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Archive for the ‘Development’ Category

Nick Kristof writes approvingly in the New York Times about faith based aid organisations:

Some liberals are pushing to end the longtime practice (it’s a myth that this started with President George W. Bush) of channeling American aid through faith-based organizations. That change would be a catastrophe. In Haiti, more than half of food distributions go through religious groups like World Vision that have indispensable networks on the ground….. A root problem is a liberal snobbishness toward faith-based organizations. Those doing the sneering typically give away far less money than evangelicals. They’re also less likely to spend vacations volunteering at, say, a school or a clinic in Rwanda.

I have two observations about this.

First, it is an indictment of the aid system that we have no way of knowing whether these organisations are more effective, less effective, or about the same, as their non-religious counterparts. Kristof’s claim that they are “indispensible” is completely without evidence either way.

Second, World Vision, which as Kristof says is the US’s largest development and organisation, has an explicit policy against hiring non-Christians:.

World Vision United States has diverse opportunities for qualified and committed Christian professionals who are willing to share the life, light, and hope of Christ.

All applicants for staff positions with World Vision United States will be screened for Christian commitment. The screening process will include:

- Discussion with the applicant of his/her spiritual journey and relationship with Jesus Christ;
- Understanding of Christian principles;
- Understanding and acceptance of World Vision’s Statement of Faith and/or The Apostles’ Creed

Either religion is irrelevant to the work these organisations do, in which case they should not discriminate on the basis of religion in their hiring; or religion is important in the work they do, in which case they should not be allowed to spend public money in its pursuit.

Even if you believe that these organisations should be allowed to discriminate against possible employees on the basis of religious belief, this surely means that they cannot be allowed to receive money from the taxpayer,  or be used as a contractor for government aid.

So those people (whom Kristof calls “liberals”) who want to stop channelling taxpayer money through organisations that discriminate on the basis of religion must surely be correct.

On the CGD blog, Nancy Birdsall proposes “Ten Actionable Ideas … for a 21st-Century Global Development Agenda”

What are examples – some realized and some on the table but untested – for practical action in the interests of global prosperity? Where do good ideas come from? How do they get translated into action?

Nancy’s ten:

1. More AMCs for vaccines and green technology
2. Protect some aid from security and political objectives
3. Independent evaluation agency
4. More representative G-20
5. Visas for people from poor countries
6. Duty free, quote free access to all markets
7. Per capita distribution of net income from non-renewables
8. Reform of selection of heads of international agencies
9. World Bank to have a global public good window
10. Petrol tax in the US

Ever fizzing with ideas, Nancy throws in a few others: endow think tanks in low-income countries; increase capital at development banks; Climate Investment Funds to bring private investment money;  Cash On Delivery Aid; new insurance and risk management instruments at the multilateral development banks.

Well I agree with all those, of course (and not just because I’m a visiting Fellow at CGD!).   She asks for other suggestions.  Here are my ten:

1. Global standards for transparency and traceability of all aid to increase accountability and effectiveness
2. Climate justice – every person in the world to have equal, tradeable, carbon emission rights, capped overall at the level scientists tell us is safe
3. Global information sharing among tax authorities to prevent tax evasion
4. Unbundling of aid funding from aid delivery, complete untying and global standardised output and outcome indicators to enable cost comparisons
5. A global minimum income guarantee backed by cash payments to the world’s poorest people
6. Product traceability from sweatshop to supermarket using barcodes
7. A complete ban on exports of small arms
8. A standing, professional  UN peacekeeping force to be deployed by a reformed Security Council
9. Reform of intellectual property to permit free access in the lowest value markets
10. Increasing the share of aid to LDCs from 38% of global aid today to 90% by 2012.

Update 25 February: On Twitter, Nancy Birdsall (@nancymbirdsall) says: “@OwenBarder has 3 more actionable ideas (and 7 dreamy ones)”.  This is a good game: which of these does Nancy think are actionable and which are dreamy?  My guess is she thinks (1), (3) and (9) are actionable and the rest dreamy.   But what do you think?

I think they are all realistic – but then I’m with John Lennon: “You may say that I’m a dreamer, but I’m not the only one. I hope some day you’ll join us, and the wo-o-rld will live as one”.

Laura Freschi at AidWatch lists four ways in which the brain drain from Africa is a good thing. Her analysis includes (a) gains to the migrants; (b) gains to the migrants’ families; (c)the benefits of exchange of ideas; and (d) the stimulation of the accumulation of skills.

This is consistent with what Michael Clemens at CGD has been saying for a while. (Take a look at his very accessible and interesting article in Foreign Policy, for example).

Yet it remains the received wisdom that industrialised countries should do more to prevent workers from moving from developing countries to rich countries.  There is an unappealing alliance between the development activists and the unions to limit the use of medical professionals in the British National Health Service.

It is becoming increasingly clear that preventing people from developing countries from accessing the labour market in developed country impoverishes poor nations in a the same way as preventing access to our markets for goods and services.  Yet this is a campaign that development advocates are strangely reluctant to take on.

No less a scholar than Bill Nighy urges us to support a “Robin Hood Tax” to take money from the bankers and speculators and give to the poor.

The Robin Hood tax appears at first sight to be a way to kill three fairly succulent birds with one stone.  It offers an attractive combination of:

1. Higher taxes on the wealthy, so reducing inequality
2. A curb on speculation and financial market excesses
3. More money for global public goods and aid.

All these are worthy objectives, but Robin Hood tax is not a good way to achieve any of them.

Branding a financial transaction tax as a “Robin Hood tax” which takes from the rich and gives to the poor is a brilliant piece of communications.  (Imagine if it had been called a “Class War tax” – this says more or less the same thing but somehow seems less appealing.)  A Robin Hood tax lures many people who care about social justice, and want to spend more on international development, into opportunistically supporting the introduction of a tax on financial market transactions.  But before we are seduced we should take a hard look at whether it will achieve what we want.

Stand and Deliver!

The campaign would like us to believe that this tax will be paid by speculators.  That isn’t true, of course.  It is like thinking that beer duty is paid personally by the barman in the pub, or that Richard Branson personally forks out for your airline passenger duty.  The people on whom a tax is levied generally pass it on to someone else: their customers, employees, suppliers or shareholders.  We don’t know who will end up bearing a financial transactions tax, but it is likely to be all of us who meet the costs, as customers of firms that use financial markets, or savers whose money is invested in financial assets.  You should not assume that it will mean less champagne for people who work in the City: they may be in-bred aristocrats but they are probably smart enough to figure out quite quickly that they should pass on the cost to someone else.

If we want to tax the rich more, there are much more effective ways to do it than to tax financial transactions – ways which might actually fall on the rich, and catch a much bigger spread of rich people than a transactions tax.  For example, you could raise much more money from the rich by extending National Insurance charges to all capital income (eg interest, capital gains, dividends and rent) rather than imposing it only on labour income.  You could also abolish the upper earnings limit on National Insurance.  You could close loopholes for non-domiciles and people who use trusts to avoid inheritance tax; or simply raise the top rate of income tax.  You could treat all inheritance as income in the hands of the beneficiary, and tax it accordingly.  Any of these would be a more targeted and fairer way of increasing taxes on the rich than a financial transaction tax.

