Volume 171 Number 212011-2012
The Georgetown PUBLIC POLICY REVIEW
The Global Workforce: Responsesto Challenges in America and Abroad
Interview with Jennifer Granholm, former Governor of Michigan Ingrid Stegemoeller GEORGETOWN UNIVERSITY Interview with Harry Holzer, MAY 2'2.2012 former Chief Economist, US Department of Labor Ingrid Stegemoeller PERIODICAL ROOM The American Recovery and Reinvestment Act and Subsidized Employment in Mississippi Ed Sivak
The Informal Sector and Domestic Investment in Developing Countries Julie Biau
Incorporating Human Security into National Strategy Derek S. Reveron and Kathleen A. Mahoney-Norris
The Role of Public Perception of Crises Weimin Mou and Richard Harris
THE GLOBAL WORKFORCE: RESPONSES TO CHALLENGES IN AMERICA AND ABROAD
Editor's Remarks
Interviews
Interview with Jennifer Granholm: On Infrastructure Investment,AmeriCorps Expansion, and the Need for the Media to Call out Obstructionists Ingrid Stegemoeller 1
Interview with Harry Holzer: Jobs, the Recovery, and a Scarred Generation Ingrid Stegemoeller 11
Research
Responding to Challenging Economic Times: The American Recovery and Reinvestment Act and Subsidized Employment in Mississippi Ed Sivak 23
Engine for Growth or Drag on Productivity? The Informal Sector and Domestic Investment in Developing Countries Julie Biau 39
Issue Spotlights
Incorporating Human Security into National Strategy Derek S. Reveron and Kathleen A. Mahoney-Norris 61
Crisis Communication: The Role of Public Perception of Crises Weimin Mou and Richard Harris 79
GEORGETOWN UNIVERSITY
MAY 2:2 2012
PERIODICAL ROOM
GEORGETOWN PUBLIC POLICY REVIEW II
Editor-in-Chief Amanda Huffman Exe . Cutlve Managing Editor Richard Harris
Executive Print Editor Kathryn Bailey
Executive Online Editor Luca Etter Exec . Utlve Interview Editor Kathryn Short
Executive Director: Christina Moore Marketing & Outreac~
Executive Director: Matthew Doyle Graduate Thesis Editio~
Executive Director: jennie Herriot Hatfield Finance andO' perations
Executive Director: Sarah Orzell Data and Analytic~
Senior M k . ar etmg Directors Kaitlin Bernell, jason Bowles, Long Hong, Ashley Nichols, Kim Peyser
Director of Social Media Kim Dancy
Fundraising Director Christina Golubski
Senior Print Editors Allison johnson, Danielle Parnass, Michelle Wein
Associate Print Editors Malek Abu-jawdeh, Chris Adams, Noora AI Sindi, Adina Appelbaum, jason Clark, Kim Dancy, Ana Maria Diaz, Paul Heberling, Long Hong, Robbie johnson, Betsy Keating, Lauren Shaw,Thomas Smith
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Senior Interview Editors Ingrid Stegemoeller; Robert Wood
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Associate Online Editors Noora AI Sindi, josh Caplan, David Dickey-Griffith, Aaron Dimmick, Alex Engler; Carl Ginther; Chris Hildebrand, Erin Ingraham, Amy Kaufman, Christopher Klein, jason Kumar; Henry Schleifer; Mark Sharoff Rob Stone, Robert Wood
Faculty Advisor Robert Bednarzik Alison Audinbaugh, Robert Bednarzik, Carol Flynn,jan Goldman, Gillette Hall Faculty Reviewers Andreas Kern, Lindsay Lowell, Dennis McBride, Mark Nadel, David Podoff Ron Shadbegian, Adam Thomas
We would like to express our infinite gratitude to Paul Begala, Cindy Brenner; Special Thanks Darlene Brown, Rose Clouston, Charles Covel, E.j. Dionne, Carolyn Hill, Felecia Langford, Chris McCall, Eileen McKeown, Ed Montgomery, Mark Rom, Lynn Ross, Barbara Schone, the Graduate Student Organization, and the Georgetown Public Policy Institute
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GEORGETOWN PUBLIC POLICY REVIEW 1III The Georgetown Public Policy Review publishes articles that contribute to the thoughtful discourse of publiC policy. Each year, our traditional journal is organized around a theme, chosen in advance, that is addressed with interviews, relevant research articles, book reviews, and opinion pieces.
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IV I GENERAL INFORMATION EDITOR'S REMARKS
As the world struggles to recover from a major recession, a primary focus of domestic and international policy discussions is how to educate and train a strong workforce capable of responding to a changing global economy. Amidst this backdrop, the theme of this volume of the Georgetown Public Policy Review is "The Global Workforce: Challenges and Opportunities in America and Abroad."
We open the journal with an interview with former Michigan Governor Jennifer Granholm, who discusses how Michigan's successful No Worker Left Behind program may offer a blueprint for other states to help displaced workers. Governor Granholm also shares her thoughts on infrastructure investment, AmeriCorps expansion, and government obstructionism, leaving us with a sense that now, more than ever, the US needs young leaders dedicated to public service.
Review staff also had a chance to sit down with Georgetown Public Policy Institute (GPPI) Professor Harry Holzer, Senior Research Fellow at the Urban Institute and former Chief Economist at the US Department of Labor. Dr. Holzer suggests some policy options for improving the unemployment rate, as well as how the US can better provide career and technical training in order to address long-term employment challenges. He also expresses concern about youth recovery from the recent recession, stressing that America can do better to equip a scarred generation for the future.
We cannot thank Governor Granholm and Dr. Holzer enough for sharing their expertise with the Review and our readers, as well as for their inspiring dedication to challenging policy issues.
Turning now to this volume's quanitative pieces, Ed Sivak, a GPPI alumnus, shares initial research findings from his evaluation of a subsidized employment program in Mississippi created by American Recovery and Reinvestment Act (ARRA) funds. Sivak's exciting research concludes that the program may be associated with an increase in participant wages and labor force attachment that could prove valuable for informing federal workforce development policy.
Next, Julie Biau, another GPPI alumna, examines the informal sector and domestic investment in developing countries. Biau's exceptional research suggests that informal sector investment outcomes may vary according to country income level, providing evidence for revision of developing-country policy toward the sector.
Rounding out this volume, the first of our issue spotlights is an author- revised book chapter from Human Security in a Borderless World. Authors Derek S. Reveron and Kathleen A. Mahoney-Norris make a
THE GEORGETOWN PUBLIC POLICY REVIEW I V strong case that, in light of a world in which threats are increasingly borderless, the US should include the concept of human security within its broader national security strategy.
A collaboration between Professor Weimin Mou and GPPI graduating student Richard Harris completes this volume. In the fall of 20 11, Professor Mou spent several months at Georgetown in an exchange program with the Central Committee Party School in China. The Review is honored that Professor Mou took the opportunity to work with Mr. Harris and offer his valuable insight on the role of public perception of crises.
On behalf of the staff of the Georgetown Public Policy Review, I would like to thank each author for their extraordinary contributions to our journal. I would also like to extend the same gratitude to the members of the GPPI community who contributed to our efforts this year, especially our faculty advisor, Robert Bednarzik, and our faculty reviewers, Alison Audinbaugh, Carol Flynn, Jan Goldman, Gillette Hall, Andreas Kern, Lindsay Lowell, Dennis McBride, Mark Nadel, David Podoff, Ron Shadbegian, and Adam Thomas.
I am most grateful to have worked with a remarkable group of peers to carryon the Review's thoughtful contributions to public policy discourse. Each and every member of Review staff was vital to our astounding progress this year, including unprecedented blog traffic, first-ever policy forums, spectacular fundraising events, and the publication of the inaugural Georgetown Public Policy Review Graduate Thesis Edition. This publication, our annual journal, is the result of the particular dedication of Kathryn Bailey, Richard Harris, Kathryn Short, and each member of our exceptional print and interview editing teams.
Finally, I would like to extend special thanks to the Executive Team: Richard Harris, Kathryn Bailey, Luca Etter, Kathryn Short, Christina Moore, Matt Doyle, Jennie Herriot Hatfield, and Sarah Orzell. Their leadership, initiative, and dedication to excellence inspired me at every turn over the past year.
Congratulations, all, on another outstanding year. Warmest regards,
Amanda Huffman Editor- in -Chief
VI I EDITOR'S REMARKS INTERVIEW WITH JENNIFER GRANHOLM: On Infrastructure Investment,AmeriCorps Expansion,and the Need for the Media to Call out Obstructionists
By Ingrid Stegemoeller
ennifer Granholm served as Governor of Michigan from 2003-20 I I. She is a Distinguished Practitioner of Law and Public Policy at UC Berkeley Granholm and her husband, J Dan Mulhern, recently authored the bestselling political book, A Governor's Story: The Fight for Jobs and America's Economic Future, which explains how Michigan pioneered ways out of a perfect economic storm and offers proven advice for a nation desperate to create jobs. She recently became the host of'The War Room with Jennifer Granholm" on Current TV, which airs weeknights at 9/8c.
GEORGETOWN PUBLIC POLICY REVIEW I I Georgetown Public Policy Review: is you must agree to be trained in an Education is a key component to area of need. We had worked with our this country's future economic community colleges and our business success, both for young people and community to identify what those area) for adults whose jobs no longer of need were in each region of the state, exist. In Michigan, you started the And we crafted, in partnership with No Worker Left Behind program, the community colleges, programs to which has successfully retrained more address those displaced workers that than 150,000 Michigan citizens. This would land them a job at the end. That initiative has national promise. What was the structure of the program. recommendations can you provide for The federal changes that need to federal policy makers in using your happen are to provide states with model? flexibility, or at least we need to Jennifer Granholm: In Michigan, we upgrade our current labor laws and had to go to the federal government to the laws related to compensation for get waivers from the restrictions that workers who have been displaced. The are embedded in the current Workforce rules are very rigid and there are a lot Investment Act and Trade Adjustment of hoops to jump through, but the Assistance money. We asked for a reality is that in a 2pt century global waiver to allow us to have the flexibility economy, the ability to retrain people to craft a program that would serve our and to be creative about it, and to be population, which obviously had been responsive to the private sector, which enormously affected by the changes in is really what you want, must be much the manufacturing sector and the auto more robust than what it currently is. industry. They gave us permission And I use in the book, for example, to do that, and they also, with the what Germany has done. Instead Recovery Act, provided additional of requiring people to continually funds. And so, I said in the State of search for a job-as opposed to the State address, the first 100,000 going to get retrained while they're people who come in the door, we will on unemployment, they encourage pay for your tuition at a community apprenticeships, they allow people college: two years, $5,000 per year, up to remain employed, they subsidize, to $10,000 per worker. But the catch essentially, employment rather than unemployment. In down cycles, the manufacturers, for example, really "So, the bottom line is, our system, like that because they have a skilled which was developed and perfectly workforce they don't have to layoff anc fine in the last century, is antiquated then rehire; they just reduce worker when you compare it to a global hours and account for the down cycle economy and the rapidly changing in that way. needs of the private sector in that So, the bottom line is, our system, global economy:' which was developed and perfectly fine
21 GRANHOLM in the last century, is antiquated when from the federal government while the you compare it to a global economy auto industry was floundering. Can and the rapidly changing needs of the you talk more about the importance private sector in that global economy. of the state-federal relationship and where you see opportunities for GPPR: The Race to the Top initiative additional partnership? encourages states to make innovative and meaningful education reform in JG: The states simply do not have a competition for federal grants. How the resources to compete globally for might this model work in other policy jobs. We just don't. All we can do is areas? compete against one another as states. This weekend [Feb. 24-26, 2012], JG: To me, the idea of putting out a pot in Washington DC is the National of money that states can compete for, Governors Association meeting, and and requiring them to make changes I can guarantee you that governors to their state laws through their state will go there and sort of nudge each legislature to be able to successfully other and say, "Ha, I got that company vie for that, is the best model that to come to Ohio from Massachusetts I have seen that addresses both the because I was able to put these types of needs of Democrats and Republicans. incentives on the table:' We're always There's obviously a lot of philosophical vying against one another for job opposition to federal government locations inside the United States. involvement, and the governors really like the ability to compete. So if you want a bottom up strategy, then put "Left alone, the states will never out a pot of money-Race to the Top be able to compete against China, was $4 billion-put it out and have the states vie for it. For example, if against India, or against any of these we wanted to become independent emerging nations. We simply don't of foreign oil, if we want to have a have the resources. You have to significant move toward clean energy have a partnership with the federal or energy independence, then put out a government." pot of money that would reward states that demonstrated they were willing to change their laws to really encourage But the reality is, jobs in a global the jobs and investment that would go economy are moving to places that along with creating a whole new energy have lower wages than any of us sector. To me that model is the perfect would ever want to provide, and to model for a "Jobs Race to the Top." countries that are being very aggressive in offering access to capital and GPPR: In your book, you discuss the assembling land for investment in differences in your experiences with factories, etc. So we've got to have a the Bush and Obama administrations state- federal partnership on economic in terms of the support you received development. Obviously the Race to
THE GEORGETOWN PUBLIC POLICY REVIEW I 3 the Top idea is one idea, but truly the But I would say the federal government states need to leverage federal dollars is also a great place, especially with to be able to go after international ambassadors that are located in every investment and encourage that country, to allow for partnership investment to happen inside the with the states to be able to go after United States. Left alone, the states international investment, so that yoU will never be able to compete against see insourcing of jobs to the United China, against India, or against any of States, rather than this continual these emerging nations. We simply outsourcing of jobs. don't have the resources. You have to So on both fronts, playing defense have a partnership with the federal by ensuring the playing field is level government. through the US trade representatives and enforcement of trade agreements, "We identified which companies and playing offense by going after across the world were supplying the international companies that want to do business in the US - in partnershiP things that were necessary for us to with those ambassadors, targeting that build this industry and then I went strategy to make the US a destination after them, and got them, and brought place for international investment. them back to Michigan." Those are both great strategies.
GPPR: As governor, you were quite successful in traveling to other GPPR: Do you think there are trade countries and recruiting businesses policies that could be changed to from outside the US to come to better leverage state and federal Michigan. What lessons did you learJl resources globally? out of those experiences that might be JG: I do think the federal government applied either in other states or at the is the place to be able to attack the federal level? issue of unfair trade, and of going JG: Let me give you a story from after trading partners who are taking Michigan as an example. When the us to the cleaners, where there are no federal government decided that we consequences for violations of trade wanted the United States to be able agreements. The trade negotiations to produce the means for our own that are done by the US trade energy independence, at least with the representatives are a place where we electric vehicle and the guts to that can really level the playing field and electric vehicle-which is the lithium insist that our trading partners abide by ion battery-when the US decided the same rules that we abide by so that to do that and the state of Michigan our businesses are not disadvantaged. pancaked our state resources on top of So absolutely, the federal government the federal grants to make Michigan is necessary to ensure there's at least a irresistible, what we did is to say we level playing field.
41 GRANHOLM Want. the Woe hi' supply cham for the headquartered in Japan if they're hiring lIth' IUm ion battery. our citizens.
Many of those suppliers are not in GPPR: Working with unions in the Un't d 1 e States. So I had to go to restructuring the auto industry was Japan ,t or example, and get a company a key part of your success. How called Techno Semi Chern to come can unions continue to adapt to the to Mich' . igan and be a suppher to changing economy? What role do you that lith' . rum Ion battery. I had to go think they'll continue to play in our to Jap an and get a company called country? TOda to come to Michigan and build JG: I use Bob King, who is president a cathode for the lithium ion battery of the United Auto Workers, as a really as a suppIer. li I had to go to Korea ~ fine example of a 2pt century union to get LGChem, a Korean company, leader. He's often said "this is not to build the batteries in the United your father's auto industry:' While States. "Wi'd e 1 entiified w hilChcompames . in the 20th century, their strategy was ac~oss the world were supplying the to hold onto job classifications and thIngs th at were necessary for us to to pit labor against management, but build thO . IS industry and then I went in the 2pt century they recognize the after th em, and got them, and brought enemy is not management, the enemy them back to Michigan. So for us, that' . is the globe. And if we want to make s Just one story. We were able the US-based companies successful, ~oget 17 companies in the lithium the UAW has to take on a different ~onbattery space to come and locate role and become the broker of great Inside fM' . - . 0 ichigan because we targeted skill. So the UAW is now the place International investment. where sophisticated techniques related Now the US does not have a national to auto manufacturing occurs. The ~oal of What is known as foreign direct automobile is the most technologically InVestment, FDI. Almost every other advanced mass-produced product in advance d nation . has a goal. If you the world and they are the place that go t S· h 0 mgapore, for example, they trains the kind of workers that will aVean astounding goal of getting a make the quality products that the auto certai n amount of foreign companies companies want. to locate there, invest there, and hire Singapore citizens. Every state and the federal . . government should be workmg In tandem to have international "A paycheck is just as green from goals of getting companies to come a company that's headquartered to ou . . r country to be able to hire our in America as a country that's Itizens. A paycheck is just as green headquartered in Japan if they're hiring ~om a company that's headquartered lllAmenca . as a country that's our citizens."
THE GEORGETOWN PUBLIC POLICY REVIEW I 5 For example, there's a factory that was really does provide a much more built a couple of years ago outside level playing field, particularly for the of Detroit called the Global Engine workers in those countries who may be Manufacturing Alliance, and in that undergoing very unfair labor practices, factory there's not a single worker or working 12 hours a day for $0.50 an that doesn't have a college degree, or hour, or who may be up against child a technical or vocational certification, labor and all sorts of practices that because you need to have people who we find abhorrent but that reduce the know how to program the robots, who cost of manufacturing in that country. know how to maintain a robotic line. We need to ensure that people are You need a level of sophistication that protected around the world. was never imaginable in 20th century GPPR: One of the many problems manufacturing processes. You don't you pose in your book addresses have people doing this sort of repetitive infrastructure, and the fact that stateS motion stuff that comes off an and the country have chronically assembly line anymore. You really have underinvested in schools, the energy to have a very high level of skill. This is grid, the health care system and what the UAW can offer to automakers. more. How do you propose to fix If you want to have a quality product these problems when state and federal that is going to make you proud across budgets are still stretched tight? the globe, build it here, because we will ensure that quality is present. JG: First of all, we have to look at our The number of people on the line is relative investments-relative to the significantly reduced, and the level of rest of the advanced nations. If you quality has significantly increased. look at the OEeD nations and the percentage of their GDP that they That's, I think, the model for a 21st invest in infrastructure, you would century labor union. And back to the see a significant difference from what trade issue, we should be negotiating we have in the United States. Other into trade agreements the ability of countries understand the importance workers to organize in other countries, of investment in these basics-not to level the playing field as well. So, just hard infrastructure, but soft if the UAW and others are able to infrastructure too. When I say soft organize in other countries, then that I mean making sure we have high- speed Internet, or making sure we have "If you look at the DECO nations and investment in human capital. Other the percentage of their GOP that they countries are doing this to a much invest in infrastructure, you would greater extent and they're using it as a see a significant difference from what way to lure industry to their shores. we have in the United States. Other So, for example, yesterday [Feb. 22, countries understand the importance 2012] the President rolled out a tax of investment in these basics.." plan, and Republican presidential
61 GRANHOLM candidat M· e, Itt Romney, did as well. By far, I cut more. If shrinking This m . ornmg there are some front- government, and shrinking the number pageheadh mes that compare the of state employees, which I did far concept . s in these tax plans. And on the more than any state in the country; Repubr . . ican side, what they are doing is cutting taxes, which I did 99 times in prOjectingforward massive deficits so my first term in office; if that alone lli ' eyWould be depriving our nation of were the prescription for economic the inve t . . s ments m the mfrastructure success, Michigan would've had the of OUr country so that we can be most robust economy in the nation. comp ti . e itive by providing corporate tax cuts B. ' . ut If you ask industry, they WOuld say Wewant to see the United "Clearly the 20th century-or frankly Statesi .. nvest m mfrastructure as part 19th century-strategy of simply of the . common good so that we can h cutting, and shrinking the size of IrepeopI e who are trained, so that ourp d government doesn't work. Ifthat is ro ucts can travel on roads that are h srnoot and so that we can ensure your only economic development that ele t .. c ncny gets to our factories. strategy, it is a loser." of th . All at ISpart of the common gOod · ' so Wehave to have a rational InVest The flip side to that, and what actually . ment strategy, which means a ratIon I works, is having just the things a revenue strategy that supports those· you and I discussed: public private mvestments, and that means a rar partnerships, state- federal partnerships, · IOnaltax policy that will sustain the InVest a strategic, active government- ments necessary for them and for OUrn . not a passive government, not a atlOn to be competitive hands-off government, but an active GPPR... If you could offer federal government-and I'm not talking POlicy makers one piece of advice for about a big government either, I'm telll ki . a ng the US economy's structure, talking about a strategic, active gIVen . \6' Your experience as governor of government with a strategy to be able !VJ.lch· Igan, what would you offer? to get internatio~ investment, to be Ie· Cl able to invest in th€ things we know we . early the 20th century-or frank! 19th can be competitive globally as states . Y century-strategy of and as a federal government. But Sllllplycutting, and shrinking the size of gov without an active strategy, without a · ernment doesn't work. If that ISyou hands-on aggressive nature, without r only economic development strategy· . a leader who stays up at night trying , It ISa loser. Michigan's eXper" ' to figure out how to create jobs every lence, in our laboratory of dell1 single day, without that, we will be Ocracy,demonstrates that. I cut destined to continue this downward ll10rethan any governor in the history ofl\r . spiral and loss of competitiveness to d . lchlgan, but also in the country, other countries. UrIngthe first decade of the century.
