Results and submissions : REF 2021

Improving productivity through better management practices

Submitting institution: The London School of Economics and Political Science
Unit of assessment: 16 - Economics and Econometrics
Summary impact type: Economic
Is this case study continued from a case study submitted in 2014?: No

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1. Summary of the impact

Research by Professor John Van Reenen and colleagues has shown the very large effect of management on firm and national performance and developed a new methodology for quantifying management practices across diverse organisations, industries, and countries. Data generated using this methodology have been used to examine the impact and determinants of management quality and provide recommendations for how policymakers, business leaders, and public sector managers can improve it. The research has particularly informed UK policy debate around productivity, resulting in the launch of business- and government-led initiatives promoting effective management practices to boost productivity.

2. Underpinning research

There is a long history of research on the causes and implications of variations in productivity across firms. Differences in management practices are now widely recognised as having a central role in these productivity differences. Until recently, however, empirical economists had largely ignored management as a factor, in part because they lacked any robust way to quantify basic aspects of management practices. Research by John Van Reenen and colleagues has delivered a new method of consistently measuring management practices across firms, industries, and countries, and new insights into their links to productivity.

Developing a new measurement of managerial capabilities: one of the most significant contributions of Van Reenen’s work is its provision of an entirely new way to empirically measure managerial capabilities. Van Reenen and colleagues have subsequently used data generated using this method to help explain the large and persistent differences in total factor productivity (TFP) across firms and countries. Their work has particularly improved understanding of the role of management practices in that heterogeneity.

The new methodology was first established in a paper co-authored with Nick Bloom (then at LSE, now Stanford), based on work done at LSE between 2003 and 2007 [1]. This presented data generated through an innovative survey tool - the World Management Survey (WMS) - to collect management practice information from hundreds of medium-sized firms in the USA, UK, and France. The WMS was established by Van Reenen and Bloom in 2004. It provided the first robust evidence on the dispersion of management quality across firms and countries and, crucially, on the relationship between management practices and productivity. The measures of managerial practice it produced were shown to be strongly associated with firm-level productivity, profitability, Tobin’s Q (the relationship between the market valuation and intrinsic value of the firm), and firm survival. The unique WMS methodology (described extensively in **[1]**) allows interviewers to obtain information about key management practices used by organisations across different sectors, and to evaluate and score these from 1 (“worst”) to 5 (“best” practice). This scoring builds up a picture of management practices in several dimensions likely to improve a firm’s productivity, particularly around monitoring, targets, and incentives.

WMS data insights: the WMS is now a major international research initiative which has, to date, supported more than 20,200 interviews in over 35 countries. Its focus has extended from medium-sized manufacturing firms to include (among others) hospitals, retail stores, and schools. Data generated using the WMS methodology have yielded vital new insights into the determinants of variation in management practices and the effects of that variation on the productivity of firms. Between 2010 and 2014, Van Reenen and colleagues reviewed the empirical and theoretical findings generated to date by the WMS [2]. This confirmed a very wide dispersion of management quality in all industries and countries. It also confirmed a significant link between management practices and productivity, suggesting that between one quarter and one third of cross-country and within-country TFP gaps could be attributed to management practices. This was confirmed in research with the US Census Bureau, based on a large-scale mandatory survey in 2010 and 2015 of management practices in 35,000 manufacturing plants in the USA [4]. A huge dispersion of management practices was observed across plants, 40% of which variation was within the same firm. Management practices were shown to account for more than 20% of total variation in productivity, giving them an influence similar to that of R&D and human capital [4].

As well as demonstrating their independent importance to productivity, the research has shown that management practices affect the outcomes of investment in other areas intended to improve a firm’s TFP. LSE research between 2004 and 2012 used the WMS methodology to explore the US productivity growth acceleration in sectors making intensive use of information technologies (IT). US multinationals were shown to obtain higher productivity from IT than non-US multinationals; organisations taken over by US (but not by non-US) multinationals also increased the productivity of their IT. This, the researchers suggested, was due primarily to the better “people management” practices in US compared with European firms, implying that IT investments will produce disappointing results unless accompanied by improvements in management. The research team calculated in [5] that around half of the faster productivity growth between the USA and EU in the decade after the mid-1990s could be accounted for by managerial differences.

Understanding the policy implications of variation in management practice: crucially, variation in the quality of management practices has been shown to be systematically related to structural characteristics that can be influenced by policy interventions. The first of these is product market competition. This improves management both through a Darwinian selection effect driving out badly managed firms, and by incentivising incumbent managers to improve their performance. Van Reenen and colleagues have demonstrated the importance of competition to performance in both private and public sector organisations. Research between 2006 and 2015, for example, showed the strong incentive effects of competition on management quality - and subsequent health outcomes for patients - in hospitals [3]. It was shown that adding a rival hospital increases management quality by 0.4 standard deviations and increases survival rates from emergency heart attacks by 9.7%.

WMS data also suggests that firms owned and managed by second or later generation descendants of the founders (especially eldest sons) tend to have the worst management scores. In [2], the researchers therefore recommended avoiding tax incentives to protect family firms. This is in contrast to the practice, common among governments around the world (including the UK), of providing tax subsidies for family firms. This, the LSE research suggests, distorts the tax regime, increases inequality, and in fact reduces productivity. [2] also recommended reducing barriers to the market for advice, noting that poor information is a factor in inhibiting the spread of better management practices. The WMS data reveals that many good managers underestimate their managerial quality whereas many poor managers overestimate it, illustrating the importance of performing “diagnostics” to evaluate the performance and practices of firms [2].

Author contributions: findings are described in a series of papers co-authored with Bloom and Sadun while Van Reenen was Director of the LSE Centre for Economic Performance (CEP). The exception is research published in [4], some of which was conducted at LSE between 2010 and 2016 and some at MIT between 2016 and 2018. Sadun (now Harvard) and Bloom (now Stanford) were Van Reenen’s PhD students.

4. Details of the impact

The WMS has generated robust, large-scale data about management practices across firms, industries, and countries. Those data have supported the first empirical analyses of the relationship between differences in management practices and the marked heterogeneity of firm productivity. Insights of the body of work by Van Reenen and colleagues have important implications both for policymakers and for private and public sector organisations. Impacts described here relate particularly to the very significant contribution of the research to debate about the so-called UK “productivity puzzle” and its subsequent influence on the Industrial Strategy, which focuses on the promotion of better management practices through initiatives like the Business Basic Programme. Associated impacts are described on efforts to increase UK productivity through new, business-led initiatives.

Underpinning debate on the UK “productivity puzzle”: the research has played a central role in shaping policy narrative about the UK “productivity puzzle”, and in establishing management practices as a key focus for policy improvement. The sharp slowdown in productivity growth in the UK since the Great Recession has been the subject of growing policy debate in recent years. Van Reenen’s research is central to the now commonly-accepted policy narrative that has emerged to identify causes and solutions to this puzzle. Its influence is evident in speeches, reports and policy documents, including a 2017 speech by Andy Haldane, Chief Economist of the Bank of England (BoE) [A]. Haldane affirms in a testimonial that work led by Van Reenen has informed understanding in the BoE, including of structural constraints on the supply side of the economy. Of particular note is the fact that: “ Van Reenen’s work on the World Management Survey was the first credible attempt to measure and quantify core management practices in a consistent way across industries and countries. The data clearly shows that there is a management problem in the UK, in the sense that on average firms lag behind productivity leaders” [B]. Use of the research in both mainstream media and business blog discussions further demonstrates its centrality to debate on the “productivity paradox” [C].

Establishing management practices as a key focus of policy and practice: beyond improving understanding of the link between management practices and productivity, the research has made clear that at least some of the structural catalysts for poor management practices can - and should - be influenced by policy interventions. Several major policy initiatives reflect and respond to this, including the Business Productivity Review conducted in 2018-19 by the Department for Business, Energy & Industrial Strategy (BEIS). This establishes management quality as a key policy focus to address low productivity in the UK, in line with recommendations made by Van Reenen and Bloom on the basis of WMS data [D]. The Productivity Review highlights the importance of “ enabling businesses to understand their performance” ( [E], p. 22), since many managers misperceive their own abilities; again, this echoes findings reported in [2]. The research has also had important framing impacts on the UK Industrial Strategy, including by demonstrating the need for improvement in UK management practices and by providing a new and consistent way to measure and quantify these. Its significance in this context is confirmed by Haldane: “ on the Industrial Strategy Council (that I Chair), perhaps the key issue is why UK productivity is low and what can be done to raise it, in order to boost living standards. The work of Professor John Van Reenen and his former students such as Nick Bloom and Raffaella Sadun has been critical here’ [B].