Reducing volatility

Financial markets play an important role in the real world by channelling our savings to investments with higher returns and enabling us to share risks.  In well-functioning markets, allocating money to businesses that meet the needs of their customers and so make a good return tends to benefit all of us – whether we are investors, customers or employees of these firms.  For this allocation of resources to happen well, the prices of financial assets had better reflect their true underlying value, at least most of the time, and we are all worse off if financial asset values deviate for long periods from what the underlying businesses are really worth.  But there are plenty of structural problems in the financial services industry that make it likely that financial assets may in fact be mispriced some of the time.  These include the incentives created by bonuses (for example, linking bonuses to the value of a deal as predicted by firms’ financial models rather than the value that is eventually realised) and the rise of institutions that are “too big to fail” and therefore enjoy the implicit subsidy of a public guarantee.

However, it is hard to see how the existence of speculators, arbitrage and – most of all – liquid and highly traded markets make financial markets less effective.  In most cases, we would expect markets with lots of buyers and sellers to do a better job of identifying the underlying value of assets than markets with relatively few transactions.  Speculators generally make money when they correctly assess that a market price does not reflect the real value of the asset. George Soros made money from Black Wednesday when he judged that the value of the pound in the Exchange Rate Mechanism did not reflect what it was really worth (because the government was trying to sustain a higher value for the pound).   By betting on that judgement, Soros helped to bring about the change in price that he was predicting, and so accelerated the alignment of the asset price with its true underlying worth.

A small turnover tax is likely to deter the small-scale arbitrage that helps to reduce the short-term discrepancies between prices, making markets marginally less transparent and  slightly less efficient.  It probably won’t make any difference to the big misalignments, such as asset price bubbles. The short term gains to traders from buying in a rising market will far exceed the cost of any turnover tax, so they’ll continue to get behind bull markets. Their behaviour is only likely to be moderated if they can be made to bear some of the costs of the future correction, instead of just getting the rewards when the bubble inflates.  It is theoretically possible that a reduction in turnover will make a market more stable and less volatile (this was James Tobin’s point about “throwing sand in the wheels”), but it is the less likely outcome; more likely the opposite is true.

If we want our financial markets to work better, we should be looking at the causes of the volatility and misalignments.  It is not the number of speculators, or the number of transactions in which they engage, but rather the incentives they face. Asymmetric bonuses which reward gains but do not punish losses encourage risk taking and short-termism.  Institutions that are too big to fail will take bigger risks than they would without the implicit guarantee of a bail out. Insufficient competition between financial firms allows rent-seeking by monopolists.   The privatisation of gains but socialisation of losses creates perverse incentives.  If we want to tackle financial instability and misallocation of resources we need to address the root causes, not reach for a tax on transactions which is likely to hinder, rather than help, the ability of markets to correct themselves.

Raising money for good causes

So by now you think I’m being prissy.  So what if a new tax does not redistribute money from the rich or make financial markets work better?  It will raise a shed-load of money by taxing transactions in a way that nobody will notice, and we can use that to do good things on poverty and climate change. If taxation is the art of plucking the goose with the minimum of hissing, surely this is a sure fire way to get some money out of the system to spend on development which is woefully underfunded?

Well, not really.  Good taxes are not just taxes that nobody notices, but taxes that tend to discourage people from doing bad things and encourage people to do good things; which add to rather than subtract from economic efficiency.   There are lots of taxes that citizens don’t pay directly – such as corporation tax and employer national insurance contributions – which nonetheless add to the burden on ordinary taxpayers and the size of which is a matter of political debate.  Adding a new tax is not going to make citizens more willing to see an increase in the overall tax burden.

Aid spending is pitifully small relative to need.  As a nation we are spending much less than we should if we want to live up to our commitment to spare no effort to ensure that poverty is reduced, that mothers do not die while pregnant, that children go to school and that everyone has access to the water and health care that they need.

The amounts in question are tiny relative to total government revenues. Aid is a small fraction of overall spending and could easily be increased without any new taxes.   The limit to aid is not lack of available money, but the lack of agreement that this is a priority for spending more of the nation’s money.  Too many people believe – wrongly, in my view – that aid is not effective; that it transfers money from poor people in rich countries to rich people in poor countries; that much of it is lost in corruption or waste; and that it does as much to hinder as to help countries to grow and lift themselves out of poverty.  Those attitudes are not going to change because we have introduced a new tax.

The development industry is right to say we should spend more on aid, but we are losing the argument.  Instead of addressing the criticisms by demonstrating how aid is effective (and taking steps to make it more effective where it isn’t) we are turning to a Robin Hood tax apparently in the hope of bypassing public opinion.   Because the chattering classes (which clearly includes me) have failed to persuade enough men and women that it is a good idea to spend more money on aid as well as on the National Health Service and schools, we are apparently hoping to go over their heads, by setting up a source of funding over which ordinary people will have no control

But that is not how the system works, nor should it be.  The nation’s willingness to give money for development will be decided by whether we demonstrate the results, and whether we can really convince people that their money is being properly used.  Introducing a new tax dedicated to what we think are good causes may give aid a temporary boost, but if people are not convinced that they want their money to go on aid they will quickly demand that budgets elsewhere are reduced accordingly.   In the long run, this will have the opposite effect: a tax part of which is dedicated automatically to development will engender even more complacency in the development industry about the need to demonstrate to taxpayers how their money is being used.

Building support for development is not merely a communications challenge, as is often implied by the hand-wringing of the big aid agencies: it is a reality challenge.  Not only do we have to show people how their aid is used, we actually have to make aid more effective, more transparent and more accountable, so that we drive up performance.

Dambisa Moyo is right that bad aid does not work; but she is wrong to claim that all aid is bad aid.  She is wrong to claim that aid does more harm than good. There is a lot of hugely effective aid which transforms people’s lives every day.  But the aid industry lacks sufficient mechanisms to drive bad aid out of the system, to spend more money well, and to be able to demonstrate conclusively its results.  This, rather than a Robin Hood tax, should be the agenda for genuine progressives who want to see more money being spent on international development.

I have explained here before another reason why a Tobin Tax is a bad way of raising money for aid.  Financial markets tend to be highly cyclical – there is a lot of turnover in rising markets in economic booms, and the markets tend to go quiet in recessions.  So the revenues of such a tax would be highly cyclical – more money for development in global economic booms, less in global downturns.  Yet aid should be the opposite. It is needed most of all to protect the weak and vulnerable from economic downturns.  Aid is already too cyclical, exacerbating the impact of global economic fluctuations on developing countries, reinforcing the effects of changes in revenues from commodities, investment and remittances.  The last thing developing countries need is for aid to become even more cyclical than it is today.

Conclusion

The backers of the Robin Hood tax are on the side of good and there is no denying their commitment to social justice, nor their genius for communications and popular engagement.  We certainly need what the tax seems to offer: more redistributive taxation, a curb on financial market excesses, and more money for aid.

My reservation is not that the Robin Hood tax is too ambitious or that it cannot be negotiated. It is that it is the wrong way to address these problems.   Each of the three objectives is better addressed directly than through the blunt instrument of a tax on financial transactions.  We need to build a consensus that there are minimum standards of living below which no person anywhere in the world should be allowed to fall, and that those of us who are fortunate to live comfortably should all make a modest contribution to that.  This should be part of the social contract in a democratic society, and it should be part of the mainstream system of taxing and spending.   Robin Hood stole from the rich and gave to the poor at a time when we lacked institutions to tackle poverty and redistribute income.   A Robin Hood tax is no more a lasting solution to financing poverty reduction than was the approach of Robin Hood himself.

Update:  Duncan Green from Oxfam has responded here.  We agree that this is not a good way to curb the excesses of the financial services industry.  Duncan reckons “the banks” will pay a good part of the tax: presumably he means the shareholders.  If so, why not just levy an additional profit tax on banks?  I think his strongest argument is that in a world of second best, this is the best available option for raising more money.   I think that is a mistake. We can and should make the case for aid to be financed properly; and I do not believe that raising money this way will add additional funding to development in anything but the very short tem unless we address rather than try to sidestep people’s concerns.

