Current Table of Contents

• What is Middle Class about the Middle Classes around the World?
  Journal of Economic Perspectives 22(2): 3-28 Abstract We expect a lot from the middle classes. At least three distinct arguments about the special economic role of the middle class are traditionally made. In one, new entrepreneurs armed with a capacity and a tolerance for delayed gratification emerge from the middle class and create employment and productivity growth for the rest of society. In a second, perhaps more conventional view, the middle class is primarily a source of vital inputs for the entrepreneurial class: it is their middle class values--their emphasis on the accumulation of human capital and savings--that makes them central to the process of capitalist accumulation. The third view, a staple of the business press, emphasizes the middle class consumer, whose demand for quality consumer goods feeds investment in production and marketing, which in turn raises income levels for everyone. This essay asks what we should make of these arguments in the context of today's developing countries. We focus on two groups of households: those whose daily per capita expenditures are between $2 and $4, and those with expenditures between $6 and $10. These are the groups that we will call the middle class. Starting from survey data on patterns of consumption and investment by the middle class in thirteen developing countries, we look for what is distinct about the global middle class, especially when compared to the global poor (defined as those whose per capita daily consumption is below $2 a day). In particular, is there anything special about the way middle class people per spend their money, earn their incomes, or bring up their children?
• Where Does the Money Go? Best and Worst Practices in Foreign Aid
  Journal of Economic Perspectives 22(2): 29-52 Abstract This paper does not address the issue of aid effectiveness--that is, the extent to which foreign aid dollars actually achieve their goals--but on best practices in the way in which official aid is given, an important component of the wider debate. First we discuss best practice for an ideal aid agency and the difficulties that aid agencies face because they are typically not accountable to their intended beneficiaries. Next we consider the transparency of aid agencies and four additional dimensions of aid practice: specialization, or the degree to which aid is not framgemented among too many donors, too many countries, and too many sectors for each donor); selectivity, or the extent to which aid avoids corrupt autocrats and goes to the poorest countries; use of ineffective aid channels such as tied aid, food aid, and technical assistance; and the overhead costs of aid agencies. We compare 48 aid agencies along these dimensions, distinguishing between bilateral and multilateral ones. Using the admittedly limited information we have, we rank the aid agencies on different dimensions of aid practice and then provide one final comprehensive ranking. We present these results as an illustrative exercise to move the aid discussion forward.
• Income, Health, and Well-Being around the World: Evidence from the Gallup World Poll
  Journal of Economic Perspectives 22(2): 53-72 Abstract During 2006, the Gallup Organization conducted a World Poll that used an identical questionnaire for national samples of adults from 132 countries. I analyze the data on life satisfaction and on health satisfaction and look at their relationships with national income, age, and life-expectancy. The analysis confirms a number of earlier findings and also yields some new and different results. Average life satisfaction is strongly related to per capita national income. High-income countries have greater life-satisfaction than low-income countries. Each doubling of income is associated with almost a one-point increase in life satisfaction on a scale from 0 to 10 and, unlike most previous findings, the effect holds across the range of international incomes; if anything, it is slightly stronger among rich countries. Conditional on the level of national per capita income, the effects of economic growth on life satisfaction are negative, not positive as would be predicted by previous discussion and previous micro-based empirical evidence. Neither life satisfaction nor health satisfaction responds strongly to objective measures of health, such as life expectancy or the prevalence of HIV infection, so that neither provides a reliable indicator of population well-being over all domains, or even over health.
• What Do Nongovernmental Organizations Do?
