Robust Modeling of Policy Changes: Difference in Difference (DiD)

The difference in Difference (DiD) is a popular method in empirical economics and has important applications in other social sciences as well. DID is a quasi-experimental design that uses panel data to estimate the effects of specific intervention or treatment (such as policy changes, new laws, social program implementation) on outcomes over time and between two population groups, those that are affected by this policy and those that are not. DiD, in general, is an appealing choice for researchers who want to design a research methodology based on controlling for confounding variables.

Applications of DiD are quite diverse, amongst are

  • Impact evaluation (public policy analysis)
  • Measuring the variations overtime (Time Series) and over individuals (Cross-Sectional Data)
  • Focusing on the establishment of effects on a dependent variable derived from the interaction of exogenous variables given a treatment.
  • Variants of the DiD method can account to deal with auto-selection bias and endogeneity problems.
  • Comparing the differences between observed outcomes from partial and non-randomized samples in groups.

Although this method is highly important, few learning resources are available to instruct researchers and scientists how to properly implement and design it. There may be some resources that discuss the theoretical foundations of this method while listing a few examples of its applications. However a fully-fledged learning material for DiD that covers both theory, and guides researchers to implement this method on statistical software using real and simulated data applications are rather scarce.

At M&S Research Hub we recently launched a video library wherein our team of academic experts record offline training videos for advanced econometrics methods. This material is designed to fit researchers at different proficiency levels. They cover both theoretical and mathematical basics of the target models and their detailed application using statistical software, leaving the researcher in no further need to search for other learning resources.

A complete DiD course that takes around 158 minutes and is recorded over 7 videos are available in the library for everyone who wants to master the DID method.

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The Development Impact of Foreign Aid: Story Re-told

There has been an intense debate in the literature over the reasons behind the loose developmental effects of foreign aid. Away from the straightforward reason that majority of aid flows follow political rather than development objectives (Kanbur et al., 1999; Dreher, et al. 2009). Further, several reasons have been introduced in the literature see for example (Radelet, 2008; Bräutigam and Knack, 2004, and others). However, these reasons can be condensed into two core causes, a) Lack of clear development agenda by the recipient countries which result in misallocation of aid and establishment of various simultaneous individual projects that even if successfully completed will have limited impact on the development of the target sectors; and b) The mismatch between donors, recipients, and target beneficiaries’ priorities and needs that create an aid system that is incapable and inadequate of achieving the entailed goals.

In response to common pitfalls of the aid system, a new setting for aid disbursements based on sector-wide approaches instead of individual projects was introduced by Kamel, et al. (1998) and was later modified by (Kanbur, et al. 1999) and evolved into a system entitled the ‘common pool approach’. Our following policy suggestions will build on these, however, we bring in some modifications for the system implementation and evaluation.

The basic rationale behind the common pool approach is that a pool of donors—instead of one— allocates unconditional funds to a recipient country’s nationally representative reform plan and its implementation strategy, instead of individual projects. Such a system would increase the recipient country’s sense of ownership and commitment while enhancing the achievability of developmental and reform goals relative to individual uncoordinated projects approach. The major drawback is the minimisation of aid received because many donors – besides political lobbies and private sector firms – might not agree to fund national plans instead of individual selective projects. In addition, donors’ ability to pursue their own interests, conditions, and opinions will dwindle. Anyhow, detailed discussion for the common pool system and sector-wide approach is found in formerly cited articles. Subsequently, we introduce a new system which combines both approaches, sector-wide and common pool, whilst including our personal reflections that will hopefully alleviate the expected drawbacks of these approaches.

 Figure A1 provides a basic graphical representation of the new blended system. The graph is elaborated in the following points,