THE GEORGETOWN PUBLIC POLICY REVIEW I 7 It's not just one thing, it is a mindset- compromise is a dirty word, then yoU it is a mindset away from the notion have to remove the obstructionists that all you've got to do is get from office and put in people who are government out of the way, or shrink it willing to make progress. That is the so that it drowns in a bathtub, or have a biggest suggestion that I have. Call out hands-off approach because the private the people who are obstructing, point sector will take care of everything-the them out by name, and ask the citizens private sector will take care of making to remove them. money. That's what they're supposed GPPR: You have a new show on to do, and they will go to the place on Current TV, "The War Room." What the globe that enables them to make are your thoughts on the role of the the most money. Without an active media in calling out people who have government here in the United States, been elected to serve? that place won't be us. JG: The media have been completely lame about it, especially places like "But if you want to see progress CNN or ABC or NBC. They feel like and movement, if you want to see they have to give equal time to both collaboration, if you don't think sides. They have a dereliction of duty compromise is a dirty word, then you in not pointing the finger at why thing) have to remove the obstruction ists don't get done. Everybody knows from office and put in people who it, everybody sees it, but there's this are willing to make progress ...Call notion that you've got to have this false equivalency and have people on out the people who are obstructing, from each side so you don't get to the point them out by name, and ask the bottom of it. citizens to remove them." I want to see the media call folks out. ft simple thing-the debates. Who won GPPR: You did experience some pretty the debate? If you think somebody intense gridlock in Lansing during won the debate say it, but don't say, your time as governor. What ideas do "Well, this side said this, and that side you have for easing some of that? said this;' and even if it was clear, manY in the media don't feel like they can ca~ JG: You've got to make a very concerted it out because they have to be balanced. effort to call out people who have been The idea of balance has elevated the sent to the capital for the purpose of side that has obstructed and given obstructing. If they have gone there them some legitimacy when everybodY for that purpose, they will succeed in knows where the problem lies. The obstructing. And if that's what you media have been an accomplice. want, by all means elect those kinds of people. But if you want to see GPPR: Another demographic that's progress and movement, if you want suffering as a result of this recession i) to see collaboration, if you don't think twenty-somethings looking to begin
81 GRANHOLM their car .. eers. Many In this age group GPPR: On a related note, what arehav·Ing di ifficulty finding work, advice can you give to young people eventh h oug they are educated. What interested in public policy leadership? are Your thoughts on ensuring young people I strongly urge public policy students are able to get a successful start to the· . . to consider running for office, We've ir profesSIonal bves? got such a need for people who are of JG' I th: , in]; one of the most significant pure heart, and who only want to make and be st programs that has come out the nation better, There's such a level of the d te eral government which I of distrust, discord and disgust with would 1 '" , ove to see ten times bigger, IS politics that often people are dissuaded ~~riCorps. People who, especially from running, But if you really want Unng a toug h timeti when en Iti , s not to serve your nation, you've got to raise obviousth ere are Jobs, ' when the your hand, you've got to serve to make recove ' , ry ISslow in coming back-at a it better, tIl11el'k 1 e that, to be able to give young GPPR: Thank you so much for your Peopleth e opportumty' to serve their, time, insight, and passion for public COuntry, ,t If h ey don ' t want to serve Itin W' service. ar, grve them the opportunity to serVetherr ' nation , in. sc hools.or00 s, or mi cOnser ' vation, or in health care. To be abIe t o amp up that program is a huge "We've got such a need for people °PPort ' ' Uillty without a whole lot of who are of pure heart, and who only cost. want to make the nation better ....if ISayth' ISas a mother of two young you really want to serve you r nation, ~eoPleWho are in their 20s, who both you've got to raise your hand, you've aVegone into' AmeriCorps, who got to serve to make it better." bothh ' aVeserved in the toughest of Urban h sc ools through CityYear, and whoh c aVecome out of that experience leelin ' g It Wasthe best experience theY'd , eVerhad. They train people In leaders h' IP, they give back to the cOl11lhunI'ty, an d Its' , a wm-wm-wm ' , , a11 thew ay around, Iwould love to see a l11uchb' th Igger emphasis on the part of , ~,federal govemment in supporting InitIat' Ives that would allow young People to have the opportunity to go to a d'f , 1 ferent place, serve their country Ina V b ery meaningful way, and get a lot ack themselves,
THE GEORGETOWN PUBLIC POLICY REVIEW I 9 10 INTERVIEW WITH HARRY HOLZER: Jobs, the Recovery, and a Scarred Generation
By Ingrid Stegemoeller
r.Harry Holzer joined the Georgetown Public Policy Institute as Professor of Public Policy in the Fall of D2000. He is currently a Senior Research Fellow at the American Institutes for Research, a Senior Affiliate at the Urban Institute, a Senior Affiliate of the National Poverty Center at the University of Michigan, a National Fellow of the Program on Inequality and Social Policy at Harvard University, a Nonresident Senior Fellow at the Brookings Institution, and a Research Affiliate of the Institute for Research on Poverty at the University of Wisconsin at Madison. He is a faculty director of the Georgetown Center on Poverty, Inequality and Public Policy Prior to coming to Georgetown, Professor Holzer served as Chief Economist for the US Department of Labor and professor of economics at Michigan State University
THE GEORGETOWN PUBLIC POLICY REVIEW I II Georgetown Public Policy Review: the labor market between the skills What are the biggest factors keeping employers are looking for and those the unemployment rate around 8-9 the workers have. My guess is, that's percent? a much smaller factor than the lack of aggregate demand, but it might be Harry Holzer: Probably the biggest adding a percentage point or so to the reason that unemployment stays high is unemployment rate. that there simply isn't enough aggregate demand in the economy to create There is some evidence of high job demand for enough goods and services vacancy rates-not overall, not relative that employers would want to hire a to the unemployment rate-but in lot of workers. Even though we have certain sectors like manufacturing tried lots of stimulus, the economy's there's some evidence of very skilled aggregate demand is still weak, and jobs that employers have some trouble that's usually the case when you have filling and a few other places. a recession caused by the bursting of a There's one other issue that's probablY financial bubble. There's been work by broader than the recession. It goes a couple of famous economists named through the whole last decade of the Reinhart and Rogoff who wrote a book labor market, where it seems as though on this, and they show that all through job creation was sluggish. TechnologY history, when financial bubbles burst and globalization overall are good and you have big downturns it takes things, but they do hurt certain grouPS longer to recover because households and they make it easier for employers and firms have a lot of bad assets on to produce goods and services without their balance sheets, they're heavily in a lot of workers. The demand for debt, it takes them time to work their workers, even before the recession, way through that, so there's not a lot seems a little bit slowed by those kinds of expending or new demand that they of structural factors that limit new generate and while that's true, it's hard hiring. So that's probably one more to recover. Recoveries are slower. factor that makes the climb out of the There are other issues that might also recession a little slower. be in play, but I think that's the most GPPR: In talking about these factor» important. Some people wonder what are some policy steps that yOU about what's called "mismatch" in think could help alleviate some of thiS persistently high unemployment? "Probably the biggest reason that unemployment stays high is that there HH: The question is, "Can we do simply isn't enough aggregate demand much more to generate new demand in the economy?" And we're probably in the economy to create demand not going to have another really big for enough goods and services that stimulus package because we've alreadY employers would want to hire a lot of piled up a lot of debt and I think there'S workers." a reluctance to have a really major new
121 HOLZER stimulus. The Fed has done almost as "This gap has persisted a very long mUchas it can do-short-term interest time. There are two issues here. In ratesare close to zero. Probably the bestth' the US economy, even before the lllg Wecan hope for-and this Wasto some extent embodied in the recession, less educated men-men Presid ' . enj s proposals (the Amencan with a high school diploma or less- JobsAct)-is to have well-targeted have taken a beating in this economy." Policiesoma t ke e Iti cheaper for employersto hire new workers-very GPPR: We've seen the recession that's targeted tax credits for employers who disproportionately affected African createnew jobs. American males, an area on which you AndSome of that was included in have focused some of your study. How the P id resi ent's payroll tax cuts for long will this gap persist and how do employers. I would have preferred a you think we can fix it? Setof payroll tax cuts that were even HH: This gap has persisted a very long 1110regenerousthan what the president time. There are two issues here. In the proposed, but better targeted. Just US economy, even before the recession, redUcingthe overall employer payroll less educated men-men with a high taxthe 3 to 6 percent doesn't spur a lot o[h' , school diploma or less-have taken a IrIng. But if you have a really big cred' beating in this economy. That's a long- It targeted at employers who are Cre ' term problem, and African American , atmg a significant number of new men have done by far the worst. Many Jobs,that would be more powerful. So other complicated social factors have I think that could help. Will it have led them to have high incarceration a dramatic effect, probably not, but rates, high rates of single fatherhood. could' It lower the unemployment rate They've really been very badly hurt by byup to a percentage point, probably. this transition to a service economy. ~nd Some direct expenditures on And that in many cases doesn't show Infrastructure building and public Ser ' up in the unemployment rate because VIceemployment for the poor would they simply withdraw from the labor help too. force. So there's a long-term problem And then on top of that, other efforts of less educated men, especially less to' Illlprove the quality of education educated black men. Separate from and job creation to limit some of these that, those are also the groups that ll1iSlllatches,just to make sure workers have been hit hard by this downturn, ~regetting the skills they need for new and that shows up in unemployment, Jobs, rather than withdrawal from the labor force. But then you could say the There might be some policies to same thing as before: less educated stilllUlatemore job creation by start-up men have been hurt in this downturn, firlllSand things like that, so you could and African American men harder throw those in the mix as well. than ever. African Americans have
THE GEORGETOWN PUBLIC POLICY REVIEW I 13 always been more hurt by recessions. We could probably do some things to Roughly for every percentage point that the child support system: if you're a unemployment rises for whites, it rises low-income dad with a child-support by about two percentage points for order, make it easier to make your blacks. That's a long historical trend, payments because once these men and it was true this time around as well. fall into arrears on their payments, the taxes on their earnings are very The long-term problem ofless- high and all their incen tives are to go educated men, especially black men, underground and to disappear. requires a set oflong-term solutions that start with the education system. For a lot of these men who are going Training people for good jobs that to have poor skills and poor work actually exist, making sure that African experience, we want to do what we Americans growing up in low-income did for the moms, which is to create communities where there aren't a lot programs like the Earned Income Tat of older working men that can connect Credit, which take very low wages and them to jobs, that you help provide subsidize them and improve incentives those connections to the labor market. to work. There's a set of employment training GPPR: Could you talk about some policies that would enhance their of those long-term policies that you access to those jobs. I think also for see as helping to make sure that theSe African American men, you have to men with less education get access to do something about the incarceration education? problem. We simply have too many people in jail. We incarcerate too many HH: There you have to start relativel)' people for non-violent drug crimes, early. There's a lot that's been written and then they recidivate at high levels, on the achievement gap between often for technical reasons. So we have whites and blacks and the need to got to put fewer people in prison, we've start very early, before people go got to make it easier for men coming into kindergarten. Other scholars out of prison to find work and to have written a lot about that and I'm eliminate some of the legal barriers that supportive of those policies. My interest states have imposed that often limit is what happens when young people their access to decent jobs. become adolescents and teens and they enter middle school and especially higb school; that's where a lot of them are already behind academically. I would "We simply have too many people in prefer to see that they face a range of jail. We incarcerate too many people options, some of which lead to post- secondary education of various kinds, for non-violent drug crimes, and then but some would lead directly to the they recidivate at high levels, often for labor market. In the United States, we technical reasons." have not developed a strong system
141 HOLZER of career and technical education. "...we have not developed a strong I'm not talking about old-fashioned system of career and technical VOcationaleducation, but about high- education. I'm not talking about old- qualitycareer and technical education fashioned vocational education, but asexemplified by the career academies Orcertain very good apprenticeship about high-quality career and technical programs where people get good solid education as exemplified by the academic training that would certainly career academies or...apprenticeship prepare them at least for community programs where people get good . .. " Collegebut at the same time they also solid academic tralnmg ... learn occupational skills and labor market experience. The evaluations of community colleges to wear too many the programs like the career academies hats. We expect them to be academic haveshown quite impressive effects institutions that feed the four-year on Youngpeople that don't necessarily system but also provide occupational gointo higher education, at least right training and some of them are better away.It gives them other options in at one than at the other. I would make the labor market. both education and workforce systems In some sense the whole academic work hand in hand with each other accOUntabilitymovement has some but also make them more responsive merit,but it's focused so narrowly to labor market needs so that young on tho IS test-score gap that it has led people, or even adults returning to Usto not pursue and not develop a those systems, face a range of services Whalerange of other pathways that and options that better link them to COuldhaveserved some people welL available job opportunities. We' re not going to send everybody to a fo , GPPR: Another population that's ur-year college, we re not even goingt been affected by this recession is o send everybody to a two-year those in their late teens and twenty- College.Right now, our high-school somethings who are just starting drop Out rate is still 25 percent. We their careers and don't have a lot need to broaden how we think about of opportunity right now in this high-quality education and thinking job market. How do you think this about edUcation as having multiple generation will be affected? pathways to success either through POst-secondary or the labor market, or HH: I have big concerns about this maybe Some combination of the two. generation of young people. Again, I'd say the same thing Isaid about A. lot of this involves creating an less-educated men. There's some effectiveeducation and workforce evidence that over the last 10 to 15 sYstem,Where education and workforce years, employment rates for this group are ki ' wOr ng together, they re not have dropped; their relative wages separate siloed bureaucracies, which they f have dropped. There are different o ten are today. We expect our
THE GEORGETOWN PUBLIC POLICY REVIEW I 15 reasons for that. High-income kids are economy. Young people do bear a working less and less because they're strong brunt in a recession, and it can doing more enrichment activities, affect their earnings for 10 to 15 years. which is great, but lower income kids So even when they start climbing the often aren't getting the kinds of early ladder, they're always going to be below work experience they need. And the where they might have been. recession has hit them very hard. GPPR: Based on your work, is there aP answer to this?
HH: This is a tough one because "Young people do bear a strong brunt as long as the economy remains in a recession, and it can affect their soft, there's nothing we can do to earnings for 10 to 15 years. So even dramatically speed up the recovery when they start climbing the ladder, process. It's going to take the better part of this decade to climb our way they're always going to be below out of the hole we dug for ourselves where they might have been." and there's not a lot we can do and in that situation people in their 20s and 30s are just going to have a harder time. The best thing you can do is encourage There's evidence from the '81-'82 them to get the best possible educatioll recession, which before this one and training that they can get if had been the worst since the Great they're not working really productivelY Depression, that young people coming right now, and to find as much work out of school at that time getting their experience as they can early on. first jobs, even if they got a job, they were still scarred by the recession GPPR: What does it mean for the because the jobs they got weren't as economy down the line to have good. Young people make a lot of this generation of workers whose e progress in the labor market in their potential was a little bit stunted at tb first 5 or 10 years by job-switching, beginning of their careers? by figuring out which job is best for HH: It's hard to say, economy-wide, them. But if you're in a recession, what that means. One of the things it's harder for you to do that kind of we're also grappling with is, because the productive job-moving, your wages are nation's finances are in such bad shape, going to grow more slowly. I worry we're going to encourage people to about young people joining the labor retire more slowly. We have to because market right now. I certainly worry we simply can't afford our health about the ones that can't find anything and retirement policies for current in their field, but I even worry for the retirees. People above 55 have actuallY ones that do find a job, but it's a much done relatively well in this downturn, less successful job and job path than which is not to say that they haven't they would have found in a stronger suffered. But their employment rateS
161 HOLZER haveact 11 h ua y eld up better because that those costs are high. I did a rough alot of th . em are simply choosing to calculation several years ago saying that wborklongerand the labor market is the rate of child poverty in America a sorbing t h em. That ' s good news for ends up costing us a half-trillion dollars th oseeld 1 ' th er y people. It s good news for a year in loss or waste in GDP. That . e nation's finances, but at the same was a rough calculation and people can tune it . creates problems for people quibble with those numbers. But it's trYIngt kn 0 get a first foothold. I don't probably a big number of economic Owhow to resolve that. We can't waste. affordth p e current retirement system. eopleh b I try to make that case. I don't think, · ave to e encouraged to work Intoth . 1 politically, people disagree with that. eir ate 60s, maybe into their early70 There's a strong sense on both the s. And that is going to mean probabl left and the right that child poverty is y a slower rate of jobs opening up. wrong, it runs counter to our ideals of equal opportunity and it is bad for the GPPR'v , , J.OU ve written about child country. It's then hard to get people POverty d' b an Its negative effects on to agree on what to do about it. So oth ind'IVI id uals and society. How do the people that oppose new spending Yoush' . ine a light on this problem for programs, they argue yes, child poverty Poli CYll1akersin a strongly partisan is bad, but spending programs aren't env' Ironll1ent? necessarily alleviating. And there are BB· I' . times when they're right. It just would . Vetned to do that because I've Writte be nice if we could come to some kind th n Some things showing that ere is of consensus about where is spending b a cost to the overall economy effective and where is it not effective, Yhaving so manyki Id s grow up III . POverty A and what kinds of other policies will . nd of course the poverty nUmbersa . . A d work. But I think that's the problem: th, re Worse III a recession. n eYre . it's not just making the case that kids Co . gOIngto be bad for several years. are heard, it's then getting people to .mlUgout of this downturn, kids are gOlngt b agree on what to do about it. o e scarred, both by the high ratesof poverty and by the high rates of Parent 1 a unemployment. I've written sOme ti papers showing that even in good Imes th . · »vne hIgh rates of child poverty "I did a rough calculation several InA.m . kid enca mean that when those poor years ago saying that the rate of child h s become adults, they're likely to poverty in America ends up costing aVe10 wer rates of education, which means 1 us a half-trillion dollars a year in lost OWerrates of employment and earnin . hi .. or waste in GDP. That was a rough W gs, igher rates of incarceration; · orse levels of health-all of which calculation and people can quibble ImPosee . I' conomiC costs on the country. with those numbers. But it's probably ve do ne some calculations to suggest a big number of economic waste."
THE GEORGETOWN PUBLIC POLICY REVIEW I 17 "Part of the answer is tying federal So they don't have the incentives to and state subsidies not only to respond. academic completion rates, but to Part of the answer is tying federal and completion rates in high-demand state subsidies not only to academic fields." completion rates, but to completion rates in high-demand fields. I think GPPR: Could you talk about how it's also funding certain support well-or poorly-our education systems. We have non-completion system is aligned with the labor rates in community colleges and in the market? non-elite four-year colleges that are very high, huge resources are wasted, HH: I don't think it's poorly aligned. people spend years and years and And I think economists have a come out with no credential at all. tendency to believe that the market There are a lot of different reasons for responds to opportunities in the that. Part of it is that their academic following sense: if there is high demand preparation is too weak; part of that in a particular occupation or industry is the family situation; but part of it is that's not being met, wages and the institutions themselves that aren't salaries rise in that industry. That then responding that are keeping class sizeS encourages young people to go into limited for various reasons. But there'S that field. It doesn't happen right away, a set of services that could improve but with some time lags people will completion rates, such as remediatioIl· see those incentives and will respond There's a large amount of remediatioO, by entering the field. I think there's especially at community colleges, that some truth to that. The problem doesn't get done well. And lessons is you have a lot of institutions, get stuck in remediation and never educational institutions especially, that leave. We want to encourage these don't necessarily have an incentive institutions to, first, rethink some to respond to those market forces. A of their requirements. Maybe not lot of the public higher education everybody needs to pass ''Algebra I" institutions, they get subsidies from the to get an associate's degree. SecondlY, state, just per capita, no matter what remediation can be better integrated the students are doing, no matter what into actual occupation and training they're completing. They don't have classes. There's a program out of the incentive to say ok, we know there are a state of Washington called IBEST lot of jobs in health care. Let's expand that has done this, where remediatioIl our training capacity in health care. instead of being separate and walled Health care is expensive. Hiring nurses off, it's integrated into the occupatiOIl~ to teach nursing classes is expensive. training classes. So people are more Equipment is expensive. So a lot of motivated to do it and they only have community colleges say, it's less costly to remediate what they really need to for us to have classes in English or in know. Now, how well it really workS History than in medical technology.
181 HOLZER andwh th . e er It can be replicated in HH: States have built what we call other c B ontexts, we need to find out. "sectoral programs," which are these ut at least that's the kind of thing we partnerships between particular needt o see more of: helping people industries, very often health care sUcced . e III getting credentials that the because that's the one generating a lot Iabor rn k h ar et really rewards. We don't of jobs, and training institutions, often aVeanymagic bullet to do that, but community and technical colleges or Wecan b pro ably make some progress other providers and intermediaries, andd b o etter than we're doing now. to help bring in the workers. GPPR.·Wh Pennsylvania was probably the first and . at role should states play in generated probably the most extensive elllployment policy and programming Versu th system of industry partnerships S e federal government? under Governor Rendell. Wisconsin, fili: Idon't think it's either/or. I Washington have followed suit. The actuall h' y t ink states have an important state of Kentucky did some very roleto I P ay and a lot of them are interesting things, in terms of taking PaYingthI at. If you look at the last their technical college system and decad f e, mostly before the recession, trying to align it with the labor market, ederal l' f . po ICYin the workforce area was but also make it more accessible to alrly . monbund. Nothing came out lower income populations. The state ofit A th . nd yet, a lot of the states took of Michigan did something very e lead i d . .. tho n omg some very mnovatrve different. During the recession, they lngs,and bUilding these kinds of had a program called No Worker Left system . s of partnerships between Behind. There are a lot of fragmented Industry .. d . 1 assocIatIOns, e ucationa pots of federal money, and part of Provid . . . ers, and intermediaries the problem is this fragmentation of Provid' . lllg serVIces to workers. The all the federal pots, what people call recess' h IOn as hurt that effort because siloing. The state of Michigan took nOWth th e states are so pressed for cash all those pots, and said we're going to at th' . ey re cuttmg back on a lot of the take all this money and spend it on Progr ams that they established. But retraining dislocated workers from there' . t s an Important role for the states the auto industry, of whom there thOPlay.The states often have the data are a lot, in '08 and '09. They sent a at y I ou need to figure out what the abor market really needs. The feds "But at least that's the kind of thing can I P ay a supportive role in terms we need to see more of: helping of pro' . . YldIllg resources, providing the 1ncent' people succeed in getting credentials IYesto do that. that the labor market really rewards. GPpR. st :Are there other examples of We don't have any magic bullet to do ate' lllnovations that you think are Partie I. . .. that, but we can probably make some u arlv mterestmg or excitingi progress and do better than we're doing now."
