Kaos Kompetenz: a Note on emerging aid work formally organised as ‘Type II’ (ie assuming that change is unpredictable)

This is Blog # 5 from http://adamfforde.blogspot.com.au/

I publish on 1. Contemporary Vietnam 2. ‘Method’ and 3. Servicisation (other details at the end of the Blog). I learnt about the DFAT/Asian Foundation experiences when a friend contacted me after he saw Blog # 4. So please let me know about other interesting experiences in this area.

adam@aduki.com.au      

What is new?

Until recently I could not point to an example of a DAC member bilateral aid agency that disbursed into interventions which formally assumed that change was unpredictable. Generally, this would be contrary to DAC doctrine, as my recent book explains (here). However, I have recently found an example and this blog points to this and tries to explain why I think it is important, what its significance is and how things are likely moving forward now.

Type I and II - what does this mean?

My book Reinventing development – the sceptical change agent frames development work as operating either in environments suited to assuming we can predict what will happen, or not. Clearly, whether an environment is deemed predictable or not is a matter of choice (eg How much of the budget should we spend on research?). I call environments thus deemed predictable as ‘Type I’ and those deemed unpredictable ‘Type II’. It follows that intervening in ways that assume ‘Type I’ contexts are ‘Type I’ organisations, and vice versa. Thus, if you get it wrong and organise as though an environment is predictable, and it is not, that is a ‘II/I’ situation, and so on. This language has its problems but is useful.  

At present, the DAC/OECD requires as doctrine that aid paid for by their members assume ‘Type I’ environments and then intervene using suitable ‘Type I’ organisational forms, called the Log Frame, Theories of Change etc. That is, they assert that we live and work in ‘I/I’ ways. But as there is lots of evidence that there are many unpredictable environments, we also live with ‘II/I’. This can be tricky.

Clearly, it makes no sense to assume that all change is predictable. If it makes sense to believe on the contrary that change - in a given environment - is ‘Type II’, but DAC doctrine requires ‘Type I’ organisation, there is a problem. Conversely, I think that many aid professionals have good grounds for believing, based often on trial and error, that some environments are ‘Type I’, and if they were forced to organise as though they were not (Type II) this would lead ‘I/II’ and so tensions. 

I think of ‘war of attrition’ tactics used to push through, for example, female participation in primary schooling, where I think many would reasonably believe that a couple of decades pushing the Ministry etc would lead to measurably better results, though analysis of just how and why would likely lead to argument amongst evaluators. Experience shows often that it is reasonable to assume predictive power even if there is no good theory that explains it (see Chapter 5 of my book).

Making a distinction between ‘Type I’ and ‘Type II’ in this way helps think through various tensions.

As a country expert (perhaps the most cited writer on contemporary Vietnam) it is clear to me that country expertise usually has less prestige than those of generalists (eg experts in general on topics such as ‘rural development institutions’) amongst aid donors. However, it is also clear that the positions taken by generalists are fragile in straightforward debate, and so country expertise is often managed by ignoring it. Catherine Earl has an edited collection coming out next year that looks at aspects of this for Vietnam (Mythbusting Vietnam). I gave a seminar on aspects of this at the University of Auckland a few days ago (PowerPoints available on request).[1] My paper in Earl’s book shows scholars as senior as Dani Rodrik and Jeffrey Sachs making clear and embarrassing mistakes in articles about Vietnam published in good journals and which any country expert can spot. 

In both cases they are trying to generalise.

This suggests that such generalisations are often very fragile. This suggests in turn that part of what aid workers experience is indeed a rather extreme instability in what ‘Type I’ knowledge that they are meant to believe in: individual donors’ views change over time, views about what causes what vary between donors, and views are fragile when confronting country expertise. This suggests again that a better control over belief is to be welcomed, and what my book calls the ‘right to scepticism’ – the right to assert that a context is ‘Type II’ – is itself valuable.

The Reinventing development book tries to think-through why it is the case that the DAC position exists, and how it works, and why formally asserting a context is unpredictable and organising accordingly (‘II/II’) is so hard. When I started writing the book I could not find any such examples, but I have found one – DFAT money, spent by The Asia Foundation. I thank Foundation people for talking to me about their experiences (see here for a clear exposition).

