There is now a 50% chance of being infected by an internet worm in just 12 minutes of being online using an unprotected, unpatched Windows PC, according to Sophos.
Credit where it is due: President Bush made a speech about Africa yesterday. Two quick comments. First, I cannot see how the White House reckons it has trebled aid to Africa. President Bush said yesterday:
Over the last four years, the United States has stood squarely with reformers in Africa on the side of prosperity and progress. We’ve tripled our aid to Africa; we plan to double it once again.
The figures show that from FY 2000 to FY 2005 (estimated), U.S. aid to Africa will have increased by 78% in real terms or 93% in nominal dollars – not quite a doubling, much less a “tripling” of aid. Of this increase, 50% consists of emergency food aid (PL 480 Title II). You can see the full figures here. Second, it isn’t true that aid is only effective when given to good governments. President Bush said yesterday:
Over the decades, we’ve learned that without economic and social freedom, without the rule of law and effective, honest government, international aid has little impact or value. But where there’s freedom and the rule of law, every dollar of aid, trade, charitable giving, and foreign and local investment can rapidly improve people’s lives. (Applause.)
This sounds plausible; but none of the aid-growth regressions find that aid is completely ineffective in poor policy environments, and many of them find that the quality of the policy environment makes little or no difference to the effectiveness of aid. I have no objection to donors choosing to channel their aid to better governments where possible, but they should not mislead themselves or the public into thinking that this is justified by evidence that shows that aid is not effective in badly governed countries, or that it is substantially more effective where policy is good.
There has been quite a bit of interest today in two new studies by Raghuram Rajan and Arvind Subramanian from the IMF. I apologise for this rather technical posting, but it is important to understand that, while the authors are eminent economists, the econometrics underlying these particular papers is seriously flawed. Correctly specified, the model in fact produces the same correlation between aid and growth that countless other studies have found.
There was a press report about the study in today’s Financial Times, and also on Newsnight tonight. It has also been picked up elsewhere in the blogosphere. The first paper, Aid and Growth: What Does the Cross-Country Evidence Really Show?, challenges evidence of a link between aid and economic growth. The second, What Undermines Aid’s Impact on Growth, argues that the benefits of aid may be offset by an appreciation of the exchange rate.
The problems with the first paper are to do with the way the econometrics have been specified. The criticisms that follow are derived entirely from expertise of my colleagues – especially Michael Clemens. (Any errors are my own.)
The authors’ own results show that a number of small and sensible changes to the way they have specified their model would change their results. Each change would, by itself, only lead to a small and possibly statistically insignificant increase in the correlation between aid and growth; but if they are taken together, as they should be, the result would get a large and statistically significant positive relationship, as found in all the other studies of this topic.
Here are three examples of how the authors have missspecified the model and ignored the evidence in their own results. First, when they regress growth on aid, assuming a linear relationship between the two, they get a zero or negative relationship. They do this several times. But every growth model since the late 1950s and nearly every aid-growth study since 1995 has recognised that aid would have a nonlinear impact: that is, there would be diminishing returns to aid. If you don’t allow for this effect explicitly in your model, then an upside-down U-shape can look like a flat line. When Rajan and Subramanian allow for this (in part of one table): not surprisingly, the aid effect becomes positive in all cases and comes close to being statistically significant in many cases. Clearly, a non-linear specification is needed: but Rajan and Subramanian take no notice of this whatsoever. Second, much aid is either not aimed at growth (e.g. humanitarian) or is not expected to cause growth on the medium term, not even a few decades (e.g. aid to support democracy). When Rajan and Subramanian eliminate these types of aid from their measure and focus on "economic sector" aid: not surprisingly, the aid coefficient is positive and statistically signficant (though sensitive to the instruments chosen, as all instrumented variables are). Again, this is to be theoretically expected, but Rajan and Subramanian do not adjust their model to take account of it. Third, theory leads us to expect that it is absolutely crucial which other variables you control for, since many country characteristics are correlated with both aid and growth, and could lead to spurious negative correlations between those two variables if they aren’t accounted for. Rajan and Subramanian don’t meaningfully test the sensitivity of their results to which other variables are controlled for, they leave out variables which have been demonstrated in the literature to be correlated with both aid and growth (e.g. civil warfare and the occurrence of natural disasters) and wrongly include other variables (e.g. they control for government spending — presumably the very channel through which much aid acts!). Now while each of these effects is small by itself, if they were to make all of these changes simultaneously, as their own tables make clear, the effect of aid would be positive and significant. All of the changes are justified by theory and by 30 years of literature (to which they scarcely refer.) Just to be clear: Rajan and Subramanian’s own tables show that a well specified regression specification would reveal aid’s positive impact on growth. They would get results similar to those reported here which find a strong, positive, and statistically robust correlation.