THE GEORGETOWN PUBLIC POLICY REVIEW I 19 very large number of dislocated adult workers, that's not the usual zero-sui" workers to community college for bidding game. some kind of retraining. Now we don't GPPR: One particular federal yet have evaluation evidence on how question is public transportation. successful that effort was and we need You've written about access to publiC that evaluation evidence. But just the transportation and how that can fact that it was possible for the state to affect employment opportunities. organize this kind of a program at that What is the role of the federal level of scale was very interesting and government versus state government, very encouraging. Whether that was specifically in ensuring access to the right approach or not just shows public transportation for workers? you that a state can figure out how to pool those resources and use them for HH: In some sense, transportation something potentially productive. is really a metropolitan issue. Labor markets have become very metropolitan in nature. There "It's interesting because governors are centers of job creation going get this, and often state legislators on in metropolitan areas, often in get it and a lot of the state-level downtowns if it's booming. SometiI11eS environments are much less partisan certain parts of the hiring come froJ1l suburbs. And what you want to do is and much less polarized. They're less make sure that all workers have access ideological; they're more practical." to jobs, no matter where those jobs are located. Is that a federal responsibility? Is that a state responsibility? Again, When you look around the country I think the feds can playa supportive you do see quite interesting and role, but a lot of the action has to occur impressive things that happened at not even at the state level, but at the the state level. It's interesting because regional or metropolitan level. governors get this, and often state legislators get it and a lot of the So, it's not necessarily going in and state-level environments are much building subway lines all over the less partisan and much less polarized. place, or light rail-although that They're less ideological; they're more could certainly help. Metropolitan practical. Employers have a sense that areas are different from each other. they need economic development. The solution in the Washington DC Too often, economic development has region might be different than the meant states bidding against each other solution in Los Angeles, or some other for the same business. That's not a area. So you need these regional productive activity. But when you build entities to figure out how to improve these systems of providing assistance access. Often, it involves coordinatioIl to employers that are generating between the workforce agencies and jobs, trying to get them more trained these regional governance boards that
20 I HOLZER createt . . . ransportatlOn. For mstance, with people from their workforce 111 VVas h' Ington DC, in our region, agency or their transportation agency? ~heDistrict has its own workforce It's really very limited. Their bread Instituf Ions, and so does each county. is buttered by their agency and their SOMo t n gomery County in Maryland, incentives. It's very hard to get people ~ndFairfax and Lowden counties to work across those silos. But that's the InVir .. glllla, they have booming kind of activity that needs to take place econo . b . rnles, ut they have separate Instituf f GPPR: Thank you so much, Professor, Ions rom Prince George's COunty h . . for your valuable time and insight. or t e District. So you could PUtin t . ransportatlOn systems, but educaf lOn,workforce and housing Policy . h rnlg t also need to be considered "It's very hard to get people to work aspart of the overall picture. Transp . . . across those silos. But that's the kind ortabon ISa piece of a larger PUzzlethat needs to be worked out at of activity that needs to take place." a regional level, with federal and state support.
Thereh aVebeen some interesting grant Progra h D rns t at have come out of the S Dep D artment of Housing and Urban eYelop th ment to encourage some of at activity. It's not like we have one l11odel,butit's the mindset that the l11etro l' po Itan region is the right level ofacti . VHyand that's what we have to sUPPot c . r , lor them to come up with the rIghtsolutions. GPPR: fr . One of the themes I've taken °lllthis co .. h . . nversahon IS t e amazing lllterco . . . nnectlVlty between different Poli t cy areas that really have to come °gether.
BB· IthO . Ink that's right. That's not anew' . t InsIght, it's just really hard o do If . you think of these federal and stat b e and local agencies and Ureau . 1" cracles, they have their own IYesth h \-'-lh " ey ave their own incentives. at s th . ad '. e Incentive of a local school 111lnlstratorto work hand-in-hand
THE GEORGETOWN PUBLIC POLICY REVIEW I 21 22 RESPONDING TO CHALLENGING ECONOMIC TIMES: The American Recovery and Reinvestment Act and Subsidized Employment in Mississippi
By Ed Sivak
ABSTRACT
Ed Sivak' s part of the American Recovery and Reinvestment D' IS the founding Irectoro f the M' . . . Act, Congress set aside $5 billion to establish the ~ . ISSISSIPPI Economic rollcy ( Temporary Assistance for Needy Families Emergency enter A G • n alumnus of the A Contingency Fund (TANF ECF) to address the challenges of eorgetown P br . (. u IC Policy Institute ~~~h ' increasing welfare caseloads. A number of states accessed the as spent the last ten years funds to implement a subsidized employment program. Using enga' glng in r po ICy analysis advocacy demographic information on program participants and wage and " COlllrnunity d In . . evelopment activities records from the state's unemployment insurance system, MISSlssi . PPI. On the issue of this study examines the wages of participants in Mississippi's 'Nor~force d program before and nine months after the intervention. a evelop ment, he IS. currently steering co . Initial findings from cross tabulations suggest that wages and D rnrnlttee member of the elta WOrkf labor force attachment increased for program participants orce Collaborative and a across all demographic groups. Recognizing the limitations Illernber of the . . . . It MISSISSIPPI State Sector of generalizing from this approach, this article is the first in rategy T earn. a series of in-depth reviews of the program. Should the initial findings hold under increasingly rigorous analysis, similar programs merit consideration in future debates concerning the funding priorities of federal workforce development policy. ,
THE GEORGETOWN PUBLIC POLICY REVIEW I 23 I. INTRODUCTION Program and Services (MS STEPS), As part of the American Recovery the program served 3,236 low- and and Reinvestment Act (ARRA) of moderate-income individuals with 2009, Congress set aside $5 billion to at least one dependent. Drawing establish the Temporary Assistance for from unemployment insurance Needy Families (TANF) Emergency records provided by the Mississippi Contingency Fund (ECF). The Department of Employment Security, Emergency Contingency Fund this paper compares the quarterly provided financial resources to the wages of the participants by race, states on a reimbursement basis gender, educational attainment, to create new programs and to geography, and program success before supplement efforts to meet rising costs and after participating in MS STEPS. associated with increasing welfare Using cross tabulations, the study finds caseloads. Specifically, the ECF that, on average, the quarterly wages reimbursed states for 80 percent of the increased by $952 for the program increased costs in three areas associated participants nine months after the with serving families as a result of the program ended. Additionally, wage economic downturn (Falk 2010). gains occurred across all demographic groups. The three areas included increased basic assistance costs, non -recurrent It is important to note that the findings short -term aid, and subsidized from the cross tabs reported here do employment. States were eligible not establish causal relationships and to apply for reimbursement of cash represent an initial stage of analysis. assistance payments as long as the The study neither uses an experimental states demonstrated caseload levels in design with random assignment nor fiscal year 2009 or fiscal year 2010 that more rigorous regression techniques, were higher than in fiscal year 2007 which limits the generalizability of the or fiscal year 2008. Non-recurrent results. At the same time, the findings short-term aid essentially amounted to provide interesting observations about a one-time payment not exceeding a an overall rise in average quarterly four-month period of time. Subsidized wages of the MS STEPS participants employment represented a direct several months after the program payment to employers to subsidize ended and warrant a more robust wages of participants in public or review of the program. private sector employment. Subsidized Employment Strategies in This article examines the effects of the the Twentieth Century
ARRA funded subsidized employment Over the last century, lawmakers have approach in the state of Mississippi turned, on numerous occasions, to from January 1, 2010 to September job training and public employment 30, 2010. Titled the Mississippi programs to increase the skills of hard- Subsidized Transitional Employment to-employ individuals and to respond
24, SIVAK to deep an d protracted unemployment subsided until the economic resulting from economic . recessions, . challenges of the 1970s prompted Perhaps the most well-known of the lawmakers to review past practice. programs was the Works Progress The Comprehensive Employment ~dministration (WPA). At its peak and Training Act (CETA) passed in 1111938,the WPA employed over 1973. CETA sought two primary 3.3 million individuals who worked objectives. First, the program aimed to directly for and receivedrecei their . paycheck connect individuals facing barriers to from the federal WPA. Approximately employment - particularly low-income and minority individuals with low three-quart. ers 0 ft h e participants . . were ~nvolvedin construction projects that levels of educational attainment - with lllcluded road construction, water the training, work experience, and and sewer systems, parks, recreational human capital development needed to faClIties,"1" and public buildings. For compete for jobs. Second, by creating the.rn ost part, WPA employees were jobs in the public sector through eIther laborers with few skills or former subsidized employment opportunities, factory workers. The remaining WPA the policy tried to offset the effects of employees were engaged in public high unemployment (Mirengoff and serviceactivities '" that included sewing, Rindler 1978). school lunch, survey work, and public healthactIVItIes '" (Levine 2010). "The Act sought to address the mismatch between the rapidly evolving Two deca d es passed following. the ex . pnation of the WPA before the workforce needs of industry arising United States would agam. pursue from technological developments and human. capita . 1 development policies the existing skills of a labor force that dIrected at job creation. In the 1960s were becoming obsolete." Presidenon t J h F. Kennedy SIgned. the Manpower Development and Training Act (MDTA) into law (Kremen The two objectives waxed and waned in importance throughout the 1970s. 1974). . Th e Act sought to address the While the program initially was created mISmatch between the rapidly evolving to address the structural challenges workforce needs of industry arising of the hard-to-employ in an evolving from tec h nological developments and the e .. economy, it changed mid-decade in Xistmg skills of a labor force that Werebecoming obsolete (Liles 1972). response to the recession to focus Add' . more intentionally on job creation. By Itlonally, the social climate of the the end of the decade, the program's 1960s paved the way for workforce emphasis reverted back to policies that Policiesan d programs that addressed trained disadvantaged workers (Bassi structu ra1b arners . to employment, 1983). The shifting goals, program SUchas race, and poverty alleviation. shortcomings, and political fallout Follow' h mg t e MDTA, interest in from high profile cases of fraud in the subsid'Ize d employment programs
THE GEORGETOWN PUBLIC POLICY REVIEW I 25 program led to the end of CETA and researchers looked at the probability a restructuring of workforce policy of employment following classroom yet again in 1982 (Dean 1978; Shaffer and on-the-job training. They found 1980). evidence of increased probabilities of As the CETA programs wound down in gaining and maintaining employment the early 1980s, evaluations of the Act among men who participated in revealed mixed findings. Descriptive the classroom training components studies showed that earnings and of CETA relative to those who labor force attachment increased participated in on-the-job training while the use of public assistance (Card and Sullivan 1988). decreased (GAO 1982). More rigorous In the end, CETA's promise as a studies that used multiple regression "stepping stone" to private sector techniques also found that CETA employment never materialized. Most participants' earnings increased: people who transitioned to work from women saw increases in earnings a CETA-subsidized job did not go and low-income individuals realized into the private sector. In fact, among gains two years post-training (Bassi the CETA clients who moved into an 1983). One explanation for increases unsubsidized job upon completing in earnings among women was that the the program, there were lower rates of CETA experience socialized women to private sector labor force attachment the world of work; another was that post-program than before the increased earnings were associated with intervention (GAO 1982). increased employment opportunities Nearly all of the studies conducted and more hours of work. Men, on on workforce training and subsidized average, experienced decreases in employment programs lacked the rigor earnings. Researchers attributed of experimental design methods with earnings decreases among male random assignment. In the absence CETA participants to stigma among of experimental designs, controls employers. Whereas female CETA for selection bias and associated participants were considered motivated challenges in specifying a model and, as such, prime candidates for remained elusive and difficult to entry-level jobs, male participants overcome (Card and Sullivan 1988). were viewed, when coming from The paucity of evaluations using this situations of previous unemployment, experimental design approach served as disadvantaged and lacking skills as a defining limitation in trying to when hiring decisions were being made determine the effects of MDTA and (Dickinson, Johnson, and West 1987). CETA interventions on employment Other studies of male CETA and earnings outcomes for program participants, using a different participants, raising questions measure of success, cited slight about the overall effectiveness of the gains in employment. Employing programs (Ashenfelter and Card 1985). logistic regression techniques,
26 I SIVAK The National Supported Work Program fact that many of the women who (NSWp), managed by the Manpower obtained employment experienced Demonstration Research Corporation substantial losses to their welfare from 1976-1979, transcended both the benefits. Also of importance, the goal ambiguity of CETA and existing supported work program worked ~orkforce training program evaluation well when unemployment was high. hm'Itations, Clearly stated, the goal Employers were less willing to hire of the National Supported Work potentially "risky" individuals, but, Program was to provide supervision, with knowledge of the program, work experience, a peer group, and employers could have been open to ~work plan of gradually increasing giving supported work participants in lntensity ' to very hard-to-serve groups a structured program a chance, versus of people - welfare recipients (Aid to those with similar characteristics Farru 'I'ies with , Dependent Children or of distress not affiliated with any AFDC), ex-addicts, ex-offenders, and intervention program (Manpower disadvantaged youth, It also quieted 1980). ongoing critiques of workforce training evaluations by using an experimental design WIt , h random assignment to "The paucity of evaluations using this assess and identify the treatment experimental design approach served effects of the program, Participants as a defining limitation in trying to Wereplaced on worksites in a variety determine the effects of MDTA and of industries with NSWP subsidizing CETA interventions on employment wages, SupervIsIon ' , costs, equipment,, and earnings outcomes for program and supplies (Manpower 1980), participants, raising questions about Analysis of the projects revealed that the overall effectiveness of the the program was most effective in programs." serVing the cohort of women receiving assistance through AFDC (Blakeslee and Evanson 1982), Among the AFDC Eight years after the conclusion group, less than 33 percent had a of the program, the AFDC group high school diploma, 95 percent were continued to exhibit positive outcomes. His ' paillc or black, and their average Earnings gains from earlier years stay on welfare prior to the program remained statistically significant ~as 8,5 years. Despite these normally and of meaningful size. As a result, hrn' , Ihng demographics, participants the cumulative earnings associated reported more stable employment with the Supported Work Program h' ' Igher earnings, and lower rates intervention eclipsed the costs of of Welfare use 27 months after the training the AFDC participants in program ended compared with the year eight (Couch 1992). The findings COntrolgroup. The finding is most from the evaluations of the National striking when juxtaposed with the Supported Work Program suggested
THE GEORGETOWN PUBLIC POLICY REVIEW I 27 that a well-targeted work experience unemployment. Nearly all of the and training program can improve programs attempted to accomplish the labor force attachment and wage these goals by subsidizing work prospects over time for hard-to-serve opportunities with public sector populations. employers. Evaluations of varying
Increases in post-program earnings rigor revealed that hard-to-serve were consistent with the findings populations, specifically very low- in other studies such as those of an income women receiving public On-the-Job Training (OJT) program assistance, experienced positive, with welfare recipients in Maine and long -term gains in earnings post- an OJT program for low-income in terven tion. adults receiving services through the Mississippi Subsidized Transitional Job Training Partnership Act (JTPA) Employment Program and Services (Auspos, Cave, and Long 1988). The Thirty-eight states submitted an earnings increases realized under the application for the reimbursement of a JTPA program were recognized for subsidized employment program with their magnitude among individuals expenses funded by ARRA through the receiving welfare (Bloom 2010). The TANF ECF. While previous subsidized program's success among hard-to-serve employment programs, such as the populations lies in the acquisition WPA and CETA, targeted public sector of both hard skills, namely those employment opportunities, Mississippi directly related to one's competency explicitly designed its program in performing a job's specific tasks, solely for private sector employers and soft skills such as working on a and nonprofit hospitals. Mississippi team, arriving at work on time, self- accessed $27.8 million to assist with confidence, and network development (Bartik 2002). rising unemployment among its low- income residents through the TANF ECF. Of the $27.8 million, 92.6 percent "The findings from the evaluations of the award went toward a new of the National Supported Work subsidized employment program, MS Program suggested that a well- STEPS (Falk 2010). targeted work experience and training MS STEPS operated as a joint program can improve the labor force partnership between the Mississippi attachment and wage prospects over Department of Human Services time for hard-to-serve populations." (MDHS) and the Mississippi Department of Employment Security (MDES). In the implementation of Throughout the last century, a the policy, MDHS served as the lead number of subsidized employment state agency in the procurement of programs sought to build the skills of the TANF ECF reimbursement dollars disadvantaged workers and increase from the US Department of Health labor demand during periods of high
28 I SIVAK and Human Services. Once MDHS one dependent under the age of 18, had received the TANF ECF money, it was a family income below 250 percent of transferred to MDES to subsidize the the federal poverty level, and was not ~ages of program participants through currently working. Applicants received dIrect payments to th eir . employers. case management, job search assistance, and skills assessment (Staples 2011; In total, 68 public administrators were McMorris 2011; Butler 2011). hired to operate the program. MDES also relied on its existing Workforce Once an agreement was established Investment Network (WIN) Job Center between MDES and an employer and staff familiar with the On -the- Job a placement was made, the employer Tra· . InIng program to recruit employers received a monthly subsidy for the to p .. artIcipate in the program and to wages paid to the MS STEPS employee establish hiring agreements. Private for the duration of the program, as sector, nonprofit sector, and public long as the employee remained hired. ~oSPitals were eligible to participate The wage subsidy was designed to In the program as long as they begin as a full wage subsidy followed Werein good standing with MDES, by monthly or bi-monthly decreases existing Iabid or aws, an M· ISSISSIPPIs . . ., over a period of six months. Table 1 procurement policies. In exchange for illustrates the wage subsidy schedule. re .. celVIngthe employee referral and To receive payment, invoices were the Wagesubsidy, employers needed submitted to MDES for each month to commit to retaining the MS STEPS of work covered under the program. participants after the six- month Once processed, payments were training period. remitted directly to the employers from Interested individuals applied to MDES. Of the initial target of 3,500 partiCipate in MS STEPS in one of the individuals, 3,236 individuals were ~tate'sWIN Job Centers. Qualifying placed in the program. IndiViduals identified through case rnanagement were also referred II. CONCEPTUAL MODEL to the program. Given the TANF AND HYPOTHESES objectives of working with families With more than 3,000 MS STEPS With ch·ld·I ren in economic. di istress, participants and research strongly MDHS caseworkers specifically suggesting that subsidized employment targeted Supplemental Nutrition offers a means for placing hard-to- A·SSIstanceProgram (SNAP) and TANF serve individuals in jobs, a question clients to participate . . m. t h e program on wages over time emerges. and made intentional referrals to the Specifically, what were the differences WIN Job Center (Pavetti, Schott, and in average quarterly wages before Lower-Basch 2011). An individual was and after the program was completed Considered eligible for the MS STEPS among program participants program if he or she was a US citizen with different characteristics? To and resident of Mississippi, had at least
THE GEORGETOWN PUBLIC POLICY REVIEW I 29 Table I. MS STEPS Employer Wage Subsidy Schedule per Employee by Month Month 1 100%
Month 2 100%
Month 3 75%
Month 4 50%
Month 5 50%
Month 6 25%
Source: Mississippi STEPS presentation for Agency for Children and Families
answer this question, the functional post-program wages increases. The relationship between wages and labor basic tenets of human capital theory force attachment and educational state that one's employment and attainment, race, gender, region of earnings hinge on one's productivity. state, and program completion status Productivity, in turn, is affected by can be expressed as: one's educational attainment and training. Individuals with high Wages =f(having at least a high school education, race of participant, levels of education and training will gender of participant, region of the demonstrate high productivity and, by state, program completion status) extension, increase the likelihood that they will be employed. In contrast, low Given the success of past subsidized probabilities of employment among employment programs among individuals are the result of low levels individuals experiencing significant of human capital development (Ting barriers to employment found through 1991; Dickinson, Johnson, and West rigorous evaluations, I hypothesize that 1987). Over time, education and MS STEPS participants, particularly training appear to generate returns on those who are most disadvantaged the investment among former welfare such as African Americans, women, recipients. For example, seven to nine and participants with the lowest years after receiving education and educational attainment, will experience training for jobs, welfare recipients that wage gains, on average, that are higher engaged in human capital development than if the groups had not participated activities outperformed other welfare in the program at all. recipients that only participated in Based on human capital theory, I labor force attachment strategies also hypothesize that as educational (Blank 2002). Numerous other studies attainment rises, the likelihood that a found that higher levels of educational STEPS participant experiences higher attainment positively affected the
30 I SIVAK econOm·ICoutcomes of people lowest in the state within the Delta, leaVing We If are for employment and African American unemployment experienced higher earnings (Sandefur rates are among the state's highest and Cook 1998; Holzer 2000; Vartanian within the region. The region is also and McNamara 2000). known for its high rates of poverty and historical underinvestment. Other factors not accounted for by According to the 2010 Decennial humancapIta . 1 theory also merit Census, two of the 10 poorest counties discus··sion, Specifically, the choices. that in the country are in the Mississippi Onemakes regarding training, tenure, Delta. In the Mississippi Delta, TANF and overa11 work expenence. do not participation is also higher among always. ComCI . id e with . the actual manner African Americans than in other In whoIC h the labor market functions. communities with similar demographic While a person may be hired and then rem· characteristics (Parisi, et al. 2003). am on the job due to his or her skills,h e or she may also be hired. as Program status is a measure of possible a resulto f organizational .. structures, unobserved obstacles or assets. For networks, and other characteristics of example, a person who completes the the· b )0 seeker. Furthermore, race and program may have a stronger support classalso a f£· ect earmngs (Tornaskovic-. network than someone who quits. Devey,Thomas, and Johnson 2005). Likewise, someone who is terminated from the program may have fewer soft Taking into . account these additional or hard skills that are applicable to the factors th at can affect hiring.. dec· . specific position in which he or she was ISlons, I hypothesize that STEPS placed than someone who completes partic·. lpants who were from a county the program. Individuals, who either In the Mississippi Delta will be less completed the six-month training cycle likelyto expenence . wagemcreases . than· or remained in good standing with the in other regions of the state. program when the funding ran out, TheM· .. ISSISSlppiDelta is a region experienced larger gains in earnings lOcated on the western side of the state .. than individuals who quit or were COnslstmg of the counties near theM· .. terminated from the program. ISSISSlppiRiver. Many of the Cou . . ntles are rural and majority lllmo . . III. DATA DESCRIPTION nty with large African American POpulations. Holmes County, for For this project, the Mississippi eXample,has the highest African Department of Employment Security Am . encan population rate of the Delta provided administrative data on all count" . A . ~eswith a rate of 83.4 percent. participants in the Mississippi STEPS ddltlonally, individuals residing program. To build the data set, MDES Withi h . . n t ese counties expenence merged demographic and program wide diff I lerences in employment data collected from participants in the OUtcomes b y race. Whereas white MS STEPS program with quarterly Unemployment rates are among the
THE GEORGETOWN PUBLIC POLICY REVIEW I 31 wage information that was available zone may work for employers in from the unemployment insurance Memphis. For unemployment wage files managed by the agency. insurance purposes, wage data for Post-program quarterly wage data were these participants may not be reported also pulled from the unemployment in Mississippi; it may be reported insurance wage files by MD ES in Tennessee. Since the Mississippi and matched with the MS STEPS Department of Employment Secunity is participant files via social security the source of the data for this project, numbers. Once matched, MDES participants in border counties, may removed the social security numbers, not have complete wage information. replaced them with a unique record Second, the program status variable haS identifier, and provided the data set 113 observations for which individuals in a spreadsheet for external analysis. had conflicting information. For The unit of analysis is the participants example, an individual may have that enrolled in the MS STEPS been coded in the data set as having program, and the sample consists of completed the program and having 2,878 observations. Table 2 provides quit or been terminated from the the sample variables along with the program. To address the limitation, definition and respective descriptive statistics. the 113 conflicting observations are dropped from the analysis on the program status variable, bringing the III. DATA LIMITATIONS total number of observations reviewed A number of limitations exist in for program status to 2,765. the data. First, not all program Third, the study does not employ an participant files could be linked with experimental design with random the wage files. Since the participant assignment. If differences are found in demographic files were linked to the wages before the MS STEPS program administrative wage files by social and after the MS STEPS program, one security numbers, participants who will not be able to make the statement did not have a social security number, that the MS STEPS program caused such as legal immigrant workers, were the increase in wages. A quasi- not matched and do not turn up in experimental design may allow us the sample. Of the 3,236 participants to make some inferences about how for whom demographic information different independent variables affect was collected, only 2,876 have both the dependent variables; however, the demographic information on at most, the relationship will be the participant and quarterly wage suggestive. information. In addition, wage files may not capture all wages earned. For example, individuals living in DeSoto County, a Mississippi county within the Memphis, Tennessee, commuting
321 SIVAK Table 2. MS STEPS Employer Wage Subsidy Schedule per Employee by Month
Definition Mean
Quarterly Quarterly Wage 9 months: Post~Program $2.530 Wage~ Note: Intervention occurred 11I1 r 0 -9/30/10
Percent of Sam ple Level of Measu rement !Definition
Less than high school: 19.7% Less than high schcel :::: I 49,6% High School Diploma or GED == 2 HighSdiOQI DiplomaorGED: Some College: 20.'1% Some Colfege == 3 Associate's Degree: 5% AS$odate's Degree == -1 13% Bachelor Degree or higher::: 5 Bachelor Degree or higher.: Not Reported: 2% Not Reported:= 6
African American: 6-4,7% African American;; r White: 31,.3% White;;; 2 Other: 0.9% Other:;; 3 Not Reported: I 1.1% Not Reported =: 4: African American: 6'1.1% African American := I White: 31.3% WhIte:::; 2 Other-. 0,9% Other == 3 Not Reported: 11 % Not ~eported == -4 Male: 25% Gender f"lale=' I Female: 74_3% Female =: 2 Not Reported: 0.7% Not Reported =: 3 26,4% Delta County as Defined by the Delta R.evitalrtatron Task force:::: I 73.6% Other county:::: 0 Other::
Complete: 51.6% Progr;aTn Completed six months of traiining ;; Status Stillenrolled when program ended. but did not 10,3% complete program;; 2 Partial Complete: Quit or was terminated: 18,2% Indlvidua.'l quit or was terminated from program:;; 3
THE GEORGETOWN PUBLIC POLICY REVIEW I 33 IV. ESTIMATION STRATEGY participants after participating in the program (3 quarters after the program, To address the research questions, time 2). There is not a control groUP, a longitudinal study that employs a so the basis for comparison is the quasi-experimental before and after pre-treatment wages and the post- time series design is used. Using cross treatment wages. Since random tabulations, the research examines assignment did not occur prior to the wages of the participants before participating in the MS STEPS the start of the MS STEPS program, a true experimental design could not be program (time 1) and wages of the conducted.
