Modeling Bounded Rationality at the World Bank

Modeling Bounded Rationality at the World Bank

By Sagar Rijal

Although Washington D.C. is the center for applied public policy, every so often there is a lecture on pure economic theory for which the practical application is not even confirmed. Such was the case of Dr. Ariel Rubinstein’s lecture on “Directions in Modeling Bounded Rationality” at the World Bank on Thursday March 28. Dr. Kausaik Basu the Chief Economist of development economics group at the Bank, introduced Dr. Rubinstein as the foremost theoretician of game theory and advanced formal research on “bounded rationality” in the last twenty years. Dr. Rubenstein did nothing to diminish his reputation. His presentation was quite esoteric, formal and not exactly geared to a layperson. Dr. Basu’s claim that the work would influence policy and debate on the field regarding the use of behavioral economics and meaningful rationality did not seem to bear out. Instead, the takeaway might have been the deeper questions regarding the value of basic theoretical research and its application to public policy problems. All we can say is that what is rationality and how agents use rationality in their actions is contingent upon the rules of the game.

Dr. Rubinstein presented his recent paper that he co-authored with Dr. Jacob Glazer, his colleague at Tel Aviv University, Israel. The premise of the highly technical and formal paper is that the rationality principle that undergirds much of economic theory is highly contingent so that agents who are knowledgeable or astute can play the game by learning how to change their true choices based on the rules of the game. The game as presented is a persuasion or selection situation, a variation of the leader-follower game, which the authors call the listener-speaker game. In this game the listener presents her profile of information to which the speaker offers a matrix of conditions with which to judge the listener’s profile. Upon listening to the conditions the listener has to respond. The implication of the model is that “boundedly rational” agents might respond to the speaker’s conditions by telling the truth or lying.   

What is the “practical implication” of Dr. Rubinstein research presentation? After presenting his model and the implications of the model, even the author was non-committal of the practical implication of this or any other theoretical model. He insisted that as an economic theorist who tries to replicate a slice of reality into his highly stylized models, he is way of making grand pronouncements or sweeping conclusions. As a way of example, Dr. Rubinstein jokingly warned that no one should ask a game theorist if Israel should attack Iran. For game theorists who work in IR, such questions might be the ultimate application.

Because the forum for the lecture was the World Bank and not an academic conference, the question of application was paramount. How do pure theoretical research benefit the policy and practice of economics, especially developmental economics? Again Dr. Rubenstein was dismissive of such concerns suggesting that these are highly formalized models, which approximate reality but cannot replicate it. As such these models would be meaningless or contradictory if the “rules or procedures” of the game is tweaked to fit a different context. Yet, in his closing remarks, Dr. Basu, being the chief economist of the Bank, tried to defend formal models and their application to practical questions and suggested it was up to the researchers working in practical projects to find useful applications of formal model, such as the one presented by Dr. Rubinstein.  

  ~Sagar Rijal, ABD, is spending the final semester of his graduate assistantship doing research for his dissertation in Washington, D.C. Every week he will attend meetings, seminars, or presentations at think tanks and develop a column for the Bulletin community.

He can be reached at srijal@odu.edu

Australia’s Response to the Asian Century

By Sagar Rijal

The continuing shift of economic and political power to Asia in the twenty-first century has prompted varied responses from the incumbent powers. In the advanced Western states questions are being raised about how best to handle the growing power of China and India. The concerns are not limited to inter-state hard power issues. Rather a spectrum of international and domestic policy issues – economic, trade, education, immigration – are at the source of the discussion and debate as countries try to adapt to a world of Asian power.

Australia provides a good case on the variety of responses to the rise of Asian powers. An advanced industrial democracy with a wealthy economy, Australia, due to its history, culture and language identifies itself as a Western nation. However, in terms of geography, economic relationships and emerging migration trends this island nation perceives the impact of rising Asian power acutely. So far this resource-rich country has done well by exporting its natural resources to the voracious needs of China and other Asian states. But in order to remain competitive in the long term, it must diversify its options to build better trading and business relationships with its Asian neighbors. What can Australia do to achieve that?

