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Archive for the ‘Markets’ Category

There was an interesting article in last week’s Economist about the use of prizes to promote innovation. It was supportive of the idea in general, but it seemed to gloss over the economic  arguments.  I think it is a shame that the Economist did not take the opportunity to explain the economics of rewarding innovation, and in particular to explain in economic terms why our current arrangements do not do a good job of creating incentives for innovation that benefits developing countries.

You can think of patents as a kind of prize.  When you invent a new product, the government gives you the right to operate a temporary monopoly. This enables you to charge more than the marginal cost, and the premium is your “prize”. This arrangement has the huge advantage that it links your reward to the amount people are willing to pay for your invention, so it encourages innovations that people actually value.

This kind of prize as a reward for innovation may be fine for a new kind of vacuum cleaner, or for Lady Gaga’s latest album. But it has two big disadvantages which are especially relevant for people who live in developing countries.

First, the use of patents prevents some people from benefiting from the new technology if they are unable to pay the higher price.  If a company develops a drug for heart disease, or a more efficient form of solar panel, the patent will enable them to charge much more than marginal cost for their product. That’s how the inventor gets paid. But the result is that millions of people will not be able to afford that product – though they might be able to afford it at marginal cost. The temporary monopoly results in fewer people benefiting from new technologies than ought to benefit, in the sense that those people would be willing and able to pay the marginal cost.  This is potentially a big welfare cost to society as a whole. It means, for example, that people may die of heart disease because they can’t afford the high price of the drugs, even though they could buy the drug if it were sold at marginal cost; or they can’t use new fertilizers or seed technologies, even though the benefits to them of doing so exceed the cost.

Second, if we reward inventors by granting them temporary monopolies, we only create incentives to develop products for which there are likely to be enough consumers wealthy enough to pay a monopoly price.   Nobody will invent a vaccine against malaria, or a cassava plant that resists mosaic virus, based on the possible rewards they will get from charging high prices to its consumers.  So the patent system is a prize for people who invent cures for baldness, but not a prize for people who invent ways to prevent the spread of malaria.

For these reasons, other incentives, such as prizes, Advance Market Commitments, and similar mechanisms, may be effective either as alternatives or complements to the patent prize of a temporary monopoly, especially for technologies that would have benefits in developing countries.

The Economist quotes Tachi Yamada, the president of Global Health at the Gates Foundation, as suggesting that Advance Market Commitments or prizes may not work well for drugs that require a long time to develop:

Tachi Yamada of the Gates Foundation is a big believer in giving incentive prizes, but gives warning that it can take 15 years or more to bring a new drug to market, and that even AMC’s carrot of $1.5 billion for new vaccines may not be a big enough incentive. No prize could match the $20 billion or so a new blockbuster drug can earn in its lifetime. So, in some cases, says Dr Yamada, “market success is the real prize.”

This seems to reflect the suggestion that is sometimes made that Advance Market Commitments may not be appropriate for for early stage drugs, but the economics of this argument is faulty.

It is clearly true that the reward for bringing to market an early stage medicine, such as an AIDS or malaria vaccine, would need to be higher, both because of the greater uncertainty and risk of failure, and because the rewards are further in the future.  So an AMC for an early stage product would probably need to be larger than for a late stage product that just needs some tweaking for use in developing countries and some investment in bigger production facilities.  But let’s not overstate this.  The median total market size for new chemical entities that pharmaceutical companies actually bring to market is about $3-$4 billion.  Most medicines are not $20 billion blockbusters.  So $3-$4 billion is roughly the market size that the private sector considers sufficient reward to develop new medicines.   We don’t need to match the blockbusters.  An AMC of $4 billion might well be enough to incentivize the development of a malaria vaccine: and let’s not forget that if it turns out not to be enough, it won’t have cost the funders anything.

Furthermore, just as the firms discount the prize by the risk of failure, the funders should similarly discount the cost.  If there is a 25% chance that no vaccine will be developed (because the technology is uncertain) then firms will discount the “prize” – that is, the value of the committed market – when they make their investment decisions.  But in this case, the expected cost to the funders of a $4 billion pledge is $3 billion, and this is what they should include in their value for money calculation.  That means that even though the nominal amount that has to be promised for an early stage product needs to be higher for a given impact on R&D, to take account of the probability of failure, the expected cost to funders is not higher.

The same point can be put another way.  A high probability of failure makes all investment in R&D less attractive, but it does not make AMCs relatively less attractive than other forms of funding.  When the probability of failure is high, the expected return from each dollar spent encouraging innovation is lower. This is true if that dollar is spent up-front in the form of research grants of the kinds normally given by aid agencies and foundations (since the higher probability of failure reduces the expected benefits of the grant), or in the form of a prize or promised market (since the higher probability of failure reduces the expected benefit to firms, and so reduces the incentive for them to invest in R&D).  The effect is the same either way. Higher probability of failure is clearly bad, but it does not make AMCs relatively less efficient as a way to pay for research for early stage products.