Table 3. Cross Tabulations for MS STEPS Participant Wages Pre- and Post-Intervention
Average Quarterly Wage$ ------~M~e~di~an~Q~·=ua~rt=e~t~L·_VV~a~g~e$~ ---
I Quarter before MS STEPS 3rd Quarter after MS STEPS (04 2009) Overall Sa.rnple (Q22011) $1,578 $2.530 $0 $1.810 ___
~Ed~V~~~t~io~na~1~A~tU~i7nm~..~en~t---~~~~------~~~------~---- __ ------Le$$ than HighSchool $1,324 $2,'068 $0 $1.271 High School Diploma or GED $1,520 $2,-499 $0 $1.700 Some College $1.394 $2.606 $0 $2.,120 $2.0.46 $)..433 • $~~ Bachelor'~ Degree Or Higher $2,755 $....230 ------,_;$!:,;I:::;O __:$!:.:i'~.5~89:;____--- Race African American $1,318 $2,201 $0 $1,525 White $1,945 $3.178 $0 $2,563 Other $964 $3.784 $0 $3,342 Gender
Male $2.204 $4.028 $0 $3.690 Female $1,287 $2,021 $0 $i.348 Region __ --·--~------O~----~J89----~------$I.a58-- $0 $1,108 Other $1.639 $2,771 $0 $2,062
~ram_ Staw!__ . ._._.__. . . ._--- Complete $1.706 $2,.990 $0 $2,623 PartiallyComplete $1.456 $ 3.309 $0 $2,fH 0 Quit or Terminated $1..305 $1,644 $0 $119 N=2,876, edl.lI:adonal attainment, race, gender, regiOn
N~2.765 program ~ Note: Average quarterly wages are listed first; median quarterly wages are listed below. 341 SIVAK V.RESULTS Table 2 shows that 96 percent of participants in the sample were either This stud 1 k . b Y 00 s at cross tabulations African American or white. On etween d the i wages an the mdependent average, wages for African Americans variables listed. While the cross participating in MS STEPS rose by tabulations suggest certain $883 dollars. For whites, average relatio h· ns IpS,one cannot use them wages nine months after participating to establish causality or statistical in the program rose by $1,233. The relationships between two variables. differences in the wage increases were Add· . lhonally, another limitation of consistent with the literature citing this ap h i proac mcludes the fact that wage disparities between African Onecannot rule out the effect of other Americans and whites in the South facto rs on wages. Table 3 provides the due to differences in economic crosst b I . a u ations between wages and opportunities in the communities educ ti a ronal attainment, race, gender where concentrations of both races and region. occur (Lichter 1989). AVerage Wages Average quarterly wages for male Prior to th e intervention,. . the average participants were higher than female qUarterly wage of the MS STEPS participants, both by dollar amount participants was $1,578. In the and by rate of change. One possible tho ird quarter, post-intervention, the explanation for the differences could qUarterly wage had risen to $2,530 for be in the referral patterns of the the sample. By educational attainment, program. Nearly three-quarters of the bon ave rage, quarterly wages increased sample were women. With Mississippi f etWeen 53.5 percent and 86.9 percent Department of Human Service case "" participants. While average wage workers that typically work with lll.creaseswere largest for individuals very low-income women referring ~lth bachelor degrees, the rate of individuals to MS STEPS, female Increase was the smallest of all the participants could have been more educa t· tonal attainment categories. likely to have lower skills than male !he rate of increase was largest for participants in the program. Ind· . . IVlduals with some college. If Consistent with the literature, Individu I .. . h a participants WIt some participants from the Delta had lower Collegehave a credential, the finding wage increases by dollar and by rate COuldbe consistent with studies of change (Parisi, et al. 2003). Delta that show th .. . . at a tipping pomt exists, participants experienced quarterly whereby a d ult students experience wage increases of 53.9 percent, or $669. the I argest wage gains of any category Participants from other regions in the of edUcational attainment with one state had average quarterly increases of year of post-secondary training and a 69.1 percent, or $1,132. At the same credential (Prince and Jenkins 2005). time, despite coming from a region with many socio-economic challenges,
THE GEORGETOWN PUBLIC POLICY REVIEW I 35 participants still experienced average quarterly wage gains nine months after quarterly wage gains of more than 50 the program ended. percent. Among all of the variables examined, The average wage increases differed average quarterly wages increased for markedly based on whether or not MS STEPS participants. Gains were a program participant completed highest by percentage increase for the MS STEPS program. MS STEPS participants of a race other than white participants who were still involved or black, participants who completed with the program when it ended, but the program and those who were still did not finish six months of training, attached to the program when it ended, experienced the largest average males, and participants with some quarterly gains, from $1,456 to $3,309. college. The lowest average quarterly wage gains were for individuals that either quit or were terminated' from the "Among all of the variables examined, program, followed by individuals with average quarterly wages increased for less than a high school diploma and MS STEPS participants. Gains were individuals from the Delta.
highest by percentage increase for Median Wages participants of a race other than white A review of median wages shows that or black, participants who completed more than half of the sample (1,518 the program and those who were participants) was out of work three still attached to the program when months before the start of the MS it ended, males, and participants with STEPS program and had no earnings. some college." Nine months after the program ended, the number of participants who were not attached to the labor force had Next, participants who completed six dropped to 1,019. While any number months of training saw their average of factors, including an improving quarterly wages increase by $1,284. economy, could have explained the The difference between the two increase in employment outcomes increases suggests that subsidized wage among MS STEPS participants, the , t programs may not require six months findings around labor force attachmen of public investment to still have the suggest that the program could have, desired effect of wage increases among in part, improved the overall job participants. Finally, for individuals prospects of the participants. who quit or were terminated from the program, average quarterly wage gains were the lowest for any of the groups examined among the selected variables. Not quitting or being fired appeared essential for realizing large average
361 SIVAK VI. AREAS FOR FUTURE in the future reauthorization of the RESEARCH AND Workforce Investment Act and TANF IMPLICATIONS in an environment of increasingly scarce federal resources for workforce This art'ICe I mar k s the first in .a senes . development. of. incr easmg . I.. y m-depth reviews of the MIssissippi STEPS program. Initial findings. suggest t h at partrcipation ..' Inthe MS STEPS program may have REFERENCES COntnib uted to increases in labor force Auspos, Patricia, George Cave, and David ~~h ment and quarterly wages nme. Long. Maine: Final Report on the Training l110nthsafter the program ended. Opportunities in the Private Sector Program. Program Evaluation, New York: MDRC, 1988. Atthe sa'me time, as mentione. d i m the . article, the cross tabulations are Ashenfelter, Orley, and David Card. "Using the Longitudinal Structure of Earnings to lil11itedin their ability to establish Estimate the Effect of Training Programs." relationships. Subsequent studies that Review of Economics and Statistics, 1985: el11ploymultiple and logistic regression 648-660.
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38 I SIVAK ENGINE FOR GROWTH OR DRAG ON PRODUCTIVITY? The Informal Sector and Domestic Investment in Developing Countries
By Julie Biau
ABSTRACT lUlie B' of ~ LI' lau completed the Master he informal sector accounts for an immense share of Uu Ie Pol' ~u~r ICy at the Georgetown income, output, and employment in low- and middle- Ie Policy I. ~r nstltute in 20 II and e~ared thi' ' income countries, providing jobs to over two billion Oe s theSIS as part of the T ~ree re . people worldwide (OEeD 2009). Nevertheless, the current wor~ qUlrement. Julie currently . s at the World B k .. policy debate is largely biased against informality, with major actors Infra an supervmng struetur . assertively pushing for formalization. Yet, as the informal sector ~oliy' e prOjects in Nicaragua, la, Haiti d G continues to expand, some have asked whether this phenomenon to a I. ' an uyana. She wishes (~nowled of L ge the valuable guidance could, in fact, be a lifeboat for poor economies, enabling citizens lIer ad . t~a I. Vlser Gillette Hall, and to engage in more flexible modes of production in the face of n~s Mike B ~iana H' arker, Andreas Kern, institutional constraints. This study addresses a critical knowledge Inova d ( . t~ei an arole Blau for gap by empirically investigating the impact of informal sector r eneour ... agements and mspiranon. size on the economic dynamism of low- and middle-income economies. It hypothesizes that at low income levels, informal sector size has a positive effect on economic dynamism (as measured by domestic investment), but that as economies become richer, they reach a tipping point at which this effect becomes increasingly negative. A fixed-effects panel analysis of 22 developing countries between 1995 and 2006 finds evidence of a non-monotonic relationship between the economic impact of informality and GDP per capita. The effect of informality on domestic investment changes direction with country income level and appears to describe an inverted U-shape, suggesting the existence of an 'informal sector Kuznets curve.' These findings call for a more nuanced understanding of the informal sector's economic repercussions, recommending a two-track approach: low-income countries stand to gain from implementing policies that fuel the informal sector as an engine of growth in the short run, while simultaneously laying the institutional groundwork for a long-run increase in formality.
THE GEORGETOWN PUBLIC POLICY REVIEW I 39 I. INTRODUCTION Recently, there has been a renewal of interest in the dynamics of From the favelas of Rio de Janeiro informality, but economists and to the busy streets of the Nairobi decision-makers disagree as to whether city center, the 'informal sector' is this phenomenon is a problem to be a source of livelihood for millions suppressed or an opportunity to be of vendors, mechanics, domestic stimulated. Some experts argue that, workers, bus drivers, and micro- due to their small size, informal finns entrepreneurs. Economic activity in cannot achieve high capital intensity developing countries cannot be fully and productivity (Pages 2010). This understood without recognizing view is reflected in declarations by that an immense share of income, international organizations stressing output, and employment is generated the urgency of formalizing economies outside the formal economy. Broadly (ILO-WTO 2009). On the other hand, defined as small-scale, self-financed the rising popularity of microfinance activities operating with a low level initiatives and micro-pension schemes of organization in an unregulated for informal workers casts informality environment, the informal sector has as a force for inclusive economic exploded with increasing levels of development. Informal sector jobs globalization and economic openness can enhance the competitiveness and (Verick 2006). Its contribution to the flexibility of production, allowing economy now matches and sometimes workers to find employment in the , outweighs that of the formal sector in , tl absence of government support (Nilsa many developing countries. In 2009, 2010). The debate is far from resolved informal activity accounted for over and stands to be informed by further 80 percent of non-agricultural jobs in quantitative analysis (Schneider and Sub-Saharan Africa and South Asia Enste 2000). and 58 percent of non-agricultural growth in Ghana (OECD 2009; CUTS The opposing attitudes toward the 2009). This expansion shows no signs informal sector are not necessarily of slowing down. Even with strong incompatible; rather, it is plausible that economic growth in Southeast Asia the informal sector plays a positive and Latin America, rates of informal role in some countries and a negative employment have increased steadily one in others. This paper investigates over the past twenty years, with formal two interrelated questions. First, how employment stagnating in comparison does the effect of the informal sector (OECD 2009). Yet, despite the on a country's economic dynamism clear economic, political, and social vary across different levels of GDP per importance of this phenomenon, a capita? Second, is there some income, knowledge gap remains concerning threshold at which the direction of thIS the impact of informal sector size on effect is reversed? The analysis explo~es macroeconomic outcomes (Gerxhani the impact of informality on economIC 1999). dynamism with a two-way fixed effectS
40 I BIAU Panelan. a1 YSIS . of 22 African, Asian and II. LITERATURE REVIEW LatInA . mencan countries between 1995 Drag on productivity or engine for and 2006. The ILO's (2009) l11easur f' growth? e 0 mformal employment as a shareo f total employment is used Competing theories of the ~thei d . fo' n ependent vanable, to proxy determinants and consequences of r Inform a1 actrvity " more generally, informal employment have received and th e\Vi orld Bank's (2010) measure varying credence over time. In the ofdo .. d m eshc mvestment is used as the academic arena, three schools of ependent vanable, . to capture the thought propose contrasting analyses notiono f economic dynamism. of informal employment and its Intuiti economic outcomes. 1 on would suggest that at very OWeountry mcome. levels, the informal Sector h s ould have a positive effect "The opposing attitudes toward the on the " eConomIC environment by encou . informal sector are not necessarily ragmg alternative modes of incompatible; rather, it is plausible that thProdu cti Ion. Past a certain income reshold, however, the obligation to the informal sector plays a positive reIn . fi am informal may begin to limit role in some countries and a negative r~ productivity, and the impact one in others." ofInfo l' . d ~ma sector SIzeon economic YnamlSmISexpecte. d to d' immis . . h and bee . . ome mcreasmgly negative. On one side of the debate, the dualist Co . nSlstent with this hypothesis, this school perceives informality to be PaperreveaI s evidence of a non- a uniformly negative phenomenon. 1110 . thnot Oillc relationship between Dualists assume that at early stages e eeon " orrin, Impact of informality of development the formal sector andGD · P per capita. The effect of alone cannot supply enough jobs for a Inform l' ch a ity on domestic investment growing labour force, so that informal · anges direction with country jobs arise to provide transitory 1ncom 1 . e evel and appears to describe employment for workers unable to an inv erted U-shape, suggesting find opportunities elsewhere OLO- the e . I<: Xlstence of an 'informal sector WTO 2009). Dualists argue that UZnets'curve. The findings. call for informality constrains economic Inor a e nuanced understanding of the growth and productivity through econo . nne consequences of the informal several channels: informal firms limit Sector hi h . their size to avoid detection, reducing · ,w lC ISespecially timely given Itspr . oJected expansion in the wake their ability to achieve economies of f °2the global economic crisis (OECD scale (Pages 2010); the uncertainty and 009). lack of property rights associated with the informal context prevents firms from making large-scale investments
THE GEORGETOWN PUBLIC POLICY REVIEW I 41 (Loayza, Oviedo and Serven 2005); and economic outcomes by creating by escaping taxation, informal firms employment opportunities well- undermine the government's ability suited to the production structure of to provide productivity-enhancing labour-abundant poor countries; by public goods (Kauffman, Johnson and fostering competition within highly Schleifer 1997). homogenous informal markets with
On the other side of the debate, low barriers to entry; and by offering space for entrepreneurship in the face the structuralist and legalist schools of constraining government regulations both believe informal employment (Potts 2008). to be an optimal choice made by rational actors in light of prevailing economic and institutional III. CONCEPTUAL conditions. Structuralists emphasize FRAMEWORK AND the existence of linkages between HYPOTHESIS formal and informal economies in a Motivating an informal sector production system where each sector Kuznets curve has comparative advantages based on different factor costs (Schneider The growing body of employment- 2008). This allows the informal sector based research on the informal sector to increase the competitiveness of shows a surprising lack of consensus, formal firms by providing them with with ambiguous prescriptions for cheap labour (Asea 1996). Legalists policymakers. As expressed by a present informality as a response to recent OEeD report, "it is unclear government-induced distortions, whether or not informal employment arguing that in an overly controlled represents a drag on productivity environment, workers voluntarily opt or could, at least temporarily, be an out from the formal labour market engine of growth" (OEeD 2009). ThiS to escape the burden of government is the question that this paper seeks regulations, cumbersome bureaucracy, to address. Economists lauding the and high transaction costs (see for positive attributes of the informal example De Soto 1989; Loayza 1996; sector and those deploring its pitfalls Johnson, Kauffman and Shleifer could both be correct; their competing 1997). Structuralists and legalists theories may simply apply to different expect informality to improve kinds of economies. Specifically, a dialectical argument could consider legalist and structuralist theories to be "Economists lauding the positive most relevant to low-income countries, attributes of the informal sector and and dualist predictions to have greatest those deploring its pitfalls could both applicability in a middle-income be correct; their competing theories context. may simply apply to different kinds of At low-income levels, it is plausible economies." that informality stimulates an
421 BIAU economy's dynamism by providing an "This paper hypothesizes that at very altern ti d . a rve evelopment path III the low levels of income, informal sector absenceof fully-fledged institutions. size should have a positive effect on Thisaligns with structuralist theory, the dynamism of economic activity, whichSuggests that informality drivesgrowth in poor countries by but as economies become richer, providing economic opportunities they reach a tipping point at which unavailable in the formal sector. this effect diminishes and becomes LikeWise,legalists consider informal increasingly negative." ~Il1PloYmentto be optimal behavior Inlow-income countries, where the bureaucratic and regulatory burden has on its economic dynamism, and ofengaging in productive activities is whether the direction of this effect particularly high (Loayza, 1996). Yet changes with country income - the p .. . c 1· OSIhveeffects of inrorma ity may whether there is a 'tipping point' at not hold for all economies. Firstly, for which the informal sector impact turns a . gIVenincome level, there are likely from a net gain into a net drag on the tobe diminishing returns to informal economy. This paper hypothesizes that sector growth; past some informal at very low levels of income, informal sector size, the niche for new micro- sector size should have a positive effect enter . d pnses may become saturate , so on the dynamism of economic activity, that informal actors no longer create but as economies become richer, newValue-added but only redistribute they reach a tipping point at which economic activity among themselves this effect diminishes and becomes ~Bateman,2007). Secondly, returns to increasingly negative (Figure 1). This Infor 1· . ' rna Ity may dechne as an economy non-monotonic effect would resemble develops, and become negative in the inverted U -shape relationship response to Improve. d mstrtutionsinstituti between economic inequality and and economic opportunities. This income famously described by the would be consistent with the dualist Kuznets curve, which has since ~Otionthat in a modernized economy, been applied to other economic Informal firms operating outside of phenomena.' If a tipping point does legalContracts and clearly defined exist in the informality-investment ~roperty rights can constrain economic relationship at some income level, the Initiative. Rather than being uniformly current work may add to this literature negative or positive, the economic by providing preliminary evidence of COntributions of the informal sector an 'informal sector Kuznets curve.' ~aYinstead vary with an economy's Income level.