What are the problems formalisation of Type II (ie a ‘II/II’) must solve?

What is the problem?

It is not entirely clear to practitioners what problems formally working in II/II ways must solve. This is mainly I think due to lack of formal experience. That is why DFAT/The Asia Foundation work is so valuable.

Watching practitioners and those they report to work this out is fascinating. We can learn something from other situations (see Reinventing development), and these often report that working this out requires very big shifts in cultures of power, responsibility and hierarchy. This does not yet seem to be happening, which helps explain why pressures to redefine ‘II/II’ as some form of ‘I/I’ can be strong. For example, discussing evaluations with a bilateral official recently, it was clear that evaluations from a ‘II/II’ perspective, that did not assert ‘what had happened’ but reported different accounts from stakeholders), could see senior levels require a ‘synthesis’ that came down to ‘yes, but state which account is correct’ – thus asserting that the context was Type I not Type II.

‘Narrative’ evaluations seem rather straightforward

If a context is deemed unpredictable then so-called ‘narrative’ evaluations make sense in that they report different accounts and different valuations, without asserting that, for example, one Theory of Change is correct. These have been around for a while but contradict DAC doctrine – see this JICA-funded exercise (Beyond Logframe; Using Systems Concepts in Evaluation). See also my own evaluation of the Sida Chia Se program in Vietnam much-quoted here. Canny aid officials have I think long liked narrative evaluations that report various stakeholder accounts of what they think happened, and what they thought of it. These in effect, if people think like that, report multiple Theories of Change and multiple valuations of subsequent situations. The authors can then say what they think, but the official is aware of the views of relevant actors and is therefore (of the reports are reliable) protected against unpleasant surprises. There is of course evidence that repeated evaluations of interventions that assume ‘I’I’ do not usually agree with each other (for example – here). This suggests that learning from evaluations in Type II situations is not about learning how to create a better more predictively powerful Theory of Change.

But very little thinking about how to decide whether a context is deemed to be ‘Type I’ or ‘Type II’

The guts of all this, I think, is that thinking about Type I vs Type II, both in terms of context and organisation, comes down to securing and managing far better control over belief. After all, a Theory of Change may be based on a view that a context is predictable 60% of the time, or not, depending on what people think is important – such as, it is to do with views of the costs of being wrong, and the costs of some learning that would hopefully get the 60% up to 80%. It is quite reasonable to argue that, depending on such considerations, one group decides that it thinks a context is Type I, and another that it is Type II. Thinking like this is itself I think empowering. All realities are complex in some sense: whether a complex or a simplifying model is used depends on many factors, not least the costs of developing and using the model.

What is striking is that there is so far extremely little discussion about this issue. Stating as the DAC does that contexts must be defined as Type I is often attacked on the grounds that ‘development is unpredictable’ (The Asia Foundation’s position – see here). I think that aid professionals often have very good grounds in their accumulated trial and error experiences (and the need to focus on areas where they believe they can work reliably in ‘I/I’ ways) for thinking that it makes sense to assume predictability. And why not?

But the dam has broken

The Asia Foundation, paid for by DFAT, has experience in ‘II/II’ that so far as I know is unique. A key document is here. So far as I know, this project itself was managed outside the LFA, using Australian tax-payers’ money and so audited. It is therefore a ‘II/II’, an example of formal organisation that assumes unpredictability. They want to ‘win’:

… efforts to operationalize a ‘thinking and working politically’ approach have prompted a broader reconsideration of development practice because the structures and requirements of standard development projects do not facilitate innovative, politically-informed ways of working. While there are multiple articulations of what a more effective approach to development assistance might look like, one core principle they generally share is the need for greater flexibility. This emphasis on flexibility stems from an understanding that development is a complex, unpredictable, and dynamic process that depends on the changing interests, incentives, ideas, and relationships among multiple groups and individuals. In this context, an iterative approach that closely links learning and action is most likely to bring about effective solutions

and

bringing about change requires navigating an unpredictable and complex landscape of interests, [2, stress added]

The position here is that change is always unpredictable. Therefore, at any point in time an asserted belief in what is happening, what interests are, etc, is asserted to be provisional, changeable and so flexible. This gives more control over beliefs – what is said to be the change pattern is deemed unstable, changeable, ‘true-for-somebody but not necessarily everybody’ and so on.

