The series so far includes:

• Duncan Green from Oxfam, who contrasts progress in developing countries over the last year with the gloom of the ‘formerly rich’ countries of the G-8.
• Calestous Juma from Harvard, who identifies regional integration and better links with the diaspora as key drivers of Africa’s growth.
• Shanta Devarajan from the World Bank, who is cautiously optimistic, especially in the light  of increased demand by Africans for their governments to be accountable.
• Linda Raftree from Plan, who also emphasizes progress towards more inclusive and open societies.
• Kevin Watkins from Brookings and UNESCO, calling for “a properly financed global fund for education like those that have delivered such striking results in the health sector“.
• Jonathan Glennie from ODI and the Guardian, who is pessimistic about the prospects for international cooperation in the face of rising protectionism and nationalism as a result of poor economic prospects in the US and Europe.
• and my contribution, reproduced below, which gives a positive account of progress in many countries in Africa over the past year, and emphasizes the importance for developing countries of better global decision-making.

Economic growth has made the developing world less dependent on aid

A new generation of leaders, business friendly policies, technology, the spread of peace, and strong demand for natural resources have helped Africa to withstand the global downturn.

The Mercato, the commercial hub of the Ethiopian capital, Addis Ababa. Ethiopia's economy grew by 7.5% in 2011.

I celebrated New Year’s Day 2011 in Ethiopia, where we lived for three years. Ethiopia is humming with the optimism and energy of a fast-growing country, creating more jobs, sending more children to school, expanding healthcare, and providing electricity, clean water, sanitation and roads.

Ethiopia’s economy grew by 7.5% this year, and it is not the only country in Africa to boast a high growth rate. Africa has been the fastest growing continent of the past decade. The emergence of a new generation of leaders, the end of the continent’s debt crisis, business-friendly policies, new technologies, the spread of peace, and strong demand for natural resources have helped Africa withstand the global downturn.

Steve Radelet, a former senior fellow at the Centre for Global Development, has documented the emergence of 17 African countries in which total income is growing by more than 5% a year – increasing average incomes by 50% in 13 years. That growth is attracting businesses and investors from Africa and abroad, and the continent’s middle class is expanding. By 2015, about 100m African households will have incomes greater than £2,000 a year, roughly as many as India today.

And as they grow, developing countries are becoming less dependent on aid.

At the start of 2011, we did not expect a year in which so many people would be able to claim their rights and freedom. The Arab spring has moved many of us, but should not have surprised us. Better government has spread across Africa and the Middle East, defying outdated assumptions in the west. Thirteen African countries held national elections in 2011, four leading to a change of government; there will be 13 more in 2012. South Sudan gained its independence after a largely peaceful referendum.

When the year began, we did not know the rains in east Africa would fail. But in contrast to the 1980s, in today’s Ethiopia drought no longer means famine. Unlike its neighbour Somalia, there has been no repeat of the TV images of starving people in Ethiopia. That’s because, with the help of foreign donors, it has put in place early warning, food reserves and distribution systems, and a safety net that supports the poorest families in their own communities.

As developing countries have become more integrated into the world economy, and less dependent on aid, so their interests have changed. The most important international events for developing countries this year were the repeated failures of European leaders to put in place a credible plan to save the euro, the G20′s decision to put the world trade talks out of their misery, and modest progress at the Durban talks on climate change. These will all have more impact on developing countries than gatherings of the “development set” at World Bank meetings, the UN general assembly or the Busan forum on aid effectiveness.

But while progress has been good, it is not yet fast enough. Hundreds of thousands of people in the Horn of Africa will have spent Christmas in refugee camps, and about a billion people will go to bed hungry on New Year’s Eve.

In the years ahead, the Centre for Global Development in Europe will be working with policymakers, researchers and academics to find evidence-based, politically savvy ways for rich countries and powerful institutions to help developing countries lift themselves out of poverty. Our focus is on the world’s efforts to promote shared growth, protect our environment, reinvent our financial system, clamp down on international corruption, encourage and share innovation, reduce inequality and entrench peace.

For affluent and developing countries alike, these are the aspirations for 2012.

Narrative 1: Glass half full: we need a big heave

The dominant story from the summit was that development can be achieved if the world would only come together with a big heave. On this view, the glass is half full. We have made good progress towards the MDGs (supported by the new MDG report card by ODI; and their excellent new Development Progress Stories website); and with more money, we can do more.  Jeff Sachs, whose Millennium Villages Project exemplifies the idea of a big, coordinated push, called in the FT for aid to be scaled up through pooled donor funding, “to scale up what has been proven to work”. (Oddly, he chose the Global Fund rather than the World Bank as his example of effective multilateral institution.)

The new report of the Commission for Africa advocates a further big heave

A new Commission for Africa report, Still Our Common Interest, agrees. The original 2005 report was probably the most authoritative (certainly the most weighty) argument for a big heave; and it concluded (among other things) that donors should treble their aid to Africa.  The updated 2010 report reiterates that view, celebrates the progress that has been made, and calls for donors to increase their aid, including – very oddly – a proposal for a new Global Fund for Education.