  1. The recipient country starts to move in the direction of prohibiting all forms of aid transferred to individual uncoordinated projects, but rather allows only aid channeled towards sectoral reform plans.
  • The governmental authority with the cooperation of civil society, the private sector, policymakers, and citizens, formulate a reform plan for the target sector.
  • A series of roundtable meetings are held in the recipient country capital that involves potential donors (single and multilateral), international experts, and other national parties in order to receive feedback on the preliminary proposal (sponsoring the meetings in the recipient country would ease national parties’ involvement and cooperation, which reflects in a higher sense of belonging and ownership).
  • A final neat version of the proposal is then reformulated along with its implementation strategy that involves foreign and domestic shares. For instance, technical and human resources in the implementation strategy are distributed as 70% domestic and 30% by the donor’s side. One major drawback of the common pool approach is the lack of donor involvement in the implementation, which in essence is a good thing to increase the sense of ownership by the recipient. However, this is reflected in lower lobbying by the private sector and political parties in the donor country to step forward for similar approaches. We, therefore, propose a cooperative share of interests, however still managed and authorised by the domestic country and in the framework of the domestic strategy.
  • The donor authority in this phase lies in accepting or rejecting the plan and the amount of fund provided, based on credibility and achievability of the plan.
  • Donors together with the recipient responsible authority would agree on a set of quantifiable and measurable assessment measures that are monitored and reported by the authority itself, though donors are also allowed to intervene in the monitoring and evaluation of these measures. This is an incentive for the authority and other parties involved in the strategy to abide by the rules and the plan. Also, in the case of system corruption, which is the likely case in the majority of developing and poor countries, it is well known that foreign assessment might intervene anytime to inspect and evaluate. In addition, donors will be more relieved and secure when they have a hand in the evaluation process, unlike the common pool approach which prohibits any form of foreign intervention in the process unless requested by the recipient.
  • Finally, a renewable annual funding plan is offered based on the realisation of these measures; failure to abide by the authority results in a violation of the contract. By doing this we eliminate any chances of aid misallocation, corruptive activities, and other illegal traits because the recipient knows for sure that failure will hinder any future possibilities of funding for other reform plans. Moreover, the ex-ante participation of civil society and citizens makes the government accountable to the public, which also affects their political popularity.

Eventually, let me conclude with this phrase from Kanbur, et al. (1999) “The possibility of the decline in aid will require a substantial amount of confidence on the part of recipients who adopt the approach. It requires a government with the willpower to say to donors: ‘Here is my program in this sector: if you wish to help me implement it, you are most welcome. If you wish to do something different, I regret that you are not welcome in this sector in this country.” The foremost outcome of the proposed blended system, common pool, and sector-wide approaches, is filtration of aid received by the recipient, by adopting these approaches, will be able to locate donors that endeavor no hidden, political, or ideological agendas but only support the recipient country’s development efforts.

References:

Hassan, Sherif (2016): Seventy Years of Official Development Assistance: Reflections on the Working Age Population. MPRA, Paper Nr. 74835.

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The evil in the heart of the good: Unfolding the role of remittances in the escalating trade deficit figures of the MENA region.

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

The MENA region is ranked first in terms of remittance receipts (3.83% of GDP) worldwide, it has also the highest non-oil trade deficit among other developing regions (World Bank, 2018). This study uses panel data from 11 Labor-abundant MENA countries (main destination of remittance receipts) to examine the trade balance effect of remittances. We postulate that the main driver of the trade deficit in the MENA region is the weak industrial sector, which fails to provide domestic substitutes for imports of manufactured products (El Wassal 2012). Based on our hypothesis, we imply that in countries with weaker domestic absorptive capacity, the excessive demand of remittance-recipient families will not be compensated by domestic production, but rather imports of the consumption good, thus worsening the trade balance deficit.

The empirical work from the MENA region on the trade balance effects of remittances is limited. Bouhga-Hagbe (2004) supported the evidence of this effect in Morocco, wherein remittances covered the trade deficit and contributed to the observed surpluses of the external current account. Kandil and Mirzaie (2009) showed that remittances promote both exports and imports in Jordan while nourishing only exports in Tunisia. In the case of Egypt, El Sakka, and McNabb (1999) reported that imports financed through remittances have a high-income elasticity, thereby implying
that they are either consumer durables or purchased by high-income groups. In a study, involving interviews of 304 remittance-receiving families across 16 Egyptian governorates during 2015–2016, Farzanegan et al. (2017) examined further the causes and effects of
remittances. Using a panel of 17 remittances receiving countries in the MENA and Central Asia regions over a period of 1990–2009, Abdih et al. (2012) concluded that a significant portion of remittances is
used to purchase foreign goods.

Our empirical results confirm the import triggering effects of remittances, however these effects are mitigated as the investment capacity of a country gets stronger and become able to neutralize foreign purchases with domestic products. Many policymakers are pushing to increase remittances as a reliable source of income by reducing transfer costs. The real challenge is promoting the productive use of these remittances in financing domestic production capabilities and non-oil exports. The channel of promoting domestic capital formation through encouraging private savings and productive use of remittances could improve the balance of trade. This can be realized by promoting financial services, which targets repatriates and their families, like saving incentives, interest rate premium on migrant’s deposits, and the issuance of remittances back bonds. Although
remittances may carry some development-related outcomes, such as income smoothing, reducing poverty, and promoting education, the applied literature is still equivocal about the magnitude of these effects and the governing conditions to realising these effects. Our paper is an
example of a study that has highlighted a rather countercyclical effect of the
inflow of remittances on the recipient countries’ trade balance. This piece of
evidence among others suggests that promoting remittances does not always come in favour for the recipient economies and is conditioned to the prevailing economic and institutional environments.