This is reflected in changes in learning processes, which shift training and reflection down towards activities (and so towards local expertise and away from generalists):

ST {strategy testing – AF} is a time and labor intensive process for program staff. Unlike some of the more conventional monitoring techniques, ST cannot be delegated to monitoring and evaluation (M&E) officers. It requires program teams to dedicate significant blocks of time away from their day-to-day work and make a serious commitment to critical reflection, discussion, and documentation. [15]

This means that INGOs and others can now argue that if DFAT can disburse to The Asia Foundation on the assumption of ‘Type II’ contexts, then, if they can make the argument that their context is important and ‘Type II’, they should be allowed to proceed accordingly. 

Are they clearly solved, and if so how?

Thus, I think that the process of learning how formally to organise in ‘II/II’ ways has now started, and people like me can ask people like The Asia Foundation, and the DFAT officials who managed them, how they did it. Since this means (as the JICA evaluation did – here) that DAC members in effect walk around DAC doctrine, formal experience is now accumulating. For me the key issue is deeming a context unpredictable – ‘Type II’.

Evaluations of such activities will then assume that one is managing beliefs and reporting them in relevant ways; this is not complex. Officials sign-off on projects based upon their acceptance of narrative evaluations.

Reflective learning associated with evaluations seem, in ‘II/II’, to move towards the local and practitioners, devaluing generalists’ knowledge. As in other contexts, practitioners train practitioners more than bringing in outside experts.

What seems to be lacking, I think in part as experienced aid workers’ beliefs based upon trial and error are often under-valued, is a thinking-through of the issues involved in deeming a context to be Type I or Type II. I think that the argument that ‘we only have $10 mn so why spend lots on research? Let us assume Type II and then organise as though we are simply believing this or that now, others disagree but we can move forward’, makes very interesting sense. Similar arguments suggest avoiding complex models and explanations that are costly to produce and, more importantly, to understand and work with. For me, much comes down to the value of asserting a ‘right to scepticism’ in using beliefs and getting them under control.

As a result, in part as so far there is only a limited understanding of the major changes in culture and the meaning of leadership implied by ‘II/II’, the natural tendency is to ‘revert to ‘I/I’ – as was put to me senior officials would say ‘Yes you have a narrative evaluation but which account is true? Who is right?’. And that wants to go to a ‘I/I’, but actually pushes far too readily to a ‘II/I’, where everybody knows (but cannot formally say so) that the asserted predictive knowledge is very fragile, varies over time and between agencies, avoids country expertise as it is too destructive, and often ends up, as it devalues or ignores those who disagree with the central position that is ‘deemed true’, ignoring voices that may just hit the donor hard through a complaints procedure with local NGOs getting into 

bed with INGOs who brief a visiting TV crew, or simply the Ambassador asking why when the projects were deemed successful nobody seems very happy, least of all the security organisations. 

The point is not be right, but to be effective.

Comments, extra information, very welcome.

Prof. Adam Fforde

adam@aduki.com.au

http://adamfforde.blogspot.com.au/

Victoria Institute of Strategic Economic Studies, Victoria University www.vu.edu.au/vises  (Professorial Fellow, part-time)

Member, Editorial Boards: Journal of Current Southeast Asian Affairs and Canadian Journal of Development Studies

Consultancy Services (ABN 27412011042)

Website: www.vietnampolitics.net

BOOK JUST OUT - Reinventing development - the sceptical change agent (Palgrave March 2017) http://www.springer.com/us/book/97833195022670

For details- http://vietnampolitics.net/?page_id=121

And for how to get a review copy - https://www.springer.com/gp/reviewers/online-review-copies---all-in-a-nutshell/4798

---

[1] “‘All good theologians end up as heretics’ – country expertise vs development experts – Vietnam and Adam Fforde as a case study” - Joint Seminar: Asian Studies and Development Studies, University of Auckland, August 4^th2017.

