Nova workboard

a blog from young economists at Nova SBE


The best Portuguese schools: should we trust the rankings?

Every year, the rankings of the best Portuguese schools are published and disseminated throughout the media. The indicator used to organize such ranking is the average national exams score results.

The analysis of schools according to such rankings has received, over the past few years, a large criticism. This year was no different: after the announcement, the controversy came up again.

A thorough analysis of the results would be interesting, but for lack of space, there are two consequent conclusions I would like to emphasize. First, private schools continue to have on average much better results than public schools. To illustrate this idea just notice that there are only 9 public high schools in the top 50, while in the similar ranking for the 9th year there are only 7 public schools. Regarding the 9th grade, this difference is quite visible in the following figure.

Image

Secondly, analyzing only the results of schools where there were over 50 tests, the results show a large difference at the territorial level, being the first places dominated by schools in the North Coast[1].

The results and consequently the corresponding rankings are undoubtedly objectives; but their interpretation is far from consensual. The debate is on whether we should use this indicator as a measure of school performance.

In my point of view, these results should not be used, in a decontextualized way, to assess school performance. In reality, this indicator does not take into account that schools have different characteristics, both in terms of social environment and in terms of human and material resources.

Because of this, there is a huge literature that points out to the weakness of this indicator. In particular, it is interesting to consider the Rita Azevedo’s WP[2] (2011) regarding Portuguese 9th grade exam results in which the author found evidence for a significant causal effect between socioeconomic aspects and school achievement. The conclusion reinforces the weakness of the indicator for the Portuguese case.

The data released by the Ministry of Education shows also socio-economic indicators of public schools (not revealing any information on private schools). Based on this information, the Público’s study divided schools according to economic contexts and calculated an expected value of the average results for each context.

Based on this, I think it would be more appropriate to use an indicator which compares the expected average test scores results with the obtained values  (in this line, Azevedo also proposed that an alternative solution would be to consider the ratio between the expected value and the current average school scores). Although it has some limitations, it would help to draw more truthful conclusions regarding school performances.

However, I cannot deny the importance of the divulgation of the results obtained by the students, because they are a key tool to make comparisons, within the same school (comparing with the previous years) or even between schools at the same context. However, we have to take into account that a comparison over time requires that the tests are comparable between different years which may not be the case of Portugal. Moreover, they are important for the government to be able to identify and combat the causes of the poor performance of some schools and regions.

To conclude, the results should be presented to the public opinion in a careful way; the media should not label the rankings as “the best Portuguese schools”. It is important that the public opinion realize that a school cannot be considered good or bad based only on the average test scores. This conclusion is not only relevant for Portugal since there are other empirical studies that find the same evidence for different countries[3].

Filipe Silvério, #617


[1]This situation is perfectly depicted in the following images, in which is possible to see the average test scores (of Mathematics and Portuguese) for high school and for the 9th year of Mathematics and Portuguese by municipality: http://imagens5.publico.pt/imagens.aspx/809225?tp=UH&db=IMAGENS http://imagens6.publico.pt/imagens.aspx/809226?tp=UH&db=IMAGENS

[2] Azevedo, Rita, “Critical Analysis: Portuguese 9TH Grade Exam Results and Socioeconomic Factors” 2011, Work Project for the Master in Economics, Nova SBE

[3] For instance, a similar study for Chile: Mizala, Alejandra, Pilar Romaguera, and Miguel Urquiola, 2007, “Socioeconomic status or noise? Tradeoffs in the generation of school quality information”, Journal of Development Economics, 84, pages 61-75

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Pollution problem in central Lisbon: imposing a tax or restricting access?

When individuals impose costs on others, without having any economic incentive to take those costs into account, we are in the presence of a negative externality. As explained by the economic theory, externalities may lead to individual decisions that are not optimal from the point of view of society as a whole. Without any intervention, the market will tend to overproduce negative externalities.

Air pollution is often presented as a classical example of a negative externality. In recent years, we have been confronted by the media with some news pointing out pollution problems in central Lisbon and claiming urgency towards action. Avenida da Liberdade, a key point for those who enter or leave the capital by car, is today one of the most polluted avenues in Europe. Several times, the legal admissible levels of air pollution were exceeded. In this context, not respecting the EU Directive of Air Quality might have severe consequences, especially when Portugal is under external assistance and so financially constrained. Would we like to pay a fine of 1.9 Million Euros plus 630 Euros per day until compliance with the EU Directive?

