Owen abroad

I’m not sure why we seem to think poor countries are not as capable of managing the same challenges that virtually all governments face—i.e. matching uncertain revenue streams with financial needs. In most of the United States virtually every municipal government is facing this problem. Rather than guaranteeing poor governments (which often have poor financial controls and poor systems) uninterupted streams of aid money, we should be improving their ability to manage this challenge– whether it comes from the unpredictability of aid flows or the unpredictability of their own tax base.

Owen replies: Jeff – Homi Kharas’s estimate of the cost of unpredictability is the cost as seen from Wall Street, not as seen from Lusaka. It uses an option pricing model to estimate the market value of a volatile aid stream. So his estimate does not assume that poor countries are less able to manage the challenges than rich countries – it estimates what the cost to them of doing so would be. (Unpredictability also costs us money in rich countres, which is why people make money in insurance, bond markets and exchange rate hedging).

Most importantly of all, people in developing countries do not have saftey nets of unemployement benefit or welfare systems. If someone loses their job in the US it is a big personal cost to them. But it is unlikely to mean that their children will suffer from malnutrition, or have to be withdrawn from school; farmers are unlikely to have to sell their oxen or their seeds for next year’s planting. If a school teacher cannot be paid in Rwanda, that can affect not only the teacher but an extended family, and the costs can be both devestating and permanent. The welfare costs of financial volatility are much greater in developing countries than in rich countries.