Whether an AMC for an early stage product is good value for money depends ultimately on the value of the product.  If donors were to spend $4 billion buying a malaria vaccine for use in developing countries, it would be a hugely good investment, saving millions of lives a year at a fraction of the price of many other interventions. It would result in huge savings on trying to prevent malaria in other ways, or treat to treat malaria; and the resulting reduction in the burden of malaria would have huge economic benefits for developing countries. Given that there is no question that donors would want to spend at least $4 billion paying for a malaria vaccine to be used across the developing world, it is inefficient for them not to say so right away, and thereby create incentives for private sector investment in accelerating its development.  The risk of poor value for money in aid spending comes not from making the commitment, but from failing to do so.

When Dr Yamada says that “market success is the real prize”, he seems to be missing the point that market success is not a good way of rewarding innovation for developing countries.   If we rely on market success, in the form of a temporary monopoly, to reward innovation then we will exclude half the world’s population from being able to access technologies developed with rich markets in mind, such as drugs against cancer and heart disease, clean energy, new agricultural technologies, or new software.  And “market success” creates no incentive to develop technologies which primarily benefit the world’s poor such as a vaccine against malaria or a variety of cassava that resists the mosaic virus, because inventors know that the people in poor countries cannot afford the monopoly prices that would enable inventors to recover their costs.

I am grateful to Oxfam’s Duncan Green for his fair and thoughtful review of my paper about improving aid, Beyond Planning: Markets and Networks for Better Aid.

I’m glad that Duncan and Chris, his Oxfam colleague,  endorse a key argument of the paper, which is that the development industry will improve through evolutionary change rather than grand design; and that a driver of this change will be better mechanisms feedback from the citizens of developing countries about what is working. The paper points out that this kind of evolutionary change comes from variation and selection – and that the aid business does not have enough of either to ensure evolution towards more effective aid.

Duncan and Chris  have reservations about the word “beneficiary” to describe the people in developing countries whom aid is intended to support.  I think that is a good point, and I’d be happy to use a different word if we can find a suitable alternative (I don’t think that “primary stakeholder” or “rights holder” takes the trick, since neither is sufficiently specific about who we mean).

I don’t want to put words in Duncan’s mouth, but I detect from his review that he is more sceptical than me about the value of markets. He dismisses without much fanfare the  the idea of giving more choice to the, er, “intended beneficiaries” (aka primary stakeholders and rights-holders):

Where I think he is wrong is a largely market based philosophy for creating incentives based on New Public Management theories of expanding choice more than voice. … This in turn requires some quite fundamental organisational change with in aid agencies, as well as establishing more citizen to citizen links possibly using new social media.’

That is an unfair characterisation of my view: I am in favour of choice AND voice.  A large part of the paper, especially when talking about networks, is precisely about how citizens can have more voice, and I talk explicitly about citizens links through new social media.  But there are huge problems to overcome in achieving this, because the “intended beneficiaries” are geographically and politically remote from decision-makers in aid agencies, which means their voice is dimly heard, if at all.

While I agree with Duncan on the need to ensure that people have voice, I find it surprising that he (in common with many people who regard themselves as progressive) is so reluctant to give choice where possible as well.   Duncan’s (excellent) book is called From Poverty To Power – and I believe that giving people direct control of resources and allowing them to choose what services they want, and from whom, can be one of the most important ways of empowering people.  Duncan calls this a “technocratic/new labour enthusiasm for using market mechanisms” – but the idea of giving the poor more direct control of resources goes back long before New Labour:  Oxfam’s honorary President, Amartya Sen, got a Nobel prize for his 1982 book, Poverty and Famines: An Essay on Entitlement and Deprivation, which argued that it would be better to give people money than food in a famine.

I have not swallowed the New Public Management story hook, line and sinker, but I do believe that there have been positive experiences (for example, from the publication of league tables, and the distinction between purchaser and provider).  While I think we should learn from new public management, my paper describes in some detail the shortcomings of a market-only approach, especially as it relates to foreign assistance.  I hoped my paper would be an elegant synthesis of some of the best (and proven) tools of this school of thought with lessons from other approaches, especially the use of complementary mechanisms of networks, voice, regulation and planning.

The aid industry has almost entirely evaded the reform of public services over the last decade.   There is no measurement of results; no distinction between purchaser and provider; no customer choice.  Presumably the lack of reform is partly because the shortcomings of the industry are felt by people with no political power or voice in the political systems of donor countries. The incumbent service providers are politically powerful, well organised, and deeply conservative about any change that affects their interests.  The aid system has, over time, drawn to it people who are sceptical about the value of markets and choice, saddling developing countries instead with five year plans and long coordination meetings.  No politician in a donor country is enthusiastic to take on these vested interests, in order to improve services for people they will never meet and who have no vote in the election.

Michael Clemens from the Center for Global Development talks about immigration – which he describes as “The Biggest Idea in Development that No One Really Tried“.  In this TED-talk style video, he addresses criticisms of open borders such as the idea that open immigration would impoverish rich countries (it wouldn’t), and that it is politically impossible (so too, once, was the abolition of slavery).
 