Furthermore, the problem is even worse due to the daily traffic congestion during rush hours. As we know, urban traffic congestion is a modern example of a “tragedy of the commons”. If we consider the trips by car along the Avenue as a good, immediately, we will agree on its non-excludable nature. However, since there is free access, there will be rivalry in consumption, that is, the access creates scarcity of space and thus congestion. 

How should this problem be addressed? As a science, Economics can offer its contribution. Indeed, from very simple models, we can extract powerful insights. The 2012 Prize for Shapley and Roth clearly demonstrates the growing acknowledgment for the use of abstract theory to ongoing efforts to find practical solutions to real-world problems.

We decided to use a simple model with marginal benefits and marginal costs. The model incorporates both pollution and congestion problems. We have assumed that there is demand for a certain good Q, which will represent the number of trips by car along the Avenue. The cost structure has two major components: (1) private costs, including costs related to car use such as fuel and maintenance, and also time costs derived from traffic congestion that drivers partially take into account; (2) external costs, which include all those costs that drivers impose on others and that they have no economic incentives to take into account (e.g. reduced air quality, increased level of noise and higher risk of certain diseases, as well as the external portion of congestion that is not internalized). The sum of private with external costs gives the social cost function.

We have assumed that until QA there is enough environmental assimilative capacity to absorb the emissions associated with the number of trips in the Avenue, and that congestion only starts after that level. In other words, below QA there are no external costs to society (no pollution and no congestion problems), but only the private costs to drivers, which we considered as constant. Then, after QA, the marginal private cost function (MCp) becomes increasing due to the portion of time costs internalized by the drivers. Additionally, after that level, the number of trips along the Avenue starts causing external damages to the society: congestion not internalized (cong) and air pollution (e). It is important to note that in our setting, we have assumed complete independence between the damages of congestion and the damages of pollution. In practice, it is plausible that there is a relationship between these two functions, which would further complicate the analysis of the problem. Here follows the graphical analysis (the Q-axis is normalized):

The optimal number of trips in the Avenue is given by Q*, where marginal social costs (MCs) equal marginal benefits (MB). At that point, from a social perspective, there are no economic incentives to increase or decrease the number of trips. Obviously, if doing nothing is a possibility, drivers will freely choose Q0, where they are minimizing their private costs.

From our simple setting, we will be able to analyze, from an economic perspective, two alternative policies to solve the pollution problem.

The first one, which is already implemented by municipal authorities, consists in changing traffic laws in a way that access is restricted. Due to restriction of access, the number of trips that starts causing congestion will be lower than QA and marginal private cost will become an increasing function after that level. However, restriction of access will change the social optimum. Since the government is trying to solve the pollution externality by restricting the access to the Avenue, in reality, it is creating a bigger problem by correcting one externality aggravating the other. Now, as traffic starts congesting at an earlier stage, the new social optimum will be lower than Q*.

An alternative policy would be the imposition of a congestion charge, covering a vaster area in the center of Lisbon (including the Avenue), similar to the one already implemented in London since 2003 (for further details: www.cclondon.com). Theoretically, that charge would be a Pigouvian tax, which is, by definition, a unitary tax equal to the difference between marginal social costs and marginal private costs at the optimum. While raising revenue through the implementation of this tax, authorities force drivers to internalize the damages that were previously not taken into account. The net losses associated with higher private costs due to traffic congestion are now a net transfer of welfare from drivers to the government.

Both policies attain the objective of reducing the number of trips. However, restricting access to the Avenue leads to an inefficient outcome, since those losses incurred by drivers are not appropriated by the government. On the other hand, a Pigouvian tax will lead to an efficient outcome as it maximizes net benefits from a social perspective, that is, we will reach Q* again. Additionally, this measure will not aggravate the existing externalities.

In conclusion, our example illustrates the distinction between an efficient policy and a feasible one. While it is efficient to apply a Pigouvian tax, it might not be practical, since it imposes a higher burden to drivers than restriction of access.

Tiago Silva

Nuno Salva

Yan Yang


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“(…) while it is always a misfortune to die when one wants to go on living, it is not a tragedy to die in old age; but it is on the other hand both a tragedy and a misfortune to be cut off prematurely.”

John Harris, The Value of Life (1985)

While the end of September was approaching, the country was confronted by somewhat controversial headlines.[i] This time, surprisingly or not, we did not have an announcement from the Finance Minister, regarding the implementation of new austerity measures. So, what happened?