As well as government policy interventions, the research recommends that industry bodies and firms themselves focus on improving management practices to enhance productivity. These messages have been widely embraced in both the private and the public sectors. Recent publications by the Confederation of British Industry (CBI), for example, identify management skills as a key area for improvement for British businesses [F]. According to CBI Chief Economist, Rain Newton-Smith: “ Van Reenen’s work on measuring and understanding the drivers of management practices is essential reading for us […] We have used this work in many of our initiatives […] and more recently in our work on regional growth as well as the diffusion of innovation” [G].

Impacts on the diffusion of management best practices: the focus on management quality informed by Van Reenen’s work has informed the creation of business- and government-led initiatives aimed at increasing the diffusion of best practices to boost firm-level productivity. These include a series of measures announced in the Industrial Strategy in 2017, including the launch of the Business Basic Programme (BBP) and support for the Be The Business (BTB) initiative [H].

The BBP was launched in 2018 to test innovative ways of encouraging small and medium enterprises (SMEs) to adopt existing technologies and management practices to improve their productivity. The programme provides grants to businesses, academia, trade bodies, and other parties to support the development of ideas and design (proof of concept stage) and the delivery of impact evaluations (trial stage). Its first two funding rounds in June 2018 and January 2019 awarded GBP4 million to 26 evaluation projects focused on technology and management best practices adoption [I]. The first funded projects will report impact in 2021 (the original timeline was adapted to account for delays due to the COVID-19 crisis.)

BTB launched in 2017; it supports businesses to improve their management practices by providing access to interactive digital benchmarking tools, peer-to-peer mentoring and structured executive leadership and management training. It was created following the publication of a 2015 review by the Productivity Commission, which notes that: “ the WMS has finally allowed for robust analysis of the links between management practice and business performance” and concludes that “ making up the management practice gap would go some way to making up the productivity gap” [J]. The report further argues that “ getting objective benchmarks against which to compare business practice and performance is critical to driving improvement”, relying on “ evidence from the WMS [showing] that managers’ intuitive evaluations of their own business practice are often wide of the mark” [J]. BTB has recently extended its support to business through the publication of online advice and guidance helping SMEs adapt their business practices, prepare for recovery, and build resilience in the context of the COVID-19 crisis.

International impacts: although this case study focuses on domestic impacts, the WMS and associated research has also had significant impacts on international policy and industry understanding. These are observed in a 2017 World Bank report, which notes that: “ the WMS initiated by Bloom and Van Reenen…has permitted a quantum leap in the comparative quantitative analysis of management practices and their implications for productivity and innovation” [K]. The international use of WMS data is further corroborated by Haldane, who writes: “ I am particularly pleased that in his most recent work [Van Reenen] has forged partnerships with statistical agencies around the world (such as our own ONS). This will help management data become part of the data infrastructure that we can use as policymakers to inform policy decisions” [B].

By raising awareness of the role of management practices on firm productivity and growth worldwide, the research has influenced the operations and policies of businesses, governments, and development institutions. WMS data has enabled a host of countries to benchmark the quality of their management practices, including by helping them diagnose weak practices. Industrial policy documents in Australia [L], France [M], and New Zealand [N], for example, have used the data as a diagnostic tool to identify weaknesses in domestic firms’ practices. They cite [1], [2], and [5] to highlight the role of good management in supporting productivity and competitiveness. The WMS methodology has also been used in impact evaluations measuring the effects of improved management practices on firm productivity, notably in India and Kenya. Findings from these evaluations were used by firms offering consulting services and management training. These include businesses such as Accenture and industry bodies such as the African Management Institute, which describes the work by Van Reenen and his co-authors as “ crucial to our practice in making managerial interventions” [O]. In addition, since 2014 WMS results have been referenced in key documents associated with 15 operations projects financed by the World Bank, representing USD2.6 billion in direct International Development Association/International Bank for Reconstruction and Development lending.

These impacts represent significant contributions to understanding of the importance of management practices to performance. The work has underpinned the development of both policy and industry interventions to improve management practices, to enhance productivity, and thereby contribute to improvements in people’s quality of life.

Improving the lives of the ultra-poor

Submitting institution: The London School of Economics and Political Science
Unit of assessment: 16 - Economics and Econometrics
Summary impact type: Societal
Is this case study continued from a case study submitted in 2014?: No

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1. Summary of the impact

Of the 800 million people around the world thought to live on less than USD1.90 per day, almost half are classified as “ultra-poor”. This demographic has proved particularly difficult to reach. Researchers at LSE and UCL led the first evaluation of a “graduation-style” anti-poverty programme targeting the ultra-poor, intended to support a long-term and sustainable move to a more stable state. The work provided robust evidence that this sort of intervention does set the ultra-poor on a sustainable path out of poverty, with positive effects being maintained long-term: 95% of “Targeting the Ultra-Poor” programme participants were shown to achieve “graduation” and to maintain their improved conditions beyond the programme cycle. Today, graduation programmes help some three million ultra-poor households. The research continues to inform programme development and implementation among national governments and national and international NGOs, affecting the strategic spending of millions of dollars, and ultimately helping millions of the world’s poorest people achieve more stable and sustainable futures.

2. Underpinning research

The “ultra-poor” are defined variously as those living at less than half the poverty line for “extreme” poverty, and those who eat below 80% of their energy requirements despite spending at least 80% of their income on food. Working largely in insecure wage labour, with few or no assets and limited skills, they are the most marginalised subset of the extremely poor and cannot participate in modern economic growth. The majority are landless rural women. Traditional poverty alleviation interventions such as food aid, cash transfers, public works programmes, and market-based interventions (including microfinance) often fail to reach this group. Where they do reach them, resource constraints often mean that their benefits last only as long as the intervention itself. Since the 1990s, research organisations and development agencies have exerted considerable effort to understand which interventions might both reach the ultra-poor and provide them with a sustainable route out of poverty. Research described here has significantly advanced these efforts.

Evaluation of a pioneering anti-poverty programme: the key underpinning work consisted of a large-scale, long-term analysis of the causal link between extreme poverty and labour markets. Specifically, it looked at whether the very poorest women could be set on a sustainable path out of poverty through interventions enabling them to take part in labour activities usually confined to their richer counterparts. The analysis was conducted as part of a randomised evaluation of “Targeting the Ultra-Poor” (TUP), a nationwide poverty alleviation programme run in Bangladesh by international development agency BRAC. First run in 2002, TUP pioneered an approach intended to help households “graduate” out of extreme poverty by enabling them to change the work they do. The programme transferred wealth (rather than income alone) by increasing both physical and human capital. This entailed a one-off transfer of livestock assets, which nearly doubled the baseline wealth of participants, alongside a programme of technical and other complementary skills training of equivalent value, delivered over two years. The evaluation was unique in its focus on: a) the effects of relaxing both capital and skills constraints; and b) the long-term effects of TUP.

LSE Professors Oriana Bandiera and Robin Burgess worked with Professor Imran Rasul (UCL) and with colleagues from the University of Bocconi, as well as with BRAC itself, to evaluate the TUP. In work starting in 2007, the research team randomly assigned 40 BRAC branch offices serving 1,309 villages to either treatment or control groups for four years. A participatory wealth ranking was conducted before baseline in both treatment and control villages, followed by the application of TUP eligibility criteria by BRAC offices. This process classified households into four groups: ultra-poor, near-poor, middle-class, and upper-class. Only ultra-poor households (6% of the population) were eligible to participate. The team surveyed all the ultra-poor and near-poor households and a 10% sample of the middle- and upper-class households. Households were re-surveyed four times over the seven-year period from 2007 to 2014, gathering data on hours worked, days worked, and earnings for every labour activity of every household member.

Evaluation results: At baseline, women’s labour activities were shown to be both limited in nature and strongly correlated with poverty. However, women targeted by the TUP programme increased both their total working hours and their earnings, supporting an accumulation of livestock, land and business assets, and a reduction in poverty. Crucially, these effects were shown to accelerate over time. Four years after the initial livestock asset transfer - and two years after direct programme support had ended - the programme produced a 9% increase in per-capita non-durable consumption and a decline of 8.4 percentage points in the number of households living on less than USD1.25 per day. Household cash savings increased nearly nine-fold, the value of household assets more than doubled and the household savings rate increased by 25 percentage points from an initial value of close to zero. The value of land owned by the ultra-poor rose by 220%, the value of productive assets tripled, and beneficiaries became more engaged in credit markets. Importantly, these gains did not come at the expense of non-targeted households in the same communities. Villagers who were already running livestock-rearing businesses were not crowded out and wages for the casual jobs that programme participants had previously occupied increased as the supply of labour to such activities was reduced. Indeed, rather than reducing consumption, expenditure, or savings, the business assets of non-targeted households actually increased, perhaps because beneficiary households shared some of their new resources (or at least now required less support from others). The value of land owned by the upper classes did fall as the value of land owned by the ultra-poor increased, but the drop accounted for only 2% of the value of upper-class owned land.