Michael’s approach is an enviable combination of analytical rigour and strong ethicaal principles.  This 25 minute video is a powerful argument for why we can, and should, remove government restrictions on where people can live and work.

Martin Wolf in the Financial Times says he is calling for “a debate” about immigration but his article is, in truth, a thinly-veiled diatribe against immigration on the grounds that it harms the economy, the environment and society.

The most important step in his argument is the first one.   Wolf says:

I, for one, have no difficulty with arguing that immigration is a privilege, not a right. Most people agree.

The assertion that “immigration is a privilege not a right” seems to me to be the wrong starting point.  I would begin with an opposite premise that seems to me to be much more basic and compelling:  “The burden of proof rests on those who would restrict human freedom.” If someone wants to move from one part of the planet to another, to live and work and raise their family, then we ought to have a very good reason before we set up a system to stop them.

To construct his argument, Martin Wolf wants us to believe both the following claims:

1. Immigration has a negative impact on the existing population; and
2. We ought to pay more attention to the interests of the existing population than the interests of the migrants.

On the first leg of this argument, Martin Wolf (under the guise of “calling for a debate”) claims that immigration is harmful to the economy, environment and society of the existing population.  As it happens, I don’t agree with any of this, though since that is not the point I want to focus on, I shall restrict myself to pointing to the economic and social success of countries that have been open to large-scale immigration.   But while I think the first leg of the argument is wrong, it is the second leg of the argument that I most want to challenge.

I doubt if anyone would seriously contest the view that even if if immigration causes some harm to the existing population, this harm is in total is far less than the very significant benefits to the migrants themselves.   So the case for restricting the freedom of people to live where they choose can only be made if you accept that we should pay more attention to the interests of the existing population than to the interests of the migrants.

There is no question that it is a widely-held view that we should give more weight to the interests of the existing population.  For example, Wolf says:

My view is that the interests of the existing citizens are of decisive weight, though we should also place some weight, too, on the interests of immigrants.

Perhaps I was born with faulty wiring, but I simply do not understand this view.

I believe we should give equal weight to the rights and interests of every human being. The idea that the interests of people born in our own country should weigh more in our moral calculus than the interests of people born elsewhere is, in my view, indefensible.  To say that we will less attention to the interests of another human  because they happen to have been born far away is organised racism, directly comparable with the pass laws under apartheid.

The United States Declaration of Independence asserts:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

The Declaration of Independence does not limit its assertion of equality to people born within a single country. Nor is the pursuit of happiness bounded by national borders created by man. (This is just as well, as in the period following US independence one third of Europe’s population migrated to the Americas.)

Of course, the view that we should give equal weight to the interests of all human beings is unlikely to get very far in political systems designed to represent the interests of the citizens within existing borders.  But just because a political system makes it possible to ignore the rights and interests of a group of people who are weakly represented in it does not mean that it is morally right to do so.

My view is that the burden of proof lies with those who would restrict the freedom of people to live anywhere they choose.   This argument would require, at minimum, weighing up the costs and benefits of a restriction to show that we are better off in total if we curtail this freedom.  A case could only be made by placing more weight on the interests of the existing population than on the interests of other people.  I understand that there is a a widely-held view that we should do exactly that, but I nonetheless think it is profoundly wrong.   When we weigh up the argument for a policy to restrict people’s freedom based on the benefits that such a restriction will bring, we should place equal weight on the rights and interests of all people, and not privilege the interests of some people who happen to be like ourselves.  The case for restricting immigration rests on denying the equal humanity of people born abroad.  I hope that, over time, we will come to see this with the same moral outrage as we now view slavery and apartheid.

When I was a teenager, I visited Berlin, and read the grafitti on the Berlin Wall that said “No wall can stand forever”.  Now on the twentieth anniversary of the fall of the Berlin Wall, we look back with horror at the way the wall was used to keep people in.  Perhaps in another twenty years we will look back with equal disgust at the walls we build today to keep people out.

Daniel Kaufmann and Mushtaq Khan talk about corruption in the latest edition of Development Drums.

Though they come from quite different points of view, there is quite a lot of convergence between them. They agree that there is much more corruption in poor countries than in rich countries; that nobody should put too much faith in econometrics to decide whether corruption is a reason that poor countries remain poor; and that you do not fight corruption by fighting corruption.  But whereas Daniel Kaufmann believes that you have to tackle corruption to create the conditions for markets to work and to to create economic growth and prosperity, Mushtaq Khan believes that you should focus on policies to promote growth and that a certain amount of corruption is an inevitable (albeit undesirable) corolloray of the transition to a capitalist economy. I hope you find the discussion between them as interesting as I did.

What strikes me about all this is that this is a topic on which there is a serious gap between mainstream public opinion and the opinion of many (but by no means all) development “experts”.  Most people believe that corruption is a one of the most important reasons why poor countries remain poor; and yet a lot of people working in development seem to be willing to tolerate some corruption as an inevitable fact of life in poor countries.   My view is that this is a topic on which we need to see much more convergence of thinking, based on sound evidence and analysis, and that this is an important step if the development business is to regain and retain the trust of the people paying for development assistance.

