PUBLIC ADMINISTRATION AND DEVELOPMENT, Vol. 6 , 445-454 (1986)

On the art of giving economic advice: tactics, access, damage-limitation, packaging, confessed ignorance

and timing

CHARLES HARVEY

Institute of Development Studies at the University of Sussex

INTRODUCTION: ON THE TACTICS OF GETTING ADVICE ACCEPTED

It is quite common for an adviser to believe that advice should be accepted, but to know that it may not be. It may be rejected because it will damage the interests of powerful people, or because it is easier to do nothing than to take a difficult initiative, or because it will remove some part of the power of the administration itself. This last is quite common, for example where economists advise that prices and markets will work better than some administrative system of regulation or distribution.

So the adviser must calculate the best tactics for getting advice accepted-and implemented, that is not just nominally accepted and then neglected. In other words, getting the economics right is only the beginning; the next stage is to plan the tactics of getting the advice accepted, or at least some second-best version of it that is better than nothing at all. This may involve including some compensation for the losers, or a way of organizing the gainers so that their support compensates for the loss of the losers’ support. The point is not so much whether one particular strategy or another should be adopted, but that thinking about the consequences of advice being taken, and planning for those consequences, must be an integral part of the whole process of giving economic advice.

There is a considerable danger in such tactical calculation. The economic adviser can get so involved, in the art of getting advice accepted, that he or she can lose sight of what really ought to be done, as opposed to what is realistic in current political circumstances. The latter can deteriorate into a complete abandonment of professional honesty. There has always been some merit in the position taught at graduate school: that the economists’ role is to give the best possible economic advice, leaving the final decisions to politicians.

Dr Harvey was formerly Assistant Director of Research in the Bank of Botswana (1976-9); economic adviser to the Bank of Botswana and the Ministry of Finance and Development Planning periodically since 1981.

0 1986 by John Wiley & Sons, Ltd. 0271-2075/86/040445-10$05.00

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In this paper,’ the graduate school doctrine is shown to be too pure for real life. It is also unproductive when it leads to the adviser having little or no influence on events. But it should never be taken too far. The need to make rather difficult judgements cannot be evaded.

ON THE IMPORTANCE OF ACCESS, AND WHO GETS IT2

Economists seem, to the rest of the world, to have a perverse attachment to policies which seem unfeeling, or even cruel. Opponents of these views can point out, with some accuracy, that economic advice derives from theories based on very unlikely assumptions. What is more, those assumptions are even less plausible in the conditions of developing countries.

So the adviser is unlikely to get advice accepted by appeal to the optimum allocation of resources in perfect market conditions, if the advice is to raise interest rates, remove subsidies on bread,3 or levy fees on those who use schools, standpipes and clinics. Indeed, the adviser would be foolish to expect success using such tactics, even when the relevant committee is chaired by someone with an MA in economics.

As it happens, the real reason for such apparently heartless advice has less to do with optimum allocation of resources, in the economists’ meaning of that phrase, and a great deal to do with who gets allocated those resources, when they are scarce and have to be allocated by officials rather than by prices. Or at least that ought to be the real reason, and it is certainly how the advice should be presented-assuming for the moment that the advice is sometimes correct. I think it can be shown to be, with the exception of the impractical idea of charging for water from standpipes.

The point is that if some service is subsidized in a poor country, then it is exceedingly likely that there will not be enough to go round. Rich and developed economies may be able to afford to provide free health services, or subsidized credit to farmers, and to meet the ‘excess’ demand which arises from eligible applicants. Poor countries cannot afford to supply the demand, so shortages develop.

If some valuable services, such as cheap credit or free extension advice (not all extension advice is valuable but some is), or some commodities, such as cheap fertilizer, are subsidized by the government, and demand greatly exceeds supply,

The writer’s employment in Botswana explains the strong Botswana flavour of the paper, but it should be obvious from its content that it does not reflect the views of either institution. It should be added that the Botswana government is a delight to work for, because of the serious attention it gives to economic arguments-advisers feel that the quality of their economic analysis weighs heavily in the acceptance or rejection of their advice. My thanks to Mike Faber and Philip Daniel who provided helpful comments on an earlier draft.