There are other, even more technical problems about their econometric strategy. In particualr, they do not make a clear case that their instruments capture a large fraction of the variance in aid, i.e. that their instruments have "power", which is absolutely essential if one is going to claim that the coefficient on an instrumented variable is indeed zero.
Rajan and Subramanian second paper seeks to explain their findings by reference to the macroeconomic effects of aid flows, and in particular the "crowding out" effect of Dutch Disease. The point is that an increase in aid flows can cause an appreciation of the real exchange rate which then crowds out the very export industries on which a country may depend for growth. When I was at the Department for International Development (the UK aid agency), we did quite a careful study of this. The results were published here. The paper found that, sustained aid inflows raise incomes and welfare in the recipient country, but in doing so they generally cause some appreciation of the nominal and real exchange rates. This is a necessary aspect of the adjustment process. If aid is used effectively, this appreciation will not undermine growth, either in aggregate or in the export sector. We also found that temporary increases in aid require greater flexibility on the part of the recipient government, and that this effect was an additional reason why donors should ensure ensure that aid flows and their disbursement are sustained and predictable.
Rajan was quoted in the FT saying "We need to be careful given the chequered history of aid, that we do not place more hopes on aid as an instrument of development than it is capable of delivering." This is absolutely right: aid is not the whole answer to development. But the study which claims to contradict the substantial body of evidence that aid makes a significant contribution to economic growth in developing countries is seriously flawed at a technical level.
Please sign the One Campaign Declaration. The declaration is:
WE BELIEVE that in the best American tradition of helping others help themselves, now is the time to join with other countries in a historic pact for compassion and justice to help the poorest people of the world overcome AIDS and extreme poverty. WE RECOGNIZE that a pact including such measures as fair trade, debt relief, fighting corruption and directing an additional one percent of the U.S. budget toward meeting basic needs – education, health, clean water, food, and care for orphans – would transform the futures and hopes of an entire generation in the poorest countries. WE COMMIT ourselves – one person, one voice, one vote at a time – to make a better, safer world for all.
Tim Worstall has an interesting post in which he argues that redistribution is made harder by having big government. I agree with him that:
- the poor pay too much in tax
- the state takes an unnecessarily large share of national income
- income tax should be used as a tool for redistribution
But:
- he ignores the role of spending in redistribution; public spending – for example on pensions & benefits – is much more important for reducing inequality than taxes. Overall, taking indirect and direct taxes together, the tax system is not redistributive; and all the redistribution caused by government is the result of the redistributive effect of public spending. About half of the government budget is handed back as grants, not spent by Government on goods and services. So if you care about inequality, on the whole you want more, not less, public spending.
- he asserts (without offering any evidence) that a progressive income tax system is harder to achive if revenues are a larger portion of national income. Presumably the problem is meant to be that it is hard to tax the rich proportionately more than the poor, which is what a progressive tax system requires, as the tax take increases – but it is not clear that this is in fact a constraint on the extent of redistribution through income tax at the current rates of tax.
Both of these make it very unlikely that the size of the Government is in fact an important determinant of the extent of redistribution. I think Tim and I would agree that income tax would be improved if we could broaden the base by reducing tax exemptions and allowances and reduce tax rates – a policy which Nigel Lawson pursued with some success and which this Government has largely reversed. This tends to be progressive because many of the tax breaks and allowances benefit vocal middle class lobbies more than they do the poor. Many people on the right argue for flat taxes, and for tax to shift from direct to indirect tax. Either of these would make it harder to pursue redistribution through income tax, an objective which Tim seems (unexpectedly, to me at any rate) to embrace.