Paul Collier’s last book, The Bottom Billion, proposed that there are four “traps” in which the poorest countries can become enmeshed (a conflict trap, resource trap, geography trap and governance trap).   He vividly explains why he thinks that “business as usual” will not lift these countries out of poverty, creating the prospect that 58 countries, home to the poorest billion people, will fall further and further behind the standards of living of the rest of the world.

At a conference at Wilton Park this week a number of people gathered together to review progress since the Africa Commission and Gleneagles Summit in 2005, and to discuss the prospects for a transformation in Africa over the coming years.  One participant (one of the authors of the Africa Commission report) argued that the Commission set out a comprehensive action plan which, if implemented across the range of its recommendations, could address these traps and lead to real progress.

I am not so sure. I think there is a fifth trap facing Africa which is more chronic and pervasive than any of the four traps identified by Paul Collier. It is the “unfair rules” trap, and I think it makes it very hard for Africa to make much progress on the other four.

Development and an improved standard of living for people in developing countries will come not from aid but from industrialisation and economic growth.  We do not know exactly how to ensure that these economic transformations occur, though there is much we can do to create the conditions in which it is more likely.  (Aid can help create the conditions for growth, and can help people to live better lives while the process is under way).  But as the world economy becomes more integrated and more globalised, many (though by no means all) of the determinants of a country’s opportunities for economic development are determined by international institutions, systems, rules and agreements.

The “unfair rules” trap is that the rules of the game are determined by the rich for the rich.  And the consequence for the poorest countries is that they are having to fight uphill to create conditions for their development; so they continue to fall behind the rest of the world economically.  Their relative lack of economic power reinforces their lack of political influence internationally and so makes it harder for them to influence the institutions and rules which contribute to their continued economic marginalisation.

This “unfair rules” trap takes many forms.  There is a myriad of complicated rules and institutions that affect a huge swathe of economic and political life.  These international agreements range from highly political – such as the global allocation of the right to emit greenhouse gases under the post Kyoto framework for climate change – to the deeply technical such as phyto-sanitary standards which unnecessarily limit exports of groundnuts from Africa to Europe.

On BBC World this weekend there is a debate among a group of African leaders in which Linah Mohohlo, the Central Bank Governor of Botswana, points out that new global rules are currently being devised to promote financial stability – an issue that affects every country in the world – without any participation by Africans.

Consider our attitude to property rights.  Rich countries have attached considerable importance to the establishment and global enforcement of intellectual property rights, which enable their firms to secure revenues from the use of their intellectual property. They have, for example, pursued this through the WTO.  Whatever you think about intellectual property rights, there is no doubt that they can be expensive for developing countries, both because of the huge revenues that flow from Soweto to Seattle and because of the restrictions imposed on access to vital knowledge rich products such as pharmaceuticals, software and business practices.    But consider a parallel property right: the right to emit greenhouse gases.  Like intellectual property rights, emission rights are an institutional construct designed to bring about an improvement in economic efficiency (by rewarding innovation in the case of IPRs, and by taxing polluters in the case of emissions rights).   Emissions rights, if properly designed, fairly allocated and enforced around the world, would entail a reallocation of wealth from rich countries to poor countries.  But while the rich world is happy to insist on the importance of intellectual property rights (of which it is a seller) it is unwilling to consider the establishment of property rights over assets for which it would be a buyer.  In the run-up to the summit in Copenhagen, there was no serious discussion of the idea that every citizen should be entitled to an equal share of the atmosphere, and that anyone wanting to occupy more than their fair share should pay compensation to those who are using less. The discourse is limited to the realpolitik of what rich countries are likely to accept.

Of course, it was ever thus.  Nobody should be surprised to hear that the rich and powerful set the rules, and that these are not always to the benefit of the poor.  But within nation states this dilemma is partly addressed through the political process.  Universal suffrage has made it impossible for national institutions, laws and regulations completely to ignore the interests of the poor; though of course there is still a long way to go before the interests of the poor are given the attention they deserve.

But the international system does not benefit from the equal representation implied by universal suffrage within nations.  In some international institutions, power is formally one-dollar-one-vote.  In many others  this is not the formal position, but it is true in practice.  The global political system does not rebalance economic power between nations in the way that political processes can within nations.

To address Paul Collier’s four traps will require concerted international action – for example, to take steps to prevent the corruption and patronage that is associated with extraction of natural resources, to limit the sale of arms which fuel conflict, or change trade rules in ways that improve Africa’s prospects of trading with the rest of the world.  That is why the trap of “unfair rules” is so profound: for as long as Africa remains politically weak in the international system, it is hard to envisage how the international cooperation is required will be brought about.

I find it hard to see how a transformation can be brought about unless we find a way to address the problem “unfair rules”.  For as long as Africa remains economically disadvantaged, it is marginalised in the setting of rules and governance of global institutions.   This in turn profoundly affects its ability to escape Collier’s four traps, and so limits its prospects for development, and thus locks in the growing divergence from the rest of the world.   Africa seems to be likely to be caught in the jaws of this trap for as long as there is no political process that allows African countries to obtain more power and influence within these international institutions than their relative economic weaknesses entails.

One argument that aid sceptics like to use – often without really understanding it – is that aid damages recipient countries through a macroeconomic effect known as “Dutch Disease”.  The issue has been raised again in a new working paper: so let’s go back to basics and think about what is going on and whether recipient countries are being harmed by aid.  My conclusion is that it is highly unlikely that aid could be harmful overall to a country’e economic development through Dutch Disease, and that – notwithstanding how it is sometimes presented – the econometric research does not imply that it is.

Raghuram Rajan and Arvind Subramanian argue in a new CGD Working Paper that aid inflows reduce the relative growth rate of exportable industries; and they find some evidence that aid inflows cause a real exchange rate appreciation. They say that this effect helps to explain why there is, in their view, little robust evidence that aid leads to economic growth.  Raghuram Rajan and Arvind Subramanian are both smart people, but I don’t think the evidence they present leads to the conclusion they want us to reach.

Where we agree: trade is good for growth

I am pretty sure that everyone agrees with the following:

• The growth of trade is good for growth and development.
  There are essentially no examples of economic development that have not involved rapid export growth.
• In a static welfare sense, exports are a cost not a benefit.
  Exports are the price a country has to pay to be able to afford imports.  In a static world (just comparing two states of the world, rather than thinking about what causes economic growth) a country is better off if it can make fewer goods for export and still afford the same level of imports. (Normally this isn’t possible but it happens in the special case of a country receiving foreign aid.)
• There are dynamic benefits from trade which might come from exports, imports, or both.
  We know that trading economies grow more quickly than closed economies.  The long-term compound effects of this growth are a key driver of development.  We don’t know if the dynamic benefits of trade come mainly from exports (e.g. because firms which compete in foreign markets are forced to raise their productivity) or mainly from imports (e.g. because capital goods like machines, and intermediate goods, are imported; imported products are copied locally; knowledge and skill are imported).   If exports and imports both go down, this is likely to be bad for the economy. But if exports go down and imports go up, we don’t know what effect this will have.

The direct impact of foreign aid

Foreign aid has both direct impacts (it increases particular kinds of spending and consumption) and indirect impacts (the changing composition of the economy may affect long-term growth; or the investments financed by aid may effect growth).  Let’s look first at the direct effects.