Where do I come down?  I guess somewhere in between. Corruption is clearly a very serious problem which robs the poor most of all, and deprives millions of people of access to service and of the opportunity to earn a living.  In some countries, it is a major obstacle to economic growth (I think Nigeria is such a country). But there are many different causes of poverty, and there are some poor countries that have very little corruption (Ethiopia, where I live, is such a country).  And there are striking examples across history of countries that have experienced rapid industrialisation despite having quite high levels of corruption at the time (including Indonesia, Thailand, Korea, Japan) – in many cases, corruption is something that is tackled after the establishment of an industrialised capitalist economy with a strong middle class, not before.

I do think that many people working in development are too complacent about corruption.  The poor, like all of us, have dreams of a better life, and they are not helped by a poverty of aspiration on our part.

There are some countries – such as Nigeria – in which corruption is clearly a major obstacle to investment and growth.  There are other countries – such as Ethiopia – in which there is very little corruption which are nonetheless very poor, so it cannot be the case that eliminating corruption is the main driver of development.  And a lot of industrialized countries had long periods of rapid economic growth despite widespread corruption – which in many cases they sorted out after they became rich, not as a pre-requisite to growth.

On the first World Pneumonia Day, spare a thought for the mothers and fathers of the five thousand children who will be killed today by pneumonia.

Pause for a moment in silent thanks to the staff of the GAVI Alliance which works to get immunisation to children in developing countries.

If you pay taxes in Italy, the UK, Canada, Norway, or Russia, pat yourself on the back.  Your government has contributed to a market-based financing mechanism called the Advance Market Commitment, or AMC.  This provides  an incentive for vaccine makers to produce suitable vaccines in the necessary quantities at an affordable price for developing countries. The result is that GAVI has been able to reduce the current price of existing pneumococcal vaccines by up to 90%.

In the past, it often took 15 or 20 years before vaccines developed for rich countries were sold at affordable prices in developing countries.  Because of the Advance Market Commitment, four vaccine suppliers are now offering pneumo vaccines, specifically developed for the the developing world at affordable prices.

This is aid at its best: creating financial incentives for companies to bring their expertise and innovation to the table to solve some of the world’s most pressing problems.  Donors only pay for vaccines that actually get delivered and used. This money will save the lives of about seven million children over the next 20 years.

We owe a debt to Michael Kremer and Rachel Glennerster for the idea, to the Center for Global Development (especially Ruth Levine) for developing a practical proposal, to Carlos Monticelli from the Italian Finance Ministry who steered a group of donors to make it happen, to the Bill and Melinda Gates Foundation for paying for background research, to Orin Levine, Gargee Ghosh, Amy Batson, John Hurvitz, Andrew Jones, Susan McAdams, and many others for making it happen.

And to the countless bureaucrats and nay-sayers who thought it could never happen: yah-booh-sucks.

Not according to Michael Clemens at the Center for Global Development.  Read his “Think Again” piece in Foreign Policy.

Here’s a sample:

This common idea that skilled emigration amounts to “stealing” requires a cartoonish set of assumptions about developing countries. First, it requires us to assume that developing countries possess a finite stock of skilled workers, a stock depleted by one for every departure. In fact, people respond to the incentives created by migration: Enormous numbers of skilled workers from developing countries have been induced to acquire their skills by the opportunity of high earnings abroad. This is why the Philippines, which sends more nurses abroad than any other developing country, still has more nurses per capita at home than Britain does.

There are bad reasons and good reasons for supporting the use of innovative finance for development. Unfortunately, some development advocates seem williing to back any proposal that they think might raise more money for development, instead of focusing on mechanisms that will improve the way that money is used.

When is innovative finance good?

Innovative finance can improve the effectiveness of aid spending. There are at least four ways this can work.

First, innovative finance can improve intertemporal optimisation.  Aid budgets are often given from year to the next, which makes it difficult to spend the money at the best time.   For some spending, it makes sense to spend today to save money tomorrow (for example, spending money to eliminate smallpox reduced the need for health care spending later on).   It is not always sensible to bring forward spending – particularly if you believe that there are diminishing returns to some kinds of aid spending. The International Finance Facility for Immunisation is a good example of how spending tomorrow’s aid today can be sensible, because future generations benefit from the increase in herd immunity in today’s beneficiaries.

Second, innovative finance can create a commitment technology.   There are many benefits to being able to make commitments – which is why in normal life we have mechanisms such as contracts and warranties.   We need commitments to deal with dynamic inconsistency and to allocate risks.  But constraints on aid agencies make it very hard for them to make commitments about aid.  A good example of an effective forward commitment is the Advance Market Commitment, which guarantees manufacturers a more lucrative price if they develop and produce a new medical product for developing countries.  Forward commitments enable governments to invest in reforms which have costs over several years, or firms to invest in new products for developing countries.

Third, innovative finance can change incentives both for donors and recipients.  For example, funding schemes that link payments to results may reduce the incentives of donors to micromanage the way aid is used.  If payments to organisations are linked to demand (eg through a virtual voucher scheme) they may improve their services for beneficiaries.