Reference:

Mohammad Reza Farzanegan & Sherif Maher Hassan (2019) How does the flow of remittances affect the trade balance of the Middle East and North Africa?, Journal of Economic Policy Reform, DOI: 10.1080/17487870.2019.1609357

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Oil war: GCC stability Vs. EU stability

https://www.desitrending.com/wp-content/uploads/2018/08/1533689404_

After the dramatic turmoils that took place in France and then have spread across other European countries. These turmoils were mainly triggered by the hikes in Oil prices in the last few months, These surges have caused rigorous supply shock to prices, causing thousands maybe million of Mid-class people in EU to struggle. Lives casts from Paris and Belgium brought back memories from the Arab spring in early 2011, the similar domino effect of the tragedic sequences where people get into the streets to demand something, then other people who suffer from a different thing – etc. labor reforms- use the chance and start raising their voices, a different group, farmers start asking for higher prices for their products, an escalations of social frustration that build on as days pass by.

However these problems start to loosen up as oil prices start to sharply decline again, and as this was the main trigger for these social escalations, it was the main lessor for these as well. besides other measures that were adopted by these countries’ governments, but none of these could have worked without first the stabilization and reduction of oil prices. OPEC countries that are dominated by GCC oil hubs such as Saudi Arabia, UAE, and Kuwait have been pushed to increase oil production and this will automatically bring down oil prices. A strategy that indeed comes in favor of these conflicted first class developed countries, yet it does not necessarily come in the favor of the people living in oil exporting countries, especially in such times where domestic inflation rates in Saudi Arabia and UAE are escalating, budget deficits in the new Saudi Budget reaches historical records, however, the political pressure simply cannot be overseen. GCC countries have to react in favor for the big ones instead of their people, as oil is their major budget components, few dollars reduction in its prices will cause millions of budget revenue to be lost.

One lesson here is that the economy is no longer free, the political influence of the big ones govern economic laws of supply and demand as well as the strategic products prices. However, for developing countries, governments need to fight back against this political dominance and strongly hold to the power of rejection to decide what’s good for their own people.

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General guidelines of scientific writing

An excerpt from Manikw’s blog 

When I was CEA chair, I sent the following guidelines to my staff as they started drafting the Economic Report of the President. A friend recently emailed me a copy, and I thought I would share them with blog readers. They are good rules of thumb, especially for economists writing for a general audience.

ERP Writing Guidelines

· Stay focused. Remember the take-away points you want the reader to remember. If some material is irrelevant to these points, it should probably be cut.

· Keep sentences short. Short words are better than long words. Monosyllabic words are best.

· The passive voice is avoided by good writers.

· Positive statements are more persuasive than normative statements.

· Use adverbs sparingly.

· Avoid jargon. Any word you don’t read regularly in a newspaper is suspect.

· Never make up your own acronyms.

· Avoid “of course, “clearly,” and “obviously.” Clearly, if something is obvious, that fact will, of course, be obvious to the reader.

· The word “very” is very often very unnecessary.

· Keep your writing self-contained. Frequent references to other works, or to things that have come before or will come later, can be distracting.

· To mere mortals, a graphic metaphor, a compelling anecdote, or a striking fact is worth a thousand articles in Econometrica.

· Keep your writing personal. Remind readers how economics affects their lives.

· Remember two basic rules of economic usage: o “Long run” (without a hyphen) is a noun. “Long-run” (with a hyphen) is an adjective. Same with “short(-)run.” o “Saving” (without a terminal s) is a flow. “Savings” (with a terminal s) is a stock.

· Buy a copy of Strunk and White’s Elements of Style. Also, William Zinsser’s On Writing Well. Read them—again and again and again.

· Keep it simple. Think of your reader as being your college roommate who majored in English literature. Assume he has never taken an economics course, or if he did, he used the wrong textbook.