• The immediate effect of using foreign aid must be to increase the real value of imports relative to exports.
  You don’t need a regression to tell you this: it is an accounting fact. Aid is a gift of goods and services from abroad, or foreign currency which can only be used to pay for imports now or in the future.  Aid means that people in the recipient country get to consume things made abroad that they do not have to pay for with exports.  That means that the direct effect of using aid must be  some combination of (a) additional imports and (b) a shift of productive resources (e.g. people and land) from producing for exports to producing for home consumption without forgoing imports.   So the ratio of imports to exports must rise compared to what it would have been without the aid: there is no way to stop this other than to stop giving or using aid.   It also means that exports must fall as a share of income as a direct result of the aid.  This is not the Dutch Disease effect: it is simple arithmetic.
• The size of the effect on exports depends on the way aid is used
  How much imports will increase and exports fall depends on two things: the composition of the additional demand, and the extent to which there are unemployed resources in the economy.  Some of the aid arrives in the form of goods and services from abroad (e.g. food aid, foreign consultants).  Other aid is spent directly on additional imports (e.g. pharmaceuticals, project vehicles, building materials). These additional imports have no effect on exports.  But some aid is spent on “non-tradable” services, such as paying for teachers or construction workers, who are employed locally. If there are unemployed people who are able and willing do these jobs, then total labour supply increases and there is no effect on exports.  But if supply is scarce, as it might be of skilled labour, then the scarce inputs (e.g. labour) for these activities have to be pulled in from the tradable sector (e.g. export industries). This competition for scarce productive resources increases the price of non-tradables relative to tradables, and may result in a contraction of exports (compared to what they would have been).  This is the Dutch Disease effect.
• These direct effects unambiguously increase income and welfare of the recipient country.
  All these direct effects are welfare-enhancing.  There is an increase in imports that does not have to be paid for  which increases incomes and consumption.  Exports go down but only because the resources that were needed to produce them are shifted to non-tradable production, while the imports they were needed to pay for continue.  National income goes up by the value of the aid. (Somehow people seem to forget that income equals what is produced locally plus the value of the aid; so even if local production fell, it would need to fall by more than the value of the aid for incomes to fall overall).

What are the indirect effects of aid on exports, GDP and income?

If the story stopped with the direct effects of aid, there would be no dispute.  A permanent inflow of aid worth 5% of GDP increases national income by 5% and the country is better off.  Now lets see what happens when that works through the economy.  Here are four indirect effects we need to consider:

• Aid may raise productivity and so increase the growth of both tradables and non-tradables
  If aid is spent well it can increase productivity in lots of ways: by providing infrastructure, educating people, increasing security, reducing disease etc.   In principle these effects on productivity and growth could be large (for example, getting rid of malaria has been estimated to add about 0.5 percentage points to the growth rate in countries of high prevalence).
• Aid may change the composition of the economy and so change the average growth rate
  If non-tradables increase as a share of total income, and if non-tradables tend to grow more slowly than tradables, then this will – as matter of arithmentic – reduce the average growth rate.  (This effect is an order of magnitude smaller than the above – at most about 0.05 percentage points on the growth rate).
• A country with a smaller export sector may enjoy smaller spillover growth effects.
  An increase in aid results in higher imports and possibly lower exports compared to the economy without aid. Because we don’t know whether the dynamic growth benefits of trade come mainly from spillover benefits from imports or exports, we don’t know whether this increase in imports and fall in exports will increase growth, reduce growth, or cancel out.  It is theoretically possible that this will have a significant negative effect on growth; but it may also have positive effects.
• There may be adverse political effects
  There is a set of worries about the political effects of aid: large aid inflows might weaken the social contract, sustain otherwise unpopular regimes, feed corruption, or disrupt the effectiveness and accountability of government. These are important and valid concerns, but they are distinct from the macroeconomic effects of aid through Dutch Disease, and we are not going to deal with them further here.

How big could the Dutch Disease effect be?

Suppose a country receives aid each year worth 5% of its GDP.  If the export sector had previously accounted for 10% of the economy, then even if exports are completely unchanged, the direct effect of the increase in the denominator is that exports drop to 9.5% of the economy. (The impact on GDP and GNI will differ according on how the aid is delivered and used.)

Subramanian and Rajan do not report whether or how they have adjusted for the denominator effect in their calculations.  If they have not adjusted for the increase in national income as a direct result of aid, this would explain why they find that exports grow more slowly relative to the rest of the economy when aid increases.  But since they are very smart people, we’ll assume that they have taken account of the denominator effect and simply forgotten to tell us about it.  So having adjusted for the denominator effect, the question is whether there are any long term effects on growth from any or all of the three economic possibilities described above (aid increases productivity; the composition of the economy changes; dynamic benefits of trade are lost).

Suspending our scepticism about cross-country growth regressions, and assuming they have adjusted for the growth of the denominator and forgotten to tell us how, let’s accept Subramanian and Rajan’s estimates of the impact of aid on the export sector. They find that an increase in aid of 1% of GDP leads to a fall in the growth rate of exportables of 0.5 percentage points.  Let’s look at what this means for the impact of aid on a country’s income and welfare.

For a country to be made worse off by an increase in aid of 5% of GDP, domestic production would need to fall by at least 5% (so that the loss of income from lower domestic production exceeds the benefit to incomes of the aid). How likely is this?

Well suppose a country without aid has exports at 10% of GDP; and then starts to receive aid at a constant level of 5% of its GDP. According to Subramanian and Rajan, the export sector will begin to grow at 2.5 percentage points a year more slowly.  Leave aside for now whether there is any impact on the growth of the other 90% of the economy, the impact on the exportable sector reductes total GDP growth by 0.25 percentage points a year.  It will therefore take about 20 years before the export sector shrinks by 5% of GDP, at which point total incomes have fallen to their without-aid levels.  Over that time, the country will have received benefits (higher income and consumption) from the aid, and it will take another 20 years of below-trend income before the country is worse off overall as a result of the aid.  So if the macroeconomic impact of aid were entirely on the exportable sector, and it were of the size that Rajan and Subramanian identify, in this example it would take about 40 years of aid before the country would be worse off overall.

Could the country be worse off as a result of aid?

So according to the Rajan and Subramanian regressions, the impact on exports would mean that a country could be made worse off overall as a result of receiving aid, but it might take of the order of 40 years before the negative impact through exports is big enough to offset the direct benefits of aid.

But this is only part of the story. The overall impact on the economy depends also on what happens to the non-exporting sector.

In principle, the effect on the non-exporting sector could be negative.  The contraction in exports could lead to a negative impact on the rest of the economy because the country is deprived of  some of the benefits of having to compete in the world economy.

For the overall impact to be negative, the non-tradable sector would need to be adversely affected by slightly lower exports and this effect would need to be larger than any benefits from higher imports and any benefits from how the aid money is spent.

This is theoretically possible, but it seems highly improbable.   The non-tradable sector must be growing to some extent (since that is what is crowding out the export sector).  At worst, it might be growing less fast than the export sector is contracting (so that the overall effects are negative after even more than 40 years.)  But there are good reasons for thinking that the aid would accelerate growth in the non-exporting sector, at least to some extent.  There will benefits from higher imports, including access to intermediate inputs, skills, and machinery, and benefits to the domestic economy of competitive pressures from imports.  And at least some of the aid is spent in ways that should increase productivity – for example, by improving education and skills, reducing sickness, enhancing security, building transport and communications infrastructure, and improving government administration.  For the overall effect on the non-tradable sector to be negative, all these benefits would need to be overwhelmed by the harm done to the non-tradable economy because the export sector is a little smaller than it would otherwise have been.

Even a very modest increase in growth in the non-tradable sector resulting from aid would be enough to offset the impact on GDP of the contraction in the export sector.  In the numerical example above, an increase in growth of just 0.05 percentage points would be sufficient to offset the negative impact on exports.