IiYpothesis 1 For example, Grossman and Krueger (1995) Th· have proposed an 'Environmental Kuznets Curve' ISstUdy investigates the effect that relating per capita income to an economy's level the . of environmental degradation. SIzeof a country's informal sector
THE GEORGETOWN PUBLIC POLICY REVIEW 143 Figure I. Conceptual Framework _ the 'Informal Sector Kuznets Curve'
Effect of informal sector size on economic Tipping pOint: country dynamism income level at which the effect of informal sector size on economic dynamism becomes negative instead of positive
countries: income negative effect countries: of informality, positive effect increasing of informality, with country decreasing income level with country income level
COUNTRY L_------'------~--_?INCOME LEVEL
The notion of an inverted U -shape IV. METHODOLOGY relationship between the economic . ifi tion effects of informality and country The baseline econometnc speCl ca income level flows from several testable is a two-way fixed effects model as follows: assumptions. The author expects to find that informal sector size increases Y = a + ax. + yZ + oyeart + ) It fJ It It (1 economic dynamism in lowest-income Acountry. + c. I It countries, with less positive effects where Y represents economic as income rises; that the optimal size it dynamism, a is a constant term, yeart of the informal sector is greater in is a vector of year dummies, country, low-income countries than in middle- is a vector of country dummies, Xit income countries; and that there are are the main explanatory variables of diminishing returns to informality interest (informal sector share, country (so that even in a country where the income level, and interaction terms), Zit economic effect of informality is are controls, and Cit is the error. positive, this marginal effect should diminish as the informal sector grows, Dependent variable: until some optimal level of informality domestic investment is reached for that country's income The choice of dependent variable level). Although it may not be possible requires identifying some to explicitly demonstrate the presence macroeconomic measure to reflect the of a tipping point, providing evidence concept of 'economic dynamism,' or of these three effects would lend the health of the broader economic substantial support to the 'informal environment. Domestic investment sector Kuznets curve' hypothesis. is one such measure: as a component of national income, it is a driver of production efficiency that reflects
441 BIAU the degree of trust in the domestic discussing here. Firstly, the IlLS economy (Drine and Nabi 2010). database combines data from several Domestic investment is measured by direct sources - including household grossfixed capital formation (GFCF) surveys conducted by the ILO and by as a percentage of GDP, as defined by African National Statistical Offices theWorld Bank's World Development - to yield harmonized estimates of Indicators. This variable indicates informality comparable for each how much of the new value added in country over time. This raises a the economy is invested rather than potential limitation: variations in consumed. The dependent variable definitions of informality across willbe expressed in logged form to countries prevent pooling the data or reflectthe effect of informality on carrying out a cross-sectional analysis. proportionate rather than absolute To overcome this problem, the present changes in GFCF. analysis follows the ILO and WTO (2009) in assuming that definitions of ~ain independent variable: informality vary across countries but Informal sector size are fixed within each country over time Th' ISpaper uses the ILO's employment- OLO-WTO 2009). This implies that based definition of informality, panel data can be used in making cross- focUsingon the traits of the production country comparisons: a two-way fixed Unitsin which economic activity effects model drops time-invariant occurs. Informal production units omitted variables (including country- l11eetthree criteria: non-registration specific measurement methods) from of the enterprise, small size in terms of the model, so that the ILO's use of el11ployment, and non-registration of different measurement methods across el11ployees(Hussmanns 2004). Data countries should not bias results. A fo . r lllformal sector size (percent of second potential limitation is that total urban employment) are drawn the IlLS measures informality rates from the ILO's International Institute in urban settings OLO-WTO 2009). for Labour Studies (IlLS) Informality While this may limit the transferability Database (2009), which covers thirty- of this study's findings to rural one Asian, Latin American and African employment, focusing on the urban cOUntriesbetween 1989 and 2006. context is also likely to reduce the The database's coverage is determined measurement error associated with the by availability of direct data sources independent variable, and to allow for l11easuringthe incidence of informal better cross-country comparability. el11ployment by the ILO's preferred Control variables l11etric. The basic model will include controls The main difficulties associated with for standard determinants of domestic l11easuringinformal sector size are investment, specifically the inflation diScussed in the Limitations section; rate, the real interest rate, external however, two of these are worth debt, availability of credit to the
THE GEORGETOWN PUBLIC POLICY REVIEW I 45 private sector, official development countries covered by the ILO's IlLS assistance, foreign direct investment, Database; however, the variety of GDP and per capita GDP. These variables per capita levels within this group are drawn from basic macroeconomic (ranging from $226 to $13,070) is relationships and from the work of arguably sufficient for this sample to Ouattara (2004), Sioum (2002) and be representative of low- and middle- Misati (2010) on private investment in income countries more generally African economies. Guided by several (for details on sample coverage, see econometric models from the legalist Appendix 2). school, further specifications of the Table 1 provides descriptive statisticS model will additionally control for for the sample. The mean size of the the main determinants of informality. informal sector as a share of total These include the tax burden, labour employment in the sample is 55.530/0, market regulations, government demonstrating that on average the spending, protection of property rights, informal sector outweighs its formal and control of corruption. These counterpart in the countries and years controls will be introduced selectively, observed. The mean GDP per capita to observe their effect on the main is $6,054. Broadly speaking, informal variables of interest and determine sector size varies inversely with GDP their appropriateness to the model. per capita: countries with an above- Sensitivity testing should provide average income level have a smaller insight on the channels through informal sector than poorer countries, which informality affects investment whereas countries with a larger-than- and help to disentangle the effects of average informal sector have a lower informal sector size from the influence GDP per capita than those with a of other strongly related phenomena. smaller informal sector. Splitting the As displayed in Appendix I, data for sample by income level shows that the control variables is obtained from the simple correlation coefficient between 2008 Economic Freedom of the World informal sector size and domestic (EFW) database and from the World investment is stronger for economies Bank's World Development Indicators. with a per capita GDP below the Dataset description sample mean (r = 0.466) than for This analysis merges data from the economies with a per capita GDP above it (r = 0.178). However, this ILO's 2009 IlLS Informality Database, preliminary analysis does not indicate the Fraser Institute's 2008 Economic Freedom of the World database, and the any change in the direction of the informality-investment relationship. World Bank's 2010 World Development Indicators to create an initial dataset Testing the tipping point hypothesis containing 250 observations. The calls for a more sophisticated investiga tion. unit of analysis is the country-year. The analysis is limited to the 14 Latin American, 6 Asian, and 11 African
461 BIAU ____ Table I. Descriptive Statistics of Main Variables Variabl;:-e------~------ob!u'!rvations M(!an Standard Deviation Minimum Maximum
~ei'tdenl V4riobk! GfCF 240 205432 5.2651 10.17249 39..95819 In(GFCF) 240 2.992847 0.2101943 2.31%87 3.687834 Pave . . fly headcount Ito 15.57385 15.49037 l 8107
234 55.52578 15,.97001 12.221339 93,2- 248 6053.966 3246J'S9 216,.2.35 130n)..
He 6,SOS681 3,6.60059 (lS012at3 2(),JH03 248 4J.3383 3:1.00152 4,789315 157.1448 248 2..360556 4.789656 -0.11:0048 28 ..72016 248 2J.lOlBS 2.466918 ·2;,757439 14.92151 236 36.58565 204.4967 ·3.206555 2) 1l.965 236 I1.88946 16.13404 -38.86846 86.97994
Control VOriables for sensitivity analysis Gover I nrnent regulation 121 3.741322 1.312991 6.9 ax burden 126 31.05829 5,681766 10 42.22 Gover nrnent spending 248 13.08678 3.680148 2.975538 28.30431 R.uleof taw I16 4.155172 1.421716 1.2 8 Bribery I16 5.298276 1.323827 2.1 8.5
Sour (200~): own calculations based on data from ILS 2009 (International Institute for Labour Studies Informality Database (20I0)' Geneva: International Labour Organization); EFW 20 I0 (Economic Freedom of the World Version 20 I0.0 I • Fraser Institute); and WDI 20 I0 (World Development Indicators (20 I0). Washington, DC:The World Bank).
SUggested analysis results of sensitivity testing, the final specification will retain only the most The first step of the analysis is to est' appropriate controls. Unate Model (1) with a basic set ~f COntrolvariables (determinants of The statistical significance and Investment). Several specifications magnitude of the informality terms and oftho ISmodel are then estimated to interactions in the final specification testthe . .. f k . d d SenSItivIty 0 ey In epen ent should provide important information v . anables to the inclusion of additional regarding the manner in which GDP COnt 1 . ro s. This second set of controls affects the informality-investment Includ es variables whose place in relationship. Informal sector size is the model is less straightforward to introduced into the model in linear and ascert . . am from theory, as these are quadratic forms. The quadratic term 1111hPortantdeterminants of informality allows the effect of informal sector t at' It may not be logical to hold growth on domestic investment to be COnstantW hil 1 e estimatmg . . t he e Impacti influenced by the preexisting level of of chan .. C li h ges In mrorrna ity, Based on t e informality in the economy, to capture
THE GEORGETOWN PUBLIC POLICY REVIEW I 47 the possibility of diminishing returns. of domestic investment. Table 2 also . ns Linear and quadratic interaction presents several extended specificatlO terms between informality and of this baseline model, testing the national income are also introduced sensitivity of the main independent
(In(GDPpc)*in!ormalitYit and variables of interest X. (informal It d In(GDPpc)*in!ormality) to explore sector share, country income level, an whether the effect of informality interaction terms) to the introduction on a country's economic dynamism of additional controls. It should be changes direction at different levels of noted that these specifications are not country income. If both linear and estimated over a consistent sample, quadratic interactions are statistically as sample size varies between models significant, the effect of informality due to the introduction of controls on domestic investment varies both for which fewer observations are with the level of GDP per capita available. This may make it difficult to and with informal sector size (with compare coefficient magnitudes across the squared interaction allowing for specifications, but should not hinder . . h 1S any diminishing marginal returns the process of model selection, wh1C from informal sector growth to have determined by statistical significance. different effects at different income The final specification obtained froI11 levels). this sensitivity testing is Eqn(3)- The second part of the analysis which controls for government directly addresses the hypothesis of regulation, rule of law, and bribery. an inverted U-shaped relationship, The controls retained greatly increase by splitting the regression sample by both the statistical significance and income level to observe how the effect magnitude of all informality terrns. of informal sector size on domestic This suggests that informality exerts investment varies between income an effect on domestic investment categories. This should help to identify independently of these variables, and a change in direction of the underlying that excluding them from the rnodel
relationship, and perhaps to locate a would bias the estimation of Xjt distinct optimal informal sector size for downwards. On the other hand, the each income group. statistica. . l slgmsiznifi cance and magn itude
of Xjt is only marginally affected by V. RESULTS OF controlling for the tax burden and MULTIVARIATE ANALYSIS government spending. This implies either that informality has little effect Effect of informal sector size on on domestic investment or that its domestic investment effect works mainly through the The first column of Table 2 reports channel of government spending regression coefficients and standard and taxation. These variables errors for Eqn( lA), which controls should therefore not be held fixed in only for the standard determinants estimatmg. .t hee mrormai C I" ity-mvc stIllent
481 BIAU ~elationship and are excluded from the direction of all explanatory variables nal specification. of interest is reversed for the 'rich' The . country subs ample-higher levels of estImates in Eqn(3) highlight two ge 1 informality are associated with lower . nera findings. Higher levels ofInfo . levels of domestic investment. This hi rmahty are associated with effect becomes increasingly negative Igher levels of domestic investment ~dt~ a ' as informality increases. Meanwhile, t ISeuect has decreasing returns the direction of all control variables .o scale' ' and th e positrve .. electff of Inforll1 is consistent across both subsamples. d anrty on domestic investment This aligns closely with the hypothesis .ecrease s as country income level rIses,at di " . of an inverted U-shape relationship a iminishing rate. While the lb.agnitud .... between informality and investment: of t e and statistical significance the effect of informality on domestic hese effects are sensitive to sPecific ti investment changes direction at of a Ion changes, the direction some per capita GDP level, with all in£orma1· ity terms is consistent acrossth (diminishing) positive effects in e seven specifications eXal11' the sample's poorer countries and i E tned The explanatory variables n (increasing) negative effects in the v .qn(3) explain 60 percent of the ariatio . sample's richer countries. a. n m the dependent variable and re Jointl . . t y sIgmficant at the 1 percent eVe!.
Effectof' " ...the effect of informality on . Informal sector size on InVest domestic investment changes ll1ent by country income level The· direction at some per capita GDP 1; b SIgnsof the interaction terms in a Ie 2 level, with (diminishing) positive effects in Suggest that the informality- in the sample's poorer countries and aVestment re 1 a t· Ions hin Ip ISnon-lineari crossdif . at I ferent mcome levels, but is it (increasing) negative effects in the Sono r n-monotonic? Table 3 shows sample's richer countries." esults f E Split. 0 , qn(3) when the sample is or Into po ' andri nch' countnes . (asdete . rmmed by comparing GDP Marginal effects of informality Per ca . of $ Pita levels with the sample mean Regression results strongly suggest that ch 6,504). The results suggest a the informality-investment relationship inange i ndi Irechon . of the informality- Vestm .. is non-monotonic: the partial effect c. ent telationship at a GDP per aplta Ie I of informality on investment changes Ve close to the sample mean. not only in magnitude but also in Borthe' , inc Poor country subsample, direction with increasing levels of tOrm r d a lty has a positive effect on GDP per capita. Although estimating °l11esti ...... ret c lilvestment WIth diminishing Eqn(3) separately by income quartile Urns t 1 S 0 sea e, as for the full- could allow for more detailed analysis al11plere . gresSIOn. Strikingly, the of these phenomena, this is prevented
THE GEORGETOWN PUBLIC POLICY REVIEW I 49 Table 2. Effect of Informal Sector Size on Domestic Investment _____
Varicbk 1!t-l___f~1 (m___~:£1 __ j!91 (2El---6{7~~- loformality 0.1)508 1,343***0,1 03 (U)271 1.604*"'"* L492t,.* L (0'{)969) (O,4{'Jl) (O.199) (OJ 14) (0.394) (OJ93) (0.398) In(GDPpc) 0.232 4,935- 1.121** 0.1SO 5.651- s.rss= S.89~ (0,298) (1.242) (0,489) (0.298) (1.200) (1.229) (L1S6)
InCol'mal1tf ..0;000510 ·OJ}I12'1~* ·0.00.0&49 ~J)00281 ,{).OI3g.~" .0.012~"~ "().OI·U~"; (0,000997) (0.00354) (0,00208) (0.00120) (0,00357) (M0355) (0.003$6) In(GDPpl;)~lnformality .0.00713 ·O.153~ ~O.OI09 .(1.1)0437 ..0.!82* .O.169**" ..o.I~ (MIlO) (0.04(,)) (0.026!) (0;0131) (0,0455) (0.0451) (0.04>0)
In(GDPpc)"'lnfon;nalirf 7.56e-0S. 0,00 129-'+"'" 8.J8€-05 <4 .•86c-05 OJ)!)I57*** 0.00 146"''''' 0.0016J"~ (0.000114) (o.o00405} (0;000265) (0,000139) (0.()()()409) (0.000405) (0.0(10406 t .().OOl08 ·0.0121"" ·0.00851 "(}JJ0625 .0.00965~ '().llOS36 .0.00S23 (0.00514) (0.00626) (0.00913) (0.00582) (0.00512) (0.00499) (O.Q()'WJ)
Credil.to pMViue sector 43 0.00245 ·0.00 J 44 -0.00108 M0245 () 00....3 .0 .oo304* ,0.003 "" ,', .4<> "" (0.00]52) (0.00155) (0.00136) (0.00167) (0.00151) (0,00167) (0.00147)
ODA 0.0126 .... .().OIN 0.023P"'" O..OllOM' ..0,0225 -0.0217 .0.0278 (0.00510) (0,0316) (M082l) (0.00478) (0,0280) (M208) (0.o208l FDl 0.0109- 0.0202;'- 0,00932 00103- 0.0176- 0.0100* o.o12~ (0.00365) (O.00i79) (0.00665) (0.00143) (0.0030B) (0.00558) (0.0043<4) jofl~tiol1 r.lte (CPt) -0.00362.- .0.000540 -0.000307 -0.0035·$- -0.00 lOS -0.00152 .0,001:) (0,000839) (0.000740) (0,000878) (0.000700) (0.,00108) (O.,OOO92S) (OJ)OOSI)) Real interest r.nl1£ 860 -a.002T9"*" 0.0002S3 -0.000724 ·0.0029'4*"'* 0.00140 0.000700 0000 (0.OO(992) (0.00187) (0.OOI71) (0,000921) (0.0021'0) (0.00217) (0.00212) Government r~b.tion ·0.00536 .0.00571 (labour ma;rket regulations) (o..0!06) (0,00960)
Tax burden 0.00330 (hl&hlm cQrpoTatt! marginal tax ram) (0.00245) Go~rnment $p~mding 0.00443 (0.00949) Ruie of law .()i0209 .O.()466;i (protection of property I'ighl;$) (0.0160) (0,02·<13) Bribery 0.0833# 0.0567** (0.0214) (0.0332) Constant _49.2S¢ 1.075 -40.03- -6.998* IAn -46.73- -42,85- (2.637) (10.78) (3.963) (2.624) (10.36) (10.57) (10.84) Year Fixed Effects yes Yes Yes Yes Yes Yes Yes Country Fixed Effects Yes Yes Yes Yes Yes Yes Yes R-squared 0.'173 0.607 0.'158 0.'174 0.519 0.557 0.600 N 208 103 110 208 100 100 ~
Note: Standard errors (allowing for clustering at the country level) are in parentheses. A single asterisk denotes significance at the 10% level. A double asterisk denotes significance at the 5% level. A triple asterisk denotes significance at the I% level.
50 I BIAU ____ Table 3. Effect of Informality on Investment by Country Income Level
--~~~------~------~----~------Main Indepiitit!rmt Vatiabl>as of Interiist Control Variables
·0.716 6.'128*** Extemal d10lbt ~O.OOa22 ·(1,0I03 (2.617) (1."13) (0.00842) ((l051'1)
·0.644 23.aS~ Credit to private secter ~ilOO222 ..0,0045$ (5,971:) (5;927) (0.00193) «tOOl74)
0:(12) ·O,()SOI~ aDA .0354 ·O.OlSO (O;O)O2) ('0,0105) (0,198) (0.0246)
II)(GDP ., . . 1X)*lnformaHty (l,0S92 ·!'),7ltr- FOI OJ)l2~'* 0.001371 (0.294) (0.171) (0.00462.) (0,(494)
In(GDPpC:)"lnfOtm~ttr ·{lOOf40 0.00577**" Inflation ratc (CPI) .o.00635H ·OJJ02S3 (l1003J7) (0,00126) (0.00206) (0;00207)
~->======ear Fixed Effects Yes Yes Real interest rate -0.000326 0,00429 (0.00214) (0,00399) Country Fixed Effects Yes Yes Government regulation 0.0135 0.0265 R-sqUared 0,659 0.860 (labour market regulations) (0.0143) (0.0265)
Rule of law ·0.0622** ·0.0220 ~ ------~~----~---61 39 (protection of property rights) (0.0272) (0.0526)
Bribery 0.0844 0.0417 (0,0603) ,(0,0448)
Note· a:'R.ICH' . b:'POO ~ountnes have a GDP per capita above the sample mean of $6054 R. Countries have a GDP per capita below the sample mean of $6054
;~n~;~d errors (allowing for clustering at the country level) are in parentheses. A single asterisk denotes significance at % level. A double asterisk denotes significance at the 5% level. A triple asterisk denotes significance at the I% level.
THE GEORGETOWN PUBLIC POLICY REVIEW I 51 by insufficiently small sample size. diminishing and then negative Simple graphical analysis is nonetheless returns to informality for a given informative. In Figure 2, the regression income range). sample is divided into income quartiles and the predicted informality- The effect of informality on investment relationship (determined domestic investment changes direction with GDP per capita, from the fitted values of Eqn(3)) is plotted against informal sector size with more positive effects at lower income levels: the quadratiC for each group. Three points emerge relationship is most pronounced from this exercise, all of which support in lowest-income economies. the 'informal sector Kuznets curve' hypothesis: This relationship is flatter in low-income and middle-income Informality generally has a economies and is entirely negative positive effect on economic for the sample's highest-income dynamism, with diminishing group. This suggests that the returns to scale: excluding the relationship between GDP per highest-income economies in the capita and the effect of informality regression sample, informality on domestic investment may has an initially increasing and indeed resemble an inverted then decreasing impact on U-shape function. domestic investment (indicating
Figure 2. Predicted Domestic Investment against Informal Sector Size, by Income Quartile
~(") :::_»=-==.~:"":_~="~~::.:~--- ~ _--- -~-~ :;"
~ ID E til ID ,go
<;.) ~ 20 IV 40 ... .. 60 80 100 E Informal sector SIze (% total urban employment) a a lowest income: GDPpc
521 BIAU Optimal informal sector size The conclusions derived from this is inversely related to country analysis can nonetheless be extended income level: the turning point to a wider range of economies, as the of each parabola in Figure 2 regression sample includes countries represents the 'optimal' informal from a variety of regions, many of sector size for that income group which are significantly richer than (the level of informality at which others. Furthermore, the use of panel the effect of informality on data reduces the risk that results may investment is maximized and past be driven by country characteristics which further informal sector specific to this dataset; as country growth brings negative returns). fixed effects eliminate potentially For the highest income group problematic time-invariant variables. where this parabola is inverted, The use of panel data should also the optimal informal sector minimize any bias associated with size is the leftmost point of the potential omitted variables, provided function, for which the associated that these are fixed over time. No leve] of domestic investment is major omitted variable bias is expected greatest. The optimal level of to arise from time-varying variables, informality (*) moves backwards given that model selection involves as country income increases. For sensitivity testing to the inclusion of the economies in this regression numerous auxiliary controls. sample, optimal informal sector More importantly, data are missing size for the lowest-income quartile in a non-random way for certain occurs at roughly 70 percent of variables. The Economic Freedom of total urban employment. This the World indices are only available for may be compared to a level of 1990,1995, and for every year after roughly 40 percent in low and and including 2000. Consequently, middle-income quartiles and specifications including these controls a little above 30 percent in the consist mostly of observations sample's highest-income quartile. occurring in or after 2000. While the number of observations remains VI.LI~ITJ\TI()~S high enough to establish statistically
EXternal validity significant results, the relationships derived from such models may be bue to inconsistent data availability picking up effects specific to the across countries, Latin American 2000's. It is, however, unlikely that economies are over-represented relative global macroeconomic trends between to Asian and African economies in 2000 and 2006 would have differed ~hisdataset. Additionally, middle- sufficiently from those of the previous Income economies far outnumber decade for this to markedly influence low-income economies as classified results. The inclusion of year dummies by the World Bank (Appendix 2): should also mitigate any resulting
THE GEORGETOWN PUBLIC POLICY REVIEW I 53 biases. Conclusions from the final however, are highly sensitrve. . to changes specification may nonetheless have in specification of the underlying . stronger external validity for recent model. Given this lack of consensus 111 years. measurement techniques, estimating ~easurefiaenterror the economic effects of informality will inevitably be subject to some Described by many as the "shadow measurement error regardless of the economy," the informal sector is chosen metric. difficult to observe directly. This leads to very different approaches to Endogeneity its measurement. 'Direct' methods, This analysis investigates to what such as household surveys or tax extent changes in informal activity audits, help to determine the extent affect domestic investment. It is of informality in the labour force. possible that changes in domestic However, these methods may not investment in turn affect the size of include individuals engaged in the informal sector (for example, precarious employment or in very investment in domestic businesses small-scale activities, who often fall could cause enough informal firms to outside the survey frame (ILO- WTO reach a size at which they formalize). 2009). 'Indirect' procedures exploit The potential bias associated with discrepancies between macroeconomic endogeneity can be mitigated through indicators (for example, the difference a two-stage least squares (2SLS) . between national expenditure and instrumental variable estimation. ThIS income statistics) to approximate the requires identifying, as an instrument, 'leakage' of economic activity into the a variable that is strongly related to informal sector. A third method relies informal sector size but whose effect on econometric techniques to build on domestic investment works only 'dynamic multiple-indicators multiple- through the channel of informality. causes' (DYMIMIC) models (see The lagged term of the independent for example Loayza 1996; Schneider variable arguably fits this criterion: the 2008). These calculate informal correlation between informality, and sector size using predicted values informalitYt_l is necessarily non-zero, b from regressions whose independent and there is no causal channel throug variables include typical determinants which domestic investment this period of informality. The resulting estimates, could affect informal sector size last period, eliminating the possibility of "Further research could focus reverse causation. on finding a more appropriate The 2SLS estimation presented in instrumental variable for informal Appendix 3 uses lagged terms of the key independent variables X as sector size, with stronger first- it instruments. All main independent stage significance and a more robust variables of interest in the second stage exclusion restriction." are statistically significant and have the
541 BIAU sam d' e Irection and order of magnitude "Current developing-country policy asin full-sample OLS, However, as toward the informal sector is :one of the instruments is statistically Slgnifi ' therefore in urgent need of revision. cant III any of the first stage regr ' Stifling the informal sector in pursuit eSSlOns,the 2SLS estimation cannot of economic modernization is SerVetoverify that the main findings areUnbi lased, Further research could counterproductive ... authorities would :ocuson finding a more appropriate gain from enabling informal activities Instrumental variable for informal to thrive in a policy environment Sect ' , OrSIze,with stronger first-stage less threatening toward the informal Slg 'fi nl cance and a more robust workforce and more responsive to its exclu ' SlOnrestriction. needs."