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Why minimum wages and why not?

https://upload.wikimedia.org/wikipedia/commons/thumb/5/5e/Assorted_United_States_coins.jpg/280px-Assorted_United_States_coins.jpg

Understanding the economic intuition behind minimum wages
law is of great importance, given the economic fluxes spreading all over the
world, from the Arab spring in Middle East, to budget deficits in USA and the debt crises in euro zone. Regarding the debatable and controversial outcomes of minimum wages, I will try to explain why governments tend to be quite hesitant when it comes to agree on such law settlement.

A typical labor market with an upward supply of labor that shows the number of employees willing to work at different wages levels, it
might be viewed as the marginal cost (MC) of each additional unit of
labor. The demand curve for labor by employers at given fixed level of Marginal productivity and price level is downward slopping; any changes in those exogenous variables would lead to inward/outward shifts in this curve. The equilibrium wage and No. of workers are determined at the intersection of the two curves at W*, L*.

The government may at any point of time intervene and set a price floor for wages (wages cannot decrease below this level) in form of a minimum wage that is higher than the equilibrium wage. Why any government think
to apply such law, simply because the government considers the equilibrium wage insufficient for sustaining poor people, so the government uses its legislative authority and force employers to offer workers higher wages than competitive wage level.

Notably to mention that low skilled job seekers are the target group by this law, because low skilled or teenagers who lack the sufficient educational and job experiences have no chance to compete in such market, in
other words, they are more eligible for internships with no payment, or on job training with wages lower than equilibrium wages.

With wages at the minimum floor, we might observe the following:

1- The No. of people who actively seek jobs would rise, this increase in supply of labor might come from existing labor force who were employed as interns or on job trainees, and people who are counted as voluntary unemployed, such wage rate now meet their expectations and force them to get back to the play yard.

2- The cost of hiring workers now is higher, employers are obliged to pay higher wages, which would force them to reduce the demand for employees, except for really skilled, highly efficient ones.

3- The outcome would be a surplus in the labor market, where the supply of labor by employees exceeds the demand for labor by employers.

4- Only highly skilled labor (LD) are being employed and receive the benefits of higher wages “ Not the target group “

5- Teenage unemployment tends to increase, No. of students who drop out of schools might increase (as now it is more tempting to seek jobs than before) , the rate of job creating in the shadow “underground” economy might hike, because of the legal market surplus (No minimum wage laws in shadow economies)

This is not the end of the story, otherwise things would be quite easy and simple, and we can conclude that minimum wages are bad, and
governments should seek better –less costly-ways to do its job for supporting low-income people (i.e. Earned income tax credit).

More than 200 academic researchers have been studying the
effects of minimum wages on labor markets over the last century, and have been trying to observe the patterns of teenage unemployment after setting this wage floor. Opponents argue that it causes unemployment, lead to discrimination for the favor of highly skilled workers (or black people as observed in the minimum wage law settlement in USA during the 1930s), schools drop out increase, illegal and criminal activities increase, inflation rises.

Proponents -on the contrary- argue that minimum wages are
not bad, however, when, how and where they are applied is the crucial issue.
They advocate that minimum wages would hike productivity of workers and
increase the opportunity cost of leisure, moreover the hike in prices would
increase the demand for labor because the accession in employer’s profits, and thus the observed unemployment rise is transitory. In addition, the marginal propensity to consume (MPC) of low income people is much higher than high income people, consequently the whole aggregate demand might rise and instigate the rate of job creation in the economy, not mentioning, moral, ethical norms of providing better life for low income people and the reduction of criminal/illegal acts in the economy.

However, empirical evidence stands for the side of proponents; a typical econometric analysis of this phenomenon has shown that, an increase of 10% in minimum wage would reduce employment by only 1-3%,
depending upon the elasticity of the demand for labor in this market, and the degree of wage raise.

To fully understand the whole picture we should also incorporate our analysis with the case of removal of fringe benefits. Observing
employer’s reaction to the imposed minimum wages, possibly by removing fringe benefits from their employees “transportation, health insurance, memberships, relaxed work conditions, free coupons, etc…” , we might conclude a different outcome, as both employees and employers tend to be worse off in terms of gained utility in favor of lower reduction in employment levels in the labor market.

To recap, each market should be considered separately; there is no general catalog for the spillovers of minimum wages. Governments should
treat such decision very carefully, also to consider the amount of wage raise, the elasticity of the demand in each market, and others law or legalization that might hinder/strut the negative spillovers of minimum wages. Favorably a government could seek better – in sense of controversy- , stable -in sake of predicted outcomes-, and less costly -in terms welfare losses- than this dangerous remedy for poverty.