Fourth, innovative finance can improve the allocation of risk.  Insurance pools may diversify risk, and permit rapid increases in funding in the case of disasters.  We can pool medicines, for example, so that they are available to whoever needs them first.  Stabilization funds with automatic disbursement criteria can ensure that finance is rapidly available, without strings, where and when it is needed.

In each of these four cases, well-designed innovative finance can increase the productivity of aid spending.  As aid becomes demonstrably more effective, so in the long run we can make the case for greater investment.

When is innovative finance not good?

While there are excellent reasons to identify innovative ways to give aid, the need to increase funding is not one of them.  I am in favour of a large increase in aid, but not in favour of achieving it by distorting rational decision-making on taxation and spending.   Many development advocates support schemes to tax financial transactions (a so called “Tobin Tax”) or airline tickets, or a new global lottery (a tax on the poor), if these are used to pay for increased foreign assistance.    I understand the desire to get aid any way we can, but I don’t respect this kind of opportunism.

We should determine the structure and level of taxes on the basis of evidence about the most effective (or least damaging) ways of raising the revenues we need; and we should decide the level of spending on the public’s various priorities based on how we will do the greatest good.  Linking a particular kind of spending to a particular revenue  cannot improve choices about spending or tax, and may unnecessarily constrain them.

Conclusion

Some particularly misguided proposals involving introducing taxes on goods or services we would not normally considering taxing (such as investment in information technology).  By linking these proposal to the (rightly appealing) goal of increasing aid spending, we are in danger of being seduced into doing the wrong things for the right reasons.

Innovative finance holds rich possibilities for accelerating poverty reduction by making aid money work better.  If we can find ways to relax the institutional constraints on spending money at the right time, or increase our ability to make rational commitments, we can make aid money work harder.  In time, this may mean that taxpayers and donors are willing to spend more.  But we should not invent mechanisms whose main effect is to bypass our existing processes for making sensible decisions about tax and spending.

I’ve just watched Steve Jobs at the Apple event today. I was glad he paid tribute to the man whose liver he received, and that he called on others to register as organ donors.

But it is  less impressive to see people come to this issue only after they themselves need an organ.  I don’t recall Mr Jobs using his celebrity to promote this issue before.

I think it would be a good idea to introduce the presumption that people who register as organ donors will jump the queue if they themselves subsequently need an organ.  Perhaps that would focus some minds.

For the record, if I should die, please use anything that still works; and sent the rest to med school for dissection training or whatever they do.  I won’t care then, and as a person living today I like to think that I might be useful.

Over on Huffington Post, Seth Berkley and Orin Levine make a plea for the United States to consider an Advance Market Commitment for an AIDS vaccine:

Traditionally it has taken up to 20 years for new vaccines to reach children in developing countries. The AMC can fix this inequity. Through the pneumococcal AMC, and with the support of the GAVI Alliance which administers it, children in Rwanda and the Gambia are benefiting from pneumococcal vaccines even before children in wealthy countries such as Austria and Japan. What’s more, the mechanism is spurring development and deployment of two newer vaccines that extend protection against strains of pneumococcal disease most common in the developing world. Thanks to such advances, the accelerated use of pneumococcal vaccination is projected to save 5 to 7 million lives by 2030.

The idea (which is mainly down to Michael Kremer at Harvard) is simple: donors promise in advance that if somebody invents and delivers a vaccine that meets certain requirements, then donors will  pay for it to be bought in large quantities.  That promise may provide sufficient certainty for the private sector to invest in developing new products, and to build large-scale manufacturing facilities.  Take a look at this video to see what a difference Michael’s idea is already making.

From a public policy point of view, a nice feature of this schemes is that if it doesn’t work, it doesn’t cost anything.  If you make a promise to purchase an AIDS vaccine when one is developed, but scientists are unable to crack the puzzle, then you have not spent a dime.  You are only committed to buying an AIDS vaccine when it is developed – which, let’s face it, you would have done anyway. By making a firm commitment in advance, you change the incentives for the private sector.  (The economics is set out here in an article in The Economists’ Voice.)

This scheme is designed to tackle an economic problem that runs deep in most market  economies. We typically set up incentives for firms to innovate by promising them a temporary monopoly (through patents) if they are successful. This enables a firm to charge a premium for a limited period to recoup its investment and to compensate it for the risk it has taken.  But this scheme only works if the consumers are willing and able to pay that premium.  (And even then, it has a social and economic cost because it excludes consumers too poor to pay the premium).  The scheme doesn’t work at all for products most of whose consumers are very poor – such as people who get malaria or who need cassava plants that are resistant to attack by the mosaic virus.  That’s why firms spend ten times as much hunting for a cure for baldness as they do hunting for a cure for malaria.  The Advance Market Commitment makes investment in those products much more attractive to the private sector, because now there is an opportunity to charge a premium (paid by the donors) even though the ultimate consumers are poor.

We will be in a better position to judge the effectiveness of the pneumococcal AMC when kids are actually getting injections paid for under the AMC. An important test will be whether we see pharmaceutical firms returning to the development and large-scale production of vaccines for developing countries (and there are some early signs that this is happening).