Answering a request from the Health Minister, the National Ethics Council for the Life Sciences (CNECV) produced a report, proposing a decision model for financing the costs of medicines in three specific areas: HIV/AIDS, oncology and rheumatoid arthritis.[ii] The main conclusion taken from the report is the existence of ethical arguments supporting healthcare rationing – indeed, a conclusion that might harm the most delicate sensibilities.

Within this line, I think it is of utmost importance to reveal the most inconvenient truth: it is not possible to have everyone having access to everything. Moreover, the situation is even more complicated when there is a tight budget constraint. The MoU mentions that reforms in healthcare system should aim at improving efficiency and effectiveness, inducing a more rational use of services and control of expenditures. The constraint is even clearer in the area of pharmaceuticals, where it is expected to reduce public spending to 1.25% of GDP by the end of 2012 and to about 1% of GDP in 2013.[iii]

The growing cost of healthcare services jointly with increased costs arising from technological innovation are causing expenditures to overshoot. Since there are limited resources and theoretically unlimited needs, these cost-drivers are creating new challenges to health professionals, scientific investigators and policymakers. In this sense, knowing the social preferences is crucial for priority setting. However, the answer to whether an efficient allocation is better or worse than an equitable one cannot be given directly by economic analysis, requiring a value judgment that weights equity and efficiency. On the other hand, there is also no consensus about the adequate form of the Social Welfare Function. Nevertheless, as we have seen, today it is very unreasonable to adopt a Rawlsian Welfare Function (pure egalitarian), despite the attractiveness of the justice argument of choosing under a “veil of ignorance”.

In fact, setting priorities accordingly to social preferences is a very difficult task. For instance, at a first stage, we can often recognize that some groups may have priority against the others. However, at a second stage, when we attach the opportunity costs, it can well be the case that we do not detect evidence towards any social preference.[iv]

Most people tend to believe in the idyllic picture that if a given treatment is available, regardless of what it costs and no matter the chances of success (i.e. surviving), it should be made available to us. But let me ask: is it ethical to spend thousands of Euros in treatments with modest or null effects, when they are consuming large amounts of resources that could be used with better outcomes, including saving lives? Let me put it concretely: do 20,000€ justify two additional months of life, especially when it can be painful for the patient? It seems clear to me that some equity should be traded-off by efficiency when prioritizing in healthcare. The question is not if there should be rationing or not. Rationing does already exist and, currently, it is decided by the doctor when treating the patient. The focus should be instead in what type of rationing we want to have. And, in this context, I think it should be clear, explicit and responsible in order to avoid the so called “random rationing”.

Finally, some notes are worth to be mention, due to the introductory quotation by John Harris. Throughout this text, we have been discussing priority setting in healthcare. Let us now assume that there is only one medicine available and two patients to be treated: one aged 22 and the other aged 82. What to do? From my point of view, the “fair innings argument”, as exposed by Alan Williams, seems to be very attractive, implying greater discrimination against the elderly.[v] However, it is also subject to some criticism. What about those who consider that an individual has a greater right to enjoy additional life years the fewer life years he has already had? Moreover, what about the growing population above 65 and the possibility of lobbying in order to change government priorities?

The discussion will surely not end here. This issue is far from being consensual. Curiously, one of the thorniest issues is a question of semantics, that is, the negative connotation associated to the word “rationing”, which reminds us of times that we do not want to live again.


[ii] The report produced by the National Ethics Council for the Life Sciences (CNECV) can be found here:

http://www.cnecv.pt/admin/files/data/docs/1348745574_Parecer%2064_2012%20CNECV%20Medicamentos%20SNS.pdf

[iv] For an interesting example:

Desser et al., Societal views on orphan drugs: cross sectional survey of Norwegians aged 40 to 67, British Medical Journal (2010).

[v] Williams, Alan, Intergenerational equity: an exploration of the ‘fair innings’ argument, Health Economics, Vol. 6: 117-132 (1997).

By Tiago Silva


Ageing and health expenditures in Portugal – an overview

On September 14-15, a conference promoted by Fundação Francisco Manuel dos Santos, launched a large debate about how Portugal will be in 2030. One of the topics subject to discussion was ageing and the challenges it poses to the Welfare State. During that weekend, the debate was also extended to the media. As expected, the skeptics appeared and presented ageing as an enemy, responsible for jeopardizing the sustainability of the Welfare State and for uncontrollable health expenditures in the future.