Type I and Type II development contexts

Since the publication of Cowen and Shenton’s Doctrines of Development in 1996, (presaged by Arndt’s pointing out in 1981 that development was both transitive and intransitive – both done and something that happens), practitioners have had academic materials to feed a nagging concern: do we know enough about what we are doing to treat our knowledge as predictive, and so feel happy with the log-frame and other intervention logics posed in terms of cause-effect relationships that we can know before and after we act? Of course, practitioners have also had their own experiences, and I think this increasingly leads them to the same place. And this is confusing. If expertise says X will lead to Y, why so often does it not?

I think this is experienced as confusing because many forces, indeed many common beliefs, push very strongly for a formal, organisational, belief that contexts are what I call ‘Type I’ – that is, that they are suited to assumptions of predictive knowledge. Log-frames, Theories of Change and other ways of organising interventions come down to this. DAC doctrine on how to do international development states this clearly, and, whether we clothe it in languages of ‘adaptive learning’, ‘results-based management’ or ‘reflective practice’, I think that the evidence shows that the forces to assume that contexts are ‘Type I’ are very strong. I think also that much evidence suggests that such assumptions are often fragile. In a recent book, I go into this in perhaps tedious academic detail (Reinventing development – the sceptical change agent 2017). But, as a publisher’s review put it:

"I think that this book should have been written 50 years ago – not that it is out of date, but that it is long overdue.  That said, I think that its arguments are likely to be long-lived, at least for as long as we don’t change the way in which we understand beliefs about cause and effect in social and economic policy."

But, if there are ‘Type I’ contexts, then logically there must also be ‘Type II’ contexts - where it can reasonably be believed that there is no reason to assume predictive knowledge. This may be because such knowledge is too expensive (‘Just how much can we spend on the baseline study?’), too hard to understand (‘No I cannot afford staff who understand the mathematics behind complex models’), likely unobtainable (“All the surveys are clearly fabrications”), or for some other reason. There is much evidence that ‘Type II’ contexts are familiar and rather easy to find. In areas of high risk, a need for great efficiency and effectiveness, and where donor organisations can cope, clearly one must expect there to be pressure for, and experiences of, working in contexts deemed to be Type II. But put this way, aid work that formally assumes this is not easy to find: that is, formally organised aid work that openly organises, trains, evaluates, reports and learns on that formal assumption.

So, it is odd that the DAC and so on require people to assume ‘Type I’. Be that as it may, it seems evident to me that many of the most interesting and creative developments in aid practice and thinking can be thought of as an exploration of how ‘Type II’ contexts can be managed. This I am starting to learn more about from ‘performing’ the book and discussions with colleagues.[1]

On the one hand, studying these explorations are a research topic. In my book, I try to clear the ground and frame things in this way, and I think this is useful. This is because it highlights the forces pushing for a reversion to ‘Type I’ assumptions: that what we need to do is work out how to obtain change, to seek out such a causative order, and then organise around it. For example, adaptive learning can treat the predictive knowledge as something that varies over time; Theories of Change allow predictive knowledge to vary between interventions; Doing Development Differently can allow for greater variation and fizz in the development of predictive knowledges. All, or perhaps most, clearly preserve the power and value of researchers and all, or perhaps most, I think, fail to grasp the nettle of ‘Type II’ contexts (where such research is of little value). 

But on the other, if there is practical issue then we need to find ways to move forward. Having now presented my new book a number of times (seminars, conferences, collegial discussion etc - it has a number of supporting published articles), I would like to share one pretty fundamental conclusion, which comes down to the idea that it is useful to treat ‘Type I’ and ‘Type II’ as a black/white distinction. There are I think various reasons for this.

First, any academic worth their salt can blur the distinction, but keeping it like this helps because it prevents back-sliding from a ‘Type II’ to a ‘Type I’ position. If asked, researchers will almost never reply ‘we don’t know’, but argue that we know with uncertainty (‘Type I’), or we need more resources (‘Type I’) etc.

