IN THIS ISSUE

• Advance Directives and Medical Care atthe End of Life

• The Economic Decline in Africa• Flexible Exchange Rates Reduce

Economic Volatility• Does School Choice Increase School

Quality?

TheNBER DigestNATIONAL BUREAU OF ECONOMIC RESEARCH

January 2004

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Many Americans have decidedto prepare written instructions ontheir preferences for specific medicaltreatments in the event of a loss ofmental or physical competence. Thistrend toward preparing “advancemedical directives” has been debatedextensively by physicians, philoso-phers, and social scientists.

One issue is whether these end-of-life instructions would reduce thesubstantial health care resourcesdevoted to patients near death. In1990, the 6.6 percent of Medicarerecipients who died accounted for22 percent of program expendi-tures, a pattern that has changed lit-tle over time.

Another issue is whether patientautonomy and overall well-beingwould be enhanced by the use ofadvance directives. Although socie-ty has reached a consensus thattreatment decisions should reflect apatient's informed preferences, thisideal is often not implemented inpractice. Traditionally, physicianshave made such treatment decisionsin consultation with a patient’s fam-ily members. In addition, physiciansmay disregard a patient’s earlier stat-ed preferences, believing that termi-nal patients’ preferences change astheir illnesses progress.

In Advance Directives andMedical Treatment at the End ofLife (NBER Working Paper No.9955), NBER Research AssociateDaniel Kessler and Dr. Mark

McClellan provide new evidenceon the consequences of states’ lawsgoverning advance medical direc-tives for treatment at the end of life.They use a randomly selected sam-ple of elderly Medicare beneficiarieswho died between 1985 and 1995and estimate the effects of twotypes of laws: laws enhancing incen-tives for compliance by physiciansand hospitals with advance direc-tives; and laws requiring the appoint-ment of a health care surrogate —

such as a family member or guardian— in the absence of an advancedirective.

The authors report three keyfindings. First, laws enhancingincentives for compliance reducethe probability of dying in an acutecare hospital by .76 percentagepoints. Second, laws requiring theappointment of a surrogate todecide on treatment change the mixof treatment in the last month oflife, increasing the probability ofreceiving acute care in the lastmonth of life by .98 percentagepoints and decreasing the probabili-ty of receiving non-acute care by1.79 percentage points. Third, nei-ther type of law brings any savingsin medical expenditures at the endof life.

In particular, laws enhancingincentives for compliance withadvance directives increase medicalexpenditures in the last month oflife by $335; laws requiring delega-tion increase expenditures in the lastmonth of life by $379. On a base ofaverage expenditures in the lastmonth of life of $14,122 (1995),this amounts to a 2.4 and a 2.7 per-cent increase, respectively.

The authors also find that lawsgoverning end-of-life care have dif-

ferent effects on different types ofpatients. For example, amongpatients who died from cancer, lawsenhancing compliance with advancedirectives reduced the long-runprobability of dying in an acute carehospital by almost twice as much —1.38 percentage points — as for theentire sample of decedents. This isconsistent with laws having a largercausal effect for patients for whomend-of-life care is particularly impor-tant. In addition, laws enhancingcompliance with advance directiveshave a greater impact on less-edu-cated patients, but laws requiringdelegation in the absence of anadvance directive have a greaterimpact on more-educated patients.

The authors point out that theirfindings are consistent with previous

Laws dealing with advance directives and surrogates do not bring“any savings in medical expenditures at the end of life.”

Advance Directives and Medical Care at the End of Life

clinical research on the effects ofadvance directives. Advance direc-tives are not simply a means forrefusing treatment, although this isthe most common request. In addi-tion, previous research has also sug-gested that surrogates systematicallyopt for more intensive treatmentthan patients would prefer.

The authors conclude with sev-

eral suggestions for further research.Unless patients receive too littleacute and too much non-acute careat the end of life, laws requiring del-egation do not improve the align-ment of end-of-life treatment withpatient preferences, particularly formore-educated patients. The authorshypothesize that this may be becauseeducated patients also have educated

surrogates, who are better able topersuade medical care providers ofthe patient’s perceived wishes. Ifthis is the case, then programs toencourage surrogates to communi-cate better with their patients couldenhance patient autonomy and con-serve health care resources.

— David R. Francis

While the rest of the world’seconomy grew at an annual rate ofclose to 2 percent from 1960 to2002, growth performance in Africahas been dismal. From 1974through the mid-1990s, growth wasnegative, reaching negative 1.5 per-cent in 1990-4. As a consequence,hundreds of millions of African cit-izens have become poor: one half ofthe African continent lives belowthe poverty line. In sub-SaharanAfrica, per capita GDP is now lessthan it was in 1974, having declinedover 11 percent. In 1970, one in tenpoor citizens in the world lived inAfrica; by 2000, the number wascloser to one in two. That trendtranslates into 360 million poorAfricans in 2000, compared to 140million in 1975.