The influence of Bernard Schaffer on what follows will be obvious to those who know his work on access. It does not follow that he would have approved of it. For a late work on access which contains references to his earlier writing, see Lamb and Schaffer, 1981.

There is nothing inherently wrong with cheap food for poor people. The problem is that either it means low prices for farmers who may be just as poor and frequently poorer, or it means government subsidies that grow unmanageably in cost. Once governments have taken control of basic food prices, and the political credit for keeping those prices down, it becomes politically very difficult ever to raise those prices. So the subsidies escalate in cost beyond the means of all but the richest governments.

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then the key question is who gets access to the limited supply. The answer is obvious: those who are less remote (nearer the main road or the railway), who know what’s going on, who can fill in forms or know someone who can do it for them, who can communicate effectively with officials, who know (in short) how and when to apply, and of course those who are powerful enough to use political influence or offer favours, or who are rich enough to pay bribes.

The result is, then, that the government subsidizes the better-off who are better at access, provides power and possibly income from bribes to those lucky or (more likely) powerful enough to control access, and forces people to waste a great deal of time seeking access, including many of those whose time is extremely valuable. It is very costly if senior officials have to spend much of their day getting access to the best school, or to the hospital, or to cheap credit, for their relatives and other dependants.

To give a particular but common enough example, suppose that the balance of payments is worsening fast, say because export prices have fallen, and that commercial bank lending has been increasing much faster than can be afforded in these circumstances. It is really quite simple to cut back the growth of credit, by setting a ceiling or by taking away the commercial banks’ spare liquid assets. Lending will be less than it would have been and imports will also be less.

But if nothing is done about interest rates, the now-limited supply of credit will appear cheap, and access will begin to be decided by bank managers, and those who can bring pressure to bear on bank managers. Everything points in the same direction: large and powerful businesses, including foreign-owned ones if that category is significant, will quickly get to the head of the queue for the scarce cheap credit. Bank managers know very well that it is more profitable to make a smaller number of large loans to a few borrowers, than a larger number of smaller loans to many borrowers. It is also usually very much less risky.

Advice to raise interest rates in these circumstances is likely to be resisted on the grounds that the small (and often also local) business cannot afford to pay higher interest rates-and that seems eminently fair and reasonable at first glance. At a time when credit is going to become difficult to get, and other fators are going to make life difficult for all businesses, it seems perverse to hit the small business with high interest rates.

The adviser will not (not often anyway) win this argument by appealing to monetary theory, and the effect of interest rates on the demand for money or financial deepening. But advice to raise interest rates might be accepted, if it is pointed out that the small business will not be able to get any credit at all while it is made scarce and kept cheap. It could also help to argue that big (and foreign) business is best able to borrow abroad, especially if borrowing abroad is made cheaper than borrowing from domestic banks. A touch of populist dislike of the influence of big business, and a touch of xenophobia thrown in, might carry the day-and largely for the right reasons.

Some of the same sort of arguments are applicable to the charging of fees for such things as education. In an ideal world, with enough resources to provide education for everyone, it would obviously be preferable to offer free education. But if there is not enough to go round, or if there are some schools which have very much better facilities, it is certain that the rich, powerful and privileged will use all the resources at their disposal to get their children and their relatives’

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children into those schools. In such a situation, not charging fees will be a subsidy to the well off, and deprive those who fail to gain access of the extra school places that could be paid for out of the fees. Because of the outcome of administered access, therefore, it would be better to force those who will get access anyway to pay for it. Moreover, using fees to regulate access, assisted perhaps by means- tested scholarships, will avoid the minor and major corruption of administered access.

ON DAMAGE LIMITATION AS A SECOND BEST

Every government agency, and every adviser, sooner or later faces a situation in which winning a battle will cost too much, or in which failure is certain. In either case, opposing the project would use up too much political capital and credibility, which would be better saved for a winnable cause. It is not just that advice from the same source may not weigh so heavily in future; advice may not even be sought if it is seen too often to be unhelpful and negative. There are many ways of leaving people off circulation lists and key committees.