VII. CONCLUDING REMARKS The policy implications of these Mot' IVatedby a clear knowledge gap, findings are three- fold, Firstly, in th' Ispaper set out to bridge a theoretical contexts where institutions and andpolicymaking impasse regarding socioeconomic environments theeconomic effects of informality, do not allow formal productive The findings provide evidence of activities to thrive, the informal astatistically significant positive sector can stimulate the dynamism relationship between informality of the domestic economy. Current and domestic investment in low developing-country policy toward and middle-income countries, with the informal sector is therefore in dim' Inishing returns to scale, The effect urgent need of revision, Stifling the ofin£orma I'ity on economicic dvnamiynamlsm informal sector in pursuit of economic chan di , , h ' ges irection WIt country mcome modernization is counterproductive. level,seemingly describing an inverted Indeed, the wholesale formalization U-shape function: informality has a advocated by numerous international POSitiveand statistically significant organizations is itself a misguided effecton domestic investment in objective: all economies examined in POorereconomies, and this effect this analysis have some optimal, non- ~eakens and becomes negative and zero level of informality, which is a In ' SIgnificant as an economy crosses a function of their income level. Instead, Certainincome threshold, Moreover, authorities would gain from enabling Optimalinformal sector size appears informal activities to thrive in a policy to be inversely related to an economy's environment less threatening toward per capita income level. These results the informal workforce and more Strongly suggest the existence of a non- responsive to its needs. mOnotonic relationship between the Secondly, informality provides only economic impacts of informality and a second-best solution for economic COuntryincome level, along the lines of activity in the short run; it is probably an 'informal sector Kuznets curve: not an acceptable foundation for
THE GEORGETOWN PUBLIC POLICY REVIEW I 55 sustainable development over time . . dicate More generally, these findings III (OEeD 2009). This paper finds that . . werful that the mformal sector IS a po the positive effect of informality on substitute for the formal sector: in domestic investment has diminishing a sub-optimal policy setting, the returns to scale and declines as informal sector can fill important national income increases. Thus, economic loopholes and encourage the findings do not challenge the entrepreneurship and investment. . 5 notion that formal employment is Policy efforts in low-income counwe beneficial to a society's workforce. In . . I· l'hoods should focus on improvmg ive 1 I an ideal policy environment, social and producti uctrve capacity .. in b0 th forma protection, job security, and tax k start and informal sectors, so as to kiC . e revenues undoubtedly contribute to the economy's informal growth englO a higher quality of life. This analysis in the short run, while simultaneously simply encourages policymakers to laying the groundwork for a long-run take a more differential approach to the increase in formality. question of informality, informed by their country's level of economic and VIII. REFERENCES institutional development. In low- income contexts where governments Asea, Patrick K. 1996. "The informal sector: . are not willing or able to invest in baby or bath water? A comment:' Carne~le-45: Rochester Conference Series on Public Poltcy improving the institutional framework 163- 171. and lowering the costs of formality, Bacchetta, Marc, Ekkehard Ernst and Juana (,II it may be more worthwhile to sustain Bustamente. 2009. Globalization and r: the informal sector than to repress it. Jobs in Developing Economies. Internation~ Labour Office and Secretariat of the worl In sound policy environments and at Trade Organization, Geneva. higher levels of income, the question instead becomes how to successfully Bateman, Milford. 2007. "Commercial " Microfinance: Undermining Development. transform informal microenterprises Private Sector and Development 07/2007. into formal activities without driving London School of Economics.
them out of the market. Bello, Omar D. 2002. "The Informal Sector, Productivity Shocks, And Distortions. . in the Labor Market." Banco Central de Venezuela, Escuela de Economia Universidad Cat6liea "In low-income contexts ...it may Andres Bello. )11icS be more worthwhile to sustain the CUTS Centre for International Trade, Eeono & Environment. 2009. "Informal Sector: h" informal sector than to repress it. In Definitions and its Implications for Growt . sound policy environments and at CUTS International. higher levels of income, the question De Soto, Hernando. 1989. The Other Path: The ic Economic Answer to Terrorism. New York: Bas instead becomes how to successfully Books. transform informal microenterprises Drine, Imed and Sami Nabi. 2010. "Public into formal activities without driving External debt, Informality and Production jc Efficiency in Developing Countries:' Econorfl them out of the market." Modeling 27: 487-495.
561 BIAU EnsteDo .. 20; "nlllllk H. and Friedrich Schneider. Pages, Carmen, Ed. 2010. The Age of Productivity: C O. Shadow Economies: Size, Causes, and transforming economies from the bottom up. 3~(nsequences:' Journal of Economic Literature Inter-American Development Bank. New York: 1): 77-114. Palgrave Macmillan. Gerxha . D ill, Klarita. 1999. "Informal Sector in Potts, Deborah. 2008. "The Urban Informal A.eVelopedL' an d L ess Developed Countnes:. Sector in Sub-Saharan Africa: from bad D' Iterature Survey." Tinbergen Institute to good (and back again?)" Development Iscussion Papers Number 99-083/2. Southern Africa 25(2).
GlobalF. aIrness Initiative. 2009. "Roadmaps to Rogers, Carol Ann and Kenneth A. Swinnerton. FOrm li . Ri a lZatlOn: Promoting Informal Labor 2004. ''A Model of Informal Sector Labour A.vg~ts(PILAR) in Guatemala and Nicaragua:' Markets." Conference of Northeastern d allable at: http://www.globalfairness.orgl Universities Development Consortium, HEC- oWnloads/PILAR_Roadmap _Eng. pdf Montreal.
Grossm "E an, Gene M. and Alan B. Krueger. 1995. Schneider, Friedrich. 2008. "The Shadow Thconomic Growth and the Environment." Economy in Germany: A Blessing or a Curse e Quarterly Journal of Economics 110(2): for the Official Economy." Economic Analysis & 3 53-377. Policy 38(1).
li:ussmanns, Ralf. 2004. "Measuring the informal Sioum, Admasu Shiferaw. 2002. "Private economy: From employment in the informal Investment and Public Policy in Sub-Saharan Sectort . c p 0 intorrnal employment." Working Africa: an Empirical Analysis." ORPAS Baper No. 53, Policy Integration Department Institute of Social Studies Working Paper 356. oUreau of Statistics, International Labour ffice, Geneva. Verick, Sher. 2006. "The Impact of Globalization on the Informal Sector in Africa:' Institute for Jilttin J I g, . and Laiglesia, 1. R. De. 2009. "Is the Study of Labour (IZA). tformal Normal? Towards More and Better ~bs in Developing Countries." OECD Databases: evelopment Centre Policy Brief, March 2009. International Institute for Labour Studies l(aufm S ann, Danny, Simon Johnson and Andrei Informality Database, Geneva, International TChleifer.1997. "The Unofficial Economy in Labour Organization, 2009. ra?sition:' Brookings Papers on Economic ActIvity 1997(2): 159-239. Economic Freedom of the World Version 2010.01, Fraser Institute, 2010. Loayz ).,T . a, l~orman V. 1996. "The economics of the Informal sector: a simple model and some World Development Indicators, The World Bank, empirical evidence from Latin America." December 2010. ~a~negie-Rochester Conference Series on Public olzcy 45: 129-162.
LoayZ ).,T a, l~orman v., Ana Maria Oviedo and Luis Serven. 2005. "The Impact of Regulation ;n. Growth and Informality: Cross-Country VIdence." Policy Research Working Paper WPS 3623, World Bank Group.
11isat'I,R. oseline Nyakerario. 2010. "The Role of the Informal Sector in Investment in Sub- Saharan Africa." International Entrepreneurship and Management Journal 6,(2): 221-230.
OUatt ara, Bazoumana. 2004. "Modeling the Long R.unDeterminants of Private Investment in Senegal." CREDIT Research Paper No 04/05, University of Nottingham.
THE GEORGETOWN PUBLIC POLICY REVIEW I 57 Appendix I. Variable Abbreviations, Definitions and Sources -"-a-r-j1l-1}-'e------"-.b-b-""-eV-j-M-iO-. n-.-0-. 'e-ft-In-it-io-n------$()ur(e
WDI GFCF lOlO WDI InfGFeF) In(GFCF) In ·fGros5 fixed capital formation) 2010 WDI 0 povpen:el'lt PO"'erry ne'ldcolJnt racio at $1 ,:as a d1li~·.p,pp.&x, (,f mf-'11pt~p\;ilal;oO} 101
GDPpt GOPpc GDP per capita, flPP (constant 2005 hit" $}
8llsi( (ont/of vadabJes WD! External debt Tdebt Toul debt service f% of GNI) lOIO WP' iOiO WDI aDA Oda Net Official Development Assistance recclvc.d (% of GDP) 2010 WDI Fdi Foreign direct iovestment net Inflows (% ofGDP) lOlO WDI Infhticn rate (CPt) Cpi Consumer p~it:c index (%) 2010 WPI Real interest ~ate rinteresc Real interest rate (%) 2010
Control variables for sensitivity analYSis
Government regulation reghire Index of labour market (hil"ing and firing) regulations' Tax burden rnrgrax Highest marginal corporate tax rate (%) GOllernmem spending govexp General government final consumption expenditure (% of GDP) Rule of law rolproprightlndex of protection of property rights" Bribery Bribe Index of extra payments and bribes"
Source: adapt~d f~om ILS 2009 (Internation.al Institute for Labour Studies Informality Database (2009), ~eneva: Internat~o. nal I0 Labour Organization); EFW 20 I0 (Economic Freedom of the World Version 20 I0.0 I (20 I0), Fraser Institute); and WDI (World Development Indicators (20 I0), Washington, DC: The World Bank).
Note: a:This sub-component is based on the Global Competitiveness Report's question:"The hiring and firing of workers is he impeded by regulations (= I) or flexibly determined by employers (=7)." The question's wording has varied slightly over t ~~L ~ b:This component is from the Global Competitiveness Report's question:"Property rights, including over financial assetS a poorly defined an not protected by law (= I) or are clearly defined and well protected by law (=7)." ld c:This sub-component is based on the Global Competitiveness Report's question:"ln your industry, how commonly wou ort you estimate that firms make undocumented extra payments or bribes connected with the foliowing:A _ Import and e~P permits; B - Connection to public utilities (e.g., telephone or electricity); C - Annual tax payments; D _Awarding of publiC contracts (investment projects); E - Getting favourable judicial decisions. Common (= I) Never occur (=7)".
Source: World Economic Forum, Global Competitiveness Report in Economic Freedom of the World database, Fraser Institute (20 I0).
581 BIAU Appendix 2. Country, Year and Income Group Coverage: ______I_ll_S_I_n_fo_r_m_a_l_it~y_D_a_t_a_b_a_se__a_n_d_F_i_na_I_R_e~g~r~e_ss_io_n__S_a_m~p_le ___
Country Coverage in ilLS Informality Database Regression sample (Eqn3) Income group (World Bank 2011)"
Argentina uecer-mrocre income Bolivia 1990-1997; 1999; 2002 ",,..,'p,._rn'rl<1l., income Brazil 1992·1999: 2001·2006 2001-2006 Upper-middle income Chile 1990; 1992-2000; 2003; 2006 Upper-middle income Colombia 1992-1998; 2000 ..2004 Upper-middle income Dc ~Osta Rica 1990-2006 2000-2006 Upper-middle income rnlrl1tan Republic 2000-200) 2000-2003 Upper-middle income Ecuador 1994; t99S; 1998·2006 2000·2006 Lower-middle income Honduras 1990; 1992; 1994-1999; 2001·2006 2001-1006 Lower-middle income Mexico 1995-2006 !99.5; 2000-2006 Upper-middle income Panama 1991-2006 2000-2006 Upper-middle income Paraguay 1995-2006 2001-2006 Lower-middle income Uruguay t996·2005 2000·2005 Upper-middle income Venezuela 2000-2006 1995; 2000-2006 Upper-middle income
"' ...... "Im 1<1'111 I.. income Ii'\dia 1994; 2000; 2004 2000;2004 lower-middle Income Ihdontlsia 1990~2003 2000~2003 Lower-middle income Pakisbn 1992; 1997;2000;2004 lower-mIddle income Sri lanka 1989;1990; 1994; 200~2003 2000·2003 lower-middle im;ome Thailand 1994; 20t)! 2001 lowcr-mh::ldlo income
Uooel' ...middle if1(;:ome 1993;2005 2005 Lower·middle income Egypt '9~; 199S; 2006 2006 Lower"mlddle income Ethiopia 2000:, 2003-2005 2005 low~lncome Ghana 1999 lOW-Income Kenya 1992~1994; 19'97 low·in<:ome MalaWl 1998 low·in<;:ome SOUth Africa 1995:~2006 199>5;2000·2006 Upper-middle in<::ome Tanzania 1990; [995 low-in<::ome Zambia 1991; [998 low~in<:ome Zimbabwe 1990;2002 2002 low.jn(,ome
Note: ~~~~)e:World Bank, 200 I, http://data.worldbank.org/aboutlcountry-classifications; World Bank List of Economies (january THE GEORGETOWN PUBLIC POLICY REVIEW I 59 Appendix 3. Instrumental Variable Estimation '2SLS 1i~(,.tJf>jKJ· lo{GOF'IKJ+ J:t"~!2:JJC~'!!):~!!:~~~.."_"!~~':!!:!~~"""""~__!~~!!!'~~L""_"""J..':'!~E!I).~~.tr..';_"---""_"._".!!!!'?!:.~ll~:__ _!.r:E5f'eM·"J!!..!!ri~!!.__'",{Gfq)~ __ InFOrmJJity,~ 4,.,29 JB75 17.9.2 1.!1M 11,11 1.0BI". (U);i4) (M:9.$} ($~.n) (4,$Q I) (4.,"1$ i) k1(Ct~~J e.Q31 1.!{'1 ~.2{l e,~$l 1",{GOPt~i .,IOS·· .;18.68) (!,6J9) (170.1) (14,386) (1.++1) InformJJi"Y',l ,,:l'.03'1l '),186 "::.ll,:> ·32.17 IV2 ,{)JJOB94~" (tl.r,)SS.f) {$Al ..} (t),~97) (4)$,$9) (~00409j b(G[}P'Pc)"'nfol"m~lit}',., .(Jc.o!9-1 .-+92~ .LISI "397:'1 IV] ,O.III.~ t.~L6t{l) {~9..64} (6.093) (5236) ( N 88 as 88 8!1 N 88 Note: Standard errors (allowing for clustering at the country level) are in parentheses. A single asterisk denotes significance at the 10% level. A double asterisk denotes significance at the 5% level. A triple asterisk denotes significance at the I% level. 60 I BIAU INCORPORATING HUMAN SECURITY INTO NATIONAL STRATEGY 1 By Derek S. Reveron and Kathleen A. Mahoney-Norris I. INTRODUCTION he second decade of the 21 st century continues to Derek. Reveron is Professor of N Natlonal Secunty . Affairs at the US demonstrate that it is conflict within states, often spilling aval War College. Tacross state borders, which will likely pose the most complex and numerous threats to US national security. One .kathie en Mahoney-Norris has only to note the ongoing regional turmoil in the wake of IS Prafe . ~ SSor of National Security the "Arab Awakening," whether in Egypt, Libya, or Syria, and the attudies t he Air . Command and Staff ( torturous debate within the US national security community ollege. about how to best respond to these situations. Yet, as this analysis contends, any national security response that does not take Their. lat est b ook IS. Human Security /f1aR orderless World. into account the foundational human security issues at play in these conflicts will only produce continuing instability, violence, and suffering. As we argue below, it is not too far-fetched to assert that formulating US national security strategy in a world increasingly characterized by threats without borders mandates novel ways of conceptualizing security. Thus, in this article we focus on a "human security" construct as providing a valuable corrective to more traditional policy analysis centered on major competitor states, conventional wars, and nuclear threats. In fact, while there are remnants of traditional, conventional conflicts on the Korean Peninsula and in the Persian Gulf region, today these are largely the exception. Major conflict may still be an important concern, but it is a rare occurrence. This led well-known scholar John Mueller A.Uthor 's Note: The conclu . to conclude that war among great powers has almost ceased to exist.' Slons and opinions Indeed, consider that the US military finds itself preoccupied not with eXPresse d Ini this document Qre conventional operations, but with what are essentially human security th ose of the author Qnd ' challenges in Central Asia, the Horn of Africa, and Southeast Asia. do not reflect the offici 1 " These human security challenges are inextricably linked to issues such G a Posltzon of the US as disease, poverty, crime, and poor governance, often magnified by DOvernment, Department of corrupt and incompetent foreign leaders. Clearly these challenges often Refense . thuu: U nzted . States Air engender instability and conflict, and this type of conflict is increasingly Orce, or AIr . University. THE GEORGETOWN PUBLIC POLICY REVIEW I 61 intra-state, but also internationalized." and building security, justice, and The recent successful NATO operation law enforcement institutions to that sought to protect Libyan civilians strengthen state governance and from their own murderous regime sovereignty. Again, traditional under Muammar Qaddafi is illustrative conceptions of national security of this phenomenon. A similar cannot account for this phenomenon scenario may occur as Syria becomes of assistance, and conventional destabilized. Undoubtedly, the perspectives offer little insight into implications of this changed security the growing American preoccupation landscape are profound for all those with transnational issues." Likewise, involved in national security concerns, traditional conceptions of security are whether civilian policymakers, military severely strained to explain a security planners, scholars, issue experts, or environment where peer competitors nongovernmental activists. or potential adversaries like the United States and China may also be It is worth noting that as early as transformed into cooperative partners 2002 the United States had enshrined in its national security strategy the to combat common transnational conclusion that the country was challenges like pandemic diseases, threatened more by weak states than by piracy, and terrorism. Similarly, powerful ones, already acknowledging traditional conceptions of security can that weak states may allow their only poorly, if at all, account for the domestic threats to become larger growing influence of nongovernmental transnational ones. Barely ten years later, in fact, the United States finds I Derek Reveron is Professor of National Security itself engaged around the world Affairs at the US Naval War College. Kathleen Mahoney-Norris is Professor of National in predominantly weak states in Security Studies at the Air Command and Staff military operations that have little College. Their latest book is Human Security in a Borderless World. to do with fighting, but everything to do with providing humanitarian 2 John Mueller, "War has almost Ceased to Exist: An Assessment," Political Science Quarterly assistance, training foreign militaries (Summer 2009), 297-322. 3 In 2010, the Uppsala Conflict Data Program tracked zero interstate conflicts, 21 intrastate "...as early as 2002 the United States conflicts (eight fewer than 2009), eight of which were internationalized internal conflicts (e.g., had enshrined in its national security Afghanistan). Uppsala codes "internationalized strategy the conclusion that the internal armed conflict" as conflict "between the government of a state and one or more internal country was threatened more by opposition group(s) without intervention from other states." Uppsala Conflict Data Program, weak states than by powerful ones, Centre for the Study of Civil Wars, International already acknowledging that weak Peace Research Institute, UCDP/PRIO Armed Conflict Dataset Codebook, (Oslo, 2008). states may allow their domestic 4 See Derek S. Reveron, Exporting Security: threats to become larger transnational International Engagement, Security Cooperation, ones." and the Changing Face of the U.S. Military (Washington, DC: Georgetown University Press, 2010). 62 I REVERON & MAHONEY-NORRIS continuum of human security issues- groups and activists who work across conceptualized as civic, economic, state boundaries to tackle human environmental, and health concerns- rights abuses, poverty, HIV/AIDS, constitutes the most prevalent threats and climate change. As just one to US national security. In sum, a example, it is estimated that some narrow focus on the most catastrophic 10,000 nongovernmental groups were threats of great power, war and nuclear operating within the relatively small attack, will only blind us to the most country of Haiti after its horrific 2010 earthquake.' insidious threats. In order to justify the relevance of mcorporating a human security "...a narrow focus on the most perspective into US national security catastrophic threats of great power, policy and planning efforts, the war and nuclear attack, will only blind analysis offered here addresses several us to the most insidious threats." aspects. First, a brief summary of contemporary security challenges is The "New" Security Environment provided, showing that the factors fueling endemic conflict and a It is important to first emphasize that pervasive sense of insecurity over the human security challenges are not last twenty years will only accelerate really a new phenomenon. In fact, in the 21st century. We then argue two years before the 9111 terrorist that these challenges are often best attacks, the US government's federally- explained by the human security chartered Hart-Rudman Commission concept, explicitly recognized by the on National Security/21st Century United Nations (UN) as early as 1994. predicted: In effect, this means that the national New technologies will continue security of states cannot be assured to stretch and strain all existing without achieving the human security borders-physical and social. needs of individuals and groups. We Citizens will communicate with and find that there has been a growing form allegiances to individuals or acknowledgement of this point within movements anywhere in the world. the international community, ranging Traditional bonds between states and from a focus on achieving the UN's their citizens can no longer be taken Millennium Development Goals to for granted, even in the United States. recognition of the "responsibility Many countries will have difficulties to protect" populations. As noted keeping dangers out of their below, policy initiatives under the territories, but their governments Bush and Obama Administrations have also demonstrated increasing 5 Katie Nguyen, ceQ: How Many Donors Does It recognition of these concerns. This Take to Fix Congo's Health Sector?" AiertNet, analysis concludes by offering a more April 11,2011. Accessed at http://www.trust.org/ nuanced understanding of how the alertnet/news. THE GEORGETOWN PUBLIC POLICY REVIEW I 63 will still be committed to upholding demonstrate that development the integrity of their borders. Global inequities foster unrest within, and connectivity will allow "big ideas" between, societies in Europe, Asia, and to spread quickly around the globe. the Middle East alike. Some ideas may be religious in In this globalized environment non- nature, some populist, some devoted state actors may have some inherent to democracy and human rights. advantages over governments. Whatever their content, the stage Consider that small private groups can will be set for mass action to have more readily harness and adapt off- social impact beyond the borders the-shelf technology such as satellite and control of existing political phones, encryption, and transportation 6 structures. technology. For example, in the Just as the Hart-Rudman Commission Caribbean Sea, semi-submersible foresaw, technological changes and vehicles or the "poor man's submarine" increased information flows have carrying cocaine are increasingly helped to stimulate new transnational common. And in Nigeria, organized challenges that are creating widespread criminal groups illegally trade 100,000 insecurity across the civic, economic, barrels of stolen oil every day, which environmental, maritime, and requires an elaborate system of health realms. One example is the transportation and financing. Whether proliferation of small arms and light they are state-supported, local, weapons, often linked to narco- transnational, narco- terrorist, Islamist, trafficking and criminal gangs, which or neo-cornmunist, these groups have undermine regime legitimacy and access to a variety of underground social stability in Latin America and economies, putatively religious the Caribbean where communities charities, and illicit government and individual citizens do not feel sponsorship. secure. An additional example includes In the United States and many other international migrant smuggling developed countries criminal gangs and human trafficking networks and other illegally armed groups are that challenge traditional notions of seen as a problem for law enforcement, sovereignty and human rights in West and there is minimal concern about and North Africa. Both examples domestic stability. Yet with so many "In this globalized environment non- nongovernmental and illegal groups operating at a sub-national level in state actors may have some inherent all regions of the world, many police advantages over governments. Consider that small private groups can more readily harness and adapt 6 Commission on National Security/ZI" Century, New World Coming: American Security in the 21" off-the-shelf technology such as Century (Washington, D.C.: U.S. Government satellite phones, encryption, and Printing Office, September 1999),5. Accessed at http://www.au.af.mil/au/awc/awcgate/nssg/ on transportation technology:' March 12,2009. 64 I REVERON & MAHONEY-NORRIS "The realization that even powerful forces in developing countries are under-equipped to effectively confront states can be vulnerable to human these groups-or too frequently they security issues marks an important get co-opted through corruption. advance in understanding; in the past Illegally armed groups thus may developed states have tended to drastically weaken a state's ability to be more immune than developing provide security for its citizens and states to the negative aspects of their communities; a widespread occurrence in many Latin American globalization:' countries. One of the most prominent to manufacture vaccines, stockpile examples of this trend has been anti-viral medicines, and inoculate occurring in Mexico, where at least tens of millions of people in a short 40,000 citizens have lost their lives since period of time. However, developed 2006 when large-scale violence erupted states' often complacent attitude about between Mexican authorities and the their own domestic security seems to narcotics-criminal families and gangs be changing. As Nick Gvosdev has battling for control. Demonstrating astutely commented, "The riots ... in the the power of these criminals, Forbes United Kingdom, coming on the heels magazine listed Joaquin "El Chapo" of the terrorist attack in Norway, the Guzman, the billionaire leader of the protests in Greece and the tsunami and Sinaloa cartel, as the 55th most powerful subsequent nuclear accident in Japan ... individual on the planet in 2011, while should be a wake-up call to Europe and no Mexican political leader made the the rest of the developed world that it list. cannot ignore the domestic side of the The insecurity in Mexico is also national security equation. It is time significant as a demonstration of the to dispense with the hubris of thinking increasingly transnational nature that natural disasters, civil unrest or of human security challenges: the terrorism produces instability only in Mexican narco-trafficking and criminal countries like Haiti or Iraq."