The Logic of Social Impact Analysis B. Essama-Nssah World Bank Poverty Reduction Group April 2007
Introduction • Fundamental Question of Development Effectiveness: • Is the intervention having the intended effect on the target population? • Goal of intervention defines the metric for effectiveness • Aristotelian vision: Maintaining and improving the living standard of the population is the ultimate goal of public policy and a fundamental expectation of the governed (Sen et al. 1987).
Introduction • Working Definition • Social impact analysis is an assessment of variations in individual and social welfare attributable to a shock or the implementation of a socioeconomic policy. • Hence PSIA is an exercise in social evaluation • Evaluation: assessment of relative merits of actions. • Valuation: comparison of things.
Introduction • Evaluative Framework • Identification of objects of value and stakeholders. • On the basis of the policy objective. • Aggregation • Linking individual and social outcomes • Attribution • To what extent is the outcome induced by intervention? • Ranking • Based on welfare maximization
Introduction • Focus of Presentation • The Living Standard • Welfarism • Non-Welfarist Perspective • Aggregation Rules • Collective Choice • Distributive Justice • A Class of Social Evaluation Functions • Causal Inference • Concept • Modeling Implications • Targeted Interventions • Economy-Wide Policies
The Living Standard • A Multidimensional Concept • An outcome of interaction between opportunities offered by society and readiness and ability of individual to identify and exploit such opportunities. • Impossible to consider individual achievements in isolation from the natural and social environment. • Identification of valuable dimensions depends on underlying view about personal features and social arrangements that are deemed important in the realization of any freely chosen life plan.
The Living Standard • Welfarist Approach • Indicators of the living standard based solely on individual preferences or utility. [Welfare understood as the satisfaction of preferences (Hausman and McPherson, 1996)] • Preferences are unobservable, hence must be revealed by proxy indicators. • Assumption: consumers purchase the best bundle of goods they can afford. • Implication: level of expenditure on goods and services is a good proxy measure of the living standard. • Limitations: approach ignores non-market goods and non-material human conditions not captured by consumption behavior.
The Living Standard • Non-Welfarist Approach • Pays more attention to such things as primary goods (Rawls 1971) or empowerment/capabilities (World Bank 2001 and 2005, Sen 1999). • Primary goods: • Basic liberties • Freedom of movement and choice of occupation • Powers and prerogatives of offices and positions of responsibility • Income and wealth • The social bases of self respect
The Living Standard • Non-Welfarist Approach • Empowerment/capability perspective • Opulence not equivalent to standard of living • Important distinction between achievements and ability to achieve [outcomes from opportunities; functionings from capabilities] • Achievements (or functionings):a set of activities and states (“doings” and “beings”) that constitute an individual’s life. • Capabilities define the freedom of choice or the opportunity set.
The Living Standard • Non-Welfarist/Empowerment (continued) • Emphasis on individual agency • Internal capabilities versus combined capabilities (Nussbaum 2000) • Basic capabilities correspond to one’s endowment at birth • They mature into internal capabilities at the end of the formative phase (of life). • Combined capabilities entail appropriately developed internal faculties supported by a favorable external environment for their fulfillment.
The Living Standard • The Millennium Development Goals (MDGs) are consistent with the empowerment (or capability) approach to the living standard • Eradicate poverty and hunger • Achieve universal primary education • Promote gender equity • Reduce child mortality • Improve maternal health • Combat major diseases • Ensure environmental sustainability • Develop a global partnership for development
Aggregation Rules • An aggregation rule establishes a relationship between individual and social aspects for the purpose of deciding an issue or evaluating alternatives. • Aspects: interests, preferences, values, views, judgments, capabilities, resource endowments, etc…
Aggregation Rules • A collection of value judgments (or normative principles) defines a set of acceptable rules (or rules of the game). • Sources: (1) Collective Choice Theory; (2) Principles of Distributive Justice • Arrow’s Social Choice Framework • A template for designing social welfare functions i.e. mechanisms for ranking social states.
Aggregation Rules • Arrow’s Framework (continued) • Aggregation Mechanism • Pareto: If everybody prefers a to b, then a is socially better than b. • Non-dictatorship: the social decision should not depend on the preferences of a single individual, regardless of those of everybody else. • Independence of irrelevant alternatives: social ranking of a vis-à-vis b should depend only on individual rankings of a and b, and nothing else. • Universal domain: Whatever individual preferences may be, the social welfare function should always be able to rank alternatives. [Aggregation scheme must work for all possible preference profiles] • Collective rationality: social ranking must be complete and transitive.