Second, to the extent that we have historical examples of shifts from Type I to Type II, these tend to have required major changes that are locally explained as qualitative paradigm shifts requiring massive changes in views of power, the nature of leadership and the nature of the relationship between strategic visions and tactical interventions. This is often said because attempts to manage the shift without such an appreciation leads to unhappy results.

Third, whilst there are some areas where piecemeal change seems viable, in general working to Type II assumptions requires violation of organisational doctrine (the DAC is a good source of this), which, combined with the powerful forces that push for Type I assumptions means that experimental activities that can exploit formality are unstable: find a good branch head and you can get away with Type II ‘under the table’, but if they leave it reverts to ‘Type I’, likely supported by the latest research that shows that there is reliable predictive knowledge, when the practitioners think there is not, and have to be corralled into line. An example I know of where Type II practice can be found clearly in a part of the practice is evaluation, where (as in my own practice) reports are of trustworthy accounts of stakeholder and others’ accounts of what caused what, and what they felt about it, reported back to them. The assumption that there is no predictive knowledge means an assumption that an intervention will contain a range of beliefs, thus avoiding (one hopes) denial of voice that is built-in to Type I work where these who disagree with the (assumed) predictive knowledge are deemed wrong.

Fourth, as I watch the process unfold, it seems to me that the pressures for change come from the widespread evidence that, whilst trial and error has generated convincing power to predict in some areas, generally there is belief that there are Type II contexts that should be worked in, and that we lack thought-through ways of organising to do so. Theories of Change and other adaptations of hard-line doctrine are then seen as useful, but also as pushing back towards Type I beliefs, and that these not only do not solve the problem of Type II contexts, but they actually prevent working out how to do so, because they do not accept that in such contexts research containing cause-effect logics gets in the way.

What we need, therefore, are formal trials of how to organise in Type II contexts. This means:

• 1.      Finding ways of judging contexts to be treated as unpredictable. This could be because they are very important, hard to research, because of their nature, or whatever. There are statistical ways of judging whether a particular dataset is too irregular, but this is not likely to drive aid workers into paroxysms of delight. Some ways of coping with this task are needed.
• 
  
• 2.      Sorting out how strategy is to be developed in those contexts in ways that have meaning for lower levels, gives them the discipline of accountability, allocates them suitable and suitably defined resources, and leaves them to get on with the job.
• 
  
• 3.      Developing training systems that are suitable. Evidence suggests that organisations that work formally in what they believe are Type II contexts train primarily through practitioners and that leadership capacity at one level is also capable at the both of the two levels above it: that is, the project team leader is competent at project manager level and, say, the local country desk and the home-country equivalent. This means, naturally, that the latter is also competent as a project team leader.

From what I have been learning since the book came out, one reason why we lack experience of formal organisation to do aid work in Type II contexts is because it has not been realised clearly that that is the core issue (is it? – trial and see), and so trials and experiments are carried out within organisations designed, as we know from the LFA, to suit Type I contexts. Much existing literature (which I cite in my book) shows the inconsistencies, tensions and frustrations that accompany this.

Prof. Adam Fforde

adam@aduki.com.au

Victoria Institute of Strategic Economic Studies, Victoria University www.vu.edu.au/vises  (Professorial Fellow, part-time)

Member, Editorial Boards: Journal of Current Southeast Asian Affairs and Canadian Journal of Development Studies

Website: www.vietnampolitics.net

BOOK JUST OUT - Reinventing development - the sceptical change agent (Palgrave March 2017) http://www.springer.com/us/book/97833195022670

For details- http://vietnampolitics.net/?page_id=121

And for how to get a review copy - https://www.springer.com/gp/reviewers/online-review-copies---all-in-a-nutshell/4798

---

[1] For a Seminar at the ANU see - https://crawford.anu.edu.au/news-events/events/9461/coping-high-risk-and-uncertainty-aid-policy-design-and-practice I also presented at this - https://www.jcu.edu.au/@jcu/rethinking-development-pedagogy-and-practice-new-visions-for-global-development

Market failure in Australia – what is happening to structural change?