There are a number of choices. Occasionally there can be an ingenious solution which satisfies everyone. Some time in the 1970s the IMF sold some gold at a profit and distributed those profits to developing country members ‘for devel- opment’. This generated a dispute between the Botswana Ministry of Finance, which claimed the money for the development budget, and the central bank which claimed it as profit on the country’s holdings of foreign reserves. Passions ran high over what was, in national terms, a small sum of money, even though it seemed foolish to generate a clash over such a small matter. Central banks can win a certain number of battles, but they always lose the war. Or at least the governor does, and spends the next few years with a peerage in semi-retirement (if from England) or contemplating the joys of one of the more obscure embassies (if from Africa). It would have been possible, though, for the central bank to have claimed the money., thus satisfying the strict letter of the law, but then to have lent it to the government on an indefinite-period non-interest-bearing loan, thus making it available to the development budget at no cost to the government.

Such amiably neat solutions are not often available. But the choice is not always the stark one between giving way, on the grounds that personal or institutional capital is best saved for more important battles, and fighting a vigorous battle for the sake of the record, knowing that the battle will be lost. There has to be something better, most of the time, than that classic admission of defeat: ‘never- theless I would like my dissent recorded in the minutes’.

Occasionally that may be the right tactic, even though there is nothing more wearisome than the adviser who is constantly quoting the minutes of some long- forgotten meeting. But often a project has such a head of steam behind it, both from some outside source of funds such as the World Bank as well as from the government itself, that it cannot be stopped. That is when damage limitation may be a much more useful and effective tactic than outright opposition.

A lot of hard work on reducing the project’s final cost, or shoring up its weaknesses, and on preventing a bad project from wrecking otherwise sound institutions, will be of some genuine and lasting benefit. And such damage limi-

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tation will be the best tactic if the wretched thing really is unstoppable: better to limit the international airport to one runway and a single-storey arrivals building, than to waste time and credibility in opposing the inevitable. Similarly, some real benefits can come from keeping a bad project off the books of an otherwise sound development bank, or from insisting on more accountants to prevent the failure that would otherwise be likely from trying to expand an institution too fast. Such advice has the added advantage that the adviser can appear helpful and avoid being wholly negative.

Another, rather ingenious example of damage limitation concerns protection of a new industry. Many economies are too small to have several factories, which might have a chance of keeping costs down through competition. So the cost of protection falls heavily on the consumer, in both higher prices and loss of choice. Yet the lure of new industry, and of new jobs, often puts this decision in the category where damage limitation is the right objective. There may not be much to be done about loss of choice. But it is possible to grant protection in the form of a high tariff on the competing imports, which should present the local market to the new local producer, while making protection conditional on the protected firm’s selling price being no higher than the imports would have been without the tariff.4

Of course it is not at all easy to judge when the second-best of damage limitation is preferable to outright opposition. Nobody wants to be associated with an infamous failure. So the need to exercise such judgement cannot be ducked. The adviser will not gain much from opposing the project in principle and then trying to offer helpful advice on how to improve it. Advisers cannot have their cake and eat it any more than anyone else.

ON THE ROBUSTNESS OF PACKAGES AND THE UNWRAPPING OF ADVICE

There are two aspects to the packaging of advice: the sugaring of unpopular measures with something attractive, and the ruining of good advice by including something that is unacceptable. An example of the first would be making tax reform more acceptable by including tax cuts in the policy package, in order to make reforms acceptable to those who would lose special privileges.

Similarly, the unpleasantness of devaluation and the resulting increased cost of imports may be lessened if it is accompanied by an increased flow of goods into shops, inputs into factories, and investment into new activities. Indeed, part of the logic of accepting IMF advice is that it will result in an inflow of foreign capital in addition to the IMF loan itself.

Unfortunately, inflows of private capital, commercial bank loans and direct equity investment, never were very likely to result from IMF agreements in the poorest countries, and are even less likely in current conditions. Meanwhile, the

Something along these lines has been agreed as the condition for tariff protection of a new soap factory in Botswana. It remains to be seen whether it can be enforced; it is difficult for any government to remove protection (as opposed to threatening to) if it means closure of a factory and a highly visible loss of jobs. A similar attempt in Papua New Guinea resulted in a domestic sugar price many times the world price.