But the Pneumococcal AMC has already taught us that it is possible to navigate the legal, financial, commercial and political waters to put in place a legally-binding multi-donor commitment to buy a future product. This is the result of outstanding work done by the Center for Global Development (in which I am proud to have played a small, walk-on part).  Early nay-sayers complained that an AMC was theoretically attractive but impossible in practice.  CGD played a critical role by developing a practical way of implementing the idea, which opened the door to the implementation of the pneumo AMC.

Now that it has been shown that an AMC is technically possible, we should be looking at:

• designing an AMC for an “early stage” vaccine such as AIDS;
  It is occasionally said that an AMC works for a late stage product – ie one that has already been largely developed but needs incentives to get it produced – but that it would not be appropriate for products still requiring substantial research and development.  There is no logic to this argument. The original modelling for an AMC was done for an early stage vaccine, and I have never seen a cogent case against using the approach (alongside conventional government funding for basic research) for products at an early stage of development.
• how to get the United States involved
  This approach – of providing incentives for private sector entrepreneurship and risk taking  to be involved in products for developing countries – ought to appeal to US policy-makers, and I have never understood why the US stood aside from the first AMC. There are some technicalities involved making commitments in the US budget process but these are not insurmountable.  Let’s hope the US will be part of the next AMCs.
• using the AMC approach for other health products
  In principle, the AMC could be used to encourage the development and manufacture of a range of other health products such as drugs, diagnostics and surgical instruments
• using the AMC to promote other forms of other research and development
  we should consider whether the AMC might be a good approach for donor funding of other forms of research and development for products mainly used in the developing world, such as new agricultural varieties, solar energy products, and ways of providing clean water.
• the possibilities for other forms of “pull” incentive for research and development
  The AMC is not the only possible pull mechanism to incentivise research for products needed in developing countries. For example, donors might set up schemes to buy out patents, prizes or other rewards for success (e.g. payments linked to DALY’s averted or social rates of return). We should look again at the costs and benefits of these different ways of getting the private sector involved.

I love this idea for making money from people who believe that the rapture is coming:

We are a group of dedicated animal lovers, and atheists. Each Eternal Earth-Bound Pet representative is a confirmed atheist, and as such will still be here on Earth after you’ve received your reward. Our network of animal activists are committed to step in when you step up to Jesus.  We are currently active in 20 states and growing. Our representatives have been screened to ensure that they are atheists, animal lovers, are moral / ethical with no criminal background, have the ability and desire to rescue your pet and the means to retrieve them and ensure their care for your pet’s natural life.

I wonder if anyone is actually buying this insurance?

It worries me that people who are interested in reducing world poverty leap so readily on the Tobin Tax bandwagon.

There are three questions to answer:

• should we spend more on reducing global poverty?
  (my answer: yes, if we have to)
• should we tax transactions in financial markets?
  (my answer: maybe, though I am not persuaded)
• should we link aid budgets to revenues from such a tax?
  (my answer: definitely not)

My answers are explained below the fold.

I can see why some people are attracted by a combination of extra money for the world’s poor and a poke in the eye for the unacceptable face of capitalism.  But to support the Tobin Tax on these grounds is at best opportunism, and at worst reveals a hostility to the functioning of markets which will, in the end, not serve the poor.

Read the rest of this entry »

Adair Turner, Chair of the Financial Services Authority, says that the FSA should not be expected to curb city bonuses:

Lord Turner, head of the Financial Services Authority, said it was “economic illiteracy” to expect his organisation to be able to dictate to banks what they paid their staff.

He complains that is is beyond the remit of the FSA:

“My message was . . . stop telling the FSA to go beyond its remit and to start imposing limitations on the level of bonuses, which it is neither within our legal power or our practical ability to do,” he said.

Well, up to a point, Lord Copper.

It all depends on why you want to curb city bonuses:

• concerns about social inequality
  If inequality is your motivation, Adair Turner is right. This is for the Government to sort out, not the FSA.
• concerns about the cost to the banks
  If you are worried about the cost of salaries, this is for the shareholders to sort out. Again, since the Government is a big shareholder in a number of the banks, the Government could take steps to address it.
• concerns that bank staff have incentives to take unnecessary risks
  But this is squarely the business of the regulator.  If you think that the bonus culture leads city folk to take risks with our money because the bonuses reward short term payback and do not sufficiently penalise long run losses, then this is something the FSA should sort out.

So it is not economically illiterate to think that the FSA should look at city bonuses, if there are concerns that they might create incentives for risky behaviour that we want to avoid. (I have no idea whether the FSA  the legal powers to do so: but that is a different point.)

Tim Harford has an interesting article in this weekend’s Financial Times about private health and education in developing countries:

Imagine that your daily earnings were less than the price of this newspaper. Would you consider buying private education and private healthcare?

Before you make up your mind, here are a few considerations: government healthcare and primary education are free; the private-sector doctors are ignorant quacks and the teachers are poorly qualified; the private schools are cramped and often illegal. It doesn’t sound like a tough decision. Yet millions of very poor people around the world are taking the private-sector option. And, when you look a little closer at the choice, it’s not so hard to see why.

