Economics, ultimately, is about making choices. We all recognize that fact when we measure the span of our desires against the limit of our paychecks. And while economic decision making can be difficult for individuals, it is far more so at the global level, where needs are much greater and resources are stretched paper thin.
Many of the world's most pressing problems could be mitigated if given more resources, certainly, but allocating funds among them is excruciatingly difficult and often it is done without the benefit of economic analysis. What will the solution truly cost? What are the real benefits? Which solution would yield the greatest benefit at the least cost? Economic analysis of this sort can help apportion scarce resources among a wide range of problems, leading to maximum potential benefit.
In May 2004, University of Chicago macroeconomist Nancy Stokey flew to Denmark to join other scholars in the Copenhagen Consensus, an effort to bring precisely this kind of analysis to bear on critical international problems. Stokey, a visiting scholar at the Minneapolis Fed, met with seven other eminent economists to establish a set of global priorities—or more precisely, to prioritize solutions to serious world problems.
It was, according to Stokey, a good opportunity "to step back and ask, what are the most urgent problems? What are the things that we should really be focusing attention on? It really does make sense to compare them with each other and say, where are the benefits greatest?"
The Consensus was the brainchild of Bjorn Lomborg, a Danish economist and director of the Environmental Assessment Institute (EAI), which co-sponsored the event with The Economist magazine. Funding came from the Tuborg Foundation, the Carlsberg Bequest, the Danish Ministry of Environment and the Sasakawa Peace Foundation. And it was launched with the idea that careful economic analysis could lead to beneficial global outcomes.
"It will give us the information we need to make our choices more rationally," wrote Lomborg, in advance of the May 2004 meeting. "Most importantly, it will place debate over the prioritization of our resources firmly on the agenda, making it possible not just to do some good in the world, but to do the best that we possibly can."
In autumn 2003, the panel of economists, among them several Nobel laureates, had narrowed a list of 32 global problems to what they considered the 10 most serious challenges. Experts in those 10 fields then prepared papers that reviewed each challenge and proposed solutions to it. The process resulted in 38 possible solutions to be evaluated by the panel of economists on the basis of the costs incurred and benefits conferred.
Over five long days in May, the economists debated the proposed solutions and developed a prioritized list. Four proposals were deemed to have very good benefit/cost ratios, another five had good ratings, eight more were rated fair or bad (see table). Twenty-one proposals were eliminated from consideration because they lacked sufficient detail to evaluate. Top on the list: efforts to prevent and treat HIV/AIDS, provide micronutrients, liberalize trade and control malaria. At the bottom: climate control.
In a recent conversation with The Region, Stokey described the process as intellectually stimulating and extremely productive, despite a few limitations. Ultimately, she noted, it was an important effort to highlight promising solutions to pressing global problems. And it demonstrated the crucial contribution economics can make in helping policymakers decide how to allocate scarce resources.
"What economists brought to the table was how to, in a sense, do the math," she noted. "The whole enterprise was originally framed in terms of the question, if you had $50 billion to spend, what would be the best way to use it? Economists know how to do cost-benefit analysis." For the panel, then, it was a matter of carefully reviewing each proposal, judging its feasibility, evaluating its likely costs and benefits, and comparing those ratios among different projects.
But the exercise was not simplistic data-crunching and blind adherence to numerical outcomes, said Stokey. The top priority chosen by the experts was the prevention and treatment of HIV/AIDS. About 28 million cases could be prevented by 2010, at a cost of $27 billion, estimated the experts, resulting in benefits of about $1 trillion. The benefit/cost ratio was thus nearly 40—high indeed, but some projects given lesser priority had higher ratios still.
Specifically, efforts to promote free trade would have a benefit/cost ratio well beyond 40, calculated the economists, with very low economic costs and annual benefits as high as $2.4 trillion. Nonetheless, the panel put free trade third on the list, behind both HIV/AIDS prevention and programs to provide micronutrients to prevent diseases caused by zinc, iron, iodine and vitamin A deficiencies. (A series of initiatives to control and treat malaria was the fourth proposal given a "very good" rating.)
"It had to do with the perception among the panel of experts that AIDS is a very urgent problem," explained Stokey. "If something isn't done fairly quickly, in the next five to 10 years, there are countries that could more or less collapse from the epidemic." With trade, on the other hand, while the "potential gains are huge ... there's not going to be a disaster if it's put off for a while."