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countries that were able to get large inflows of private money, such as those in Latin America, have nearly all become so unattractive to commercial banks that new private-sector loans can only be obtained when the world’s banking system is threatened, and only then through the bringing of immense pressure by the IMF and the United States government. Some aid donors, encouraged to block their aid programmes pending an IMF agreement, may unblock them, and this prospect may be the attraction that makes IMF advice acceptable.

The emphasis above on foreign advice, and foreign resources to sugar the unpleasant parts of that advice, is because the sugar has a real cost. And countries often find themselves without the means to pay for the sugar. Obviously it is easier to advise a rent increase, on oversubsidized public-sector housing, if it can be accompanied by a wage increase. It takes much greater ingenuity to get such advice accepted and implemented when there are no resources to grant the wage increase.

The second aspect of the packaging of advice is that advice can be poisoned by including an unpopular element. One might think that it was sound tactics to include something that could be dropped without seriously damaging the whole package, as a tactical way of getting the rest accepted. But such tactics can cause the whole package to be thrown out, at least for the time being.

Some years ago, an extremely good package of advice on how to speed up the creation of employment opportunities in Botswana, and how to get them more widely distributed about the country and among poorer people, was rejected out of hand by the government because the package also suggested redistribution of the national cattle herd. Since the cattle lobby in Botswana is very strong, the reaction was not surprising, even though the proposal had most carefully included compensation, not confiscation. Most of the other proposals in this package ‘were reflected in many subsequent developments’ (Salkin, 1985), but their adoption was delayed significantly by a wrong choice of packaging.

A similar mistake, for which the author was partly responsible, might have prevented a necessary devaluation. At a time when Botswana’s diamond sales had fallen drastically, requiring a rapid response from the government in case the market did not recover -before the foreign reserves had run down, devaluation was proposed as part of a package of macroeconomic measures. Because devalu- ation would increase the income of cattle-owners, whose beef is mainly exported, an increase in the abattoir tax was proposed at the same time. Luckily, before the package got to the Cabinet, a much tougher wages policy than originally suggested was proposed, removing the need for a devaluation and therefore for increasing the tax on cattle. Later, the government devalued anyway, when the cattle tax proposal was no longer under consideration.

In this last case it was fortunate that the value of the other components in the package did not depend absolutely on the one initially rejected. It is a common failing, of economists especially, to present advice in which each component depends for its usefulnes on every other component being accepted as well. Such packages are often extremely ingenious (in the technical sense) and thus intellectually satisfying. Perhaps economists are especially prone to this form of advice because of the mathematical nature of their theoretical models, in which every variable can indeed be made to interdepend in a precise way on every other.

But no set of proposals ever survives intact the scrutiny of a committee, still

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less a full round of inter-ministerial consultations. So it is important that the package would do some good without some of its components, or if some of its components end up in a different form from how they started. In short, advice should ideally have a certain robustness-to alteration and interference-so that it can still be useful if it emerges in an altered and interfered-with form. The greatest danger is a package in which some components would actually be coun- terproductive if implemented on their own; if these components are attractive in some way, then this is precisely what is likely to happen. Of course, this sort of argument can easily become a counsel of inertia, since it can always be argued that a proposal will open the way to some variation which would be worse than doing nothing (a lack of initiative that is very attractive to public officials, see below). An official in the United States government once responded (in private) to an idea for reform by saying that his department had been enthusiastic about it for years. They had never dared introduce it for fear of the cost of all the pet projects they would be added to the legislation by congressmen, and which would have to be included in order to get the legislation passed. Whether this was true or not, it was a wonderful excuse for doing nothing.

ON THE ROLE OF CONFESSED IGNORANCE

So-called experts are employed to know things that their employers do not know, and need to know. They, the experts, are thus under some pressure to give definitive answers to technical questions in their field. As a result, one of the hardest ideas for an economic adviser to get across is that some questions do not have definitive answers, not because of the ignorance of the adviser but because of the nature of the question.

In one field, at least, the concept of confessed ignorance as a basis for policy is well established, as is the obvious response: hedging one’s bets, or, more elegantly, diversification as a way of managing risk. The optimal investment of a stock of money is well known to require more diversification, the greater is the riskiness of investments in the portfolio. Moreover the reason is equally well known, that diversification reduces the risk inherent in the investments, because there is no way of knowing their future value.