? gangs have pervasive links from South Given these transformational changes A. menca, through Central America in the security environment, we and the Caribbean, to the United contend that traditional notions of States itself. The realization that even security have little to offer in terms powerful states can be vulnerable of understanding threats without ~o human security issues marks an borders. Instead, a human security: Important advance in understanding; construct is necessary to make sense in the past developed states have tended of these threats, and to develop viable to be more immune than developing policy options. This clearly applies states to the negative aspects of globalization. For instance, as the 7 Nikolas Gvosdev, "The Realist Prism: London 2009-10 influenza pandemic illustrated, Riots and Europe's Security Equation;' World the United States had the resources Politics Review, August 12,2011. THE GEORGETOWN PUBLIC POLICY REVIEW I 65 to military forces which in the past associates were clear that the concept of have largely lacked the capabilities, security had been too much associated doctrine, and culture to confront these with military conflict and arms, and transnational security challenges. This that human security involves other is understandable as militaries tend concerns like "job security, income to prepare for defending their borders security, health security, environmental from invading forces and not for security, security from crime ... "9 improving how they work with police Fifteen years later the UNDP's Arab or enforce domestic law and order. Human Development Report 2009 However, this, too, is beginning to defined human security more broadly change in many countries as military as "the liberation of human beings forces are starting to think beyond from those intensive, extensive, warfare and are developing core prolonged, and comprehensive threats competencies to meet the challenges to which their lives and freedom are of transnational threats to better vulnerable.":" The report helpfully address nontraditional, human security contrasts state or national security concerns. and human security, by pointing out that the threats to state security are "Given these transformational changes military ones, the actors who threaten in the security environment, we states are usually located outside those contend that traditional notions of states, and that the state itself is the security have little to offer in terms object that is threatened. By contrast, with human security, the threats are of understanding threats without varied in nature, as are the actors who borders. Instead, a human security threaten humans, and "the object of construct is necessary to make sense threat in the case of human security is of these threats, and to develop viable individuals' lives, freedom, or both,"" policy options." Several other concepts are almost always part of the discussion on human security, including "the responsibility to II. THE CONCEPT OF protect;' the inherent nature of human HUMAN SECURITy8 8 This section is based on our latest book, The United Nations Development Human Security in a Borderless World (Boulder, Program (UNDP) first conceptualized, co: Westview Press, 2011). and then systematically promoted, 9 United Nations Development Programme, the concept of human security. In Human Development Report 1994 (New York: Oxford University Press, 1994),3. its benchmark Human Development 10 United Nations Development Programme- Report 1994, the UND P provided an Regional Bureau for Arab States, Arab Human explanation, justification, agenda, Development Report: Challenges to Human operational indicators, and policy Security in the Arab Countries (New York: United Nations Development Programme, recommendations centered on the 2009),23. concept of human security. UNDP 11 Ibid, 19. 66 I REVERON & MAHONEY-NORRIS concerns are increasingly evident in rights for all human beings, and the national security discourse and are concept of "development as freedom" becoming a component of US foreign as popularized by Nobel Prize laureate policy. In his first year as president, and economist Amartya Sen.12 President Obama reiterated these To grapple effectively with security themes when, upon accepting the concerns, the United States must Nobel Peace Prize in December 2009, move beyond the singular, state- he declared: centric focus of national security and It is undoubtedly true that include the organizing concept of development rarely takes root human security. But, in so doing, it is without security; it is also true that important to understand, as articulated security does not exist where human by Sadaka Ogata (then co-chair of the beings do not have accessto enough Commission on Human Security) in food, or clean water, or the medicine 2003, that: and shelter they need to survive. It Human security does not seek to does not exist where children can't supplant state security, but rather aspire to a decent education or a job to complement it. States have that supports afamily. The absence the fundamental responsibility of of hope can rot a society from within. providing security. Yet they often And that's why helping farmers feed fail to fulfil their obligations - many their own people-or nations educate times they are even the source of the their children and carefor the sick- threat to people. As the multitude of is not mere charity. It's also why the violent conflicts and extreme poverty world must come together to control demonstrates, states cannot be secure climate change... 14 if people's security is at stake. But neither can people be secure in the In fact, this changing policy had absence of strong, democratic and already been acknowledged under the preceding Bush Administration, responsible states, as the multitude and has progressed under the Obama of collapsed states in the world Administration. As Hillary Rodham illustrates. 13 Clinton proclaimed on her very first Thus, protecting the national security day as the new Secretary of State, of states is inextricably linked to achieving human security goals. 12 Amartya Sen, Development as Freedom (New Arguably this belief is reflected in York: Alfred A. Knopf, 1999). the steady shift in US foreign policy, 13 Sadako Ogata, "Human Security Now:' Remarks by Sadako Ogata, Fifth Ministerial which is increasingly focused on Meeting of the Human Security Network, Graz, combating threats across state borders Austria, May 8, 2003, 2. and in placing development on an 14 The White House, "Remarks by the President equal footing with the traditional at the Acceptance of the Nobel Peace Prize:' December 10,2009, online at: http://www. governmental tools of diplomacy whitehouse.gov/the-press-office/remarks- and defense. Clearly human security president -acceptance- nobel- peace- prize. THE GEORGETOWN PUBLIC POLICY REVIEW I 67 "robust diplomacy and effective transnational terrorist franchises can development are the best long- pose serious threats to human security. term tools for securing America's But from a positive perspective, it future:'ls Secretary Clinton later also means that individual activists, testified before the House Foreign like antipersonnel mine activist Iody Affairs Committee on February 25, Williams, philanthropists like Bill and 2010, noting, "we're developing a new Melinda Gates, or nongovernmental architecture of cooperation to meet organizations like Save the Children, global challenges that cross national can act as catalysts to change boundaries like climate change and the government policies, improve people's use of our planet's oceans. In so many lives, and incrementally transform the instances, our national interests and international system. the common interests converge. And Thus, for national security analysts so from the Western Hemisphere to and practitioners, it is essential to Africa, Asia, and the Middle East, we're understand contemporary challenges promoting human rights, the rule of through a more interdisciplinary, law, democracy, and internet freedom. inclusive approach focused on human We're fighting poverty, hunger and security, "which equates security with disease, and we're working to ensure people rather than territories, with that economic growth is broadly development rather than arms,"!' The shared."l6 dynamic forces transforming human A logical consequence of shifting interactions at the international, from a traditional, state-based, transnational, regional, and domestic territorial definition of security to levels all have profound implications a human-centric view of security for the (human) insecurity perceived is recognizing the importance of by individuals, groups, and states. It is non -state actors. From a negative widely acknowledged that much of this perspective, this means acknowledging that individuals and various 15 Hillary Rodham Clinton, "Arrival at the Department of State: Remarks to the Department Employees at Welcome Event" (Washington, D.C., January 22,2009), emphasis "But from a positive perspective, it added. At http://www.state.gov/ secretary/ also means that individual activists, rm/2009a/01/115262.htm, March 11,2009. like antipersonnel mine activist Jody 16 Hillary Rodham Clinton, "Testimony before the House Foreign Affairs Committee" (Washington, Williams, philanthropists like Bill and D.C., February 25,2010), At http://www.state. gov/ secretary/rm/20 10/02/13 7280.htm. Melinda Gates, or nongovernmental 17 In its Human Development Report of 1994 the organizations like Save the Children, United Nations Development Program noted can act as catalysts to change that it was introducing "a new concept of human security, which equates security with people government policies, improve people's rather than territories, with development rather lives, and incrementally transform the than arms." Cited at UNDP Human Develop- ment Reports website at http://hdr.undp.org/en/ international system:' reports/global/hdr1994, March 11,2009. 68 I REVERON & MAHONEY-NORRIS dynamism is fueled by globalization, "...the US military increasingly finds which is constantly accelerating itself operating in non-combat zones change. As Thomas Friedman has where human security concerns noted, this type of rapid change can predominate. Generating power, « b . .. reed enormous insecurity as well pumping water, and building roads are as enormous prosperity. They can now essential tasks within and outside breed in people a powerful sense that their lives are now con trolled by forces combat zones." they cannot see or touch,"!" Therefore, examining globalization as an ongoing building roads are now essential tasks ~rocess affecting human security within and outside combat zones. Issues is essential. National strategy Interestingly, what is still relatively tends to deal in large part with the new to military and national security negative aspects of globalization-i.e., circles is not all that new in foreign how it contributes to the growth of assistance and development circles. ~ransnational threats-but it is equally Development projects in the 1950s and Important to consider the positive, 1960s had sought to promote human cooperative aspects of globalization progress by eradicating diseases like that can fuel productive economic and small pox or building power generation political transformation. facilities. More recently, developmental and related human security concerns III. HUMAN SECURITY IS have been gaining traction among NATIONAL SECURITY international experts as the threat of a World War III-type conflict has Over the last 20 years, it seems fair to faded. This was already reflected say that human security concerns have in 1992 as Secretary General of the gained at least some currency in US United Nations Boutros-Boutros Ghali defense circles and have influenced set forth UN goals in the influential more nuanced thinking about Agenda for Peace, "to enhance respect national security. In our view, this is for human rights and fundamental particularly significant because if the freedoms, to promote sustainable most powerful state in the international economic and social development for system acknowledges the importance wider prosperity, to alleviate distress of these concerns and acts upon them, and to curtail the existence and use then the human security construct will of massively destructive weapons."19 gain increasing traction. To be sure, the Barely twenty years later the current Pentagon continues to largely train and equip military forces for major war, but 18 Thomas 1. Friedman, The Lexus and the Olive the us military increasingly finds itself Tree (1999; reprint, New York: Anchor Books, operating in non-combat zones where 2000),336. human security concerns predominate. 19 An Agenda for Peace: Preventative Diplomacy, Generating power, pumping water, and Peacemaking, and Peacekeeping (New York: United Nations, 1992). THE GEORGETOWN PUBLIC POLICY REVIEW I 69 UN Secretary-General, Ban Ki-rnoon, prevention of genocide and mass issued "a clarion call to action" as the atrocities. Soon afterwards, in 2009, 7th billion person was projected to be UN Secretary General Ban Ki-rnoon born in October 2011: outlined three key elements of a recently acknowledged international We must address and realize the responsibility to protect. First, Ban Millennium Development Goals. Ki-moon noted that states have the That is why, from now on ... the primary responsibility to protect United Nations has decided to focus their populations against genocide, on sustainable development as the war crimes, ethnic cleansing and No.1 priority, to address all these crimes against humanity. Second, issues. Climate change, food-security the international community should issues, energy shortages, water provide assistance to states in building scarcities, disease, health issues and a capacity to protect their populations gender empowerment: all these from catastrophe by addressing are interconnected. We have to underlying conditions. Third, the address these issues in an integrated international community should way. This is our vision, and all 193 take timely action when states fail to member states [of the UN] have protect their populations. As the 2009 agreed that this should be the top Report of the Secretary-General on priority:" this responsibility to protect (R2P) notes, "the strategy stresses the value "In short, waiting until war breaks out of prevention, and, when it fails, of or until masses of people become early and flexible response tailored internally displaced or refugees is to the specific circumstances of too late and unacceptable to the each case,'?' The key to prevention lies in identifying states at risk and international community." developing appropriate responses to aid governments' efforts to promote Yet, regardless of the very public development and improve standards emphasis being given to the of living. In short, waiting until war developmental aspects of human breaks out or until masses of people security, it is important to underscore become internally displaced or the accompanying international refugees is too late and unacceptable consensus on preventing violence to the international community. against human beings. Indeed, in the wake of large-scale internal 20 Bryan Walsh, "Q&A with U.N.Secretary- and regional conflicts and violence General Ban Ki-Moon," Time magazine, October against civilians-to include the 26,2011. Accessed at http://www.time.com/time/ tragedy of genocide in Rwanda- specials. the United Nations formalized its 21 United Nations General Assembly, Implementing the Responsibility to Protect: prevention activities in 2004 by Report of the Secretary-General (New York: appointing a special adviser on the United Nations, 2009), 2. 70 I REVERON & MAHONEY-NORRIS practitioner and academic Sarah The R2P construct clearly rests on Sewell is continuing to receive military human security as the central concern, support for her Mass Atrocity Response with prevention of human security Operations (MARO) Project, which violations being the ideal. Notably, is tied to R2P concerns. Sewell's team the international community's recently produced Military Atrocity commitment to R2P, although Response Operations: A Military somewhat belated, was reaffirmed in Planning Handbook, which has been 2011 by the United Nations Security useful for military exercise planningY Council when all IS members voted to invite the International Criminal Court Nevertheless, it is not surprising to to investigate possible crimes against find that accepting these modifications humanity committed by the Qaddafi to traditional military missions and regime." It will be instructive to see getting the balance right has not whether the same policy will ultimately been easy for either the United States be followed with regard to similar or the international community, charges against the Assad regime in which together have over 100,000 Syria. peacekeepers deployed around the world today. As both President Bush, Clearly, by employing its own airpower and later President Obama's Secretary with NATO allies against the Libyan of Defense Robert Gates has observed, regime in the first half of 2011, the "One of the most important lessons United States demonstrated that it of the wars in Iraq and Afghanistan is is willing to use force if necessary on that military success is not sufficient behalf of the human security concerns to win: economic development, embodied in the R2P understanding. institution-building and the rule of Based on its diverse peacekeeping and law, promoting internal reconciliation, nation-building military experiences good governance, providing basic over the last two decades, the US services ... along with security, are military has seemingly (if sometimes essential ingredients for success."24 grudgingly) come to accept its role in R2P-type activities. In fact, in 2005 the Department of Defense mandated that 22 Colum Lynch, "The U.N:s Tough Stand on Qaddafi: Exception or Rule?" Foreign Policy. stability and reconstruction activities com, March 7,2011. Accessed at: http://turtlebay. be considered on par with preparation foreignpolicy.com/posts/20 11103/07 Ithe_uns_ tough_ stand., on, qaddafi_ exception_ or_rule. for major combat, thus elevating the importance of those missions. And 23 Sarah Sewell, Dwight Raymond, and Sally Chin, Mass Atrocity Response Operations: A Military in 2008, the US military accepted that Planning Handbook (Cambridge: Harvard Uni- irregular warfare against non-state versity, 2010--A Collaborative Effort Between the Carr Center for Human Rights Policy, Harvard actors is as important as warfare with Kennedy School, and the US Army Peacekeeping rogue states and peer competitors. A and Stability Operations Institute). change in mindset among some sectors 24 Robert M. Gates, "Landon Lecture;' November of the military may also be reflected in 26,2007. Accessed at http://www.k-state.edu/me- dia/newsreleases/landonlectl gatestextll 07.html the fact that national security policy THE GEORGETOWN PUBLIC POLICY REVIEW I 71 Based upon these converging trends flourish in weak and poorly governed and assessments, we believe that it societies to prey upon ordinary is clearly not possible to understand citizens. The gravity of this issue is the complex threats to US national reflected by the United Nations' finding security-nor how to develop that, of the 750,000 people estimated to strategies and policies to deal with die annually from armed violence, the those threats-without a deeper majority (close to 500,000) die from understanding of the component issues criminal acts of violence and not due that underlie human security. Thus, it to conflict." What is more, this type of is important to examine the continuum criminal violence is not contained by of interrelated issue areas that are state borders, as United States citizens categorized here as civic security, living on both sides of the US-Mexican economic security, environmental border have found, to their detriment, security and health security. in the last few years." Civic security also entails the right IV. THE CONTINUUM OF to express one's cultural values and HUMAN SECURITY identity, to include such concepts Ineffective and failing governments are as ethnicity, race, and religious often the main contributors to human identity. As human beings value security threats, especially in the realm and identify themselves in a number of civic security. In the first instance, of societal ways beyond national or an individual's physical security and state, identity is a critically important integrity may be threatened because piece of understanding why so many the government is actually abusing threats today are transnational in human rights; whereas in the second scope. Furthermore, the fundamental instance, the government is incapable attachment that we all have to our of providing public security and cultural identity must be grasped in protecting the physical integrity and order to comprehend why globalization way of life of each citizen. The latter can provoke such a serious backlash problem is becoming more important and conflict, whether in Pakistan or the as globalization empowers domestic indigenous highlands of Bolivia. On and transnational criminal gangs, drug traffickers, smugglers, and others who 25 According to the United Nations Development Programme Newsroom, ''Armed Violence Threatens Progress on Millennium Development "The gravity of this issue is reflected Goals," May 11,2010. At: http://content.undp. org! go/newsroom/20 1O/may/ armed-violence- by the United Nations' finding that, threatens- progress- on -millennium- goals. of the 750,000 people estimated to 26 In March 2010 three U.S. consulate employees die annually from armed violence, the in Ciudad Juarez were killed by masked gunmen, presumably in the context of ongoing drug wars. majority (close to 500,000) die from That same month an Arizona rancher was killed criminal acts of violence and not due by an individual who then escaped to Mexico, and who was allegedly involved with drug to conflict." smuggling. 72 I REVERON & MAHONEY-NORRIS factors in enabling criminality, the other hand, clearly globalization extremism and even terrorism to acts equally in a positive fashion grow, whether domestic in nature or by enabling transnational social transnational in scope. movements such as the human rights movement, which has made notable It is no accident that the United strides in advancing human rights Nations' authoritative Human standards for the world's people- Development Report 2011 is subtitled particularly women. Only with Sustainability and Equity: A Better deeper insights about these concerns Future for AIl.30 There is strong can policymakers devise appropriate, and growing worldwide consensus multilayered solutions to civic security that environmental sustainability, issues generated at least in part by development and climate change are transnational actors and cultural real and will have profound effects identity issues." Many would consider economic "In fact, many scholars would argue security, in the sense of being able to that it is socioeconomic factors and provide food and shelter for oneself inequities that first fuel insecurity and and one's family, as critically essential conflict between different groups of to human security on par with security people, and not cultural differen,~es or of one's person. This is plainly revealed in the Human Development Index transnational actors and trends. (compiled by the United Nations Development Program),which 27 As an example, in Radical Islam in East Africa highlights the staggering differences (Santa Monica, CA: RAND, 2009), Angel Rabasa analyzes "the complex ethno-religious land-. in life expectancy and child mortality scape in East Africa ... that have pr~du.ced failed around the world." National or weak states susceptible to explOltatlOn by and regional economic and social extremist groups ... Building sustained national resilience that is intolerant of terrorists and development issues have clear potential extremists ... can only be accomplished by linking to stoke instability, violence, and hard security initiatives with a broader arr~y of policies designed to promote politica~, sOClal,and conflict-making weak states weaker, economic stability:' Cited from overVIew of book producing failing states, and imperiling at RAND website, at http://www.rand.org/pubs/ civic security." In fact, many scholars monographs/MG782/. would argue that it is socioeconomic 28 The Human Development Index can be accessed online through the United Nations factors and inequities that first fuel Development Program website at http://hdr. insecurity and conflict between undp.orgl en/statistics/. different groups of people, and not 29 Mary Kaldor, New and Old Wars: Organized cultural differences or transnational Violence in a Globalized Era (Stanford, CA: Stanford University Press, 2001). actors and trends. Additionally, 30 United Nations Development Progran:me, .. inequities will often be exacerbated by Human Development Report 2011; Sustamabl11ty the lack of good governance, especially and Equity: A Better Future for ~ll (Nev: York: when accompanied by corruption. Palgrave Macmillan for the United NatlOns Development Programme, 2011). These failures may all be important THE GEORGETOWN PUBLIC POLICY REVIEW 173 on everyone's security. According risk as they lack adequate resources. to the UN Intergovernmental Panel Climate change will weaken already on Climate Change's conclusions feeble states, contributing further to in 2009, "by the end of the century, regional and global insecurity. And as sea levels may rise twice as much populations are further stressed, the as was predicted two years ago ... potential for instability, conflict, and [which] means that the lives of even resource wars grows, especially some 600 million people living on where traditional societies may be low-lying islands, as well as those prone to clash with Western modes of living in Southeast Asia's populous development and modernity. delta areas, will be put at serious In terms of health issues, the 2009-10 risk ... "31 While there are climate HIN1 influenza pandemic made clear change skeptics, the implications of that disease knows no boundaries, relocating literally millions of human and that the United States is equally beings in areas threatened by rising vulnerable to chronic and infectious waters are staggering, and people are diseases prevalent in many parts of already relocating internally from the world. These include HIV/AIDS, low-lying areas in Bangladesh and the malaria, hepatitis, tuberculosis, highly Philippines. For some island countries, publicized Ebola hemorrhagic fever, like Kiribati and Maldives, abandoning and influenza. On average, three low-lying areas is not an option as pandemics per century have been their entire countries may become documented since the 16th century, uninhabitable. occurring at intervals of 10-50 years. Clearly ceo-migration is a growing If an influenza pandemic virus were trend, one triggered not only by rising to appear similar to the one that seas but also by desertification and struck in 1918 (killing an estimated 40 a lack of fresh water in areas like the million people), there will be serious African Sahel region bordering the consequences for international security. Sahara in North Africa." While the Air travel and international commerce United States may have the resources would stop. Disease outbreaks could to at least mitigate the these types trigger massive human migrations, of climate changes effects in the disrupting social order within countries future, developing countries and and across regions of the world. their populations will be most at Yet, in spite of this often daunting continuum of human security "Climate change will weaken already feeble states, contributing further to 31 Jean-Marie Macabrey, "Researchers: Sea Levels regional and global insecurity. And as May Rise Faster than Expected:' The New York populations are further stressed, the Times, March 11, 2009. potential for instability, conflict, and 32 Shankar Vedantam, "Climate Fears Are Driving 'Ecomigration' Across Globe:' The Washington even resource wars grows ..." Post, February 23, 2009, AO1. 