Now there is a dilemma here.

On the one hand, we know that charging even a very small amount massively reduces the take-up and impact of services such as health and education. (This survey by Holla and Kremer summarises the evidence.)  So charges excludes many people from access, and it seems likely that the poorest and most vulnerable will be excluded most of all.

On the other hand, we know that public services in developing countries are often poorly managed and badly delivered. That’s why, as Tim points out in his FT article, many of the very poorest people choose to go private instead.

Apologies if this is anecdotal, but I see this dilemma in practice every day. My partner works for Marie Stopes International, which operates 21 clinics for women (providing contraception and abortion) here in Ethiopia.  They charge their clients for services – a small amount which is just enough to pay for the cost of running the clinics.   The result is that they are very focused on delivering services that will bring their clients into the clinics every day – that is, services that they actually need, at a price they can afford.  My feeling is that, as a result, they are more focused on their customers than most public services in developing countries, and indeed in some developed countries, whether financed by aid or by taxation.

So how can we disentagle ourselves from the horns of this dilemma?  Here are three thoughts:

• First, we should take seriously Tim’s observation that “a little accountability goes a long way” and think  much harder about how we can make public services more acountable.  You have probably heard about the way more funding reached Ugandan schools as a result of greater transparency (though the details have been disputed (pdf)). The work of my team on aid transparency is a modest contribution to this effort.
   
• Second, we should not be ideological about whether the public or private sector actually provides services, as long as the government takes steps to ensure that there is universal access. For example, governments (with the support of donors) might issue vouchers to the poorest, enabling them to choose for themselves whether to use public or private services.
   
• Third, in the long run this problem will be reduced if and when there is equitably shared economic growth which gives people sufficient incomes for these kinds of choices to be more reasonable.

We hear a lot about the impact on carbon emissions and climate change of travel, especially by air, but very little about the impact of the livestock industry, which has been estimated to be responsible for 18% of all man-made greenhouse gas emissions, more than the total emissions from all sorts of travel put together.

I have a personal interest in this because I travel a lot by air (boo!) but I have not eaten meat for 25 years, nor do I own a car.  I also live in a house that has neither any heating nor air conditioning; nor (unlike many ex pats in Addis Ababa) do we have a generator.  So if we are fixated only on air travel, my carbon footprint looks horrendous; but it looks a lot better if you take account of other aspects of my lifestyle. I am sure I should do more, probably much more, to reduce the damage that I do to the environment: but let’s look objectively at the overall impact of a person’s lifestyle, rather than focus on any single measure.

The fixation with air travel annoys me because I think that there is public good in air travel.  The world would, in my view, be a better place if more people were able to travel and meet people in other countries and learn about other cultures.  We would have a stronger sense of solidarity with other people around the world and a greater willingness to act collectively to solve global problems.  We would probably be more worked up about the need to tackle global warming if we saw first hand how it is already affecting communities affected by rising temperatures and rising sea levels.  Air transport also enables farmers in Africa to grow flowers and beans for sale in Europe, with an overall carbon cost that is much lower than if these products were grown in greenhouses in Europe, and that trade provides livelihoods for more than a million people who desperately need it so that they can trade their way out of poverty.

I do not see a similar “public good” argument for eating meat.  I did not become a vegetarian 25 years ago because of climate change, which hadn’t been invented then, but because I thought then and continue to believe that it is wrong to eat animals purely for pleasure.  As well as being bad for the animals themselves, and for the climate, the meat industry is destroying our health and our countryside.

Yesterday Tristram Stuart Hunt in The Guardian calculated how much we should reduce our meat consumption:

Based on the global food production figures published by the FAO, I did a few preliminary calculations. Global average consumption of meat and dairy products including milk was 152kg a person in 2003. Average EU and US consumption, by contrast, was over 400kg, while Uganda’s was 45kg. In order to reach the equitable fair share of global production, rich western countries would have to cut their consumption by 2.7 times – and this doesn’t include the fact that the butter will have to be spread even more thinly if the global population really does increase by another 2.3 billion by 2050.

However, still further reductions would be necessary because global meat production is already at unsustainable levels. The IPCC among other bodies, has called for an 80% reduction of greenhouse gas emissions by 2050. Since high levels of meat and dairy ­consumption are luxuries, it seems reasonable to expect livestock production to take its share of the hit. For rich ­western countries this would mean decreasing meat and dairy consumption to significantly less than one tenth of current levels, the sooner the better.

So let’s try to focus less on air travel – which has positive benefits for the world – and more on changing our diet, which we should be doing even if there were no impact from livestock on climate change.

I suspect that the environmental movement focuses on air travel partly because it appeals to an instinct for class war. The kind of people who fly several times a year on long-haul flights are the kind of people we love to hate.  This makes a campaign against air travel much more popular than criticising people for eating meat, which would mean taking on “ordinary” people.

Of course, as a vegetarian who flies a lot, I would say this, wouldn’t I?

David Roodman at the Center for Global Development has begun an “open book” about microfinance. He is publishing chapters as he goes, with space for readers to comment.