Results of the evaluation were published in 2017 [1]. This was one of the most extensive and long-term evaluations of any anti-poverty livelihood programme and provided the first sound evidence for the long-term transformative effects of the graduation approach. The research also highlighted a new finding about the nature of poverty, namely that the very poorest are neither unwilling nor unfit to engage in the same jobs as more prosperous women in their communities, but face barriers to accessing stable and productive work.

The results from [1] encouraged a group of partners led by the Consultative Group to Assist the Poor (CGAP) and the Ford Foundation to carry out analyses of 11 pilot replicas of the TUP programme. Published research from these pilots ( Banerjee et al., 2015) has also helped validate graduation interventions. Here, studies of pilots of similar programmes in six different countries (but with much smaller samples and shorter time horizons than the scaled version of the programme evaluated in **[1]**) demonstrated that the approach was effective in contexts other than Bangladesh. Alongside [1] and the work by Banerjee et al., the CGAP “ Status of Graduation Programs 2016” report has also informed impacts described here.

However, the particular and significant contribution of the LSE/UCL work was to show that the positive effects of graduation programmes are sustainable over the longer term and when the programme is taken to scale. This represented a major advance and confirmed that graduation programmes could engineer a transformation in the living standards of the very poorest people by moving them into more productive forms of employment.

Researcher contributions: Oriana Bandiera (LSE), Robin Burgess (LSE), and Imran Rasul (UCL) led the research at every stage, from designing the surveys used through to carrying out analysis and writing up the results. Munshi Sulaiman and Narayan Das (BRAC) supported this work, particularly fielding the different survey waves with the TUP programme team. Selim Gulesci, who started the project as a PhD student at the LSE, coordinated the work by the LSE/UCL and BRAC teams and provided support for data analysis.

4. Details of the impact

In April 2013, World Bank president Jim Yong Kim announced a global target of 2030 to end “extreme poverty”, then defined as living on or below the equivalent of USD1.25 per day (updated in 2015 to USD1.90 per day). Despite considerable progress, almost 800 million people still live below that line. The research outlined here has made a significant contribution to efforts to set these people on a sustainable path out of poverty, primarily via its influence on the decisions of national governments and national and international NGOs to invest in graduation-style anti-poverty programmes. A “State of the Sector” report by the World Bank’s Partnership for Economic Inclusion showed that, in 2018, 99 graduation programmes served 3.1 million households in 43 countries [A]. According to BRAC, by 2020 the graduation approach had been adapted in 114 programmes in 45 countries. The research described here has contributed to the existence of all of these programmes by providing the first robust evidence for the long-term efficacy of the graduation approach.

A new approach to long-term poverty alleviation in the world’s largest NGO

The most obvious and direct impacts of the research have been on strategic planning and investment decisions at BRAC, the world’s largest NGO. BRAC serves a global population of some 138 million people and has an annual expenditure in excess of USD800 million. The research published in [1] has informed the USD20-30 million that BRAC devotes each year to its ultra-poor graduation programme [B]. In Bangladesh, where the original TUP programme ran, BRAC graduated 1.9 million ultra-poor households between 2002 and 2017. In line with the results of the original research, consumption, savings, and asset holdings increased dramatically among participants, 95% of whom achieve “graduation” and maintain their improved conditions beyond the programme cycle [B].

By demonstrating that the TUP approach was effective in the long term, [1] also contributed to decisions by BRAC to reproduce the model in a wide variety of countries. Preliminary research results prompted pilot programmes in Haiti and Pakistan [C] [D] and by 2018 BRAC had established pilots in eight other countries. A 2016-2019 pilot in Uganda, for example, explored methods to tackle extreme poverty among young people. Participant benefits included enhanced knowledge, skills, and resources to improve their own and their families’ health and nutritional status via greater food security, increased financial skills and savings behaviour, and improved capacity to increase their incomes [E].

BRAC also continues to use the methodology to evaluate aspects of its programming. Its Vice-Chair explains: “ the lessons about research design learned alongside LSE from 2007-2014 are still being applied in BRAC’s Research and Evaluation Division” [F]. The research also continues to be used in BRAC’s international advocacy work, including to help secure funds for new TUP programmes and to demonstrate that these are spent effectively [C]. The TUP Senior Director explains: “t he RCT evaluation of BRAC’s graduation programme…has played a large role in lending credibility to BRAC’s advocacy efforts” [G]. The research findings - and the success of BRAC-led programmes informed by them - has also “ tremendously advanced global advocacy for graduation-style programmes” [C], supporting the implementation of interventions to improve the lives of very poor people around the world.

Informing the work of other international humanitarian and development agenciesSome of these wider impacts are achieved through the development and delivery by BRAC of technical assistance for other organisations implementing graduation-style programmes. Its PROPEL Toolkit, published in January 2016, makes extensive use of the research in guidance for those implementing TUP programmes around the world. BRAC also regularly advises and trains governments, humanitarian and development organisations, and UN bodies to adapt and implement the graduation approach. Its Ultra Poor Graduation Initiative, set up in 2013, works in Bangladesh, Egypt, Liberia, the Philippines, Uganda, and Zambia. The expansion of BRAC’s own graduation programming, and promotion of graduation approaches elsewhere, has had knock-on effects on the strategy and operations of anti-poverty organisations around the world. Illustrative examples of these are outlined below.

World Vision International: the research informed an internal review of strategy at World Vision International (WV), a charity devoted to improving the lives of vulnerable children. In 2017, this led WV to make the graduation approach its core model for the period to 2030. According to WV Senior Director of Livelihoods, this change in strategy will inform a budget of some USD300 million and shape operations in 65 countries. He cites [1] as one of two pieces of evidence supporting their new commitment to graduation programmes, explaining that it “ influenced World Vision to adopt graduation because it shows that the positive effects of graduation are sustainable” [H]. This is reiterated in the WV Ultra-Poor Graduation Handbook, which cites [1] in explaining why WV chose the graduation approach [I, p. 13 ]. Its version of the TUP, the Ultra Poor Graduation Model (UPG) is being implemented in Sri Lanka, India, Mongolia, Armenia, and Bangladesh, and is starting to be scaled up in Iraq, South Sudan, Sudan, Rwanda, Ethiopia, Uganda, and Zimbabwe. With BRAC’s support, World Vision plans to implement graduation programmes to improve child wellbeing among vulnerable households in 40 countries [J].

Fonkoze: by 2019, Haitian NGO Fonkoze had graduated more than 6,000 Haitian women out of ultra-poverty through its Chemen Lavi Miyò (CLM) programme, a graduation-style intervention based on the TUP [K]. Fonkoze has also used evidence published in [1] to develop new TUP adaptations for people with disabilities and those with HIV [L], and to advocate for the inclusion of graduation in a new national social protection strategy for Haiti.

The BOMA Project: a collaboration between a US non-profit organisation and Kenyan NGO, the BOMA Project helps women in Kenya to lift themselves out of extreme poverty. Its CEO explains that the BOMA Project uses the research in various ways, including to secure donor funding and as an advocacy tool in work with African governments: “The research in [1] can help make the case to government ministries that the most effective way to structure their existing interventions is using the graduation approach” [M]. The Project further uses the work “ as evidence of a successful model upon which to base its own programmes” as it expands from Kenya into countries such as Northern Uganda, Somalia, and Tanzania [M].

Trickle Up: international development agency Trickle Up has piloted adaptations of the BRAC graduation programme to break the intergenerational cycle of poverty, and to improve the lives of indigenous people and people with disabilities. Its Director of Monitoring, Evaluation and Research explains that the LSE research “ adds to the body of evidence for graduation which informs Trickle Up’s budget of approximately USD5 million and its work in 10 countries” [N]. Examples in Trickle Up’s 2019 Annual Report include the Empowering Women and Youth through Graduation and Financial Inclusion project, which works in Bangladesh, Mexico, and Vietnam. This is expected to directly benefit 23,000 women and young people by 2021, with impacts on 115,000 people living in extreme poverty.

United Nations High Commissioner for Refugees (UNHCR): UNHCR, which serves 33.9 million displaced people globally, has adapted the TUP to support work with refugees. Since 2013, its field teams and partners (with support from Trickle Up) have implemented the graduation approach in six countries, with widely positive outcomes. In Costa Rica, for example, where the programme was implemented from 2014-2017, unemployment rates among participants decreased from 36% to 4%, while self-employment rates increased from 24% to 59%. As many as 79% of participating households reached a monthly income equal or greater than the national minimum wage upon graduation [O]. A new initiative led by the UNHCR Poverty Alleviation Coalition plans to scale up the graduation approach to reach half a million refugee and host-community households in 35 countries from 2020 to 2025 [P].