One recent Australian government policy response has sparked some debate. With the goal of increasing its Asia-related human capabilities, mainly in terms of language training, Prime Minister Julia Gillard’s government in 2012 mandated that all school students have access to learn at least one Asian language, either Mandarin, Indonesian, Japanese or Hindi. The costs for the program could run into billions.

The benefits of such a program seem great at first blush. Since Asia is going to be Australia’s main market in the coming century, up-skilling its future generations by language training could potentially pay rich rewards in terms of business opportunities for Australians. Social and cultural benefits could also be realized.

But there are thoughtful critics of the expensive program. One such criticism came from Benjamin Herscovitch, a Policy Analyst at the Center for Independent Studies, Sydney, who argued at a lecture given at the Center on February 19^th, that such a program in not only an example of governmental overreach but also a solution seeking a program. Mr. Herscovitch’s enumerated a number of ways in which Australia is already blessed with abundant Asia-related capabilities, chief among them being the large number of skilled Asian immigrants that Australia has been able to attract over the years. If the need arose, this pool of talented and native-language fluent Australians could fill the gap. Also there seems to be no demand from businesses for specific language skills to help in their business ventures. According to Mr. Herscovitch, the policy response such as the one promoted by Gillard government is wasteful and unhelpful to the problem at hand.

On analyzing from an higher perspective, one can notice the sense of security that more Asian literacy and engagement provides a country such as Australia, which depends on the U.S. for its security partnership but has a vast trade relationship with China. How Australians manage the delicate balance might be an issue of more than mere language.  

                                                                       

   ~Sagar Rijal, ABD, is spending the final semester of his graduate assistantship doing research for his dissertation in Washington, D.C. Every week he will attend meetings, seminars, or presentations at think tanks and develop a column for the Bulletin community.

Turkey as a Global Player

By Sagar Rijal

On Tuesday, February 5^th, at the Young Scholars on Turkey Conference, it was a grizzled veteran who stole the show. In his keynote address, the former finance minister of Turkey, Dr. Kemal Dervis, spoke on the current state of Turkish economy and presented a forceful case of Turkey as a global player.

Having spent a long and illustrious career as an economist in various leadership positions at the Word Bank and the UNDP, Mr. Dervis currently serves as the director of Global Economy and Development Program at the Brookings Institution. Drawing on his vast international experience, Mr. Dervis spoke with authority on Turkey’s global role. Geographically, historically and culturally Turkey has been a bridge between the East and the West, between Asia and Europe. As the progeny of the Ottoman Empire and the children of the modernizing policies of Kemal Atatürk, the Turkish people are largely cosmopolitan in their worldview. In the present context, the Turkish state is proud of its ability to manage political Islam with a democratic republic and harbors ambitions to be a role model as well as a regional leader. All these aspirations and opportunities are based on the foundation of a booming economy.

On economic matters, Mr. Dervis’ views are sacrosanct. After all, he was the main architect of the far-reaching economic liberalization policies that lifted Turkey out the deepest financial collapse in its history. In February 2001, owing to decades of political instability and an economic ideology that favored high levels of state intervention in its markets and banks given to an over-reliance on foreign capital, Turkey experienced a massive economic crisis. The stock market crashed, threatening bank failures, massive bailouts and even the possibility of state default. Arriving at the scene from a long career at the World Bank, Mr. Dervis was able to convince the IMF for enough loans to see the crisis through. In the meantime, he passed tough, long-term and market-friendly reform policies, which has led to a decade’s worth of historically unprecedented growth.

Mr. Dervis took obvious satisfaction in recounting all the ways that Turkish economy has boomed since the crisis. The GDP has grown by more than 5% per year leading to a massive uplift in the living standards of ordinary Turks. The aggregate GDP has almost quadrupled and many Turkish companies have grown to regional and even global prominence. While he remained sanguine about the continuing vigor of Turkish economic trends, Mr. Dervis cautioned about the low savings rate and very low educational attainment rate in Turkey. With its newfound budget surpluses, he hoped that expanding educational opportunity, especially female participation in secondary and higher education, would become a priority.