Probably the biggest announcement this week, which sits squarely in the big heave narrative, was for a new UN Global Strategy for Women and Children’s Health.  As I argued here the other day, the focus on women and children’s health is welcome, but this is no strategy: it is another list of spending commitments, which the UN press release says is worth $40 billion. The only interesting feature of it is that it lists commitments by private companies and NGOs as well as official donors.  All very big heave; all very retro.

Narrative 2: More accountability leads to better institutions

While the UN institutions and the NGOs promote the big heave, donor governments, particularly the US and UK, are beginning to tell a different story which focuses on the need for more transparent and accountable institutions, both in developing countries and in the international development system.  This was most evident in President Obama’s speech which announced a new US development strategy.   President Obama explicitly distanced himself from the big heave:

“This is the reality we must face — that if the international community just keeps doing the same things the same way, we may make some modest progress here and there, but we will miss many development goals.”

Both the US and the UK government argue that the efforts of donors should be measured not by what is spent, but by what is achieved, both by aid and by other policies.  Cynics might think this is preparing the ground for aid cuts in the face of tight government budgets, though this does not appear to be the motive of the UK government which has committed to increasing aid to 0.7% of GDP by 2013.

The emphasis in the new US policy on growth as the permanent path out of poverty is not as new as the President’s speech implies; but the renewed emphasis will be welcome to those who think that the importance of growth is sometimes forgotten. As Lant Pritchett writes:

The “development is about more than growth” backlash, which had important elements of truth, easily got carried away into “development isn’t at all about growth” and it is good to see economic growth back front and center of development objectives.

A more novel feature of the new US policy is the emphasis on investing in systems and institutions, for service delivery, public administration, and other government functions, and the importance of country ownership.  This is new for the US.  For many European donors it is this reasoning that brought them to give more of their aid through governments as budget support, so this new US approach will be seen as a welcome conversion.

What is striking about this narrative is the emphasis it puts on transparency and accountability as ways to make institutions work better.  President Obama set out the argument in his General Assembly speech the following day:

The arc of human progress has been shaped by individuals with the freedom to assemble and by organizations outside of government that insisted upon democratic change and by free media that held the powerful accountable.   … In all parts of the world, we see the promise of innovation to make government more open and accountable. Now, we must build on that progress. And when we gather back here next year, we should bring specific commitments to promote transparency; to fight corruption; to energize civic engagement; and to leverage new technologies so that we strengthen the foundation of freedom in our own countries, while living up to ideals that can light the world.

This emphasis on accountability seems to resonate closely with the approach of the UK Government.  The UK International Development Secretary, Andrew Mitchell, set out a similar argument in his first major speech, in which he emphasized outputs and outcomes rather than inputs, and launched the new UK Aid Transparency Guarantee.   Paul Collier and Jamie Drummond, writing in the Guardian, make a similar point about the need for transparency and accountability in the use of natural resources.

The 32 page outcome document, Keeping the Promise, sets out the usual long list of activities which “with increased political commitment .. could be replicated and scaled up for accelerating progress”.  But experienced communiqué watchers (like Lawrence Haddad) also detect a new theme: the need for more citizen-led monitoring of delivery.  For example, the outcome document calls on donors to:

[Work] towards greater transparency and accountability in international development cooperation, in both donor and developing countries, focusing on adequate and predictable financial resources as well as their improved quality and targeting; …. To build on progress achieved in ensuring that ODA is used effectively, we stress the importance of democratic governance, improved transparency and accountability, and managing for results.

Until now, I think many people working in the development community have seen transparency as an add-on, at best a way of retaining public support for aid while they get on with figuring out how to use the aid money wisely (and at worst an annoying additional bureaucratic burden).  Perhaps I am tempted to read too much into these speeches, because my day job is working towards more transparent and accountable institutions, but it was striking to see Raj Shah, Administrator of USAID, talking about the use of new media to build an online platform to help the government to reach its development goals.  I think it is now clear that, for the US and UK at least, transparency and accountability will play a more central role in their development strategies, both as drivers of change in developing countries, and forces for improvements in the effectiveness of development agencies and institutions.

A sign that this narrative is beginning to take shape is that it is already under attack.  In an interesting article in The New Republic, David Rieff is sceptical of the idea that donor nations can offer a path out of poverty:

The problem is not with the analysis but rather with the president’s implicit claim that we know how to offer peoples and nations such a path. … The stark fact is that only if one fetishizes the idea of civil society as a kind of universal ideological solvent, and believes that, in tandem with scientific innovation, the road to our collective salvation is now open to us, can such optimism be justified.