Supporting the use of graduation approaches by national governmentsNational governments now also regularly seek to incorporate the graduation approach into their social protection and poverty alleviation policies and programmes. Many governments work with NGOs to develop context-specific approaches to alleviating poverty and BRAC has provided technical assistance and implementation support to several countries; it credits the research published in [1] with helping to secure these collaborations. Significant examples include a long-term contract with the Government of Kenya to help the International Fund for Agricultural Development and the Kenyan Ministry of Finance to implement a graduation programme, and a multi-year implementation programme in the Philippines, funded by the Asian Development Bank [G].

The Government of Pakistan has also used the BRAC TUP programme to enhance social protection, notably by incorporating some of its most successful features into the Benazir Income Support Program (BISP), a federal unconditional cash transfer programme targeting some of the poorest households in Pakistan. Since 2013, the researchers have worked on this with the Pakistani Ministry of Livestock and with the Pakistan Poverty Alleviation Fund (PPAF), another large NGO. PPAF has now successfully advocated for the implementation of a graduation programme to help households currently within the BISP to move out of it. Its Group Head of Compliance and Quality Assurance confirms that [1] was a key piece of evidence used to advocate for the take-up of the graduation approach by the Government of Pakistan [Q]. In March 2018, that government announced a new agreement between BISP and PPAF to implement the Poverty Graduation strategy across Pakistan. In total, 320,000 households, representing two million individuals, will benefit from this partnership [R].

5. Sources to corroborate the impact

[A] World Bank Partnership for Economic Inclusion (2018), “ 2018 State of the Sector: Synthesis Report”. See Annex 1 for full list of graduation programmes.

[B] BRAC (2018), “ 2018 Annual Report”. Records annual spend of USD27.4 million on Ultra Poor programmes (see p. 31); see p. 20 for analysis of TUP benefits in Bangladesh.

[C] Former Director, Extreme Poverty Programs at BRAC. Transcript of interview conducted 06-07-17.

[D] Former Director, BRAC Research and Evaluation Division (2001-2006) and Deputy Director of BRAC International (2006-2012). Transcript of interview conducted 10-07-17.

[E] For impacts of pilot in Uganda, see: http://bracultrapoorgraduation.org/project/uganda/

[F] Vice Chairperson of BRAC. Transcript of interview conducted 13-07-17.

[G] Director, Targeting the Ultra Poor, BRAC. Transcript of interview conducted 18-07-17.

[H] Senior Director Livelihoods, World Vision International. Transcript of interview conducted 20-04-17.

[I] BRAC/World Vision (2019), “ Ultra Poor Graduation Handbook”, 2^nd edition, May 2019. See p. 13 for reference to [1].

[J] For World Vision implementation (with assistance from BRAC) of graduation programmes in 40 countries, see http://bracultrapoorgraduation.org/project/world-vision/

[K] Greeley, M. (2019). “ Targeting the Ultra-Poor: Lessons from Fonkoze’s Graduation Programme in Haiti”. Institute of Development Studies Learning Brief. See pp. 2-5 for the adaptation of the Chemen Lavi Miyò programme from BRAC’s approach.

[L] Executive Director, Fonkoze. Transcript of interview conducted 04-05-17.

[M] CEO, BOMA Project. Transcript of interview conducted 23-04-17.

[N] Director of Monitoring, Evaluation and Research, Trickle Up. Transcript of interview conducted 27-04-17.

[O] For UNHCR graduation programmes see UNHCR Focus Note, “ Leaving no one behind: graduation for refugees”, March 2018 (pp. 2-6). Impacts in Costa Rica are described on p. 6.

[P] For UNHCR Poverty Alleviation Coalition, see: https://alleviate-poverty.org/

[Q] Group Head of Compliance and Quality Assurance, PPAF. Transcript of interview conducted 04-07-17.

[R] Government of Pakistan press release, "BISP, PPAF Develop Understanding to Alleviate Poverty for 320,000 Households", 13-03-18.

State capacity: crafting effective development strategies

Submitting institution: The London School of Economics and Political Science
Unit of assessment: 16 - Economics and Econometrics
Summary impact type: Societal
Is this case study continued from a case study submitted in 2014?: No

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1. Summary of the impact

Professor Tim Besley has published extensively on the role and origins of state capacity, envisaged in his work as both the legal and the fiscal capacities of states. His research has underscored the need to place political economy at the centre of policy thinking about these things. It has made a significant contribution to improved understanding of the nature of state development and the causes of state fragility. It has also had an important influence on the work of multi-lateral agencies such as the European Bank for Reconstruction and Development (EBRD), International Monetary Fund (IMF), and World Bank. The research has particularly informed these agencies’ engagement with poor and transition countries, as they help them build sustainable growth strategies reflecting the vital importance of building state capacities.

2. Underpinning research

Research conducted at LSE by Professor Tim Besley has documented the role of state capacity as a central pillar of growth and development. It has addressed five key questions:

What role does state capacity play in building effective government?
What forces shape incentives to build state capacity?
How does building state capacity support markets?
What role does investing in state capacity play in establishing security and reducing conflict?
How does capacity build resilience to shocks?

The research responding to these questions provides an integrated understanding of the multiple dimensions underpinning the development process, highlighting the roles of both state capacity and institutional change in this. It was published between 2007 and 2011 in a series of papers ( **[1]**- **[4]**) and a monograph [5], which developed an overarching narrative and demonstrated wide-ranging applications of the ideas published in **[1]**- [4].

Developing a theory of state capacity: Besley and his co-author Torsten Persson (Centennial Professor at LSE; also Swedish Research Council Distinguished Professor, Stockholm University) started their work on the development of a theory of state capacity by trying to understand differences in countries’ experiences of building that capacity [1]. This led to an approach that was fully developed in their monograph [5]. State capacity is envisaged here as the ability of the state to support markets and enforce contracts (legal capacity) and to raise revenue (fiscal capacity). This theory brings together investment in state institutions, political violence, and economic growth. One key insight is that the existence of common interests among groups in society - based either on preferences for public goods or cohesive political institutions - is conducive to strong incentives to invest in state capacity. Conversely, investment in state capacity is discouraged by long-standing grievances between societal groups, which create social cleavages and oppositional identities between citizens.

The stylised problem studied in the core framework is the division of state revenue between broad-based and narrowly-targeted programmes. In the absence of institutional constraints on the executive, politicians tend to allocate more resource to their own “in-group” (e.g. selective investment in infrastructure in locations populated by their supporters), to the detriment of broad-based programmes benefiting all groups in society (e.g. a national healthcare programme). Less cohesive institutions allow the state to be run more in the interests of a narrow segment of the population; this weakens the motivation to improve the core functions of revenue collection and market support. When institutions are not cohesive, political instability shortens the time horizons of governments and diminishes incentives to invest in state.

There is a sizeable existing literature on state capacity in historical-sociological research, looking at economic development through this lens and linking political economy to comparative development. The novel approach in Besley’s research was to identify state capacity as key to institutional differences, both in income and in levels of political violence.

Political instability and political violence: it has long been observed that civil wars tend to arise in low-income countries with weak executive constraints. In [2] and [3], Besley and Persson use the framework described in [1] (and **[5]**) to consider incentives for political violence and how this can create political stability. States whose institutions are cohesive typically make little use of political violence. Where institutions are not cohesive, political violence is used by governments as a tool to maintain power. This can result in stable repressive states which have some incentives for building state capacity. However, when it leads to contested power and civil war, this is not conducive to state capacity-building. The framework developed here (particularly in **[2]**) to study political violence and state capacity can be used to provide a wider understanding of what makes states effective in maintaining a social order and delivering its core functions.

Development clusters - state fragility as a multidimensional symptom of under-development: the framework described in [1] and [5] also shows how economic and political factors combine with cohesive political institutions as a common factor in reducing political violence and building state capacity. In [4], the approach in **[1]**- [3] is used to shed light specifically on state fragility, characterised here as the clustering of weak state capacity, low income, and political violence. State fragility is a key symptom of under-development that had been insufficiently studied in mainstream development economics.

Also in [4], Besley and Persson drew on work published in [1] and [3] to propose a framework for analysing fragile states. In an ineffective state, few investments are made in fiscal and legal capacity; in a violent state, the government and opposition invest in violence to maintain or acquire political power. A common interest in providing public goods, fostered either by circumstances or cohesive political institutions, can eliminate both of these problems. However, when institutions are non-cohesive, either pathology may emerge. The model supports analysis of the conditions for their emergence, thereby contributing to understanding of the roots of state fragility. In highlighting the multidimensionality of under-development, the framework set out in [4] avoids excessive emphasis on income and brings a focus on state ineffectiveness and political violence as aspects of development. It provides a way of thinking about state fragility as a locally stable equilibrium.