  Journal of Economic Perspectives 22(2): 73-92 Abstract Nongovernmental organizations are one group of players who are active in the efforts of international development and increasing the welfare of poor people in poor countries. Nongovernmental organizations are largely staffed by altruistic employees and volunteers working towards ideological, rather than financial, ends. Their founders are often intense, creative individuals who sometimes come up with a new product to deliver or a better way to deliver existing goods and services. They are funded by donors, many of them poor or anonymous. Yet these attributes should not be unfamiliar to economists. Development NGOs, like domestic nonprofits, can be understood in the framework of not-for-profit contracting. It is easy to conjure up a glowing vision of how the efforts of NGOs could focus on problem solving without getting bogged down in corruption or bureaucracy. But the strengths of the NGO model have some corresponding weaknesses--in agenda setting, decision making, and resource allocation. We highlight three factors in explaining the increased presence of NGOs in the last few decades: a trend towards more outsourcing of government services; new ventures by would-be not-for-profit entrepreneurs; and the increasing professionalization of existing NGOs.
• The Quality of Medical Advice in Low-Income Countries
  Journal of Economic Perspectives 22(2): 93-114 Abstract This paper documents the quality of medical advice in low-income countries. Our evidence on health care quality in low-income countries is drawn primarily from studies in four countries: Tanzania, India, Indonesia, and Paraguay. We provide an overview of recent work that uses two broad approaches: medical vignettes (in which medical providers are presented with hypothetical cases and their responses are compared to a checklist of essential procedures) and direct observation of the doctor-patient interaction These two approaches have proved quite informative. For example, doctors in Tanzania complete less than a quarter of the essential checklist for patients with classic symptoms of malaria, a disease that kills 63,000-96,000 Tanzanians each year. A public-sector doctor in India asks one (and only one) question in the average interaction: What's wrong with you? We present systematic evidence in this paper to show that these isolated facts represent common patterns. We find that the quality of care in low-income countries as measured by what doctors know is very low, and that the problem of low competence is compounded due to low effort--doctors provide lower standards of care for their patients than they know how to provide. We discuss how the properties and correlates of measures based on vignettes and observation may be used to evaluate policy changes. Finally, we outline the agenda in terms of further research and measurement.
• What the Seller Won't Tell You: Persuasion and Disclosure in Markets
  Journal of Economic Perspectives 22(2): 115-131 Abstract Imagine that you are considering an investment in a new public offering of a firm's shares. The firm's officers make a presentation that includes an audited financial statement, an earnings forecast reviewed by its prestigious investment bankers, and an impressive demonstration of its new technology. Or suppose that you are buying a new furnace to replace an old one that is not working well. The salesman displays a chart showing that the projected total life-cycle cost of one particular model, including capital costs and fuel usage over the projected lifetime of the furnace, is lower than that of some competing models you have considered. This paper reviews the theoretical arguments about how sellers disclose information in an attempt to encourage buyers, and the potential role for regulation in encouraging efficient disclosure of information. How well does a system of private reporting work? When should we expect all the relevant information to be reported? If testing and reporting by the seller are costly, will too little testing and reporting be done? Or too much? When some information is withheld, what sort of information is withheld? How do rational buyers respond to such withholding? How are prices and welfare affected? What role is there for laws and regulations to improve the functioning of markets? We address these questions by studying the theory of persuasion games--games in which one or more sellers provide verifiable information to buyers to influence the actions they take.
• Competition and Truth in the Market for News
  Journal of Economic Perspectives 22(2): 133-154 Abstract In this essay, we evaluate the case for competition in news markets from the perspective of economics. First, we consider the simple proposition that when more points of view are heard and defended, beliefs will converge to the truth. This concept of competition is several steps removed from market competition among actual media firms, but it has played a prominent role in the legal arguments for a free press. We then explore three mechanisms by which increasing competition, or more precisely increasing the number of independently-owned firms, can limit bias or distortions that originate on the supply-side of the media market: First, when governments attempt to manipulate news, competition can increase the likelihood that the media remain independent. Second, when news providers have an interest in manipulating consumers' beliefs, diversity in such incentives can reduce the risk of information being suppressed or distorted. Third, competition may drive firms to invest in providing timely and accurate coverage. Overall, we argue that there are robust reasons to expect competition to be effective in disciplining supply-side bias. Next, we ask how the effect of competition changes when distortions originate on the demand side of the market--when consumers themselves demand biased or less socially relevant news. We find that increased competition may or may not improve welfare in these cases, though we caution against using this as a justification for concentrating media power in the hands of state-controlled or regulated firms.