Market failure in Australia – what is happening to structural change?

Adam Fforde

Two things are important, one is obvious, the other is not.

What is obvious is that the Australian economy is undergoing structural change.

During the 20 year boom, when export prices were high, we learnt to cope with rapid increases in tax revenue, a high exchange rate and an economy oriented structurally towards commodity exports. 

Before the 1990s, after the ALP reforms, we were using market signals to re-orient towards sustainable ways of earning our living internationally such as exports of high-value added manufactures, services and high unit value foods. With the boom, our markets told us, partly through a high exchange rate but also because of the income effects of the divvy-up of exports revenues, to shift towards retail, domestic non-traded services and construction. Construction did not keep up with demand, but money was made, employment created and profits earned.

The boom started to end with the Global Financial Crisis, but had an Indian Summer due to Chinese nation-building economic stimulus, which kept our mineral export prices high until they started to fall sharply, hammering our tax receipts and causing Australians to prepare for what has happened so many times before, ‘no Boom’. We know that tax receipts are down, we know that the dollar has fallen to the 70-80 cent range, and most people think the economic weather will continue in this direction. Australians are very good at living ‘off the sheep’s back’ which means boom and no boom. 

It is obvious that the Australian economy is changing as this happens. Factors of production: our business capital and entrepreneurial skills, our labour and its capacity to apply and learn skills, and our land – must all be reorienting to the new economic conditions. This is obvious.

But it is 2015, already (the Global Financial Crisis started in 2007), and what is not obvious is, concretely, where this is heading. Despite having good economists, journalists and out own brains it is not obvious to us where to put our money, what to encourage out children to study, and what and where land prices will change. Our markets are not telling us what the central aspects of the structural change are. You can find predictions, encouraging tales, stories that dishearten and the rest of it, but these are not market signals. Our markets are failing us.

A very good example of this is the non-University tertiary sector.  Labor campaigned promising improvements, to ‘re-open Greensborough TAFE’. After the introduction of ‘contestability’ it is not yet clear, in the market, whether and how the balance between the public and private sectors will be struck. But it is clear that our labour market is not telling us what is changing, with the structural reorientation, what, now, we should train in what, now, we should avoid. It used to be IT, where strong market signals pointed to opportunities. What now? It is not clear.

Labour needs capital and investment decisions drive structural change, though employers will factor in expected labour costs and labour quality. Entrepreneurial decisions are fundamental; public support, ideally, targets spending on public goods production partly to improve welfare directly and also to leverage by supporting good private investment decisions. Trying to lead the market, for governments, is risky: entrepreneurs are paid in part to bear risk. So, where is the money going and does this tell us what we need to know about the nature of the ongoing structural reorientation of our economy? If we know, we can adapt, as suppliers of land, labour and capital.

I don’t think we do know. The stories we hear and read about investment in Victoria are largely about real estate (Fisherman’s Bend) and infrastructure (railway crossings, the East-West link). These are not guides to how we exploit the shift away from high value commodities exports and a high $: if you like from being the quarry of Asia to being Asia’s deli.

Why?

I think there are two reasons.

The first is that, whilst we can know if we want to, it takes rather a lot of effort to find out where the money is going and why. And part of the shift away from the commodity export boom years is to enjoy that effort, to like reading  about export successes that are real and authentic, and to value such studies (and give time to them). Finnish papers are different from ours – they make their living differently.

The second is that our capital markets are not working well. A friend of mine used to be a bank manager, 30 years ago, and at that time lending decisions were decentralised and he was paid to know about the branch’s commercial client base and take decisions about the banks’ business with them. He left as decision-making was moved upwards and information became standardised, reducing bank transaction costs but destroying much information. A good banker has in their head much accumulated knowledge about their clients, and, if you asked them to write it all down, it would cover a lot of paper. Judgement of risk is then an art, and that does not suit centralisation of power and reliance on statistics that summarise and so ignore detail. What I hear from our banks is a push to large state support for infrastructural investments to tide us over. This does not generate a narrative where it is clear what the structural reorientation that, obviously, is happening, and which, equally obvious (at least to me) is unclear.

