Dr. Eric Maskin: Diversification as Mechanism to Tackle Economic Crisis

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Dr. Eric Maskin

ASTANAThe Kazakh capital hosted another Astana Economic Forum, drawing the world’s attention and bringing together influential speakers from Europe, Asia, Africa and America.

The 2015 Astana Economic Forum, which completed its work May 22, was attended by more than 3,000 delegates, including world’s leading politicians, international experts in economics, Nobel laureates, heads of international organisations, business executives, media representatives and opinion leaders. The forum once again provided a platform where guest speakers exchanged knowledge and engaged in discussions on issues far beyond economics-based topics, encompassing the broader spectrum of long-term tasks targeting sustainable development.

Dr. Eric Maskin, Harvard University Professor of Economics, was among the forum’s honoured guests and gave a speech on sustainable development at a panel discussion. In 2007, Maskin received the Nobel Prize for laying the foundations of mechanism design theory. During his visit to the capital, Maskin gave lectures on the theory at Nazarbayev University and Kazakh Institute of Law, where he was titled the institute’s Honorary Doctor.

On the last day of his visit, Maskin sat down with The Astana Times to talk about mechanism design theory and its application in real life situations and share his impressions on the forum.

You have spent a great deal of your career on mechanism design theory. Could you please, in short, explain what mechanism design is?

Mechanism design is the part of economics where we work backwards from the goals to try to design a mechanism or a procedure for achieving the goals. The example I like to give is dividing a cake between two children. If you were a mother and you had two children and you wanted to divide the cake equally between them, the goal is to make sure that each child thinks that his piece is bigger than the other. That’s a fair division. How do you do that, because you don’t know how the children view the cake? It turns out there’s a simple mechanism that solves that problem. You let one of the children divide the cake and the other one gets to choose which piece he takes for himself. That means that when the first child is cutting he has to think, “If I cut this cake unequally, my brother will take the bigger piece, so I’ll have to try very hard to cut it so that the two pieces are equal from my point of view.” The first child is happy because he is getting half of the cake and the second child will be happy because he gets to choose his favourite piece and that solves the problem. That’s a very simple example of mechanism design, but it illustrates the basic features of the subject, which is that you could attain a goal, in this case fair division, even though you as the mechanism designer don’t have the necessary information yourself for reaching that goal.

On a bigger scale, on a scale of a country and society, where can mechanism design be applied?

It can be applied almost everywhere. For example, we’re riding through the streets of Astana right now and Astana from time to time has traffic jams. One place where mechanism design can be used is to try to reduce traffic in the city. There are different ways that you might attack this problem: you might impose tolls on some roads, or you might decide that all cars driven in the city have to be registered, or you might require cars to have transponders which keep track of where the cars are in the city and charge them accordingly, or you might ban certain types of cars from part of the city at certain times of the day or you might have some combination of all of these. Mechanism design gives you a set of tools for deciding which combination of those different policies will work best.

I assume governments are the main mechanism designers in most cases. Can society be a co-designer and if so, how does it become involved in designing mechanisms?

One way that society takes part directly is through contract negotiations. You can think of a contract as a mechanism for deciding how two people or maybe more than two people or two groups structure a transaction between them. If there is a company and a group of workers, they have to decide between them how long the workers are going to be working each day, what they’re going to be paid and under what circumstances their pay can be increased or reduced. All of these decisions are typically spelled out in a contract, so writing a contact is in itself an exercise in mechanism design which is undertaken by the people themselves, the people involved in the company.

Kazakhstan’s economy depends heavily on oil prices and Russia’s economy; with the two going down, there is another crisis looming over Kazakhstan. What mechanisms, in your opinion, should be designed and put into place to make sure this does not happen again?

Oil, of course, has been a boom to the Kazakh economy, but relying on it almost exclusively is risky. Economists say that whenever we’re making an investment and the prospects are uncertain, the best strategy is to diversify and the same principle, I think, applies here. What Kazakhstan really needs to do is to diversify its economy so that it’s developing alternatives to oil as the source of wealth for the country. Then it will have some insurance against fluctuations in oil prices. Coming back to mechanism design, governments can encourage this diversification by giving incentives to entrepreneurs who may be moving in other directions.

Astana has just hosted the eighth Astana Economic Forum. Many locals believe the government may be putting too much focus on branding the country and overspending on PR. When do you think the country’s measurable achievements and positive trends in the economy will be the tools for promotion of its image rather than large-scale promotional events?

You need both. In the long-term, you have to produce results, you can keep talking; but if you can’t produce solid outcomes, after a while no one is going to listen. At the same time, I think it is reasonable for a government, for a country, to hold large-scale events to get the world’s attention. It’s not just the matter of displaying your would-be accomplishments; it’s also a way of getting some ideas from the outside about future directions. It’s seems to be that people here, people in the government, are open to outside ideas and will try to act on them.

You’ve attended the Astana Economic Forum a few times. Are you seeing any positive outcomes and benefits for the hosting country from the previous discussions?

The President has just announced a series of 100 steps to advance the Kazakh economy. It seems to me that those steps have emerged out of the discussions with experts and advisors who have attended the forum in the past. That’s one example of the benefit from previous discussions.

At this year’s forum, your speech was on sustainable development and addressing the problem of unskilled workers and increasingly uneven wealth distribution. What are your recommendations in this regard for Kazakhstan and other transitional economies?

I talked about the problem, that to this point the current globalisation has tended to favour workers who have skills, not necessarily very high-level skills, but at least some skills, and has more or less left out people without skills. This has aggravated inequality in many developing countries. What to do about it? Well, the problem is not going to go away by itself; the solution is to give low-skill or no-skill workers some training so they can have opportunities, too. But this training is expensive, so that they are not going to be able to pay for it. The employers may not have the incentive to pay for it because if you train me, I can then go to work for your competitor and then you’ve lost your investment. So employers may not have sufficient incentive to do training. That leaves the government or some third party to do the investments. One way this can be done is for the government to subsidise job training by giving a tax break to an employer who hires and trains low-skilled workers.

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