Yet, the larger aspiration of Turkey as an economic power and a global player was front and center. In these times of budget crisis and austerity measures in Europe and myriad political crises in the Middle East, Turkey’s role as the stable and prospering democracy might indeed be to serve both as a model and the bridge. 

~Sagar Rijal, ABD, is spending the final semester of his graduate assistantship doing research for his dissertation in Washington, D.C. Every week he will attend meetings, seminars, or presentations at think tanks and develop a column for the Bulletin community.

Central Asia After U.S. Leaves

By Sagar Rijal

Given the planned drawdown of American forces from Afghanistan in 2014, the issues relating to Afghanistan’s future, political instability, and the role of the Taliban are of pressing urgency. But the Afghan problem tends to overshadow the fallout in Central Asia. To address that question, Center for Strategic & International Studies has published a policy report titled “The United States and Central Asia after 2014” written by the Center Fellow Dr. Jeffrey Mankoff. On February 4, a public meeting was held where Dr. Mankoff presented the major findings of his report.

Compiled after extensive fieldwork and interviews with local stakeholders, Dr. Mankoff’s report offered a complex picture of American dealings with each of the states of Central Asia in the decade since 9/11 and the 2001 invasion of Afghanistan. Seeking cheap and safe supply routes as alternatives to the treacherous path through Pakistan, the U.S. sought out airspace, logistical transit points and military cooperation in the five “Stans” of Central Asia: Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan. Riven with their internal political troubles and post-Soviet economic malaise these states were eager to cash in on the bounty of the U.S. and ISAF dollars. At the same time, these five states were in sensitive strategic situation because their bilateral relations were often contentious and each of them felt the constant tug of reprimand from Moscow, which was growing increasingly suspicious of larger American designs in its backyard. One astonishing data point leapt out: four of the five Central Asian states that allowed land supply and transit routes for ISAF forces into Afghanistan, each have received payment of more than $500 million per year since the war started. Cooperation was bought at a high price.

After 2014 when the US and NATO forces leave, the effect of the lost economic activity and monetary transfusion might be catastrophic. Dr. Mankoff highlighted the complex regional rivalries among these states based on historical squabbles, political and economic competition and strategic considerations. Their internal challenges of poverty as well as political upheavals might lead to instability. Furthermore, strategic and economic interests would surely compel Russia’s footprint to be magnified, which may not be accepted politely by the Chinese who have made massive economic and infrastructure investments there in the last decade. Given these possible dynamics in this volatile region, the question of American strategic interests and long-term plans for the region is imperative.

Just what the U.S. can or should do produced heated debate in the panel but little clarity. Dr. Mankoff recommended deep, strategic and all-spectrum engagement so that the region does not veer into chaos. Some limited variation of such a plan seems to be official American policy as well: to try create a “New Silk Road” of trade and commerce. But the discussants and the audience were wary of a deep and long American commitment due not just to budgetary concerns but also concerns about the possible response from Russia and China of sustained U.S. presence in Central Asia. What course the U.S. ends up taking, of course, only time will tell.    

~Sagar Rijal, ABD, is spending the final semester of his graduate assistantship doing research for his dissertation in Washington, D.C. Every week he will attend meetings, seminars, or presentations at think tanks and develop a column for the Bulletin community.

Strategic Security in South Asia

By Sagar Rijal

The strategic security context in South Asia is centered on India’s complex relationship with its two nuclear-powered neighbors, Pakistan and China. The long-simmering historical conundrum of Kashmir, which has provoked three major wars and a perpetual state of impasse between India-Pakistan, has for long been at the forefront of the regional security picture. However, the economic rise of China in the last three decades coupled with its growing security ambitions in the entire Asian region portends a major shift. The Sino-Indian challenge—given the two nations’ unsorted boundary issues and dueling strategic ambitions—has turned into the salient feature of South Asian transformation in the last twenty years. At a recent conference held at the Carnegie Endowment for International Peace, a panel of analysts presented their views on the these twin relationships, which have the potential to affect regional and global security in the 21^st century.