In The Economic Tragedy ofthe XXth Century: Growth inAfrica (NBER Working Paper No.9865), authors Elsa Artadi andXavier Sala-i-Martin review boththe deteriorating economic status ofthe African continent and the waysin which rich nations, as well as theAfrican nations themselves, might helpthe poor nations of the continent.

Using the robust econometricdeterminants of economic growthin a cross-section of countries, theauthors pinpoint the most impor-tant factors behind the tragedy. Thefirst culprit has been the lack ofinvestment. Over the past 40 yearsthe investment rate in Africa hasfallen. Since 1975 the investmentrate has declined to 8.5 percent for

the whole continent, compared toinvestment rates for the average-per-forming OECD economy ofbetween 20 and 25 percent, and forEast-Asian economies of 30 per-

cent. Furthermore, most of theinvestment was skewed in the direc-tion of the inefficient public sector.Recent reforms in Africa have raisedthe investment rate, but only slightly.

For the two major determinantsof human capital, education andhealth, Africa fares equally poorly. Inthe 1960s, the overall primary schoolenrollment rate averaged 42 percent,compared to a nearly 100 percentrate in OECD or East Asian coun-tries. If Africa had enrollment ratesat OECD levels during the 1960s, itsaverage 0.9 percent growth ratewould have been a much healthier2.37 percent and per capita incomestoday would be two-and-a-half timeslarger than they actually are.Improved enrollment rates since1960 mean that economic growthprospects are brighter now.

Life expectancy in Africa in 1960was just above 40 years, with corre-sponding values for OECD coun-tries and East Asia of 67 and 62,respectively. If Africa had a lifeexpectancy similar to the OECD, itsannual growth rate would have been2.07 percentage points larger.

Similarly, if Africa had no malariaover the past 40 years, its annualgrowth rate would have been 1.25percentage points larger.

Citing the fact that massive aid

programs have not helped much, theauthors suggest that new initiativesmay be needed. For example, moreresearch could be focused on thecontinent’s devastating health prob-lems. Africans themselves have nei-ther the resources nor the expertiseto discover vaccines that preventAIDS or malaria. Yet rich countrieshave little incentive to invest in theselines of research because the discov-eries will help people with little abil-ity to buy the products. The authorsbelieve that if international aidfinanced by bilateral donors andmultilateral institutions were redi-rected towards these health prob-lems, then the situation in Africamight improve.

The economic situation in Africaalso would improve if the militaryconflicts that have plagued the conti-nent over the past half-centurystopped. And, other important factorscould contribute to African economicgrowth: these include the maturationof institutions that guarantee the ruleof law and property rights; greaterinvestments in education; the reductionof policy distortions that make invest-

The Economic Decline in Africa

“One half of the African continent lives below the poverty line. Insub-Saharan Africa, per capita GDP is now less than it was in 1974,having declined over 11 percent.”

ments excessively expensive; and thereduction of wasteful consumptionexpenditures.

Opening up the African economiesto market forces of trade and techno-logical diffusion is also important.While African governments coulddo a lot to open their economies,Europe, Japan, and the United Statescould also contribute by facilitatingthe access of African products to

their markets and by reducing subsi-dies to their agricultural products.

One of the key consequences ofAfrica’s economic stagnation is thatincome inequality has increased,while it has decreased worldwide.This income inequality existswhether one looks at between-coun-try or in-country measures. That isbecause richer nations on the conti-nent have grown faster and because

rich citizens within each countryhave benefited more than poor citi-zens. A prime example is Nigeriawhere the incomes of the poorest80 percent of the citizenry havedeclined, while the incomes of therichest have increased. That situa-tion provides little incentive for therich and powerful to make meaning-ful policy changes.

— Les Picker

The international financial crisesof the 1990s — spanning LatinAmerica, Asia, and Russia —prompted a rethinking of appropri-ate exchange rate regimes for richand poor countries alike. In recentyears, fixed-but-adjustable regimeshave fallen out of favor, and manyeconomists seem to prefer eitherhard pegs or floating regimes (the socalled “two corners” debate).Supporters of hard pegs contendthat such arrangements fosterincreased economic stability, whilefloating-regime advocates maintainthat their option helps countriesadjust more quickly to externalshocks such as terms of tradeshocks.

In Flexible Exchange Rates asShock Absorbers (NBER WorkingPaper No. 9867), co-authorsSebastian Edwards and EduardoLevy Yeyati examine the impact ofterms-of-trade shocks on economieswith different exchange rate regimes.While many studies have looked atthe relationship between terms oftrade and economic growth, theauthors explain, few have studiedhow the choice of exchange rate sys-tem mediates that relationship.