Empirical findings

The Rajan and Subramanian findings tell us that the export sector contracts as a result of aid (assuming they have correctly adjusted the denominator effect); but the effect is small.  Other things being equal, a country would have to receive aid continuously for of the order of 40 years to be worse off overall as a result of aid’s impact on export earnings.  But the overall effect on the economy plainly also depends on what happens in the non-tradable sector.  This is an empirical question:  the impact on the non-tradable sector could be positive (because of the benefits of the additional imports, and the impact of aid) or negative (because the positive spillover effects of a vibrant export sector are reduced).  You need to look at the effect of aid on growth overall, not just on the export sector.

The stastical power of cross country growth regressions is not good enough to say very much at all about the impact of aid on growth.  But if you hold your nose, the most likely interpretation of the data seems to be that there is no linear relationship between aid and growth, but there is a non-linear relationship in which aid increases growth but with diminishing returns.   If so, then the data tends to be consistent with the theoretical arguments: aid may reduce exports a little, but nothing like enough to turn the overall impact negative.

Conclusion

Rajan and Subramanian would like us to believe that aid can cause dutch disease and so make a country worse off.  But their research does not support this conclusion: the common sense view that a country benefits overall from being given free money is more likely to be right. Their empirical findings tell us that aid leads to exports being a smaller share of GDP.  This we already knew, since it is a matter of arithmetic; and it does not prove that the country is worse off immediately or in the long run. There is broad agreement that exports are critical for development, but it does not follow, as is often lazily implied, that the arithmetical effect of aid of reducing exports as a share of GDP harms a country’s prospects for development.  Looking at the impact on exports alone, their results suggest that it would take about 40 years for incomes to fall in aggregate as a result of aid.  But the overall effect depends on how what happens as a result of aid to growth in the rest of the economy.   There could be an indirect effect on the rest of the economy from the contraction of exports, but there should also be positive effects from the expansion of imports and the productivity effects of aid. We don’t know the relative size of these effects, but seems likely that the total effect is positive overall (it is the expansion of non-tradables that causes the contraction of exports, after all).  There is some rather flimsy empirical support for this from the  evidence of cross country growth regressions, and none for the alternative view that the effect is large enough to outweigh the benefits of aid.

(See also David Roodman’s review of this paper.)

John Gershman offers a reading list on “What to Read on Foreign Aid” in Foreign Affairs.

I’m obviously pleased that my paper, Beyond Planning, and the amazing work of my colleagues at aidinfo, are included in the list.

Does anyone reading this blog have anything to add to or delete from John Gershman’s list?

Emmanuel Frot and Javier Santiso write about why fragmentation is a problem for international aid:

.. the real issue at the heart of fragmentation is too little competition. Numerous donors only multiply monopoly costs, without bringing the benefits expected from competition.

This has implications for how the donor community tackles fragmentation. The current approach is institution-based. Donors and recipients meet in international meetings, and pledge to act. Progress is monitored by a multilateral institution (OECD’s Development Assessment Committee) that cannot constrain donors to implement their pledges, except through a delicate game of naming and shaming.

We wonder about the efficiency of this approach. To deal with a too heavy administrative weight by creating new administrations is somehow ironic. It remains to be proven that these new institutions will lower transaction costs and manage to implement a labour division that donors are often reluctant to effectively achieve. The problem with this approach is that it basically ignores why aid is fragmented. It does not attempt to change the incentives donors and recipients face, and so is unlikely to radically change their behaviours. In particular, it disregards the lack of competition that creates fragmentation.

I think this is exactly right. Fragmentation is a good example of a more general problem, which is that there are insufficient forces within the aid system to force it to evolve towards better arrangements. Evolution requires both variation and selection, and while fragmentation may be conducive to more variation, there are no forces that then drive out the bad and expand the good.

On January 13th, a leader in The Times and Kevin Watkins in The Guardian attacked the development policies of the UK Conservative Party, from opposite sides of the political spectrum.  The Times Leader says that the Conservatives are wrong to commit themselves to increase aid to 0.7% of GNI; and Kevin Watkins says that the Conservatives are wrong to want to reform the way aid is given.   Both attacks appear to be bone-headed efforts to make political mischief by undermining not just Conservative party policies but the mainstream consensus on development. Neither attack does credit to its perpetrator.

The Times criticizes the Conservative Party for their commitment to maintain the planned increases in development spending. The leader recycles discredited assertions about the negative effects of aid rather than offering solid analysis.  There isn’t a single reputable econometric study showing that aid causes harm through  exchange rate appreciations, corruption or slowing progress to democracy.   Peter Bauer, whom the leader article quotes, was criticising Cold War foreign assistance programmes which bear little resemblance to aid programmes today. Aid today is increasingly practical, targeted and measurable, just as The Times says it should be, and it works.

Britain was one of 147 countries which pledged we would “spare no effort” to meet the Millennium Development Goals. As The Times implies, we should not be judged on what we spend but on what we achieve. On this basis we are not yet doing enough to achieve the goals to which we are committed.  That is why it is important that Britain should continue to increase its world-class development programme, and press other nations to increase their spending too.  To resist this on the grounds that 0.7% is an arbitrary figure is a clever-sounding point for a debating society, not a reasoned argument against the commitment of all the main political parties to meet Britain’s international promises, and to press other countries to do the same.

From the other end of the political spectrum, Kevin Watkins in The Guardian seems to be determined to use development to score party political points – and to do so he has had to put himself in the strange position of arguing against the country-led approach to development which is supported by all main UK political parties.

Under the Labour Government Britain has helped build an international consensus that aid works best in support of a country’s own development strategy; that policies imposed from outside rarely work; and that governments should be accountable to their own citizens for their policies and actions.  Kevin Watkins rightly supports these points in other contexts. Yet he apparently won’t entertain the idea that other countries may have different views from his (and mine) about the best way to organise and fund public services.

I’ve read the Conservative Green Paper and it does not call for state services to be rolled back in developing countries. It says that governments should guarantee access to education for all their people; and that donors should fund that guarantee and support and encourage governments to choose whatever path enables them to expand education provision fast and effectively.  It does not propose or advocate market-based solutions in education: it says explicitly that the Conservatives would work with the public, not-for-profit and private sectors.

Kevin Watkins quotes the Green Paper saying “We bring a natural scepticism about government schemes“; this is the entire basis of his claim that “the Conservatives will use aid to roll back the state in key services“.  But it is clear when you read this sentence in context that the Conservatives are questioning the role of the government in aid, not planning to tell other countries how they should manage their public services.

There is now a valuable cross-party consensus on the need to use aid money to support countries’ own development priorities and programmes.  The challenge today is how to bring public sector reform to the aid business – including the possibility of some market-like disciplines to make aid more effective and accountable.  There are proposals in both the Government White Paper and the Conservative Green Paper to make aid more transparent and accountable and to link it more closely to results. Kevin Watkins might have used his space to tell us what he thinks about these ideas instead of trying to score party political points on development.

(By the way, I admire Kevin Watkins, but I’m not comfortable with the fact that a UNESCO official, paid from public funds, is using his position to make highly partisan and inaccurate attacks in the newspapers on the main UK opposition party. )

I’ve got no party political axe to grind: my interest is in supporting the best possible policies to accelerate development, so that the world is a fairer, happier and safer place for everyone.  It seems odd that the Conservatives should be attacked from both left and right for articulating development policies which seem to me squarely in the mainstream of development thinking.