The LSE-Oxford Commission on State Fragility, Growth and Development: the LSE-Oxford Commission on State Fragility, Growth and Development (hereafter “the Commission”) was established in 2017 under the academic direction of Besley with Professor Paul Collier (University of Oxford) to inform effective approaches to addressing state fragility. The Commission presents fragility as a multidimensional syndrome, an under-development cluster with mutually reinforcing characteristics that entrap economy and society. Outputs of the Commission underpinning impacts described here include Escaping the Fragility Trap, published in 2018 to provide actionable recommendations to address state fragility [6]. The report sets out clearly the characteristics of fragility, looks at the wider consequences, and recommends a new approach to state fragility and international aid. As well as being a co-author, Besley’s work with Persson on development clusters [5] forms the analytical underpinning for Escaping the Fragility Trap. A key insight of the Commission’s work, reflected in [6], is that state fragility remains because there are vested interests in maintaining the status quo. Without addressing these incentive problems, for which the state capacity framework is useful, it is impossible to understand how progress can be made. The Commission also emphasises the need to recognise a lack of state capacity as one of the reasons for a weak private sector and low levels of private investment.

4. Details of the impact

The problem of state fragility is widely viewed as one of most intractable challenges in development, and has become an increasing urgent focus for both multilateral institutions and donors. This reflects (in part) the centrality of state fragility to UN Sustainable Development Goal 16, which calls for peaceful, inclusive, and just societies. Two major impacts of the LSE research are described here. The first is a significant contribution to improving understanding of and promoting international policy debate on state fragility, including through the work of the Commission. The second is the use of Besley and Persson’s analytical framework for understanding state capacity to support significant changes in the strategies and operations of major multilateral agencies, particularly in relation to their engagement with partner countries. Illustrative impacts are presented on the work of the European Bank of Reconstruction and Development.

1. Improving understanding of and promoting international policy debate about state fragility

Some two billion people live in countries affected by fragility and conflict around the world. It has proven difficult to deliver an effective strategic approach to tackling fragility without a framework for understanding what is distinctive about fragile states and why they are a locally stable equilibrium phenomenon, as argued in [4]. The LSE research on development clusters [5] and subsequent Commission report, Escaping the Fragility Trap [6], have helped shape policy discussion by providing this theoretical basis for understanding the factors contributing to state fragility. Chaired by former UK Prime Minister David Cameron, the Commission was established with the aim of using robust research and an approach grounded in political economy to inform policy progress. This thinking underpinned the appointment of Besley (with Collier), whose research on state fragility provided the analytical framework guiding the Commission recommendations, starting with the core guiding idea (from **[4]**) that policy needed to focus on “escaping the fragility trap”.

The Commission has sought from the outset to address issues of state fragility through partnerships with practitioners, as well as researchers. To that end, it includes a mix of academics, private sector actors, and individuals with policymaking experience. Key findings of [6] were promoted at high-profile events, including a roundtable on state fragility and development hosted by the IMF during its 2018 Spring meetings in Washington DC and attended by Kristalina Georgieva (Managing Director of the IMF, then Chief Executive of the World Bank Group) [A]. In January 2020, [6] was described by World Vision’s Executive Advisor on Fragile States as one of only two major reports “ that attempt to describe roadmaps towards more peaceful and inclusive societies” (the other is the World Bank and UN’s “Pathways for Peace” report) [B]. The report is also credited with having focused renewed attention on the issue of state fragility in the 2019 final report of the “Bellagio Consensus”. This initiative, which was co-sponsored by the United State Institute for Peace, The Rockefeller Foundation, and the Overseas Development Institute, aimed to find “a critical path forward on the future of fragile states” [C, p. 3 ]. In addition, [6] was cited as a “ key report” in discussion and debate about state fragility by Nancy Lindborg, President of the United States Institute of Peace: a 2018 paper notes that it provides “ a compelling summary of recommendations for how to approach fragility more effectively” [D, p. 2 ].

Creation of the Development Finance Institution (DFI) Fragility Forum

As well as catalysing and contributing to international debate about fragility more broadly, the Commission has supported the work of specific governments and international organisations helping fragile states to change policy practices. One of the recommendations set out in [6] was that: “DFIs and aid agencies should coordinate their financial and technical support for sectors prioritised as strategic”. The Commission further advised that “DFIs should cooperate with each other to create standardised support so that investments that succeed can readily be offloaded.” In 2019, the DFI Fragility Forum was established in direct response to these recommendations [E]. Hosted by the University of Oxford and co-organised by the African Development Bank (AfDB), CDC Group, the International Finance Corporation (IFC), and the International Growth Centre (IGC), the Forum brings together 27 DFIs in action-oriented discussion about how to improve the effectiveness of job-creating private investment in fragile and conflict-affected environments. At its first meeting, attending DFIs agreed to participate in a series of potentially transformational pilot programmes, trialling a collaborative approach to investments in fragile and conflict-affected environments. They also agreed to work together to identify ways to streamline their processes for investments in the private sector of economies affected by fragility and conflict [E].

2. Impacts on the strategy and operations of development aid agencies: redefining transition at the EBRD

The analytical framework developed by Besley and Persson in [5] has supported the development of policy recommendations that are both rooted in rigorous research and simultaneously individually and collectively coherent. These have led to changes in the strategies and operations of major development aid agencies, including the European Bank for Reconstruction and Development (EBRD). The EBRD is a multilateral development bank established in 1991 to provide financial support to the former Eastern Bloc countries and support their transition to an open, market-oriented economy. It has since expanded its operations and now invests some EUR10 billion each year in 38 economies in post-communist countries, the Middle East, and North Africa. According to its charter, three criteria guide the EBRD’s operations: sound banking, additionality (i.e. complementing rather than substituting private investment), and transition impact. The concept of “transition” - understood here as the movement of economic actors and institutions from central planning to a fully-fledged market economy - is central to the EBRD’s mandate.

Revising the transition concept: identifying qualities of a well-functioning market economy

In 2015, the EBRD commissioned an external review of the transition concept. It did so in the belief that an updated understanding of the transition concept was required to reflect a shift in its own understanding of a market economy. This shift was especially in terms of the role of institutions and state capacity in ensuring sustainable, inclusive, well-governed, and resilient markets. Besley was asked to chair the review panel on the basis of “ his track record in applied economics, his understanding of the multilateral development banks, and especially his research record and proven expertise with respect to the topic of state capacity in a market economy” [F].

The revised transition concept adopted by the EBRD argued that, “ a well-functioning sustainable market economy should be more than just competitive”, but also well-governed, resilient, inclusive, environmentally friendly, and integrated [H, p. 10 ].

The review panel was required to challenge deeply-held views within the EBRD about what constitutes a market economy. To achieve this, and to ensure full understanding and ownership of the new transition concept, it engaged extensively with the EBRD’s Board of Directors through workshops and seminars, an away day with the Board, and a lecture series held at LSE [F] [I]. This active engagement was instrumental in effecting a change in thinking regarding the role of the EBRD and in “ [building] a common understanding around the need for state and institutional capacity to support markets” [F]. It supported the formal adoption of the panel’s proposals in November 2016. By informing the development of a new transition concept which is central to the EBRD’s operations, the panel report underpinned by LSE research “ has effectively shifted the EBRD’s identity” [F].

Subsequent changes in the operations of the EBRD

The EBRD’s former Managing Director of Corporate Strategy and Acting Chief Economist describes the impacts of the review panel chaired by Besley. On the basis of its final report, he says: “ the EBRD fundamentally redrew its country and corporate strategies” to focus more on outcomes, including through the creation of a new project impact assessment framework [F]. Specifically, the implementation of the new transition concept led to the creation of “ a formal quantitative system of grading each project’s contribution to the six qualities, or Transition Impact, both ex ante and ex post” [I]. The Bank now also routinely assesses the transition gaps for each quality in its countries of operation through its annual Assessment of Transition Qualities (ATQ) [J]. This is a key input to all country strategy development processes, which generate country-specific objectives formulated around the transition qualities. EBRD investments must be consistent with these strategic objectives: projects must demonstrate Transition Impact in these key priority areas. As such, the revised transition concept informed by LSE research has had knock-on effects on key aspects of the Bank’s operations, evaluations, and strategic approach.

Supporting the development of a safer, more robust financial system for the Eurozone ...