• Media Freedom, Political Knowledge, and Participation
  Journal of Economic Perspectives 22(2): 155-169 Abstract This paper examines the relationship between media freedom from government control and citizens' political knowledge, political participation, and voter turnout. To explore these connections, I first examine media freedom and citizens' political knowledge in thirteen central and eastern European countries with data from Freedom House's Freedom of the Press report and the European Commission's Candidate Countries Eurobarometer survey. Next, I consider media freedom and citizens' political participation in 60 countries using data from the World Values Survey. Finally, I investigate media freedom and voter turnout in these same 60 or so countries with data from the International Institute for Democracy and Electoral Assistance. I find that where government owns a larger share of media outlets and infrastructure, regulates the media industry more, and does more to control the content of news, citizens are more politically ignorant and apathetic. Where the media is less regulated and there is greater private ownership in the media industry, citizens are more politically knowledgeable and active. These results are robust to sample, specification, and alternative measures of media freedom.
• Identity Theft
  Journal of Economic Perspectives 22(2): 171-192 Abstract Identity theft is made possible by the nature of modern payment systems. In the modern economy, sellers are willing to offer goods and services to strangers in exchange for a promise to pay, provided the promise is backed up by data that link the buyer to a specific account or credit history. Identity theft involves acquiring enough data about another person to counterfeit this link, enabling the thief to acquire goods while attributing the charge to another person's account. In this article, we discuss what is (and is not) known about the prevalence and cost of identity theft, describe the institutional framework in which identity theft takes place, and consider some of the main policy issues associated with the problem.
• Taking the Pulse of the Economy: Measuring GDP
  Journal of Economic Perspectives 22(2): 193-216 Abstract This article provides a broad overview of the measurement techniques used in estimating GDP and the national accounts in the United States. In the United States, the GDP and the national accounts estimates are fundamentally based on detailed economic census data and other information that is available only once every five years. The challenge lies in developing a framework and methods that take these economic census data and combine them using a mosaic of monthly, quarterly, and annual economic indicators to produce quarterly and annual GDP estimates. One problem is that the other economic indicators that are used to extrapolate GDP in between the five-year economic census data--such as retail sales, housing starts, and manufacturers shipments of capital goods-- are often collected for purposes other than estimating GDP and may embody definitions that differ from those used in the national accounts. Another problem is some data are simply not available for the earlier estimates in the reporting process. For the initial monthly estimates of GDP, data on about 25 percent of GDP--especially in the service sector--are not available, and so these sectors of the economy are estimated based on past trends and whatever related data are available. The initial monthly GDP estimates based on these extrapolations are revised as more complete data become available In producing the national accounts estimates, the Bureau of Economic Analysis attempts to strike a balance between accuracy and timeliness so that the estimates can be used to monitor real overall economic growth and inflation, as well as major sectors of interest.
• Markets: Transparency and the Corporate Bond Market
  Journal of Economic Perspectives 22(2): 217-234 Abstract For decades, corporate bonds primarily traded in an opaque environment. Quotations, which indicate prices at which dealers are willing to transact, were available only to market professionals, most often by telephone. Prices at which bond transactions were completed were not made public. The U.S. corporate bond market became much more transparent with the introduction of the Transaction Reporting and Compliance Engine (TRACE) in July 2002. Beginning that date, bond dealers were required to report all trades in publicly issued corporate bonds to the National Association of Security Dealers, which in turn made transaction data available to the public. In this paper, we describe trading protocols in the corporate bond market and assess the impact of the increase in transparency on the market. We review how TRACE has affected the costs that corporate bond investors paid to bond dealers for their transactions. We canvass the opinions of a variety of finance professionals and consider articles in the trade press to obtain a broader view of the impact of transparency on the corporate bond market
• Recommendations for Further Reading
  Journal of Economic Perspectives 22(2): 235-242
• Comments
  Journal of Economic Perspectives 22(2): 243-246
• Notes
  Journal of Economic Perspectives 22(2): 247-248