Edwards and Levy Yeyati seek toredress that deficiency by posingthree questions. First, do terms oftrade shocks truly have less traumat-ic effects on GDP (gross domesticproduct) growth in countries withflexible exchange rate systems?Second, do negative and positive

shocks have an asymmetric effect ongrowth, and if so, is the differencecontingent on the type of exchangerate regime? And third, do countrieswith flexible regimes grow fasterthan those with fixed regimes, orvice versa?

To answer these questions, the

authors use a sample of annual observa-tions for 183 countries over the1974-2000 period. Edwards andLevy Yeyati also construct fourindexes of exchange rate regimes(pegged, hard, intermediate, andflexible) for each year in the sample,since they maintain that the officialInternational Monetary Fund classi-fication of such regimes acrosscountries tends to be “misleading.”

Using a long-run GDP growthequation, the authors confirm pastfindings regarding the standard fac-tors explaining differences in GDPgrowth per capita, such as initialGDP, education, openness, and gov-ernment spending. After controllingfor such factors, Edwards and LevyYeyati find that economies with flex-ible exchange rates grow more rapid-ly than those with fixed regimes. Thedifference in the rate of growth ofGDP per capita is substantial, on theorder of 0.66 and 0.85 percentagepoints more per year for countrieswith flexible systems.

Focusing on external shocks,Edwards and Levy Yeyati find thatterms of trade shocks are exacerbat-ed — in terms-of-the-impact oneconomic growth — in countrieswith more rigid exchange rate sys-tems. For instance, in a country witha pegged exchange rate, a 10 percent

deterioration in the internationalterms of trade has been associated,on average, with a contemporaneousdecline in GDP per capita growth of8/10 of one percentage point, com-pared to a reduction of only 43/100of one percentage point in countrieswith a flexible system. Therefore,the authors explain, “under flexibleexchange rates the effects of terms-of-trade shocks on growth areapproximately one half that underpegged regimes.” (These resultshold even when the authors dividethe sample into industrialized andemerging economies.)

Edwards and Levy also find evi-dence of an asymmetry in terms-of-trade shocks: output growth is moresensitive to negative than to positiveshocks, and the sensitivity increasesthe more inflexible the exchangerate regime. The advantage of flexi-ble systems resides in their ability toadjust more smoothly to negativeshocks via depreciations in the realexchange rate. In pegged systems, a

“Under flexible exchange rates the effects of terms-of-trade shockson growth are approximately one half that under pegged regimes.”

Flexible Exchange Rates Reduce Economic Volatility

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In 1996-7, North Carolina had nocharter schools. Three years later its91 charter schools had enrolled14,899 students, about 1 percent ofthe state’s total public school enroll-ment. In Does School ChoiceIncrease School Quality? (NBERWorking Paper No. 9683), GeorgeHolmes, Jeff DeSimone, andNicholas Rupp use end of yeartest scores for grades three througheight from North Carolina’sstatewide testing program toexplore whether the competitionprovided by charter schools had anyeffect on the test scores in publicschools run by school districts.

Most charter schools opened inmetropolitan areas, and 90 percentof district schools were within 13

miles of a charter school. Theauthors find that charter schoolcompetition raised the compositetest scores in district schools, eventhough the students leaving districtschools for the charters tended to

have above average test scores. Thegain was relatively large, roughlytwo to five times greater than thegain from decreasing the student-faculty ratio by 1, and more than“one-half of the average achievementgain of 1.7 percent in 1999-2000.”

For comparison, the authorspoint out that the North CarolinaGovernor’s Office proposed increas-ing achievement by reducing averageclass size by 1.8 students at a cost of$26 million in 2002. The data sug-

gest that this would produce justone-third of the test score increasecreated by opening a neighboringcharter school, a move that wouldnot require any additional spending.

— Linda Gorman

Does School Choice Increase School Quality?

“Charter school competition raised the composite test scores in dis-trict schools, even though the students leaving district schools forthe charters tended to have above average test scores.”

depreciation of the real exchangerate requires a decline in nominalprices; if these are too rigid, negativeterms-of-trade shocks will produceunemployment and a slower rate ofeconomic growth.

The authors conclude by empha-

sizing the practical importance andpolicy relevance of their findings.Since the economic contractionassociated with a terms-of-tradeshock “nearly doubles” under apegged system, “the choice ofexchange rate regime has important

implications in terms of outputvolatility,” they explain. Moreover,pegged systems are also associatedwith “deeper and longer contrac-tions” in economic performance.

— Carlos Lozada