Ashley J. Tellis of the Carnegie Endowment began with a startling argument: the general impression that India is weaker than China is wrong. Since its shocking defeat at the 1962 war against China, India had spent a great deal of resources to avoid another such failure, deploying “forward defense” in its long mountainous border regions with China. On the other hand, China had stationed only paramilitary troops near the difficult border terrain, while keeping the larger PLA forces farther back. Thus, Tellis argued that in the greater Tibetan frontier region India had maintained operational superiority since the 1970s.

However, in the last 20 years Chinese capacity has grown in all areas including the resources devoted the border areas but also extending to its capacity in the oceans and air. China has made huge investments in infrastructure in the Tibetan region so that now it is possible to transport large number of outside forces in case of necessity. The modernization of PLA forces as well as logistical systems of the Chinese military has closed that gap in the border regions. More dramatically, the PRC has made improvements and investments to modernize its Air Force and Navy. While traditionally, Indian Air Force and Indian Navy were well prepared and slightly superior, that gap has also been closed.

What has been the Indian response to the growing military modernization campaign of China? While India has made significant infrastructure and resource investments of its own, and forged tighter security arrangement with neighboring nations, in terms of matching Chinese capacity India is slowly falling behind. Tellis argued that, like with everything else concerning India, domestic politics and strategic myopia of its politicians are to blame.

The India–Pakistan conflict also suffers from malign domestic politics in both the countries. Jack Gill of the Near East and South Asia Center, offered further pessimism about any forward progress on that front. Gill argued that in the short term the Kashmir issue is going to be held hostage to the upcoming domestic elections in both Pakistan and then in India. So until after the mid-2014 he sees no further progress on that front.    

           

   ~Sagar Rijal, ABD, is spending the final semester of his graduate assistantship doing research for his dissertation in Washington, D.C. Every week he will attend meetings, seminars, or presentations at think tanks and develop a column for the Bulletin community.

Twenty Years of Indian Transformation

By Sagar Rijal

For a daylong conference entitled “Twenty Years of Transformation in South Asia,” the panels were predictably dominated by the concerns of the largest South Asian state, India. Hosted by the Carnegie Endowment for International Peace on Thursday, January 31, the broad themes of the gathering could be divided into “the economic issues facing India” and “the security context of the Indian sub-continent.” I will present a follow-up column devoted to the security issues. Here I consider a panel discussion on some aspects of the Indian economy.

Since the economic liberalization policies of 1991-1992, India has averaged unprecedented GDP growth rates of more than 6% per year. Observers and boosters view India’s growth as corresponding to that of the much steeper and longer trajectory experienced by China. If there is a concern, it is that of continuity of reforms and growth. Where is Indian economy headed? The panel looked for answers in a few interesting directions.

Dr. Devesh Kapur from University of Pennsylvania presented data about mass education, the demand for which has skyrocketed in the past two decades. Since human resource is the one resource that India has in abundance, Dr. Kapur argued that the quality of its educational system would strongly determine the trajectory of its economy. However, the data he presented is not very sanguine. There is a lack of adequate supply of higher education opportunities as well as concerns about the quality of education. He reported that 3700 new colleges opened in India in a recent five-year period – a rate of more than ten new colleges every single day, raising questions about quality. The massive explosion in enrollment in higher education has left many institutions with an acute shortage of trained faculty.

After such pessimistic picture on education, Dr. Milan Vaishnav aroused hope in the most unlikely issue: corruption. The conventional wisdom is that corruption is rampant and impossible to solve in India. However, Dr. Vaishnav argued that there is a “great cleansing” taking place right now due to voter movements and Right to Information laws. He attributed the recent spate of high-profile corruption cases to increased transparency, which has only led to more exposure of corruption, especially amid a booming economy that expanded the corruption frontier.