From my point of view, it is impossible to reach those conclusions with such certainty, as far as we are in 2012. The Welfare State is not an unchangeable concept – instead, it is an emanation from society aimed at answering to the most imperative problems concerned with well-being. Therefore, since problems are continuously changing, new challenges require new and more prepared answers.

Why do people tend to easily conclude that ageing will imply more and more resources to be allocated to the health sector? As a starting point, the following graph may provide a hint:

Here, we must recall our first lesson from statistics: correlation does not imply causation. In fact, there is a strong positive correlation between the 2 variables: the weight of population aged more than 65 is growing and public health expenditures have also been growing (and also private expenditures, though not mentioned). The main difference is that public health expenditures have been growing very much faster.  

As predicted by the Grossman model, the older we are the more healthcare we demand. It is also important to recognize that older people cost more to the system – they are more likely to have chronic diseases, cardiac problems, dementia and diabetes, which require longer stays in hospitals. However, the ageing effect is somewhat overvalued, since other factors have contributed more decisively to health expenditures growth. Barros (1998) confirms that ageing is of less importance for healthcare expenditures than usually pointed out – his estimates suggest that ageing has no explanatory power on healthcare expenditures.[1] Since ageing has a strong impact on other aspects of the Welfare State, mainly retirement pensions, there is a common extrapolation to healthcare services of this demographic pressure. Nevertheless, at the same time, urban middle-classes with rising incomes, new needs and preferences, also originated a fast-growing demand for healthcare. But, more importantly, we have the role of cost drivers: medical and technological advances (new equipment and better OR conditions) have increased costs and healthcare services have also become more expensive (inflation).

In my opinion, the impact of ageing population alone will not be responsible for uncontrollable health expenditures in the future. Furthermore, we cannot also forget that devoting more resources to the health sector can potentially increase life-expectancy. This also means that in the medium/long-run, since individuals live longer, they will tend to invest more in education and increase the stock of human capital, with a likely positive impact on economic growth. However, more population above 65 also means the possibility of lobbying in order to change government policies in favor of their interests: withdrawing resources from youth (e.g.: sports and education) to employ in a higher budget for healthcare. Which effect will prevail? Well, in 2030, I will surely have a better answer!

By Tiago Silva


[1] Barros, P.P., 1998, “The black-box of health care growth determinants”, Health Economics, 7(6). 533-544.


Are patents blocking Health Care innovation ?

Pharmaceutical Industry may be described ambiguously as innovative but also guilty for blocking innovation when patents and trademarks enter the scene. Are the high profit patents involved in the commercialization of new health care solutions (drugs, medical devices, even empirical knowledge or molecules) fare?

Since we were born we have been confronted with social and media pressure towards such organizations, acclaimed hazard and cause of negative economic and political influence (e.g. many Hollywood movies are based in this fact) sustained by lobbies and recurrent scandals  .

Such corporations rely their business on a strategy of impetuous R&D in order to overpass their direct competitors and enjoy the benefits conceded by the trade related aspects of intellectual (or physical) property rights, rather than primary target ethical and social care since they are profit organizations.

The existence of rewarding patents serves a meritocracy system for innovative ideas and physical developments, but the question that arises here is how to define this plan and how to correctly implement a system that does not harm who invests but should not at the same time overprotect it.

Currently, a development in ‘fields of technology’ is granted by 20 years of enforceable public interests[1] which is converted in a stimulus for R&D, but at the same time prevents physicists/scientists from accessing to innovative patented materials/methods – this problem of obstructing innovation is entitled “anticommons problem”[2].

In the specific case of Health Care we can see such repercussions worldwide as the development of a new drug that for example fights cancer will be protected by a 20 year range and grants the owner a uniqueness point of sale worldwide; while this procedure representing an innovative treatment should directly be administrated in public hospitals and supported by public taxes it arises one important question:

Why should people pay higher costs in order to convert previous R&D investment into huge revenues for patent owners?

From my point of view it is important to redefine this limit.

Concerning the Portuguese case, the 2 main areas of health expenditure are oncology and AIDS, areas where it is visible the existence of a monopolist competition caused by differentiated products that are perceived (and stated by medical studies) as better treatments for such pathologies and can be figured by the following numbers:

– 53% of oncology treatments is delivered by Roche and Novartis – market value of 225 MM €

– AIDS treatment is half provided by three drugs: Truvada; Herceptin and Kaletra; representing a market value of 197 MM €

Both values are partly subsidized by universal taxes and compete against other laboratories that provide different treatments (observably the supply of cutting edge treatments is not targeting everyone).