Submitting institution: The London School of Economics and Political Science
Unit of assessment: 16 - Economics and Econometrics
Summary impact type: Economic
Is this case study continued from a case study submitted in 2014?: No

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1. Summary of the impact

LSE researchers were among a group of eight economists who developed and proposed the idea of European Safe Bonds (ESBies) in response to flaws in the Eurozone financial system exposed by the sovereign-debt crisis. Since their formulation, ESBies have been considered in virtually all European policy debates on public debt, including in response to the 2020 recession. They are familiar to every serious agent in the European bonds landscape, and almost every Member State Central Bank, Debt Office, and Ministry of Finance has engaged with them. If accepted and implemented, ESBies would create a new, EUR3 trillion market. They would make crises in the euro area less likely and severe, with benefits not only to the world’s largest common market but also, given the interconnectedness of the global economy, the world at large. The idea of ESBies has been so widely influential that any solution taken forward on Eurozone safe assets will inevitably at least respond to the proposals co-developed at LSE. To that extent, the research will have shaped whatever safe asset solution is ultimately implemented.

2. Underpinning research

The European sovereign-debt crisis exposed serious flaws in the design of the Eurozone financial system. The system was shown to be inconsistent, imposing a “no bailout clause” whilst simultaneously encouraging banks to take on excessive exposure to their own sovereign credit risk as regulators treated sovereign debt as essentially risk-free. When the Eurozone financial crisis hit in 2009, and bond prices fell, losses in its banks’ bond holdings meant that bank stocks plummeted in countries where sovereign debt was perceived as risky. Expectations of a government bailout under such circumstances further increased the perceived credit risk attached to those countries’ government bonds. Combined with the resulting cut in credit and consequent constraints on public finances, this only confirmed the initial fears about sovereign solvency, creating a mutually reinforcing feedback loop. This “diabolic loop”, as it was described in the research outlined here (see, for example, **[3]**), has been renamed the “debt feedback loop”, or “doom loop”, and has become consensual in discussions of the crisis.

A second major problem with the system’s design was that it promoted excessive capital flows across borders. The lack of a symmetrically and abundantly supplied low-risk asset promoted “flight-to-safety” flows of capital across borders, rather than across asset classes, which served only to amplify macroeconomic shocks. Capital was flowing away from countries that were experiencing banking or sovereign crises and flowing into countries perceived as more safe.

Between 2010 and 2012 a group of eight economists from France, Spain, Germany, Greece, Italy, Ireland, Portugal, and the UK developed a creative proposal to tackle the root causes of the crisis and align the incentives facing buyers and sellers of bonds. Two of the eight - Professor Luis Garicano and Professor Dimitri Vayanos - were based at LSE; Professor Ricardo Reis joined the School in 2015, where he has since continued to contribute to this work. Together, this group developed and proposed the idea of European Safe Bonds (ESBies). Their research specified the objectives of the bond, the regulatory changes required, the method of weighting different country bonds, the institutional design of a new European Debt Agency, and the necessary governance mechanisms. Specifically, the research team sought to address two key problems exposed by the crisis. First, they hoped to prevent national banks in Europe from having portfolios of assets that were heavily concentrated in sovereign bonds of their own countries. Second, they sought to develop a solution to the tendency, under conditions of heightened risk aversion, of “flight to safety” across borders.

ESBies were proposed as a response to both these problems. The proposal was first discussed in a working paper prepared for the IMF Fall meetings and posted on euronomics.princeton.edu in September 2011 [1]. The research team developed an extended proposal in a research paper first presented to the financial community in 2011 in an op-ed for The Wall Street Journal [2]. A VoxEU ebook chapter [3] aimed principally at policy audiences was published in the same year. The proposal was treated more fully in academic papers published in 2016 [4] and 2017 [5].

According to the proposal set out in [3], a European debt agency would buy on the secondary market approximately EUR5.5 trillion of sovereign debt - the equivalent of around 60% of the Eurozone’s GDP. The weight of each member country’s debt would be equal to its contribution to the Eurozone’s GDP. Each marginal euro of sovereign debt beyond 60% of GDP would need to be traded on a single bond market where prices would reflect true sovereign risk, thereby sending the right message to a country’s government. The European debt agency would pool these bonds and issue two tranches with cashflows backed by that pool. The first, the ESBies, would be senior on interest and principal repayments of bonds held by the agency. The second, the European Junior Bonds (EJBies), would receive the rest; as such, they would be the riskier security and the one that would take the hit if one or more sovereigns defaulted. The new system would require adjustments to European banking regulations and ECB policy to incentivise banks to invest in safe ESBies, rather than risky sovereign debt. The revised proposal in [5] sketches out ways in which pooling and tranching could, alternatively, be performed by the private sector.

The combination of ESBies and the regulatory adjustments required to support them would ensure that Eurozone banks hold a well-diversified portfolio of sovereign bonds and hence are not vulnerable to the diabolic loop. Regulation would require banks to hold capital against bonds by riskier Eurozone countries. This would incentivise banks to hold safer bonds. But instead of steering banks to chase after the relatively small supply of bonds by the safest Eurozone countries, such as Germany and the Netherlands, ESBies would create a large enough supply of safe bonds to ensure that the regulation-induced demand for safety is met. The creation of ESBies would also ensure that flight to safety would take place across tranches - from the junior to the senior tranche - rather than across national borders.

In [4], the research team developed one of the first formal models of the diabolic loop and examined the effect of ESBies in mitigating its damaging effects. The model made it possible to also examine how the loop could be mitigated by alternative securities. A key result of the model was that, as per the ESBies’ design, both pooling and tranching were required to maximise the amount of safe assets that could be issued.

In [5], the research team undertook a detailed exploration of various aspects of the ESBies proposal. It developed and estimated a model of sovereign defaults across the Eurozone to evaluate the default probabilities and expected losses for the ESBies and the EJBies. The team calculated that the system would allow the debt agency to issue some EUR3.8 trillion of extremely safe (AAA-rated) ESBies, which they estimated would default just once every 600 years. The junior tranche, some EUR1.7 trillion, would be considered investment-grade, making them sufficiently attractive for institutional investors as well as mutual funds and hedge funds. The pool of safe assets created through this process would be roughly half the size of US Treasuries. Paper [5] also addressed various important implementation issues, such as regulatory reform, standardisation, and transition.

Note: the research was conducted jointly by Reis, LSE colleagues Vayanos and Garicano, and five others elsewhere. All eight partners contributed equally to the work.

4. Details of the impact

The research described here has had profound impacts on international thinking, debate, and policy formulation to improve the security of the Eurozone financial system.

Presenting a politically feasible alternative to Eurobonds

At the time that ESBies were first proposed, many analysts and policymakers favoured Eurobonds as a solution to the Eurozone’s financial system problems. Eurobonds would be issued by a Eurozone-wide authority and would involve mutual guarantees across countries. That is, if a country were to be unable to service its bonds, other countries would make the payments. However, in [2], [3], and [5], the research team pointed out that because they made all Member States jointly and severally liable, Eurobonds required a common (supranational) fiscal policy. This, they argued, made Eurobonds politically infeasible, given the lack of willingness for fiscal and political integration, and possibly undesirable given the large moral hazard they would create across sovereigns.

The researchers presented ESBies as an alternative to Eurobonds that would yield similar economic benefits but that would be politically feasible since they did not require a fiscal or political union. These advantages have allowed the idea of ESBies to gain significant traction in the policy debate. In 2015-16, there was a surge of interest in ESBies, particularly from the European Central Bank, when it became clear that Eurobonds would not be politically acceptable without a fiscal or political union, and that the latter would not be on the cards for the foreseeable future.

Underpinning preparatory work by European bodies for the creation of SBBS

In October 2016, the Executive Board of the European Central Bank established a High-Level Task Force (HLTF) within the European Systemic Risk Board (ESRB) to investigate the potential creation of “sovereign bond-backed securities” (SBBS). SBBS would comprise senior and junior claims on a diversified portfolio of sovereign bonds. SBBS (pronounced in the same way as ESBies) are, in all significant senses, the European Safe Bonds first proposed in [1] and developed further in **[2]**- [5]. The HLTF was headed by Philip Lane, the Governor of the Bank of Ireland, and one of the eight economists who put forward the original ESBies proposal. The task force brought together some 100 members of the Eurosystem and entailed several rounds of public consultations with market participants, including a workshop at the Banque de France (9 December 2016).

The task force produced a thorough report, published in [A] and [B] (these comprise 40 pages of main findings and 250 pages of technical appendices). The report’s main conclusion was that a gradual development of the SBBS market could be feasible, provided that regulatory changes were made to remove existing distortions against securitised products (such as SBBS). Under these proposed regulatory changes, SBBS would be treated equally to other non-securitised bonds with the same level of risk. Some of the proposed regulatory changes would apply to banks, as envisioned in the ESBies proposals set out in [3] and [5]. Additional changes would apply to other types of financial institutions that could be buyers of ESBies, such as insurance companies and investment funds. The ESRB Task Force report was made public in January 2018.