Vikram Nehru, a former World Bank analyst, drew attention to the external angle, to and area of immense opportunity for the Indian economy. He argued that strengthening the trade and investment relationship with the nations of East and Southeast Asia would provide unparalleled opportunities for Indian economy to keep its growth trajectory. The ASEAN nations already seek an economic hedge against China, which India could successfully leverage into long-term growth. 

However, Mr. Nehru offered wise caution. India’s constraints are not external but mostly internal, meeting the challenges of human capital development, getting a handle on corruption, reforming the labor laws and achieving a modicum of political accountability. A fine list to keep India busy for another twenty-year transformation.

~Sagar Rijal, ABD, is spending the final semester of his graduate assistantship doing research for his dissertation in Washington, D.C. Every week he will attend meetings, seminars, or presentations at think tanks and develop a column for the Bulletin community.

 

“Big Bets and Black Swans”

Brookings Institution

 by: Sagar Rijal

 With the nation’s capital gearing up for President Obama’s inauguration celebration, the pundit class is busy prognosticating on his second term agenda. The ongoing issues in domestic politics – the recriminations on the fiscal cliff deal, the necessary but elusive grand budget compromise, gun control regulations – are certain to carry over from the dying days of the first term and engage the majority of the President’s time. However, a variety of ongoing and new challenges beyond the nation’s borders seem poised to demand a greater share of his attention as well.

To mark the transition, the Brookings Institution unveiled its latest publication, Big Bets and Black Swans: A Presidential Briefing Book at a public discussion event on Thursday. In that book a number of Brookings fellows offer memos on what they view as the most salient foreign policy opportunities and challenges for the President to tackle and look out for in his second term. In the discussion moderated by NBC News’s David Gregory, two panels of authors held forth on their views on the “big bets and black swans” on the U.S. foreign policy.

Every new presidential term is greeted by the clichéd “unprecedented challenges.” The director of Foreign Policy at Brookings, Ambassador Martin Indyk did not deviate from the norm. Introducing the panel discussion, Indyk used a phrase – “a plastic moment” – to emphasize that the President faces a challenging and unsettled but ultimately malleable global arena as he enters his second term in office. The discussants enumerated the “big bets,” or opportunities and issues that are sure to be on the table: satisfactorily resolving the Iranian nuclear issue; constructive engagement with China to nudge it towards a more responsible role as a regional and global player; helping to prevent the possible implosion of the Euro debt crisis, among others. David Gregory wondered if there was enough “bandwidth” in the administration, given the plethora of domestic issues to deal with, to handle all of these myriad foreign policy challenges successfully.  Robert Kagan responded that the decision to confront any of these issues, especially Iran, is not a function of choice but of necessity.

On the other hand, unexpected and unanticipated new developments might totally blind-side the administration, grabbing its attention and sapping its capacity. These so-called “black swans” – low probability but high impact events – are by definition unpredictable. Yet another panel of Brookings analysts took a stab at speculating some possibilities: disorderly breakdown of the Eurozone; accelerating climate change in the form of more catastrophic weather events, collapse of the Palestinian Authority, and even a possible revolution in Saudi Arabia leading to the fall of the House of Saud. The “black swans” seem improbable; but that is precisely the point: to analyze and plan for those highly improbable and yet impactful foreign policy crises.

The discussion thus was informative enough in its survey of possible foreign policy direction. But whether the President and his administration heed the myriad recommendations will only be known long after the inauguration parades have passed.

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For further information on the Foreign Policy at Brookings project and to download Big Bets and Black Swans: A Presidential Briefing Book, go to this link: http://www.brookings.edu/research/interactives/2013/big-bets-black-swans

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~Sagar Rijal, ABD, is spending the final semester of his graduate assistantship doing research for his dissertation in Washington, D.C. Every week he will attend meetings, seminars, or presentations at think tanks and develop a column for the Bulletin community.