A commendable speech by Condi Rice (full text here). Perhaps she read my post yesterday? She said:
For 60 years, my country, the United States, pursued stability at the expense of democracy in this region here in the Middle East — and we achieved neither. Now, we are taking a different course. We are supporting the democratic aspirations of all people. … We know that different societies will find forms of democracy that work for them. When we talk about democracy, though, we are referring to governments that protect certain basic rights for all their citizens — among these, the right to speak freely. The right to associate. The right to worship as you wish. The freedom to educate your children — boys and girls. And freedom from the midnight knock of the secret police.
I was impressed too by the unexpected humility with which Rice discussed the US’s slow progress to universal suffrage and democracy. What the speech lacks, however, is any sense of what will change on Monday morning, when Rice gets back to the office. If we are now backing democracy instead of stability, what is going to be different in US relations with Saudi Arabia and Pakistan? We shall see.
Interesting report from the New Economic Foundation (pdf) about the rise of "Clone Town Britain".
In the place of real local shops has come a near-identical package of chain stores replicating on the nation’s high streets. As a result, the individual character of many of our town centres is evaporating. Retail spaces once filled with independent butchers, newsagents, tobacconists, pubs, book shops, greengrocers and family-owned general stores are becoming filled with supermarket retailers, fast-food chains, and global fashion outlets. Many town centres that have undergone substantial regeneration have even lost the distinctive facades of their high streets, as local building materials have been swapped in favour of identical glass, steel, and concrete storefronts that provide the ideal degree of sterility to house a string of big, clone town retailers.
In general, it is not WalMart that puts small, local shops out of business, but WalMart’s customers, who choose to shop there. And since they clearly prefer the value that WalMart provides to the convenience – at a price – of more local shops, then it is hard to see how the customers could be worse off as a result of having that choice. I personally prefer small traders to large chain stores, and I generally shop in my local, sole-trader grocery store rather than Safeway across the road. But I am in the fortunate position of being able to afford the slightly higher prices that I pay as a result. For many people who live within very tight budgets, the cost reductions provided by the large-scale retailers are of considerable benefit. The willingness to pay higher prices to preserve local, independent retailers seems a somewhat bourgeois luxury; and I have little time for those who want to use the planning system to limit access to the lower prices that the big chains can offer. But the NEF report makes an interesting point about the value of diversity which is threatened by the growing domination of a small number of chain stores. They make the analogy with genetics, in which diversity lays the basis for natural selection, and hence the evolution of better genes. Perhaps we need diversity in our towns and retailing to provide an environment for innovation and hence improvement? Most societies have norms – usually enshrined in law – against incestuous relationships with close relatives. The reason for this is that there is a public good interest in preserving the diversity of the gene pool. By analogy, I suppose there may be a case for public policy to promote greater diversity in our towns, despite the market pressures towards homogenisation.
I was very struck by this article by the BBC’s Lara Pawson, about the behaviour of ex pats living in Africa.
When aid agencies like the UN’s World Food Programme move in, African administrations tend to be let off the hook. But who can object? They’re only there to help. The aid worker goes to Africa to care for the African, to make the African healthier and more democratic. Perhaps this explains why many expatriates – even a large number of those who are in Africa to ‘do good’ – so often resort to behaviour and attitudes that reveal a superiority complex reminiscent of colonialism.
I commend to you an excellent article at Democracy Arsenal about Sudan, and the failure of the powerful nations to stop the genocide in Darfur. (The article is about United States policy, but the point applies equally to the United Kingdom.)
In the eyes of the world, Darfur is a test – maybe the most closely watched test – of who we are. If we put the quest for intelligence on terror above the battle against what we ourselves have called genocide, the answer to who we are is one that will push other countries away, rather than drawing them toward us. This will hurt us in more than just the war on terror. Yes, the fight against terror is important. More important than nearly any other U.S policy objective. But not more important than what we stand for.
Very interesting article in The Times about Ratzinger and his time in the Hitler Youth.
“Resistance was truly impossible,” Georg Ratzinger said. … Some locals in Traunstein, like Elizabeth Lohner, 84, whose brother-in-law was sent to Dachau as a conscientious objector, dismiss such suggestions. “It was possible to resist, and those people set an example for others,” she said. “The Ratzingers were young and had made a different choice.” In 1937 another family a few hundred yards away in Traunstein hid Hans Braxenthaler, a local resistance fighter. SS troops repeatedly searched homes in the area looking for the fugitive and his fellow conspirators.
You can say we should forgive him the choices he made as a young man. But don’t tell me he didn’t have a choice. He did, and he chose wrong.
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