The broad view
In that sense, the economists approached their task not as specialists but with a broader outlook. "Some people had particular expertise, of course," noted Stokey. "Jagdish Bhagwati, for instance, is an expert in international trade, so he had particular knowledge in that area. Bob Fogel has done a lot of work on nutrition, so he had that special expertise."
Stokey herself made notable contributions in evaluating proposals on dealing with financial instability. "It ended up being one of those areas where it was not so clear what anyone from the outside could do," said Stokey. "You can certainly see that financial crises are very costly, and the author of the paper on the topic had a novel proposal to deal with them, but in the end we didn't feel there was enough evidence to say this would be a good solution."
An issue with many potential mechanisms for dealing with financial instability is the moral hazard problem they create. Governments often rescue banks and other financial institutions that are failing for fear that their failure will spill over into the broader economy. But bailouts create the perception that these institutions are too big to fail and encourage excessive risk taking. Such problems are serious, Stokey said. The expert panel did not discuss them explicitly, since they concluded that the proposal under consideration was simply too speculative to endorse. And while Stokey acknowledged that she had a strong role in evaluating that proposal, "I would say that for the most part, we were generalists."
The cliché is that economists rarely agree with one another, but in Copenhagen reaching consensus was not that difficult. Each economist produced an individual ranking of the proposals, as well as a commentary (see excerpts from Stokey's), and their rankings were quite similar. As The Economist put it, "Despite clear differences of intellectual approach and of ideological tendency, the group did indeed arrive at a broad consensus."
Which is not to say that the deliberations—closed to the media and public—were dull. "It was enormously interesting to be in the same room with this group for a whole week talking about these 10 topics," said Stokey. "Intellectually, it was a very stimulating week. It's too bad there wasn't a fly on the wall writing up an account of it because there were some very lively discussions."
Climate change was a particularly controversial topic, though the panelists disagreed with external critics rather than among themselves. Because EAI director Lomborg has taken a high-profile position in opposition to the Kyoto proposal on global warming, Kyoto supporters were skeptical that the Copenhagen panel would be objective in its evaluation of proposals to address climate change. And as it turned out, the panel did give a "poor" rating to the climate change proposals, but Stokey says Lomborg's opinions had nothing to do with it.
"We ranked that proposal rock bottom. Why was that? It's not because we didn't think climate change is an important problem, but we did not like the proposals that were put in front of us. We thought they were too extreme." Stokey said the analysis offered by that particular issue expert presented "an alarmist view" by, among other things, making no allowance for technological progress that could allow the world to cope more effectively with CO2 emissions and their effects on the climate. "There were a lot of people on the panel, myself included, who think climate change is an important problem, not something that ought to be ignored. But in the end, we ranked solutions, not problems."
On the other hand, Stokey agrees with critics of the panel who say that women's issues deserved more attention than Consensus 2004 gave them. "If someone does this again, it would be worthwhile to put that as one of the challenges," she said. "Women's issues are connected with education, malnutrition and many other areas that need addressing. I think it would be a good topic to put on the list."
Assessing the Consensus
Despite such oversights, the Consensus was a success, said Stokey. "The purpose of the whole enterprise was to focus attention on just what are the biggest problems the world faces, what are the things that we could actually do something about," she noted. It's not that the world is entirely neglecting such issues—money is being spent to address hunger, HIV/AIDS, lack of potable water, for instance. "But a lot of money is probably spent badly," she said.
And other problems have proven resistant to solution, regardless of well-intentioned, well-funded efforts. "Poor governance, financial instability and civil war are important problems, but at present there are few clear, concrete, convincing suggestions for how to deal with them," Stokey wrote in her individual Copenhagen commentary.
One member of the Copenhagen panel, Nobel Laureate Douglass North, has shown in his work that economic analysis is often overshadowed by political concerns. Stokey points out that this panel might help swing the balance of debate toward more rational discourse. "The main purpose was just to shine a light, to focus people's attention on these problems. Insofar as it gets people thinking and talking, then it's been a success," she observed. "And I suppose that one benefit of getting people thinking about these problems is to help overcome the political obstacles to addressing them. If there's more public awareness, maybe there's more public pressure."
For more on the Consensus:
See The Region interview with Nancy Stokey.