The cross-party consensus that the UK’s development budget should continue to increase, and that British development policy is amongst the most effective in the world but nonetheless there is room for improvement, should be a matter of shared national pride, not scorn and sniping from whichever direction.  Let’s sustain that consensus, and not allow development policy to be used as a political football even in the heat of an election campaign.

Update: see Kevin’s reply in the comments.

Jeff Marlow writes in the New York Times about Koraro, a Millennium Village Project village in Northern Ethiopia:

As the project’s first five years wind down, its ultimate goals remain elusive, and the five-year initiative has swelled to 10. The extension, naturally, will require more spending: The financial injections to date—over $5 million per year in a mix of cash and non-cash contributions—have not abolished poverty. Improvements in the five sectors targeted by the MVP are readily apparent, but their sustainability is still up in the air.

There are many people in the development set who are sceptical about the utility of the Millennium Village Project, for good reasons and for bad.  Village-level interventions have had a chequered past, and the conventional wisdom today is that development assistance should help to build capable and accountable states which can deliver services, from agriculture and education to security and health, and not provide these separately from the systems that are being established.

I don’t know as much about Koraro as Jeff, but G and I did visit the town, unannounced, one day when we happened to be driving past.  We struck up a conversation with a local shopkeeper which went like this:

O&G:                 What is it like being a Millennium Village?

Shopkeeper:    Very good. We have lots of things.

O&G:                 Does everything work well?

Shopkeeper:    No, not all of it.  But we are much better off now.

O&G:                 Who decides what to change? Do you have a village council, or is there an Elder who decides?

Shopkeeper:   It is all decided by a Professor in New York.

O&G:                 Really? Do you know his name?

Shopkeeper:   No. But he is a very famous man

I don’t have the same ideological objections to Potemkin Villages the Millennium Villages Project as some other people. As both Jeff Sachs and Nick Stern have arged, it seems plausible that there may be significant complementarities between interventions which mean that programmes work better if there are other successful programmes at the same time.  For example, there may be little value in increasing agricultural productivity to generate surpluses if there is no way to get those surpluses to market, which requires infrastructure.  That suggests that each community may need a big heave:  ensuring that all these things come in together may be more effective than a series of uncoordinated interventions spread thinly.

For me the most disappointing aspect of the Millennium Villages Project has been the steadfast refusal to subject it to rigorous evaluation.  (Their evaluation programme is described here.)  The most detailed study so far has been conducted by the Overseas Develoment Institute.  The problem is lack of a proper basis of comparison.  Ethiopia is changing quite rapidly, and Korkora would have changed with or without the Millennium Village Project. For example, there has been a 51 percent reduction in malaria cases in Koraro, Ethiopia. This has been touted as a success by the supporters of the project; and it sounds impressive until you find out that malaria cases have been more than halved across the whole country, not just in Koraro.  The improvement in the Millennium Village is apparently no greater than anywhere else in the country.

To evaluate the project, Millennium Villages need to be compared with some suitable control group, ideally through randomised controlled trials.   Ideally, the individual components of the project would also be randomised to test the hypothesis that the effects of interventions are complementary.  (It follows that I don’t agree with Chris Blattman’s view that it would be too hard.)

It would, as Chris says, be pretty surprising if the Millennium Villages Project does not make a difference. After all, it is spending money roughly equivalent to 100% of the villagers’ income. Furthermore, it has benefited from close personal attention from the Prime Minister, other ministers and officials, researchers and academics (and, of course, a famous Professor from New York).  A rigorous evaluation would help us to know how big that improvement is, and and what cost.  It might also give us insights into whether any particular parts of the progamme are particularly important.

When Google decided to set up a censored version of its search engine in China in 2006, I was among those who criticised the company for its decision (here and here).

As well thiking it was the wrong decision in principle, I worried that a company that says one thing (“Don’t Be Evil”) and does another will eventually suffer from the contradiction between their values and their actions.

So I applaud their announcement today that they are taking a new approach in China and their threat to pull out of the market.

(Ironically, Google’s own blog is censored here in Ethiopia. You cannot access blogspot blogs.)

Google is standing up to dictatorship and speaking out for free speech, and putting this ahead of their immediate commercial interests.

It is hard to imagine other companies standing up for their – and our – values in this way. (Can you imagine Microsoft withdrawing their Bing search engine instead of producing sanitized results?)

Bloggers are quick to criticise when companies do the wrong thing.  So let’s be equally unstinting in our praise when they do things right.

Good on yer, Google.

Lindsay Morgan describes the problem of unpredictable aid:

And although more aid, even disbursed on short notice, might seem like a good thing, it’s difficult for governments to spend on useful things when they can’t predict what next year’s aid will amount to. For example, governments can’t hire teachers with a boost in aid this year, when they don’t know if they will have money to pay them next year.

If you want to raise money for international development you will eventually encounter a dilemma.  You want potential donors to be interested in their fellow human beings and to feel a connection with the people they are helping.  You know that you will raise more money, and sustain a longer-term relationship with your donors if they are getting constant feedback about the people they are helping and the difference your programme is making.  Your communications team tells you that statistics are not enough: you need “human interest” stories about individual lives.  You need photographs and life stories.

The consequence is that you have to invest time and money in generating that feedback; and you have to extract that information from the communities where you work in a relationship that verges on exploitation.  At the thin end of the wedge it may be nothing more intrusive bringing your visitors to a school and expecting a welcome ceremony – perhaps some songs by the children and a shared meal under an acacia tree.  Towards the thick end of the wedge it means talking up poverty, using words like “famine” where it might not be appropriate.   And it means asking children and adults to prostitute themselves by writing letters of gratitude to their sponsors.

Here is a description of a charity “Doing a world of good” that sends money to Ethiopia

… World of Good was born six years ago.  It’s a simple concept: For $25 a month, donors sponsor children chosen by an organization Asmare runs in the city of Gondar, at the base of the Simien Mountains in the northern region of Ethiopia. It differs from programs such as Save the Children in that the money goes directly into an individual child’s supervised bank account, instead of being pooled with other sponsors’ money and used for community projects.

When I started to read about World of Good, my first impressions were favourable.  Giving money directly to children to use as they wish sounds like an empowering and progressive approach.  But as I read more I become uneasy, and then quite nauseous:

Reerslev and Gerdes made a pact not to open the letters to sponsors without each other present. When the box finally gets here, the two find a place and a time to sit together, reading each one, making sure the children are not asking for specific things or making a plea to be adopted, which is forbidden by the charity’s rules. Mostly, the two women just read, and cry. They parse through heartbreaking stories of children whose parents have died from starvation or AIDS, who have quit school so they could walk into the dangerous forests on the outskirts of their ramshackle villages to gather cow dung or timber for firewood, who have been too busy trekking miles to the nearest water well to spend time learning to read. … One girl, Tigist, lost both of her parents and, before she joined the program, was a 12-year-old trying to survive completely on her own, eating out of trash bins. She wrote letters to her sponsors that said, “You are my family,” “You are my guardian angels.” Tigist, who is now 17, just graduated from technical school.

This is poverty porn.  The children are asked to write letters, but the letters have to be censored to make sure they don’t go too far (we are happy to send you money but you must under no circumstances ask to come and live in our country).  The children write letters praising their sponsors as angels.

This is not only wasteful of time and effort, especially of the time of the poor, it is degrading to those involved.  Why should children be forced to write letters describing their lives in return for money to eat or have an education?

My indignation is not reserved for the people at “Doing a World of Good”, who doubtless mean well.  I understand why they feel they need to do this: it helps them raise money and that in turn helps them to make a difference. Their behaviour is the result of a broader problem, with the citizens of rich countries, who seem to be unwilling to sacrifice a tiny part of their income to help a fellow human being unless they feel some sort of personal connection with the recipient.   This is charity of a Dickensien sort: not a system of social justice and protection, but throwing some coins to a beggar in the street and expecting to be lavishly thanked.