Aggregation Rules • Arrow’s Framework (continued) • Outcome: There is no such social welfare function! • Interpretations • Decisional perspective • There is no social-decision making mechanism that respects both rationality and citizens’ sovereignty. • Other words: Impossible to have the choices of the people made by the people and for the people (Sen 1998) • Evaluative implications • Ordinal welfarism not suitable for distributional impact analysis: it excludes welfare comparisons both within and across states of the world.
Aggregation Rules • Distributive Justice • Assume cardinal welfarism with interpersonal comparability • Welfare is objectively measurable and comparable across individuals (e.g. life expectancy or income) • Every society has rules governing the allocation of resources [benefits and burdens] among its members. • Allocation: a collective decision about who gets a good or bears a burden (Young 1994). • Such decisions are based on relevant characteristics of the claimants
Aggregation Rules • Distributive Justice • Horizontal equity: equal treatment of equals • All claimants who are identical in terms of relevant characteristics for the allocation problem at hand must be treated equally (i.e. get same share of whatever is being distributed). • Unequals must be treated in proportion to relevant differences. • Relevance of characteristics of claimants depends on chosen principle among the following (Moulin 2003)
Aggregation Rules • Distributive Justice • Exogenous rights: Claims to the resources are set independently of the use of such resources and the responsibility in their production. • Example: Allocation of organs for transplant based on strict equality of chances (lottery) or according to social status or wealth. • Compensation: give extra resources to people who find themselves in unfortunate circumstances for which they cannot be held (morally) responsible. • Priority to those who can survive the shortest time (or whose life would be most difficult) without a new organ.
Aggregation Rules • Distributive Justice • Reward: Distribution of resources based on individual behavior (e.g. productive contribution). • Priority to the patient who has waited the longest (first come first served) • Fitness: Resources must go to the person who can make the best use of them. • Priority to those with highest likelihood of survival (maximize chance of success of transplant)
Aggregation Rules • A Class of Social Evaluation Functions • Characterized in terms of real-valued functions (social welfare functions) defined over the set of utility profiles and representing social welfare orderings. • Completeness and transitivity of associated orderings • Monotonicity: an increase in one agent’s welfare, ceteris paribus, increases social welfare (compatibility with Pareto optimality or efficiency-fitness, most basic concept in welfarism). • Anonymity (Symmetry): do not pay attention to the identity of the agents but only to their level of welfare (utility). A manifestation of equal treatment of equals in the sense that agents cannot be discriminated on the basis of any other characteristics, but their utility levels.
Aggregation Rules • A Class of Social Evaluation Functions • Focus (Independence of Unconcerned Individuals): Social evaluation should pay no attention to individuals with no vested interest in the outcome of the comparison. • Additive property: Given a utility profile u, the social welfare function W(u) is additive if there is an increasing real-valued function g(.) such that
Aggregation Rules • A Class of Social Evaluation Functions • [A continuous ordering that respects the focus assumption can be represented by an additive social welfare function] • Pigou-Dalton Transfer Principle: • An expression of aversion for inequality. Given two individuals, a transfer of resources from the better off to the less well-off increases social welfare. • Can be implemented within the additive framework by making the g function concave.
Aggregation Rules • A Class of Social Evaluation Functions • Independence of common scale • to focus on positive levels of welfare (utility), particularly when individual welfare is measured on a ratio-scale (e.g. life expectancy) and therefore invariant to positive linear transformation. • Hence rescaling all welfare levels in two social states would not change the underlying ranking (the order of magnitude of the utility level under comparison is irrelevant).
Aggregation Rules • A Class of Social Evaluation Functions • Let W(u) be a continuous social welfare function satisfying at once: (1) independence of unconcerned individuals, (2) independence of common scale, and (3) Pigou-Dalton transfer principle. Then the function g(.) can be only one of the following 3 types (Moulin 2003):
Aggregation Rules • A Class of Social Evaluation Functions • When p=1, we have classical utilitarian social welfare function (consistent with sum-fitness: distribute resources so as to maximize total welfare of the claimants). • As q tends to infinity, egalitarianism prevails (compensation principle). • As p or q tends to zero (1) or (3) tends to (2): Nash social welfare function (usually expressed in multiplicative form).
Causal Inference • Concept • Effect of a cause can be understood only in relation to another cause (Holland 1986). • Akin to the idea of netting out the opportunity cost of a resource (what it would have earned in the next best alternative use) to estimate the benefit of its engagement in one activity.