As well as an interesting way of working, this threatens to be a very interesting topic. David is not starry eyed about the role that microfinance (and other financial services for the poor) can play in development – he’ll bring an unsual degree of rigour and balance to this debate.

If we can’t get an agreement on cutting food tarriffs and limiting market-distorting agricultural subsidies now, while food prices are surging (see graph), then when we will ever?

One of the unconscionable practices in international aid is the “mission” – a team of experts from donor countries who fly out to the developing country to supervise the way that aid is used. For large aid projects, these mission teams – sometimes composed of eager but inexperienced development workers – will demand meetings with senior officials from the recipient country government, often including Cabinet-level ministers.

These missions are a major burden on developing countries. Each mission ties up many hours of ministerial and official time. The policies pressed on governments are often contradictory, lack evidence and have little or no legitimacy in local policital processes. That is why donors promised in the Paris Declaration on Aid Effectiveness to reduce the burden of missions.

Yet in the 18 months since that declaration there were 11,000 missions to 31 countries surveyed by the OECD – an average of about 350 missions per country per year. Each mission lasts about a week, so on average each country will have about 5 donor missions in country at any one time. This is a huge cost to the scarce administrative capacity of developing countries: costs which are imposed by well-meaning donors but borne by the recipient government.

The costs of missions can be thought of as a negative externality – which suggests that developing countries should adopt the polluter pays principle as a way to control the burden. Using the analogy of cap-and-trade in environmental pollution, developing countries could issue tradable missions permits. Here is how it could work:

• Developing countries would each decide how many donor missions they can absorb in total each year. Suppose that a country decides to accept 50 donor missions a year (a seventh of the number they now receive on average!). The government would then issue 50 tradable missions permits, which they would sell to donors in an online auction.
• Development agencies designing aid programmes that require a donor mission would have to include in their budget the cost of buying one of these permits, either in the auction or in a secondary market. This would mean that the budget of the aid project would include explicitly not only the cost to the donor of providing the resources, but also the cost to the recipient that the project will impose. The donor thus bears the full cost of its decisions.
• Donors would have an incentive to coordinate their programmes and send joint missions, since they could then share the costs of mission permits.
• Donors would also have a financial incentive to decentralize their operations to resident staff, rather than sending missions from HQ.

The key to making this work would be for developing countries to be rigorous in limiting donors’ access to ministers and officials to teams holding a mission permit. There would be strong pressures – including financial – on them to accept an additional meeting without a mission permit. This could be avoided to some extent through the visa regime (visiting staff from donor agencies would have to quote their mission permit number), but to some extent the donors would need to police the system themselves.

In general, it seems to me that many of the challenges in the development industry relate are the consequence of negative externalities of donor decisions. As the number of donors increases, the prospects for solving these problems through coordination and committees seem more and more remote – and we should look instead to decentralized, market-based mechanisms to align incentives to deliver better results.

Hilary Benn says that we should buy flowers imported from poor countries, even if we are concerned about the environment:

some recent research by Cranfield University – who compared the emissions from producing 12,000 rose stems in Kenya with those in Holland, including transporting them to Hampshire – and found that the emissions produced by Kenyan rose and flying them here can be less than a fifth of those grown in heated and lighted greenhouses in Holland. Why? Because Kenya is warm and sunny, and heating greenhouses in Holland uses enormous amounts of fossil fuels.

Furthermore, even if it were not better for the environment to buy African flowers rather than Dutch flowers, we should still consider buying flowers, fruit and vegetables from Africa:
people living in the vast majority of African countries are responsible for a tiny amount of carbon emissions. In Kenya, carbon emissions are 200 kg a head; here it is fifty times that. We should bear that in mind when making our choices.

This is social justice on a global scale. If we boycott their goods that are flown to the UK we deny our fellow human beings their chance to grow; their chance to reduce poverty. It’s like saying, we messed this planet up, but you can take the consequences.

So do the right thing on Valentines Day: buy flowers from Africa.

Alex Singleton at the Globalisation Institute reports that all is not well, in at least some fair trade cooperatives

Sadly, for too many farmers in poor countries today, they are trapped in not terribly voluntary co-operatives. Out in rural Kenya last week, I found that there was some scepticism towards the traditional view the co-operatives are always forces for good. In fact, in Kenya, the coffee co-operatives have suffered from significant mismanagement, with individual farmers often exploited by the leaders of the co-operatives. In fairness, Kenya has been trying to help rebalance the situation, for example introducing six year term limits on co-operative leaders. I do worry that spokespeople for the Fairtrade movement suffer from a myopic romantic vision of the coffee farmer in a co-operative, which the truth such an existence is backbreaking and mired in exploitation.

It would be a cruel irony if the fairtrade movement itself became a new form of expoitation.  The principle of fair trade – that people should be able to spend more buying products that they know to have been produced without exploitation – is a good one.  But the recent articles in the FT and Alex's report from Kenya suggest that more needs to be done to ensure that the fair trade certificate means what it says.

See also today's FT leader. 

Update: the Fair Trade Foundation replies here.