Quenching the apptetite for poverty porn is rational for each charity, NGO and aid agency: that is what they need to do to survive; but it is socially harmful.  We have to work harder to convince the public to make contributions without the titillation of letters from children or logos on lorries, but based on systematic and rigorous evidence of the difference that their contributions are making.

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.

This post is cross-posted on the aidinfo blog.

My colleague Judith Randel has made a very interesting point about aid transparency.

It was not long ago that donors conducted Consultative Group meetings in Paris about their planned aid to each developing country. Representatives of the recipients were not invited (they were subsequently given observer status to some of the meeting). That seems very strange today, as we know that development must be a country-led process. Donors aim to support the plans of developing country governments.

Yet today donors give aid to developing countries without publishing detailed information about what aid they are giving, to whom, for what, and with what effect. You can find out some general information a few years after the event, but the aid relationship is essentially a black box between donors and recipient countries. In a few years time, this will seem just as bizarre as donor-only Consultative Group meetings.

The people of a developing country – citizens, parliamentarians and civil society – have a right to know what is being spent in their country and how resources are being used. That is essential to making sure those resources are properly used, and to building the accountability of governments to their own people. Aid agencies are increasingly coming under pressure from taxpayers to publish details of how aid is spent, and there are some tentative steps towards greater transparency.

Aidinfo is working to ensure that the information is provided in a way that is accessible by, and useful to, the people of developing countries, and not just to donors.

I know it is fashionable to denounce celebrities who get in involved in international development, but I admire both Bono and Bob Geldof.   They are smart enough to take advice from smart people, and they put serious amounts of time and effort into visiting developing countries and getting to know the people and understand the issues.  Indeed, they have both probably spent more time visiting in developing countries than the armchair critics who mock them.  They have stuck with the issues for more than a quarter of a century – much longer than the fleeting interest of many journalists and politicians. Neither of them needs the publicity: their willingness to use the platform of their fame to speak out for the poor has helped to keep development on the political agenda.

Bono made two very good points in the New York Times on Monday:

An Equal Right to Pollute (and the Polluter-Pays Principle)
In the recent climate talks in Copenhagen, it was no surprise that developing countries objected to taking their feet off the pedal of their own carbon-paced growth; after all, they played little part in building the congested eight-lane highway of a problem that the world faces now. One smart suggestion I’ve heard, sort of a riff on cap-and-trade, is that each person has an equal right to pollute and that there might somehow be a way to monetize this. By this accounting, your average Ethiopian can sell her underpolluting ways (people in Ethiopia emit about 0.1 ton of carbon a year) to the average American (about 20 tons a year) and use the proceeds to deal with the effects of climate change (like drought), educate her kids and send them to university. (Trust in capitalism — we’ll find a way.) As a mild green, I like the idea, though it’s controversial in militant, khaki-green quarters. …

People Power and the Upside-Down Pyramid
A lot of us have seen or lived the organizational chart of the last century, in which power and influence (whether possessed by church, state or corporation) are concentrated in the uppermost point of the pyramid and pressure is exerted downward. But in this new century, and especially in some parts of the developing world, the pyramid is being inverted. Much has been written about the profits to be made at the bottom of the pyramid; less has been said about the political power there. Increasingly, the masses are sitting at the top, and their weight, via cellphones, the Web and the civil society and democracy these technologies can promote, is being felt by those who have traditionally held power. Today, the weight bears down harder when the few are corrupt or fail to deliver on the promises that earned them authority in the first place. The world is taking notice of this change. On her most recent trip to Africa, Secretary of State Hillary Rodham Clinton bypassed officials and met instead with representatives of independent, nongovernmental groups, which are quickly becoming more organized and more interconnected. For example, Twaweza, a citizen’s organization, is spreading across East Africa, helping people hold local officials accountable for managing budgets and delivering services. (Twaweza is Swahili for “we can make it happen.”)

(Disclosure: I am a member of the board of Twaweza, so it is not surprising that I agree with Bono that their work is good.)

Update: You should also read Alex Evans’s excellent piece at Global Dashboard on the importance of Bono’s support for contract and converge.

Whenever anybody makes a suggestion for improving foreign assistance, there is a long queue of vested interests thoughtful people ready to pour scorn on it offer constructive criticism.  To save everyone effort in future, here is a cut-out-and-keep, one-size fits all template for criticising every possible aid proposal.  I hope you will find it useful for criticising any ideas that people suggest in the coming year.

• This project may solve some problems but it won’t solve every problem.
  Your proposal may help some people but it will not solve the terrible plight of people in post conflict states / fragile states / small island states / good performing countries / Africa / Asia / middle income countries / people with AIDS / marginalised communities [delete as applicable].  The future of these people is essential to progress towards the MDGs.  Why are you proposing something that will not address their needs?
• Your proposal does not focus on the real priority.
  It is shocking that you should be proposing to spend money on this when it is clear that any additional money should go to (select one):
  • agriculture, because 80% of the world’s poor live in rural areas
  • health, because without our health we cannot be productive and it is a basic human right
  • education, because nothing is more important than educating our young; look at Asia etc
  • infrastructure, because you need roads and electricity for economic growth
  • water, because without water there isn’t life; women have to walk for 4 hours a day, etc
  • climate change adaptation, because the sea is rising and we are all doomed
  • women, because they raise the family, do all the work, educate the family, etc
  • capacity building, because you can give a man a fish and feed him for a day or teach him how to fish and feed him for a lifetime
  • small businesses, because we like small business which is folksy but not big business which is sinister; women’s handicrafts are especially good;
  • microfinance, because Mohammed Yunus is very impressive and saintly and microfinance sounds like it is a form of self-help
  • population control, because the problem is that there are just too many of them;
  • donkey sanctuaries – have you seen how the donkeys are treated? It is so sad.
• Your proposal is unsustainable. Your project may help people in the short term but aid cannot be permanent.
  Because aid cannot be permanent, poor people should be expected to pay for everything themselves after a few years, especially all the things that our governments provide for us like health, education, transport, research and development, infrastructure, security etc.  If we go on helping the poor they will become lazy and helpless and then they won’t be like us.  We must make them stand on their own two feet. The best way to do this is to make it clear that any help is only temporary.  Your idea won’t work when the outside funding stops so it is “unsustainable”.
• It is a new idea, and that will mean a lot of work.
  Everything that should be done is already being done, which is why everything is going so well in developing countries (well, apart from the poverty, hunger etc).  Therefore no new ideas are needed.  I am too busy managing existing aid programmes to give serious consideration to whether yours will work.  If you really want to help people in developing countries you should support existing programmes such as mine.
• Everybody in development is corrupt and lazy.This does not apply to anybody that I know personally but it is true of everyone else. So your aid project won’t work.
  It says in the Daily Mail is well known that all governments are corrupt and inefficient; all international organisations are run by self-enriching and lazy bureaucrats; all aid agencies are run for the benefit of the donor country; all NGOs are small and inefficient and often corrupt too. Therefore your aid project won’t work.  I know this wonderful NGO which is run be saintly people who do amazing things but there are no others like that.
• Rich countries should open their markets to exports from developing countries. Therefore your aid project won’t work.
  Rich countries do things which are very bad for poor countries, like erecting trade barriers, buying oil and enforcing intellectual property rights. This is unassailable proof that aid does not work.
• Jeff Sachs used to work on Bolivia and Dambisa Moyo is from Zambia. Therefore aid does not work.
  Jeff Sachs thinks that aid should be trebled and everybody knows this is a bad idea because he had something to do with free market reforms in Bolivia and then he changed his mind. So he is wrong.  Dambisa Moyo says aid causes great harm and although she hasn’t got any proof she is both a woman and from Zambia (and she is quite presentable on the TV).  These facts prove that aid does not work.