74 I REVERON & MAHONEY-NORRIS "While foreign aid and assistance challenges, it is heartening to note a greater understanding of these perils in are always a tempting target for many countries. As discussed above, policymakers, this time it is very US foreign policy seems increasingly probable that even the US military's cognizant of the seriousness of highly-regarded security assistance human security challenges and is programs aimed at bolstering the more effectively targeting aid and security capacity of many developing cooperation with other governments countries will be reduced." and nongovernmental groups. In fact, both the US State Department and the US Defense Department have Unfortunately, while this approach is a consciously attempted to integrate step in the right direction, it may still their efforts in a partnership, premised be too state and government-centric. on improving national-and to Ultimately, any plan to advance some extent human-security in all human security on a global level must its multifaceted aspects. This was equally account for the transnational illustrated most graphically in early actors and forces that are shaping the 2011 when, for the first time, officials international community, for better for both the Departments of Defense or worse. Equally unfortunately, it and State testified together to the US seems clear that both the US State Congress about their budgets. Deputy Department's budget and the Defense Defense Secretary William J. Lynn Department's budget will inevitably III emphasized the importance of suffer cuts considering the precarious funding and promoting security and situation of the US economy and its responsible governance to forestall budgetary concerns. While foreign direct US military interventions. aid and assistance are always a Furthermore, he told the US Senate's tempting target for policymakers, Budget Committee: this time it is very probable that even Forjiscal2012, we're also requesting the US military'S highly-regarded a new, path-breaking program which security assistance programs aimed would involve pooled funding, where at bolstering the security capacity of State and DOD officials would many developing countries will be contribute to a fund where we would reduced.34 seek to anticipate security issues wherever they are in Africa, Latin America (or) Asia, and to jointly target assistance for development 33 Jim Garamone, "DOD, State Department Offi- funding for economic assistance and cials Present Budgets to Senate:' American Forces Press Service, March 10, 2011. Accessed at security assistance in an integrated http://www.af.millnews/ story.asp?id==123246203. way in an effort to anticipate growing 34 This section is based on our latest book, crises and reduce them before they get Human Security in a Borderless World (Boulder, CO: Westview Press, 2011). started ..."33 THE GEORGETOWN PUBLIC POLICY REVIEW 175 v. CONCLUSION But now, having commemorated the 20-year anniversary of Soviet collapse In both US academic and policy in 2011 and as we rely on China as communities there remains a bias a key economic partner, we need toward great powers, big wars, and to move beyond that great powers issues like nuclear proliferation. Worst- scenario to fully understand the new case scenarios guide planning, with (albeit over 20 years old!) security many realist and neorealist adherents environment. Blindfolding ourselves still believing that only nation-states, to this increasingly complicated and especially major states with large ambiguous contemporary world militaries and nuclear arsenals, are will only delay our ability to address the proper focus for national security security issues of immediate import for concerns. Non-state actors are viewed US security and prosperity, especially as a nuisance, regardless of whether in the forthcoming era of austere they are terrorists, pirates, or other budgets. As Cyntha Enloe has argued, illegally armed groups. Transnational "how one thinks about national crime and pandemic influenza may security not only affects global relations need attention, but not under the but determines who is even allowed rubric of national security. This to sit at the table to take part in the bias toward major powers was security conversation.T" demonstrated very clearly in the Obama Administration's recent explicit An alternative, productive approach policy shifts to limit stability operations to thinking about national security and reorient US national security is encapsulated in the concept of toward Asia, and especially China. human security, as amorphous as that concept migh t seem at times.. 36 A s Perhaps this kind of logic made more Sadaka Ogata phrased it so eloquently, sense during the Cold War, when Soviet "if security is to be protected, conflict and US foreign policies under the prevented, human rights respected and shadow of nuclear exchange kept both poverty eradicated, we require urgently countries on the verge of World War a new consensus on security. This is a III, with China as a wild card in play shared responsibility. Human security between the two major adversaries. provides an impetus for all countries, whether developed or developing, to review existing security, economic, "Blindfolding ourselves to this increasingly complicated and 35 Cynthia Enloe, Globalization and Militarism: ambiguous contemporary world Feminists Make the Link (Lanham, MD: Rowman will only delay our ability to address & Littlefield Publishers, 2007), 40. security issues of immediate import 36 In this regard see Roland Paris, who has argued that "human security is so vague that it verges for US security and prosperity, on meaninglessness-and consequently offers. especially in the forthcoming era of little practical guidance ... " In "Human Secunt~: Paradigm Shift or Hot Air?" International Security austere budgets." 26, no. 2 (2001): 102. 76 I REVERON & MAHONEY-NORRIS development and social policies. "Engagingin critical thinking now will Creating genuine respect for people's enable governments, militaries, and safety, livelihood and dignity should be citizens to better provide for national the overall objective of these policies."3? and international security, while Instead of protecting against the improving good governance and social most catastrophic possibilities (great and economic prosperity for all." power war and nuclear attack), we think it is important to consider the most likely challenges, often posed by non-state actors and transnational concerns. We must educate ourselves about the many issues that have often been decades in the making, and are now demonstrating their capability to threaten all human beings. These include issues such as environmental sustainability, pandemic diseases, endemic poverty, weak and failing states, transnational narcotics trafficking, and criminal gangs. Engaging in critical thinking now will enable governments, militaries, and citizens to better provide for national and international security, while improving good governance and social and economic prosperity for all. 37 Ogata, 2. THE GEORGETOWN PUBLIC POLICY REVIEW I 77 78 CRISIS COMMUNICATION: The Role of Public Perception of Crises By Weimin Mou and Richard Harris he current scholarship on crisis management and Weimin Mou, Coordinator of Training Programs I Associate communication practice emphasizes the governmental Research Professor at the Training Tactor and ignores the role of public perception in Department, Central Party School, a crisis situation. How successful crisis management can Beijing, has a Master of Public be is determined, in part, by how the public perceives the Policy and Management from the crisis at hand. In short, two-way communication between University of Melbourne, Australia, and the government and the public provides the most fruitful a Bachelor of Arts in International Chinese Studies from Beijing Foreign environment for successful crisis management. Studies University, China. He has been involved in teaching and Each individual understands a crisis through subjective research at the Central Party judgment and experience. Factors that affect how an individual School for more than ten years. perceives a crisis include individual characteristics, type of His current research and teaching crisis, representation in media, role of government actors, and focus is on Public Administration support from civic society or the community, among others. In and Policy, Crisis Management and Commurucanon, . . Government-related this policy spotlight, the present effort expands on the different Public Relations, Organizational factors that affect perception of crises and informally offers B h . . e avior, and Comparative Public some suggestions for further action. Administration. Richard Harris completed his Master of Public Policy at the Georgetown Public Policy Institute and will begin work toward a PhD in Political Science and International Relations at the University of SOuthern California as of Fall 2012. He served as Executive Managing Ed·rtor for the Georgetown Public Policy Review for the 2011-2012 acad·emrc year. HIs. research interests include soft power, public diplomacy, public perception and participation in pOlicy processes, and East Asia. THE GEORGETOWN PUBLIC POLICY REVIEW I 79 I. INDIVIDUAL Some age groups in particular are at CHARACTERISTICS AND higher risk during a crisis. The elderly, PUBLIC PERCEPTION OF specifically those in poor health, are CRISES vulnerable during a crisis situation and, in addition, are often reluctant In a crisis situation, individuals suffer to seek help. Feelings of depression not only physical losses but also and hopelessness are typical post- psychological stress. Psychological disaster responses for this group, and stress affects people differently. The some elderly, particularly those that impact of a crisis is not homogenous are physically weak, lack interest in across groups. Individuals with less rebuilding their lives. economic or political strength, or those who are older, will be most affected Children are another group at higher by the psychological stress of a crisis. risk. Lacking, in most cases, the ability This group is also disproportionally to comprehend the crisis situation, affected by the physical losses of a many children develop emotional or crisis, as they usually have less access behavioral problems after a disaster. In to public resources. These effects are addition, many children may remain endogenous in that those affected most afraid after the crisis has passed, and by a crisis in terms of physical loss will show psychological distress, including likely be affected psychologically to a sleep disorders and lack of interest in greater extent as well. school. Research suggests the following Gender characteristics play an important role Gender influences how an individual during a crisis situation: age, gender, responds to social expectations, which psychological background and extent are in turn driven by gender itself. of background knowledge. Gender can playa role, then, in how an Age individual responds to a crisis situation. One example includes the response to During a crisis, people of different ages SARS in the early 2000s. The Chinese are likely to react differently. Younger University of Hong Kong published adults tend to underestimate the effect their findings of a survey in mid- of a crisis, while more mature adults 2003. Researchers found that roughly are able to better judge the potential 20 percent of respondents affected impact of a crisis, and, thus, may have a by SARS suffered from symptoms more negative response. such as irritability and headaches, 70 percent of whom were women. Cheng "These effects are endogenous in Lee, Director of the Mood Disorders that those affected most by a crisis Center at the Faculty of Medicine in terms of physical loss will likely be suggested that this finding may be due affected psychologically to a greater to higher worries about hygiene and exte nt as we II." 80 I MOU & HARRIS at the Medical Department of Peking family infection that women may hold University and other students across (Xinhua 2010). Beijing. Researchers found that the Psychological Background biggest difference in levels of anxiety Crises affect people of different and rational behavior are between psychological backgrounds differently those with medical knowledge and as well. When faced with a crisis, those without. In short, a medical people with better psyches (for lack background helped students of a better word) may still experience comprehend information about SARS fear, but are able to act despite that effectively, which, in turn, lowered fear. Others may be stunned by the anxiety and changed behaviors (Xie upcoming crisis, act irrationally, or 2010). misjudge the scale of the crisis. There are two qualities that influence how an individual reacts to a crisis: "Researchers found that roughly 20 how much self-control they have and percent of respondents affected by how secure they feel in general. Those SARS suffered from symptoms such as with higher self-control are less likely irritability and headaches, 70 percent to panic during a crisis. In addition, of whom were women:' those who have a stronger sense of security react better during a crisis. Different events in one's life affect how secure one feels in general, which plays Implications a role in how secure one feels in a crisis As crises affect different groups of situation. people differently, government officials Background Knowledge' and other actors should realize that communication during a crisis needs Generally, those with more background to be tailored to different groups to knowledge respond to a crisis more have the greatest effect. Some groups, objectively. As groups in society such as the elderly, very young, or those gain more knowledge about a crisis with little background knowledge, situation, they are more likely to need a different style and substance act rationally with regard to risk. of communication than other groups. Specifically and unsurprisingly, those Communication during a crisis is who engage professionally or otherwise not a one size fits all proposition; in fields related to crisis management crisis managers need to recognize are the most likely to respond to a crisis the differences of how a crisis will be situation effectively (Xie and Zheng perceived and tailor their strategies as 2003). necessary. In a study of the effect of SARS on anxiety at work and home, researchers surveyed college students THE GEORGETOWN PUBLIC POLICY REVIEW I 81 II. PERCEPTION OF CRISES at a chemical plant contaminated the IN DIFFERENT CONTEXTS water supply of the north-eastern Chinese city of Harbin and endangered Public perception of crises varies millions of people in the city. The among different groups because of Harbin municipal government issued individual characteristics, natural three announcements one after or acquired. Public perception of another, with the second and third crises, and hence the effect of crisis announcements contradicting the first. communication, also varies in In the first announcements during accordance with some contextual the crisis, the local government lied factors, which often relate to the status and announced that water supplies of the relationship between the public would be cut off for 4 days due to and actors, and the characteristics of a "maintenance." crisis itself. Many citizens did not trust such a Degree of Trust Towards Actors vague statement. Citizens began to A key principle of crisis purchase bottled water and other communication is trust. As trust supplies in bulk as well as fleeing in the government or other actors Harbin in panic. As the government increases, fear of an upcoming crisis began to release statements explaining likely decreases. The reverse also holds: the truth of the situation, as well as those who have little to no trust in preparing other emergency measures, government or other official actors will trust between the public and likely be more fearful of a given crisis. government began to grow and general fear fell (Xinhua 2005). One clear example of how lack of trust in actors exacerbated a crisis Mayor Rudy Guiliani's performance is the case of water contamination during 9111 is an example of how after explosions at chemical plants in trust in government actors can Harbin, China in 2005. An explosion mitigate a crisis situation. During press conferences, Mayor Guiliani arranged for experts to be present to disseminate information instead of "When it came to political matters doing so himself. When it came to or leadership, Mayor Guiliani skillfully political matters or leadership, Mayor used his role as Mayor to relieve Guiliani skillfully used his role as public anxiety, but left matters Mayor to relieve public anxiety, but left requiring detailed knowledge to matters requiring detailed knowledge relevant experts. When faced with to relevant experts. When faced with questions that had no clear answers, questions that had no clear answers, he admitted his ignorance instead of he admitted his ignorance instead of providing information that might have providing information that might have turned out to be false later (Guiliani turned out to be false later." 2010). 82 I MOU & HARRIS One example can be found during Certainty of Crisis the large scale SARS epidemic in As people grow less and less certain of Guangzhou, China, among other a crisis (or some aspect thereof), the places, during 2003. Mass media fear of what it might mean grows. Two avoided the topic, leading to an examples include AIDS and typhoons information vacuum. Unofficial or hurricanes. Though AIDS lacks an channels of communication took hold, effective cure today, many people are and rumors spread throughout text aware of its transmission and cause, message, the Internet, and word of leading to a generally reduced fear of mouth. Information, many of it from AIDS. The situation is similar for the unidentified sources, was replicated approach of a typhoon or hurricane; constantly via text message, which though it's impossible to prevent a eventually formed a largely avoidable hurricane from affecting a certain area, panic (Qin 2008). weather forecasters often know its likely path and strength. Society is generally able to plan appropriately. Appropriate "However, if the crisis (or certain and accurate information makes aspects of it) is uncertain, fear tends aspects of a crisis situation concrete, to increase. If information is hard to which in turn lowers public fear. come by or lacks authenticity, society However, if the crisis (or certain will seek out any information it can, aspects of it) is uncertain, fear tends even if it's only rumor." to increase. If information is hard to come by or lacks authenticity, society will seek out any information it can, Distance to Crisis even if it's only rumor. Rumors People have less fear of a crisis that will tend to be unofficial and unproven not affect them. Generally, it is only interpretations of the events at hand once someone is directly affected by the transmitted through both public and crisis that will they realize the danger to non-public channels (Lin and Li 2003). themselves or their property. Government actors may not reveal the truth as they may not know it or One brief example can be found in in an effort to avoid damaging their the SARS epidemic above. When the own reputation. Without accurate virus had not spread to Chongqing, information, it is difficult to make for example, people failed to properly correct judgments. The public will prepare for the virus, as they only tend to overreact, not only because feared that that the virus might be they are responding to incomplete brought in from outside areas. Once information but also because the cases were found in the area, however, information itself is uncertain. Rumors people began to take direct action to lack the authenticity that government prevent the spread of the disease (Qin communication might have. 2008). THE GEORGETOWN PUBLIC POLICY REVIEW I 83 III. THE EFFECT OF crisis, acting without preparation, or UNDER- OR OVERREACTION taking no action (or acting passively) TO CRISIS before or during the crisis situation. Depending on how the public perceives Why do people under-react? First, a crisis, two results are likely: under- people under-react because they reaction and overreaction. There are lack information about the crisis. degrees of reaction, however: people Sometimes this is for relatively benign may overreact a little or quite a lot. reasons: the message may not be The impact of the crisis often extends accessible in rural or remote areas (by past its direct losses. One can imagine lack of radio, Internet, or electricity), a crisis as a rock dropped into calm or media and government actors water; the event itself creates ripples themselves may underestimate the that continue to disturb the water.' In severity of the crisis and not give it general, if the public overreacts to a the proper attention. However, media crisis, there is larger chance of harm to and the government may also be afraid both themselves and to society at large. of damage to their own reputation However, if the public under-reacts to and understate (or in some cases, not a crisis, they will likely be unprepared broadcast whatsoever) any information in the event they are actually hit by the about the crisis. Additionally, many crisis, thereby increasing the amount groups in society may care little about of harm past what would be expected the crisis to begin with and simply (Zou and Peng 2009). ignore the situation (Qin 2008). Under- reaction Secondly, people may under-react because the information they have Generally, under-reaction is a social is (or is viewed to be ) irrelevant or phenomenon-dismissing the inaccurate. If leaders in society are potential danger of the crisis begets viewed as paying little to no attention further dismissal. Under-reaction to to a developing situation, the public a crisis usually involves the following: will pay little attention as well. Also, paying little to no attention to the society may not know that the crisis is important. Attention in general is limited, so putting the information "In general, if the public overreacts to out in the public domain is often a crisis, there is larger chance of harm not enough to inform decision to both themselves and to society at large. However, if the public under- 1 This is in fact Paul Slovic's ripple theory-the size of the ripples depend on the nature of reacts to a crisis, they will likely be the risk itself, how the public obtains relevant unprepared in the event they are information, and how the public interprets that information. The damage directly caused by a actually hit by the crisis, thereby crisis situation might be relatively small, but if increasing the amount of harm past the public greatly overreacts, the secondary ef- fects (i.e., large ripples) might cause much more what wou Id be expected." damage than there would be otherwise. 841 MOU & HARRIS making by the public. The crisis "...the amount of information is key needs to be publicized so that the as well: too much information on the public understands the gravity of the crisis, especially from multiple sources, situation. Even if the information is may leave people at a loss for what understood to be important, providing appropriate actions to take." inaccurate or incomplete information may lessen its effects, leading to supplies available to individuals and under-reaction. Finally, the amount of families, and create new sources of information is key as well: too much stress and panic for the community information on the crisis, especially (Yang 2003). from multiple sources, may leave There are two main reasons for people at a loss for what appropriate overreaction. The first comes from the actions to take. nature of the crisis itself; the sudden Overreaction and large change in the environment Overreaction leads to other unwanted causes fear, which is reflected and enhanced by the society as people results. During the 2003 SARS outbreak, some people reacted by imagine worst-case scenarios. A crisis washing their hands or sterilizing scenario leads people to be concerned themselves countless times a day to about themselves and their kin to prevent infection. For some, this the exclusion of others in the society overuse of sterilizing products resulted as well, leading to overreaction in in damage to their respiratory systems preparing for oneself when as a whole, (Gu 2003). society may already be adequately prepared (Qin 2008). Overreaction leads to individual and group effects. Over-preparation for a Implications crisis might cause longer and deeper When publics under-react or overreact stress for individuals, heightening the to a crisis, it can be for a number of risk for protracted health conditions. In reasons. Some may be mitigated and a group setting, overreaction tends to some may be natural. These reactions lead to panic situations, which increases may be harmful and may cause damage strain on social institutions. For outside of the effects of the crisis example, false earthquake predictions situation itself. Crisis managers should in China have led to lowered deposits work to develop an objective and and increased withdrawals from banks rational view of the crisis in the public as well as increased participation in life as much as possible. insurance plans (Zhang 1996). This is outside of the effects on commerce, the service industry, etc., where a panic situation and over-preparation for crisis situations may hamper crisis prevention and management, lower THE GEORGETOWN PUBLIC POLICY REVIEW I 85 IV. POLICY IMPLICATIONS 4. Different stages of the crisis also AND RECOMMENDATIONS require different approaches in communication (Zhang 2006). In There are four takeaways to consider the lead-up to the crisis, managers in crisis management and public should focus on educating perception. the public with background 1. Consider the public when knowledge of the crisis to help providing information about them prepare for the event. As the the crisis. Different groups crisis strikes, the message should have different needs and will switch to current and accurate comprehend the crisis in different information about the crisis, while fashions. Communication should keeping the points outlined above be tailored to specific groups in mind. to help people make rational Public perception of and response decisions about their actions. to a crisis have great implications for 2. When possible, use two-way the success of crisis management. communication methods Government actors and crisis managers between crisis managers and the should consider different methods of public. Not only does this ensure communication in crisis situation to that the public has accurately approach different groups, which will comprehended the scale and lead to better results. effects of the crisis, but it also prevents inaccurate information from spreading. 3. During a crisis different groups will be affected in different ways by the crisis. While communication needs to be tailored to these groups as mentioned above, management policies need to follow suit as well. "Public perception of and response to a crisis have great implications for the success of crisis management. Government actors and crisis managers should consider different methods of communication in crisis situation to approach different groups, which will lead to better results:' 86 I MOU & HARRIS Zhang, Zhiguang. Social Psychology. Beijing: V. REFERENCES People's Education Press. 1996. Giuliani, Rudolf. "When I was the Mayor of New Zou, Beibei, and Zongchao Pengo"Investigation York on September 11." Sino Times. Accessed of the Public's Perception of the Big Flu." Last May 23, 2010. http://www.sinotimes.com1298/ modified May 7,2009. http://theory.people. niuyue911.htm. com.cn/GBI 491541 49156/9255652.html Gu, Haibing. 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