Nobel Prize teaches Indonesia how to improve economic and public policy research – academia

Ana Noveria (The Jakarta Post)

Bandung ●
Wed, November 17, 2021

Nobel Prize, Economy, Indonesia, Politics, Research, Business, Industry, Society, School, COVID-19, Data
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This year’s Nobel Prize in Economics was awarded to David Card, Joshua Angrist and Guido Imbens. They shared the prize for their new knowledge in empirical research in economics. Card received the award for his contribution to labor economics, while Angrist and Imbens for their contribution to causal methods in economic and social policy analysis.

The three economists have provided us with new understandings of the cause and effect of economic and social policies using real-world events as natural experiences.

Previously, in 2014, French economist Jean Tirole won the Nobel Prize in Economics for providing regulators with a method of controlling sectors dominated by large companies using game theory. Tirole advised that market regulations be carefully designed for specific industrial situations, instead of imposing general regulations such as price caps.

Industries dominated by a few large firms will produce undesirable outcomes such as high prices and unproductive firms trying to limit competition. His work has advised how governments should regulate monopolies and how to deal with mergers or cartels. Tirole’s work to promote competition among large companies and protect society in general becomes even more relevant today in Indonesia in the age of Industry 4.0, where many large companies are conglomerates and affiliates.

Manuel d’Angrist, co-written with Pisckhe titled The most harmless econometrics has been essential, if not compulsory, reading for empirical researchers. The book deals with empirical studies that have revolutionized the field of econometrics, moving from very complex mathematical methods to more applied ones. The use of randomized trials, which resemble clinical trials in medical research, provides an ideal benchmark for revealing the most interesting causal relationship questions, for example evaluating the effectiveness of medical treatment resulted in huge welfare gains.

However, unlike the natural sciences, many important questions in the social sciences cannot be addressed using randomized controlled experiments due to ethical, financial and practical issues. For questions such as “What is the impact of school closures on student learning and academic performance?” Or “what is the effect of an additional year of compulsory schooling on wages?”

Since experiments are absent, researchers must rely on observational data to answer these types of questions. However, with observational data, the underlying cause of the correlation remains unclear because the correlation does not imply causation. If we observe that the minimum wage and unemployment are correlated, the question remains whether it is because the minimum wage is at the origin of unemployment.

Different estimates obtained from a randomized training program and using observational data from the same program led the winners to innovate in the design-based approach. In response to previous findings, in the late 1980s, economists turned to using data generated by natural experiments. In the mid-1990s, Angrist and Imbens made influential contributions to address the challenge of estimating the effects of policies. They demonstrated that in a realistic setting with imperfect conformity of individuals to the assignment generated by natural experiments, it was possible to estimate the “local average treatment effect”.

They combined the framework of instrumental economic variables with a potential outcome approach for causal inference commonly used in statistics. One of Angrist’s influential contributions is the return to education, or the effect of schooling on income. In their 1991 article, Angrist and Krueger estimated the effect of years of schooling on earnings using the Compulsory School Leaving Age Act in the United States, which states that students can drop out of school as soon as possible. that they reach the age of 16.

The individual’s time of birth, i.e. the trimester of birth, was used as an instrument to isolate other factors that might have blurred the results, such as an individual’s ability or his family history. After analyzing a large cohort, Angrist and Krueger found that the effect of education on earnings was larger than previously estimated.

Currently in Indonesia there is research on policy evaluations carried out by government, local and international institutions. However, studies carried out by university researchers are still limited due to the constraints of access to administrative data.

The COVID-19 pandemic has impacted all aspects of life, including health, economy, society and education. The impact can be measured more fully using the empirical methods above using administrative data. For example, in addition to assessing the impact of COVID-19 on income and the impact of social support, we can assess the impact of school closings on student learning and the differential effects for youth. children and older children.

In most developed countries, economic and statistical data collected by the government is freely available to researchers so that they can be used to generate research and policy recommendations that are beneficial to society. Statistical data collected by the government should be available for research purposes, data such as employment, education / schooling, health coverage and income can provide many opportunities for policy evaluation.

Institutional changes, nature and policy changes can be used as natural or quasi-experimental experiments to establish “counterfactual” parameters. In general, foreign institutions with less financial constraints can access the data, if they do not conduct experiments. However, university researchers are financially constrained, so we only rely on small surveys.

As researchers, we hope that the government can provide access to administrative data for research purposes so that we can conduct studies, the results of which are policy recommendations to improve the results of society.


The writer is a professor in the School of Business and Management, Bandung Institute of Technology. These views are his.

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