The owners of investments may still be intolerant of losses, even when they come after larger gains. Advisers who have warned of the possibility of losses in even the best-managed of portfolios may still lose their jobs in bad years. But at least the principle of diversifying, because of confessed ignorance of future values, is established.

Even in this field, though, people can be slow to change earlier investment policies when circumstances change. Thus many central banks were slow to diversify out of US dollars when the dollar began to float against other currencies in the early 1970s. As late as 1977 an American banker visiting Botswana to offer his financial expertise to the Bank of Botswana, and of course expecting to be well paid for it, remarked quite casually that he assumed that Botswana’s reserves were all in US dollars. He was quite surprised to hear that they were not, although appearing to take the point that it would be foolish for Botswana to invest all its reserves in one currency, still less one that was notoriously weak at that time.

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Rather oddly, the reverse point, that countries should diversify the currencies in which they borrow, was even slower to be recognized. It is of course harder for a country to diversify out of currencies previously borrowed, except in the very long term, for two reasons. There are few opportunities to borrow in one currency simply in order to repay a debt in another; and much borrowing is done without a choice of currency because of the nature of the lender. But that makes it all the more urgent to pursue the diversification objective where there is a choice, as for example when borrowing in the eurocurrency market.

Yet 90 per cent or more of Eurocurrency borrowing by developing countries is denominated in US dollars, an unnecessary risk much larger for most countries than any risk taken in investing the foreign exchange reserves, because the foreign debt is the larger of the two.

Outside of reserve and debt management, the role of confessed ignorance is even less well understood, not just by governments but by economists as well. For example, there is a vast amount of economic writing on the proper management of balance of payments deficits. Even some of the best of this writing still makes the point that the correct policy, if the balance of payments gets worse, depends on whether the problem is temporary or long-lasting (Killick, 1984).

It is, of course, true that if a balance of payments deficit problem is temporary, then the correct policy is to finance the deficit if at all possible. This avoids the high cost of adjustment which is not necessary if the balance of payments is going to recover quite soon. Similarly, if the position is not going to reverse itelf in a short time, delaying adjustment by financing the deficit would be quite the wrong policy, leading to much higher costs of adjustment later. The analytical distinction between the two cases is logical and therefore mentally satisfying.

It is also quite useless as a guide to what to do in a real situation. Indeed it can be worse than useless, since it may spark a search for a definitive answer about whether the problem really is temporary or not, and a pointless argument between the financers and the adjusters. The real point is that there is no way of knowing the answer to this question, however many experts are brought in to consider it.

The first objective, then, is to get everyone concerned to proceed from a basis of confessed ignorance. Then the right policy becomes obvious, namely to hedge one’s bets by financing a little and adjusting a little, with the balance between the two no doubt coloured by the weight of opinion on either side of the original question.

In practice, politicians have normally wanted to minimize the amount of adjust- ment because of its high political cost. More recently, the extraordinarily high cost of delaying adjustment, and then finding that a long-lasting deficit has to be managed with run-down reserves and high debts, is perhaps beginning to make some politicians as cautious as their economic advisers. This characterization is not meant to suggest that one or the other bias is more likely to be right at any one time; the bias of the adviser may be towards adjustment, but the lack of weight given by advisers to the social and economic cost of their proposals can be dreadful, as was noted at the beginning of this paper.

One final example of needing to proceed on the basis of confessed ignorance is where the correct policy depends on the actions of a third party. Probably the

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best-known case concerns the danger of retaliation against protective tariffs, and forms the basic rationale for multilateral trade negotiations.

A less well known case concerns the likelihood of South Africa retaliating against neighbouring countries for the imposition of sanctions. It is possible to demonstrate that retaliation would not be in South Africa’s own interest, economic or political, but it is equally possible to give examples of the South African government having acted against its own apparent interest in the past. So neigh- bouring countries may have to take expensive precautions against the possibility of retaliation-because of confessed ignorance of the way in which the South African government will behave, even if its own interest can be correctly analysed.