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The interaction between monetary and macroprudential policies

There is an increasing concern among policy makers and economists about macro prudential policies that aim to stabilize the economy and alleviate financial distortions through affecting output and inflation levels . This paper by Claessens, and Valencia, (2013) at VOX tries to study the possible interactions between monetary and macro prudential policies. In addition, it highlights the stylized fact that neither monetary nor fiscal policies are sufficient to stabilize the economy, additional tool is needed to continue this job.

“The newly emerging paradigm is one in which both monetary policy and macro prudential policies are used for counter cyclical management: monetary policy primarily aimed at price stability; and macro prudential policies primarily aimed at financial stability. But these policies interact with each other and thus each may enhance or diminish the effectiveness of the other”

When prices rigidities are the only distortion, then momentary policy goal of stabilizing prices will also stabilize output and maximize welfare, but in the presence of financial market imperfections, which affect people expectations and predicted risks, this will hinder the influence of monetary policy on output stabilization. If this is the case, then monetary policy is not enough, because financial distortions might not directly/indirectly be related to liquidity levels. A combination of both monetary and macroprudential policies -with one focusing on liquidity and other focusing on altering aggregate demand of this liquidity- to reduce financial risks and stabilize the economy is required.

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Urban slums and their implications for national fertility rate

https://www.thoughtco.com/thmb/ZYp-nTujBoiO45SD_PzdIpwk9tQ=/594x396/filters:fill(auto,1)/94026378-58b598403df78cdcd869451c.jpg

With the expected increase in world population by one billion people in just over a decade, governments in less developed countries are faced with the challenge of having to accommodate the majority of this future population growth. This is of concern since many of these countries currently face various social, economic and infrastructural challenges that impede their ability to adequately accommodate this increase in people. One such challenge is how to deal with the current issue of their large and youthful populations, many of which are located in slums in large cities. A large youthful population presents many opportunities for stimulating economic growth, and for building a more civil and educated community. However, as can be seen in the context of developing countries, especially those in Sub-Saharan Africa, wrestling with this problem continues
to be an ongoing challenge.

A related issue to population growth is that of high fertility rates in less developed countries. While many such countries have made remarkable strides in order to reduce fertility rates, for some countries, progress has been slow. For other countries, for example, those within the MENA and SSA developing regions, substantial progress has been made towards
reducing fertility rates; however fertility rates in these regions still
continue to be among the highest in the world. Developing regions have much larger slum populations compared to developed regions. This is in part owing to the failure of governments in these regions to adequately meet the demands (e.g., housing and jobs) of their growing population. As a result, existing slums expand and new slums emerge in order to informally accommodate the needs of this growing population. Given the typically high fertility rates in slum communities and the larger presence of slums in
less developed countries that are currently facing the most pressing population growth and fertility issues, this study hypothesized that slums are in part responsible for fertility rates variations amongst less developed countries.

Analyzing data from a sample of 72 countries in the developing world, our results support the prior hypothesis that slums affect countries’
fertility rates. More specifically, the results of this study showed that an
increase in the number of slum dwellers leads to a subsequent small increase in fertility rates. Additional drivers for fertility rates identified were contraceptive prevalence, female education, and infant mortality, all of which are consistent with the literature on fertility dynamics. For example, better-educated women are expected to be more knowledgeable on the use of contraceptive methods and ways of accessing them. These women may also favor fewer kids that can be well taken care of, compared to having large families where resources shared amongst family members may become stretched too thin. As a result, our analyses showed that an increase in female education reduces the instance of fertility rate. Further, while the results for contraceptive prevalence and female
education were consistent across all models derived in this study, the same was not true for infant mortality, with further research needed to examine why this had occurred.

In order to test the robustness of the slum measure, this study used two
measures of slum: (1) the urban slum population as a percentage of the total urban population, and (2) the urban slum population as a percentage of total population. The results of such analysis showed a similar small increase in fertility rate with the increase in the number of slum dwellers. Such empirical findings are important since they suggest that while the magnitude of slums’ impact in affecting countries’ fertility rates may be small, with the increased  growth of these communities, this impact may become magnified in the future due to the multiplier effect. Thus, in order to adequately address the fertility rate issues that less developing countries are experiencing, governments in these countries should take a more active role in better managing their slum populations.

Reference: Hassan, S.M., and Mahabir, R.S. (2018). Urban slums and fertility rate differentials. Population Review, 57(2):47-74.

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