A second task force was formed at the European Commission to assess what changes in financial regulation would be required to make an ESBies-style system work. This second task force produced a detailed and comprehensive proposal on how to regulate SBBS [C]. That report was made public in May 2018.

Members of both task forces studied the research ( **[1]**- **[5]**) and associated documents in forensic detail, using them as the basis for extensive discussion and debate. Between them, the ESBies co-authors have since 2014 provided invited talks and specialist advice based on their research to (almost) every central bank and every Minister of Finance in Europe. The ESRB task force report ( [A] and **[B]**) makes prominent references to the ESBies research published in [1], [4], and [5], which it acknowledges as the origin of SBBS. It states, for example: “ Also known as ‘European safe bonds’ (ESBies), senior SBBS are proposed by Brunnermeier et al. (2011) and elaborated in Brunnermeier et al. (2016, 2017). These papers provide the intellectual foundation for this report” [A, p. 9 ]. The report of the Commission task force makes extensive reference to the ESRB report and hence indirectly also to the original research on ESBies.

Informing regulatory change

SBBS feature prominently in other European Commission documents, besides those produced by the task force. These include a May 2017 reflection paper on the deepening of the Economic and Monetary Union [D], which advocated for the creation of a market for SBBS. Valdis Dombrovskis, Vice-President of the European Commission responsible for the euro, noted that the move would require regulatory changes to make the securities attractive to banks and other investors. One idea was to give them the same “zero-risk weighting” currently applied to government debt in the EU, which would exempt them from capital requirements. The proposal was part of a move to restart integration within the Eurozone, which has largely stalled since the creation of the EU banking union in 2014.

The idea was endorsed by the European Parliament, whose Economics Committee had discussed SBBS and produced a “rapporteur” report in October 2018 [E]. This provided suggested amendments to the Commission’s regulation proposal [C]. The amendments were approved by the Economics Committee in March 2019, and the amended legislation was approved by the European Parliament the following month [F].

In October 2020, the European Parliament’s Committee on Economic and Monetary Affairs proposed further amendments to regulation on securitisation. These make it possible to issue an SBBS without at first tranching, mandating the ESRB to monitor and later propose the tranching of these securities.

Influencing economic thinking

SBBS have also been the focus of a fairly lively debate among policy-oriented economists. In 2018, a group of 14 leading French and German economists included SBBS as part of a package of broader reforms to improve the workings of monetary union [G]. In the summer of 2018, the Centre for Economic Policy Research devoted its annual “Sintra eurozone meeting” at the margin of the ECB annual forum to discussing ESBies and their alternatives. One of three sessions at the inaugural meeting of its Research and Policy Network on European Economic Architecture, held in April 2019, was also devoted to ESBies and other safe assets. This included a large report on ESBies and the several variants of them that were by then under consideration [H] [I].

Informing the development of a new safe asset solution in the Eurozone

More generally, the ESBies proposal has prompted and informed a huge amount of non-academic discussion and debate among policymakers (as well as banks, regulators, and consumers) across Europe. There is now no serious agent operating in the European bonds landscape who has not heard of ESBies, and almost every Member State Central Bank, Debt Office, or Ministry of Finance has engaged with the idea.

There are still significant barriers to the implementation of ESBies. However, their influence on policy discussion and debate has been such that any solution that is taken forward will inevitably be at least responding to, and therefore influenced by, the ESBies proposal and the research behind it ( **[1]**- [5], above). To that extent, the ESBies research will have shaped whatever safe asset solution is implemented across the Eurozone.

Understanding and improving subjective wellbeing

Submitting institution: The London School of Economics and Political Science
Unit of assessment: 16 - Economics and Econometrics
Summary impact type: Societal
Is this case study continued from a case study submitted in 2014?: No

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1. Summary of the impact

LSE research has made significant contributions to promoting subjective wellbeing as a central objective of public policy in the UK, and provided new tools to support its measurement. The research has further underpinned major changes in the funding, delivery, and uptake of mental health support services, including new services for children and young people. Every year, some 1.5 million people in England alone access services underpinned by the research. Research insights have also been published in best-selling books and used by new citizens’ groups, promoting wide-ranging public participation in wellbeing debates and in efforts to build happier lives and communities.

2. Underpinning research

Work on subjective wellbeing (SWB) and the new “science of happiness” has been carried out both separately and in collaboration at LSE by Professors Richard Layard and Paul Dolan. Much of it was done within the Wellbeing Programme at LSE's Centre for Economic Performance (CEP). The work draws on multiple disciplines to formulate a theoretical framework for measuring SWB and for understanding how and why SWB should be prioritised as a policy objective. It has shaped the way that economists measure individual utility (using SWB alongside preferences) and social welfare (using national happiness alongside GDP).

Establishing wellbeing as a central policy goal: Layard was one of the first economists to work on happiness. His influential 2005 book Happiness: Lessons From a New Science [1] drew on economics, psychology, sociology, and neuroscience to propose new conclusions about the sources and causes of human happiness. Layard argued for the central importance of happiness as a policy goal and proposed that “the progress of national happiness should be measured and analysed as closely as the growth of GDP” [1]. Since joining LSE in 2010, Dolan has built substantially on his own previous work on health economics to develop extensive research on SWB. His research has focused particularly on producing a richer conceptualisation and more nuanced measurement of SWB, grounded in a twin focus on experiences of pleasure and purpose (see, for example, **[4]**).

Improving the measurement of wellbeing: looking beyond GDP to measure what really matters to people requires theoretically rigorous and empirically robust methods to monitor progress, inform policy design, and evaluate interventions intended to improve people’s lives. Layard and Dolan have made an important contribution to the development of such methods. In 2008, the UK Office for National Statistics (ONS) commissioned Layard and Dolan (then at Imperial College London) to advise on its national measurement of wellbeing project. Originally, the ONS considered incorporating one “headline indicator” of SWB. With Robert Metcalfe at Oxford University, Layard and Dolan set out a conceptual case for four headline indicators [2]. In making this case, they distinguished between three broad SWB measures: evaluation, experience, and “eudemonic” (reports of purpose and meaning, and worthwhile things in life). The work was published in 2012, by which time Dolan had joined LSE. It underpinned the formulation and inclusion in the Annual Population Survey (APS) of four new questions - now known as “the ONS4” - that separately test all three of these SWB measures.

Since joining LSE, Dolan has analysed data generated by the ONS4 to further improve understanding of methods of measuring SWB. This has included work to test, validate, and improve the validity and reliability of such measures in the context of public policy (see, for example, [3], exploring the SWB impacts of the 2012 Olympic Games).

Layard has worked with the What Works Centre for Wellbeing (founded in 2014) to produce guidance for policymakers, providing quantitative indicators of, and methods for analysing where, new wellbeing policy is needed and what its impacts might be. In 2018, he and his co-authors published The Origins of Happiness [6], which draws on unique survey data on more than 100,000 individuals in Australia, Germany, the UK, and the USA.

Cost-benefit analysis of mental health service provision: CEP research has consistently shown that mental health is a major determinant of SWB. Research published in [6] provides new evidence that wellbeing, not income, constitutes the fundamental inequality between people. Most human misery is shown to be due more to failed relationships and physical and mental illness than to economic factors. These sorts of findings build on an influential cost-benefit analysis of cognitive behavioural therapy, published in 2007, which showed that wider provision of psychological therapy services would have massive benefits - at zero net cost to the UK Treasury [7].

Promoting public understanding of wellbeing: Happiness [1] was written for audiences beyond, as well as within, academia. It sought to help readers become more aware of what they could do to increase their own wellbeing. Work at LSE to make rigorous academic research on wellbeing accessible to broad public audiences has been advanced since 2014 by Dolan’s publication of two best-selling books: Happiness by Design. Finding pleasure and purpose in everyday life (2014) [4] and Happy Ever After. Escaping the myth of the perfect life (2019) [5]. Happiness by Design offers a novel definition of happiness as the flow of both pleasure and purpose over time. Dolan additionally proposed that happiness is contingent not just on “inputs” (income, work, marital status, age, etc.), but on the allocation of attention (a finite resource in the production process of happiness) to those stimuli. In Happy Ever After, he explored the effects of how the stories we are told about the important sources of happiness can, in fact, impede and obscure individual experiences of happiness.

4. Details of the impact

Research described here has played an important role in ensuring the centrality and viability of SWB as a measure of national wellbeing in public policy in the UK and internationally. It has further underpinned changes to the ways in which mental health services have been financed, designed, delivered, and accessed by millions of people, including supporting the roll-out of services to children and young people in the UK. By improving understanding, particularly of the experiential aspects of happiness, the research has also supported citizens’ own efforts to actively improve happiness around the world.