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.

In Business Day, Adekeye Adebajo, the executive director of the Centre for Conflict Resolution, Cape Town, takes the gloves off in criticising Dambisa Moyo’s book, Dead Aid:

… This is a work of self-flagellating simplicity, totally devoid of any thinking by leading African research centres or scholars, making the book often read like a Harvard Masters syllabus or a World Bank report. Moyo reveals her ignorance by incredibly charging that “scarcely does one see Africa’s … officials … offer an opinion on what should be done”. …

Moyo employs crude stereotypes of “tribal conflict” to depict African wars, and recklessly suggests that aid is “an underlying cause of social unrest, and possibly civil war”. Such an absurd link would, of course, involve a huge leap of logic, and the author’s ignorant blaming of Somalia’s civil war on competition for food aid completely ignores the decade-long homicidal campaign of US-backed autocrat, Siad Barre, which eventually led to rebellion in 1991.

Read the rest here.

My own review is here (pdf) – also critical, but less vituperative.

More reviews (including some which are less negative) of Dead Aid here.

The Center for Global Development is working on an idea which they call Cash on Delivery aid, in which donors make a binding commitment to developing country governments to provide aid according to the outputs that the government delivers. I think this is a good idea in principle, and hope that it can be tested to see whether and how it could work in practice.  The UK Conservative party have said in their Green Paper that if they are elected they will use Cash on Delivery to link aid to results.

Linking aid more closely to results is attractive from many different perspectives.  My own view is that linking aid directly to results will help to change the politics of aid for donors. Many of the most egregiously ineffective behaviours in aid are a direct result of donors’ (very proper) need to show to their taxpayers how money has been used.  Because traditional aid is not directly linked to results, donors end up focusing on inputs and micromanaging how aid is spent instead, with all the obvious consequences for transactions costs, poor alignment with developing countries systems and priorities and lack of harmonisation.  If we could link aid more directly to results, I think donors will be freed from many of the political pressures they currently face to deliver aid badly; and it would be politically easier to defend large increases in aid budgets.

Other people support Cash on Delivery aid for other reasons.  Ministers and officials of developing country governments see it as a way to access more money without the attendant costs of conditionality and foreign interference in domestic policy.  Some people see results-based aid as a way to restore the accountability of developing country governments to their own citizens, a social contract in which aid donors too often inadvertently interfere.  Especially in the US, some people believe that linking aid to results can create stronger incentives for developing country governments to deliver high quality public services.  Others support Cash on Delivery because it will improve the allocation of aid resources, since money flows to the places where services are being delivered and away from the places where money is being wasted. With all these complementary reasons there appears to be the possibility of a broad coalition of people in favour of moving ahead with testing whether Cash on Delivery aid can work in practice.

But there is one group of people for whom these ideas seem to be quite unsettling: development professionals in aid agencies and NGOs.

I recently wrote a response to a brief by CAFOD about some possible concerns about Cash on Delivery aid.  As I was doing so I realised that the questions asked by some development professionals reveal some discomfort about the possible impact of results-based aid on the quality and content of their jobs.  The “risks” identified in the CAFOD brief are not primarily about the consequences for development but rather risks to the privileged position enjoyed by professional staff in aid agencies and NGOs.

You can judge for yourself whether I am caricaturing the risks set out in the CAFOD paper, but they essentially amount to this: under Cash on Delivery aid money would flow to those governments best able to make use of it; governments would have freedom to decide which services to provide and to whom; governments would be able to decide how to use resources; governments would be accountable for their choices and the results; and progress would be measured according to internationally-agreed targets for impact rather than inputs and intermediate targets negotiated behind closed doors.

All these are necessary steps towards the internationally-agreed agenda for more effective aid set out in Paris and Accra, and necessary for the emergence of capable, accountable and responsive states.  Yet when a mechanism is proposed that tries to organise the aid system in a way that means these things could start to come about, these consequences are described as “risks”.

At the heart of these anxieties, it seems to me, is a question about what sectoral advisers in aid agencies are meant to be doing.  Take education advisers, for example (I am not picking on this group in particular, but it happens that the current proposals for Cash on Delivery aid are being developed looking specifically at education.)  Many people who work for aid agencies managing aid programmes for education are themselves education professionals, often former teachers.  Deep down (sometimes also on the surface) many of them want to be educators, not managers of aid programmes.  They want to be involved designing the curriculum, reforming the pedagogic approach, training the teachers, buying textbooks, or improving the education management information systems.  But it is the job of a community to educate its young, not foreigners.  As managers of aid programmes the staff of aid agencies should be ensuring that aid is delivered in ways that increase the accountability of central and local government to the nation’s citizens, keeping transactions costs to a minimum, delivering aid in ways which support the evolution of country systems and priorities, ensuring that the money is used for the purposes intended by the funders, and showing what results have been achieved.

In short, managers of aid programmes should be focusing on the effectiveness of aid, not education policy.  If governments need technical advice on education, they can procure that separately, and get advice from people who are more trained to build capacity and who are properly accountable for doing so, not get it as a bundled free offer-that-they-cannot-refuse from the people managing their aid.  If it works as intended, Cash on Delivery aid would change the relationship between donors and governments and would turn development professionals back into aid managers instead of would-be educators.  And it is this consequence which, I believe, some people find unsettling.

Many of my best friends are development professionals, and I know that everyone who works in development (well, nearly everyone) has the interests of the poor at heart. They often genuinely believe that they need to retain a degree of  influence to ensure that developing countries make the kind of progress towards development that they (and I) want to see.  There is quite a close parallel with the evolution of the attitudes of politicians, some of whom I also know well and have known since they were young, idealistic students.  Nearly all politicians enter politics for the noblest of motives: to contribute to the improvement of the society in which they live.  To a very large extent they retain those values through their political career. But over time there can be a gradual erosion of the distinction in their minds between their own interests and the service they give to others: some politicians gradually come to think that increasing their own power is the service of others, because they believe that they will exercise that power better than anyone else.

Politicians are, of course, at their most dangerous when they can no longer distinguish their own interests from the interests of the people they are meant to serve.  Similarly we should be concerned when we hear development professionals identifying themselves as speaking for the poor, and arguing that they must retain influence (i.e. power) – purchased by the relative wealth of their country – to promote strategies which the country would not pursue on its own.

To be fair, I also know some development advisers who are focused on improving the effectiveness of aid, who are rightly aghast when they are asked to double up by providing advice on how to manage an education or health system.   If I may be permitted a partisan aside, my observation is that DFID sectoral advisers tend to be more respectful of the need to promote effective country systems for policy-making and accountability than professionals from some other donor organisations (both NGOs and official aid agencies), and they are less likely to interfere in the country’s policies and strategies.

This may seem like an elaborate point to build from an innocuous and fairly sensible CAFOD brief about Cash on Delivery aid.  But the risks identified by CAFOD, and the questions that have been raised elsewhere, would apply to any system of results-based aid that makes substantive progress towards giving governments more freedom to choose how to deliver their development programmes and making them more accountable to their own citizens for their own success and failure.   I think these concerns actually reveal a deep-seated tension between the internationally-agreed agenda for improving aid effectiveness, and the views and interests of development professionals charged with designing and implementing those reforms in practice.