Causal Inference • Modeling Implications • To evaluate policy in terms of its consequences (individual and social welfare), one needs a model that predicts the total effect of policy implementation on individuals and society. • Model links policy instruments to fundamental determinants of outcomes: • Individual behavior • Endowments (attributes related to will, ability, ownership of assets, affiliation) • Rules of social interaction.
Causal Inference • Modeling Implications • A comparison of the social state “with” the policy and the state “without” it, ceteris paribus, provides an estimate of the policy effect. • Note the ceteris paribus clause: individual characteristics (observable or not) and other macro-events unrelated to policy implementation are confounding factors that must be controlled in order to get an unbiased estimate of policy impact.
Causal Inference • Targeted Interventions • Potential Outcome • Function of participation and characteristics (Smith and Todd 2005) • Random coefficient model: impact of “treatment” or intervention varies across individual even conditional on xi.
Causal Inference • Targeted Interventions • Common effect model • Unobservable characteristics are the same in exposure and non-exposure states. • The function (xi)=[1(xi)-0(xi)] is constant with respect to observable characteristics. • Note linearity of (xi) and state-invariance of unobservable term (no 0 or 1 subscript on ui).
Causal Inference • Targeted Interventions • Impact estimation depends on stochastic structure • Exogenous Switching • Orthogonality condition: random disturbance uncorrelated with observable characteristics (xi) and participation status (di), then case of • OLS or Matching provide a consistent estimate of average impact on the treated • Endogenous Switching • Orthogonality breaks down due to the endogeneity of participation decision. • Hence find a way to break the correlation between participation and outcomes and apply suitable estimation methods e.g. IV (instrumental variable) or Heckman.
Causal Inference • Economy-Wide Policies • Scope of intervention may be so large that the whole population is affected (e.g. structural adjustment program). • Hence difficult to select a valid control or comparison group. • Need an economy-wide model such as a computable general equilibrium (CGE) to simulate the state with the policy and the counterfactual, and compare the corresponding distributions of welfare.
Causal Inference • Economy-Wide Policies • A general equilibrium model is a logical representation of a socioeconomic system wherein the behavior of all participants is compatible. • Each agent attempts to implement the best feasible option in pursuit of her objective • Optimization framework: (1) actions a socioeconomic unit can take; (2) set of constraints; (3) objective function used to evaluate action.
Causal Inference • Economy-Wide Policies • Market interaction based on quid pro quo (Lindblom 2001): each person’s claims to available goods and services limited by amount of income obtainable by that person’s successful sale of something of value on the market. • Impact of shocks and policy interpreted in terms of individual behavioral and market adjustments induced by such events.
Conclusion • Analysis of the social impact of a policy requires a reliable social policy model. • A policy model has two basic components • Positive component to predict impact of policy on individual behavior subject to prevailing social interaction. • Normative component (social evaluation function) to assess desirability of outcomes. • Attribution of consequences to policy entails a normalized comparison of social states (e.g. policy versus counterfactual). • In the end social evaluation is a matter of value judgments.
References • Hausman, Daniel M. and McPherson, Michael S. 1996. Economic Analysis and Moral Philosophy. Cambridge: Cambridge University Press. • Holland, Paul W. 1986. Statistics and Causal Inference. Journal of the American Statistical Association, Vol. 81, No. 396: 945-960. • Lindblom, C. E. 2001. The Market System: What Is It, How It Works and What to Make of It. New Haven, CT: Yale University Press. • Moulin, Hervé J. 2003. Fair Division and Collective Welfare. Cambridge (Massachusetts): The MIT Press • Nussbaum, Martha C. 2000. Women and Human Development: The Capabilities Approach Cambridge: Cambridge University Press.
References • Rawls, John. 1971. A Theory of Justice. Cambridge (Massachusetts): Harvard University Press • Sen, A. 1999. Development as Freedom. New York: Alfred A. Knopf. • Sen, A. 1998. The Possibility of Social Choice. Nobel Prize Lecture. • Sen, A., Muellbauer, J., Kanbur, R.,Williams, B. 1987. The Living Standard. Cambridge: Cambridge University Press. • Smith, Jeffrey A. and Todd, Petra E. 2005. Does Matching Overcome LaLonde’s Critique of Nonexperimental Estimators? Journal of Econometrics, Volume 125, No. 1-2: 305-353. • World Bank. 2001. World Development Report 2000/2001: Attacking Poverty. Oxford: Oxford University Press. • _________. 2006. World Development Report: Equity and Development. Oxford: Oxford University Press. • Young, H. P. 1994. Equity: In Theory and Practice. Princeton, NJ: Princeton University Press.