Providing new mea sures of SWB used in the UK and internationally

Measuring SWB in the UK: the design of practical, cost-effective wellbeing policy and interventions requires robust methods of measuring SWB. Throughout the REF period, the ONS4 questions published in [2] have provided a basis for measuring national wellbeing and for benchmarking and monitoring progress to improve it [A]. Their inclusion in the Annual Population Survey (APS) means that more than two million people have answered the ONS4 since 2013. The questions gained National Statistics status in September 2014 and were fully approved as the standard for measuring SWB within the cross-governmental Harmonisation Programme in September 2017. The ONS4 now appear in more than 30 surveys and evaluations used to inform policy in departments across the UK Government [B]. SWB data generated through these surveys is used to monitor wellbeing, support policymaking, facilitate meaningful international comparison, and help individuals make informed decisions about their lives. A 2020 Rapid Evidence Assessment by the What Works Centre for Wellbeing provides evidence of the use of the ONS4 in a growing number of UK wellbeing impact evaluations.

Informing the development of new measures of wellbeing around the world: the ONS4 have also been used to develop international measures of wellbeing. The 2013 OECD Guidelines on Measuring Subjective Well-being represented the first attempt to provide international recommendations on collecting, publishing, and analysing subjective wellbeing data, providing guidance to national statistics offices in all OECD countries. They refer frequently to work by Layard and Dolan and cite several ONS papers describing the ONS4 and analysing data generated through them. Annex A also cites the ONS4 as examples of appropriate SWB measures [C].

Layard and Dolan have further drawn on their academic research in contributions to widely-used global happiness reports. Layard has been an editor of the World Happiness Report, which provides annual evaluations of quality of life around the world, since its inception in 2012. In 2019, Dolan co-authored a chapter of the Global Happiness and Wellbeing policy report (Chapter 3, “Priority setting in healthcare through the lens of happiness”). As well as being of general public and policy interest, these reports are used by practitioners involved in resource allocation decisions at macro, meso, and micro levels.

Establishing wellbeing as a central objective of UK policy

One of the principal barriers to using SWB in policy has been a lack of robust quantitative evidence of the effects of policy change on SWB. The ONS4 has been critical in helping to reduce this barrier. The Origins of Happiness [6] also contributes to this agenda by providing policymakers with evidence about which factors are more and less important in explaining variations in happiness (and misery) among citizens. Findings of the research published in [6] were presented at an international conference jointly hosted with the OECD, held at the LSE in December 2016. Attendees included national and international policymakers, epidemiologists, and statisticians, as well as academics.

Layard has also brought his research-based expertise to bear on efforts to prioritise wellbeing through work with the All-Party Parliamentary Group on Wellbeing Economics (APPGWE), of which he is Vice-Chair. In 2014 the APPGWE recommended that: “ New policy should be routinely assessed for its impacts on wellbeing”, using wellbeing analysis in making the case for spending, setting priorities, and evaluating impacts [D]. This has since found its most significant application in the 2018 publication of the Treasury’s Green Book, the first fully revised version since 2003. Both the original Green Book and an updated 2011 version referred to the use of wellbeing data in cost-benefit analysis. However, the 2018 revision was the first to state explicitly that wellbeing should be the primary aim of appraisal. Section 2.3, for example, states: “ The appraisal of social value, also known as public value, is based on the principles and ideas of welfare economics and concerns overall social welfare efficiency, not simply economic market efficiency”. This represents a significant step-change in the emphasis on wellbeing in the Green Book, which provides guidance on how to appraise and evaluate all central government policies, projects, and programmes [E].

Improving and expanding access to mental health services

Expanding the Improving Access to Psychological Therapies programme: increasing provision for mental health services has been a long-term focus of work in the LSE’s Wellbeing Programme. A major impact of the programme’s research - particularly including [7] - was its use to underpin the Improving Access to Psychological Therapies (IAPT) programme initiated in 2008 (early impacts were described in a REF2014 impact case study). IAPT has since transformed the treatment of adult anxiety disorders and depression in England. With more than 200 services, IATP is accessed by around 1.25 million people annually, making it the largest publicly-funded and systematic implementation of evidence‐based psychological care in the world. There have been some 7.5 million referrals to the programme since national statistics were introduced in 2012, approximately 4.9 million of which resulted in psychological treatment.

Layard made a significant contribution (with David Clark, Oxford University) to the 2015 Spending Review, which dedicated an additional GBP600 million investment in mental health services and included an explicit commitment to the expansion of IAPT in the period to 2020. In its 2016 “Five Year Forward View for Mental Health”, NHS England confirmed this commitment to expanding the IAPT programme to cater for 1.5 million people by 2021 [F, p. 16 ]. The NHS Long Term Plan (2019) went further still; it aims to increase the number of people with anxiety disorders or depression who can access talking therapies through IAPT by an additional 380,000 per year to reach 1.9 million (approximately 30% of community need) by 2023/24 [J]. The IAPT is widely recognised as the most ambitious programme of talking therapies in the world. Versions of it now exist or are being trialled internationally, including in Australia, Canada, Finland, Israel, Japan, Lithuania, Norway, and Sweden [G].

Increasing the provision of services for child mental health: in 2015, the UK Government committed to investing GBP118 million by 2018/19 to complete the roll-out of the Children and Young People’s IAPT (CYP IAPT) programme. NHS England’s “Implementing the Five Year Forward View for Mental Health” subsequently announced a “significant expansion” in access to high-quality mental health care for children and young people by 2020/21: “ At least 70,000 additional children and young people each year will receive evidence-based treatment - representing an increase in access to NHS-funded community services to meet the needs of at least 35% of those with diagnosable mental health conditions” [F, p. 6 ]. Between 2018 and 2019, approximately 380,000 children and young people were treated though NHS-commissioned community services - approximately 36% of those with a diagnosable mental health condition.

Layard has been involved in the development of new mental health support services in schools. In 2016, he co-authored with Stephen Scott (King’s College London) a paper proposing a programme similar to IAPT, but delivered in or close to schools and colleges, rather than via the NHS. This included new Mental Health Support Teams to provide early intervention on some mental health and emotional wellbeing issues, such as mild to moderate anxiety. The paper was read by the then-Health Secretary, Jeremy Hunt, and discussed with him at a small private function. Mental Health Support Teams were subsequently accepted as one of three key proposals included in the 2017 Green Paper for Transforming children and young people’s mental health and the first Teams were launched in 25 trailblazer areas announced in December 2018. A further 57 sites confirmed in July 2019 are in development [I]. By 2023/24, at least 345,000 additional children and young people aged 0-25 will be able to access support via NHS-funded mental health services.

Enhancing public understanding of SWB

Happiness has been reprinted in more than 20 languages and sold well in excess of 150,000 copies. Can We Be Happier? was published in January 2020 and had sold more than 5,000 copies by September of the same year. Dolan’s best-selling books Happiness by Design ( HBD) [4] and Happy Ever After [5] have also reached very large audiences and generated significant public discussion. HBD appeared in both The Sunday Times and The Guardian’s Top 10 books lists and was serialised in The Sunday Times in the run-up to its publication in 2014. It was reviewed across the UK’s mainstream press, including in The New Statesman, which described it as “ the book that will make you quit your job”. HBD has sold approximately 135,000 copies in the UK alone and has been published in Brazil, China, Germany, Greece, Italy, Japan, Korea, Poland, Portugal, Romania, Russia, Taiwan, and the USA. Happy Ever After has been similarly widely read and reviewed, including via its serialisation in The Observer. The book has already sold approximately 45,000 copies in the UK. Public engagement with the research published in these books has been extended through interviews with Dolan in publications such as Wired and Men’s Fitness; on popular television shows such as BBC Breakfast, S unday Brunch, and This Morning; and at festivals such as Hay, Wilderness, Latitude, and How the Light Gets In.

The books have supported public awareness of and engagement with both the science of wellbeing and its relevance to public policy, supporting public advocacy for making wellbeing a key policy goal. As the many unsolicited testimonials from readers attest, they have also helped people to understand and improve their own wellbeing. This has been further supported by the Action for Happiness movement, co-founded by Layard in 2011 to help people create happier lives. The movement now has approximately 200,000 members and a Facebook following of one million. It has delivered more than 400 Action for Happiness courses, which are grounded in the scientific research described here. A full randomised control trial of the “Exploring What Matters” course showed that it improves subjective wellbeing, reduces symptoms of depression and anxiety, and enhances levels of compassion and trust.

In 2020, Layard’s contributions to improving subjective wellbeing were recognised by his receipt of the ESRC’s Lifetime Achievement Award and the International Society for Quality of Life Research (ISOQOL) Distinguished Quality of Life Researcher Award.

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