There is in the Portuguese market a new trend of centralizing purchases in order to reduce total spending which implies that hospital administrators must choose one alternative.

While screening the treatment protocols; one of the most important factors is its price. As we cannot find generics or other producers with similar drugs appearing in these markets it delivers all the binding power for the supply side. This is a mere example of an industry that is highly protected by patents that forces tax payers; hospitals and users are paying more than what the price market should be in a regulated market (where differences in some cases are disturbing).

My final suggestion goes towards the regulation of this market based on a reallocation or an adjustment of the premises used to compute the economic calculus of compensating patents.

One reduction on time like releasing the patent after 10 years and other producers/users of the development would have to pay a fee to the patent owner, this fee would suffer a gradual reduction over the years in order to grant surplus for innovative ideas but at the same time not struggling the market and not discarding social and health care. The war for patents would exist still and the system would obviously compensate the ones who innovates (e.g. exemption or reduction on taxes), but the economic calculus to compute the protection granted should be urgently revised.

André Oliveira Martins

Sources:

–          WTO Report 2010

–          2000 Panel Report: Canada – Patent Protection of Pharmaceutical Products.

–          “WTO TRIPS implementation”International Intellectual Property Alliance. Retrieved 22 May 2012.

–          “Hospitais incapazes de baixar custos com medicamentos”. Jornal de Negócios. Retrieved 2 March 2012

–          www.news-medical.net


[1] Article 27 and 33 of General Agreement on Tariffs for World Trade Organization

[2] R&D is inhibited by the presence of many intellectual property owners’ exclusive and possibly conflicting rights over devices and methods needed to perform R&D on biomedical products.


Discussing austerity and public health expenditures in Portugal

Nowadays, if we compare the front pages of the main Portuguese newspapers, in all of them we will find the two most currently used words: crisis and austerity. Etymologically, these words remember us that we are living a decisive moment in which we need to adopt rigorous procedures.  

Education, Social Security and Health – the largest Ministries in terms of public expenditure – are now facing a strong budget constraint. A special attention is devoted to Health due to the sector specific characteristics, and where the MoU predicts for 2012 that costs control will allow savings worth €550Million.

Since we are significantly cutting public expenditure, does this mean we will have a worse public healthcare sector? This is a legitimate question that everyone might ask. Indeed, these are changing times, but they are also challenging. As a science, Economics should offer its contribution. How? Economics studies the adequate use of scarce resources to satisfy theoretically unlimited needs. Economic analysis should work as an auxiliary tool in the decision-making process. It is important to know what is behind the trade-offs, which are the social preferences and which criteria we should set. In order to improve efficiency in the sector, the best choices and the definition of priorities should incorporate all these features.

Will this be painless? No. In order to induce a more rational use of the services and also to control expenditure, higher moderating fees will severely affect those who lost the exemption and those many others with a more inelastic demand for healthcare. According to the press, in some public hospitals, the reduction in intermediate consumption is already noticed and some basic materials have now become scarce (bandages, syringes, antiseptics). The adoption of innovation in the NHS is also more difficult when we are facing a more visible budget constraint. Since many physicians are now suffering the consequences of austerity, they might prefer to definitely change to the private sector, earning higher wages and benefiting from better working conditions. Does this raise equity concerns? If I were to a public hospital in January, am I sure that would I be treated equally as if I were in December when the budgetary limit is more evident?

How will the aftermath of the adjustment program be? Some might propose that, in the future, public health expenditures should have a constitutional limit as percentage of GDP in order to introduce commitment. The debate between rules and discretion is not new. We know that flexibility allows the reaction to unexpected shocks (a new deadly disease). However, we are also aware of the dynamic inconsistency of optimal plans. Usually, governments change their preferences over time and what was considered optimal in a certain point in the past may be considered inconsistent with what is preferred at another point in time. The problem is that preferences change without having any new information that was not possible to anticipate in the past. In summary, flexibility – the main advantage – becomes the main argument against discretion. However, this is what we learn from Public Economics: in thesis, rules are preferred to discretion. But now suppose: would it be difficult for the deputies in Parliament to congregate efforts and change the limit? 2/3 would be enough. And moreover: which limit should be set? Who will be responsible for calculating and monitoring? More recently, do we have any tradition of compliance with rules? This discussion illustrates how something theoretically good can, in practice, be inverted by reality.                                 

Tiago Silva