ON TIMING AND THE DIFFICULTY OF RETRACTING ADVICE

It can take a long time to get to the stage where a piece of advice is about to be accepted, because of the normal processes of consultation, the absence abroad of key people, the capacity of officials to defer decisions by asking for more infor- mation or further consultation, or official dislike of taking initiative when it can apparently be avoided. Whatever the cause, delay is normal, and lengthy delay is quite common.

Apart from the sheer frustration of wanting decisions to be taken sooner, delay has other dangers for the adviser. Firstly, by the time advice is actually accepted, it may no longer be the right advice. Worse, the adviser may not even be able to see that the advice is now wrong, because of the huge personal investment of effort in getting it finally accepted. Thirdly, the adviser might lose precious credibility if advice is withdrawn or reversed. Fourthly, valuable structural change, for example in salaries or interest rates, can be lost if the whole package is endangered by removing the more attractive parts, or by confusing shifts in professional advice. Lastly, and here lies the cruellest dilemma, the adviser could lose long-term credibility if the now wrong advice is not withdrawn; after all, others are also more than capable of noticing that circumstances have changed.

A nice example of this sort of situation arose some years ago, when the Zambian government appointed a commission on university salaries. Part of the evidence presented by the university staff concerned salaries in Britain and elsewhere, as sources of recruitment. The commission met, but its recommendations were neglected and apparently forgotten for over a year. Quite suddenly, though, the affair re-emerged. Witnesses were recalled.

By this time it was two years or more since the original evidence had been collected. The combination, of changing rates of exchange and inflation, and of academic unemployment in Europe and North America, had quite changed the competitive pull of University of Zambia salaries. Basically, a much smaller salary increase was now justified on those grounds, whatever other reasons may have existed for a large increase. But the university staff were implored by officials in the Ministry of Education not to alter their evidence, since it had taken so long to get the matter to the point of decision, useful restructuring of salaries might be lost if nothing were done, and no increase at all might result if the staff appeared to be shifting their ground.

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Another example concerns the advice given in the Bank of Botswana on investing the foreign exchange reserves in different currencies, already referred to above. So tough was the battle to get certain currencies accepted, as being both proper investments for a central bank and having good prospects for a stable or rising value, that advisers had to guard very carefully against the risk of continuing to recommend them after their prospects had changed for the worse.

A particular frustration for economic advisers is official love of sticking to nominal values, even when prices (or rates of inflation) are changing very fast. Again, the best-known examples of this are in the field of taxation. These are so well known and understood, in fact, that lack of action to raise specific taxes on such goods as tobacco and alcohol is now what causes comment: and the British Parliament has passed a resolution that some tax allowances should be routinely raised each year by the amount of inflation. This sort of indexation is still quite rare, though, except in those countries where inflation is so high that it cannot be ignored even for very short periods. It took 30 years of continuous inflation in Britain for Parliament to react in the way described.

Where tax allowances are concerned, the government (if not backbench mem- bers of parliament) has a clear interest in not raising them in line with inflation; but fines, penalties and fees also get left alone in nominal terms and thus eroded in real value by inflation. And real interest rates are allowed to change violently, not because of any belief in governments that they should, but simply by leaving nominal interest rates unchanged for long periods.

Awareness of the need for more frequent changes in nominal values is increasing all the time, It would be hastened if economists and statisticians would publish and present more ‘real’ statistics as a matter of course, as a way of shifting policy debate more rapidly away from nominal values. But some inertia will surely remain, so long as leaving nominal values unchanged has the greater appearance of doing nothing.

It should be added that some inertia is rational on the part of those who receive and have to act on economic advice. There are always urgent matters to be dealt with, which may be and often are more important than the pleadings of economic advisers for attention; and the experienced official can always recall that economic advice has quite often reversed itself in the past, when ignored for long enough. But that brings the discussion back to the art of rejecting advice, which is really the subject for a different paper.

References

Killick, T. (ed.) (1984). The Quest for Economic Stubilisution, Heinemann, London. Salkin, Jay S. (1985). ‘Research on employment creation and unemployment in Botswana’

(mimeo) (to be published in the proceedings of the Botswana Society Symposium on Research for Development).

Schaffer, B. B. and Lamb, G. (1981). Can Equity be Organised?, Gower, Farnborough.