Our markets should tell us what to do, and it is clear that they are failing to do so.

Adam Fforde

Tertiary institutions as rent-seeking, but un-owned, businesses

Who profits from Universities, if you believe in markets? 

Standard economic theory would suggest that Universities are not the same as, say, companies that produce baked beans. Their outputs have strong elements of public goods, and, since students cannot know in advance what their studies will be nor what they will lead to, they are also marked by powerful information asymmetries. Under such situations lack of strong regulation leads to shouting and screaming, as was found early in their history: shonky 19^th century teachers promised that their courses were good, and they were not, and that they would lead to good jobs, and they did not. Thus, though in practice for many other reasons, tight regulation surrounds any attempt to set up a private university.

Personally, if I wanted to set up a Masters course, and had access to a private university, the real costs involved are very low. If it had 8 subjects - a two semester course - and I could hire who I wanted to teach them, a ball park estimate would put direct costs at, high end of the range, $100,000, with some more for class teachers. Service companies that have to carry marketing and other costs usually require a mark-up of 2.1:1 or so – to pay somebody $1000 you need to bring in $2100. Round up and that gives a total cost of say $250,000 - if there are 50 students that gives a fee of $5,000. Modern Universities can and do charge far more than this. But their authentic costs are far less than a private company: their borrowing costs are lower and their real estate is far cheaper too, and anyway they do not have to pay dividends to shareholders. So who gets the profit? A good Masters is profitable for the student at far higher fees, so, as economic theory would tell us, as it Is not easy to set up a private university the resulting restriction in supply creates rents. Price control is one way of controlling this, but that is not what current policy is saying – rather, that fees should be uncontrolled.

So who profits?

If we look for pork, which is the technical term the best economists use in the bar to discuss such things, the answer is obvious. A man a friend of mine knows somebody was hired as head of an economics department in the UK in the late 1960s, and the Dean asked him if he thought he needed a Secretary. He replied that he did, but he could have managed without one. Management structures meant that he could do this, as reporting and other requirements, to managers who managed managers and on up, were far less. The system was far more efficient than nowadays, less costly and probably better in administrative terms too. He had fewer equity compliance responsibilities, as this was managed culturally, through trust, though of course sexism was an issue. So if we look for well-paid powerful people in modern Universities, and in structures associated with them, where do we find them? In University bureaucracies and in the political structures (mainly in the Federal Government) that mirror them. Measurement is of course contentious, as this state of affairs is clearly not what the tax-payer wants, and is therefore hidden, but it is normal for the % of total revenues that is actually spent on teaching to be well below 50%. More tellingly, and this reflects the question of who are the superior people who get to eat pork and who are the inferiors who get to eat pig-meat, it has become quite normal over the past couple of decades for cost-cutting to be borne by the academic staff rather than the management, especially in areas that are not attractive (Arts brings in lower value $ grants than other sectors, and since the Federal bureaucracy bases itself on money volumes so does the University bureaucracy, so Arts generates less pork and so its staff, eaters of pig-meat, get hammered).

So if one believes in markets, one can expect the freeing up of fees to create major problems, as the resulting profits accrue to those who are powerful and so eat pork (not pig-meat). Souls have no gender, no class and no race, so the natural tendency for good Christian thinking is to dislike pork and enable a level playing field. Many of our national political leaders are good Christians. And in a sector such as tertiary education, that means regulation as market failure is large and the stakes are high. Will the penny drop? So far, it has not.

