on the “probability to remain in office which is derived from his political power; on the expected wealth from attacking the opposition group and the cost of the attack.” The cost can be of two types: military expenditures and cost of outside sanctions. In the Kenyan case, the flurry of activities by outsiders (the non-state group) including the US secretary of state, the former UN Secretary General, Kofi Annan may raise the cost and might tilt the choice towards a coalition government.
Using data on civilian mass killings over the period 1816 – 1997, we attempted to identify those factors that accounted for the choice of the mass killing option. But what mass killing constitutes? And who compile the data? The data is derived from the Correlates of War (COW) project. COW gives information on conflicts with more than 1000 battle related deaths. In the conflict studies, 1000 battle related deaths have been taken to signify mass killing. In our study we use this number and also redo the statistical analysis with 10,000 battle related deaths as defining a mass killing episode.
The statistical results of testing our model for the civilian mass killing that occurred between 1816 and 1997 give insight into the question raised earlier: the ruler’s choice of mass killing or as a Mr. Slim has put it: why kill civilians? Our findings reveal that “the length of executive tenure (how long the ruler held the office) plays a very significant role in civil war killings. In addition, it identified ethnicity, as a contributing factor, in that the “more fragmented the population – many ethnic groups – the less likely is mass killing and vice versa”. The results that were not unexpected had to do with spending on the military conflict and the income of the country. High military spending increases the probability of killings; the second the higher the income of the country the less likely the ruler is to engage in civilian mass killing.
The civil war in Kenya will hopefully come to an end before it belongs to the COW records where the civilian death rate reaches 1000. It would be a tragedy not only for the civilian population who are paying a heavy price for democracy but also for the world at large. The international community should persuade, cajole even compensate (bribe?) the ruler to restore democracy by opting for the power sharing arrangement for a limited period (to save face) and to restore the presidential office to the opposition if it turned out that Mr. Odinga was indeed the true winner.