So what can we expect? It depends on how good the economists are. Good regulation will reduce rent-creation and cut pork. We can see this already in the treatment of coming cuts at some Universities and TAFEs – but how much of this is actually designed to protect core pork? Have power relations changed? It does not look as though they have. Watch Arts and watch the TAFE system, for they are weak, which is why they have suffered. Does it mean closing down conference organising sections and preserving the entourage and management levels that preserve in turn the structures in Canberra? The answer is, probably, as there is not fundamental rethinking going on. A senior University manager, with entourage, costs maybe $1m a year. Compare that with the teaching costs of running a good Masters. So what is happening, with no shift in thinking, instead feels like a classic Yes Minister response. It helps but does not solve the problem. The key indicator here will be use of political power, driven in part by good Christian ethics, and fundamental reorienting of the Federal bureaucracy, and what it thinks it is meant to do. And this requires a shift away from current philosophies of service delivery and a return to simple service, with far higher levels of trust required and far fewer levels of bureaucracy. But that means turf and Ministers are Ministers. But as pork increases in volume as fees increase (is it really likely that the tax-payer will get the proceeds in terms of reduced budget costs for tertiary education?), this could get interesting.

A second phenomenon could be the rise of private colleges and Universities. It is striking how few these are in Australia. Like many things, it is not in the interests of regulators to encourage their formation, as, unlike the state-funded tertiary sector, they do not need such profitable managing, though they do offer chance of jobs for public servants when and if they decide to cash in their relationship capital.  The possibility of large political contributions, or their reality, does not seem to have been very successful here.

So what seems most likely is that those who control Universities (various bureaucrats), rather than those that own them (tax-payers) will be the ones who profit. That is what economics tells us. Oh, and students who, even after paying off their loans, will, obviously as they have been able to do so, earned more because they are graduates. But those incomes will have come from the labour market, and in Australia on the whole that is relatively competitive. I cannot easily set up a private teaching Institute and offer degrees, but I can easily choose what to study and what to do with that degree. Under the current set-up, with weak democratisation, what I cannot do is stop rent-creation from adding a very large padding to what I have to pay for my degree. 

The economic fallacy in austerity economics

Austerity economics argues that restoration of economic growth requires fiscal stabilisation - usually, from a position of fiscal deficits, this means reducing fiscal deficits. This can be done by either cutting spending (including the cost of debt servicing) or increasing taxes. Both are influenced by the rate and quality of changes in GDP.

As austerity policies came in during 'stage 2' of the GFC, they almost always involved - large spending cuts, minimal tax hikes (in some places - the UK is an example) taxes were actually reduced, and various monetary measures to reduce interest rates and so the cost of servicing government debt. There are generally no narratives that explain why the centre of gravity of fiscal policy was so regressive - why the changes tended to push far more of a load onto state spending than upon the revenue side.

As would be expected, the effects were to cut effective demand, and quickly economic forecasts were revised downwards, with lower tax revenue accompanying lower GDP levels and high spending (for example as unemployment rose), and this increased the forecasts for fiscal deficits. In general, whilst one can expect this outcome to have been clear from the modelling made when the original austerity forecasts were made, these were massaged to give better outcomes, and then this proved hard to continue as GDP slowed.

Given this, is it clear that $1 for $1 transfers from rich to poor will increase effective demand. In Australia, removal of the effective 'flat tax' of 15% charged on contributions to superannuation funds in a way that increased income tax revenues by, say, $10 bn, and reductions of proposed spending cuts by the same amount would increase effective demand, slow unemployment gains and in a series of second-round effects reduce the forecast, and actual, fiscal deficits. In the old Keynesian language, with unemployment above the minimal level variations in the marginal propensity to consume will (in any decent macro model) have such effects.

But, what is happening? In Australia, neither the ALP nor the Coalition are offering the population a vote on tax increases. Like old issues such as immigration and the death penalty, if such policies are not in the manifesto of a party that can be elected to govern, you cannot vote for them.

But has the ALP been cunning? Instead of tax hikes, ex Treasurer Swan talks about adjustments to the taxation of contributions to superannuation funds for those with high incomes, about changes to the conditions that allow negative gearing, and taxation of mineral companies. Unless the Treasury has been completely bought by its political masters, such policy changes, which can be said not to be income tax hikes, must have positive effects on the forecasts for the fiscal position, and upon the real economy.

Which takes us back to the lack of a narrative as to why, when all those people sat around tables in those EU capitals now implementing austerity policies, these issues were not discussed enough for them to become part of the historical narrative. Of maybe this has been written up somewhere?

4/2/2015