An interesting feature of this narrative is that it emphasizes the need for a wider range of instruments (known either as beyond aid or – ghastly term – policy coherence).  For example, in his speech, President Obama said:

Development is helping nations to actually develop — moving from poverty to prosperity.  And we need more than just aid to unleash that change.  We need to harness all the tools at our disposal — from our diplomacy to our trade policies to our investment policies.

Andrew Mitchell’s speech in June said something similar:

21st century development is a complex tapestry of trade, investment and enterprise, climate change, economic growth, debt relief, financial services, intellectual property and advancing new technologies.

Bill Easterly argued in the pages of the FT that trade, not aid, is needed to promote development. I’ve argued elsewhere that we don’t know very much about whether and how aid promotes economic and development, but we do know that it enables people to live better lives while that transformation is taking place.  So it may be that these beyond aid policies are the best hope for promoting development, while aid should focus primarily on improving lives in the meantime.

Narrative 3: The challenge is increasingly inequality, not absolute poverty

In my view, by far the most interesting and important paper to be published around the summit was The World’s Poor Aren’t Where We Think They Are, by Andy Sumner from IDS. Here’s the key conclusion:

In 1990, we estimate that 93 per cent of the world’s poor people lived in low income countries. In contrast, in 2007 we estimate that three-quarters of the world’s approximately 1.3bn poor people now live in middle-income countries (MICs) and only about a quarter of the world’s poor – about 370 million people live in the remaining 39 low-income countries, which are largely in sub-Saharan Africa.

The paper also shows that just 12 percent of the world’s poor live in fragile low-income countries.  Take a look at this Guardian data visualisation tool.

Data visualisation by the Guardian

This change in the reality on the ground has profound implications for development policy, and my sense is that the discussion in New York is not yet grappling with these issues.  Readers of Paul Collier’s book The Bottom Billion will recall his analysis that the world’s poorest people lived in about 50 very poor countries which he said were stuck in a series of poverty traps.  Policy should be focused on helping those countries to escape that trap. But if three quarters of the world’s poor live in middle income countries, the challenge is to reduce inequality in these countries.  The figures suggest that the biggest causes of poverty are not lack of development in the country as a whole, but political, economic and social marginalisation of particular groups in countries that are otherwise doing quite well.

It is not clear that additional resources from abroad are an important part of the answer to this. At The Guardian, Jonathan Glennie says:

The world needs to find new ways to help other countries respond to persistant poverty and increasing inequality. The era of aid as we know it is ending. Let’s hope that a new era of development cooperation takes its place.

For some people this suggests that we should reconceptualise development as the ability of all the world’s citizens to live decent lives, rather a problem of economic industrialisation of poor countries. This view has the advantage of focusing on people and communities, rather than countries.  A recurring theme of the Chronic Poverty conference, which took place just before the MDG Summit, was the right of all citizens to a basic standard of living, and there is growing interest in the possible role of various kinds of social protection (social safety-nets, conditional and unconditional cash transfers, family grants and so on).

Similarly, a new report from Phil Vernon and Deborrah Barksh at International Alert asks us to get “beyond the MDGs”.  They call for a

… a new narrative, based on a vision of a world in which people can resolve their differences without violence, while continuing to make equitable social and economic progress, and without lessening the opportunities for their neighbours or future generations to do the same. This vision would be both enabled and recognisable by five core factors: equal access to justice, political voice, security, economic opportunity and well-being. These would in their turn be underpinned by a self-reinforcing set of values and institutions.

On this view, poverty is a problem of political and economic marginalisation which can affect communities within industrialised, industrialising and low income countries.  It calls for a different kind of policy agenda, which is as much to do with empowerment and political voice as the transfer of resources and investment in public services.

Conclusion

These seem to be three quite different views of development.  There is a substantial gap between advocating a big heave of more aid to ignite a cycle of industrialisation in the poorest countries, a focus on more transparent and accountable institutions in developing countries and in the development system, and political change that protects the rights of society’s most marginalised groups in whatever country they happen to live.

But while there are tensions and trade-offs, these views are not intrinsically contradictory, and in a subsequent post I’ll look at how these three narratives can be stitched together into a coherent whole.

Some supporters of aid have made what seem to me to be extravagant claims that aid should aim to bring about economic and social transformation of developing countries, so accelerating economic growth and industrialisation.  But this is a very high bar to set.  Aid may well help to increase the probability of economic take-off but there are lots of other conditions that need to be in place for the transition to an industrialised market economy to happen, and aid is not a sufficient condition (nor, probably, a necessary condition) for it to occur.   Even if aid does play an important contributory role, it would be statistically very hard to demonstrate a link between aid and economic growth.

Although the effect of aid on economic growth is uncertain, there can be no doubt that aid makes a huge difference to people’s lives.  Aid provides food, health care, education, clean water, financial services, and modest incomes which transform the lives of the people who receive them.   You can see this both in individual families – like the girl I met in northern Amhara, pictured here, who has health care and education because of aid – and in the overall statistics, which show that there has been a vast improvement in the quality of life on almost every measure other than income.

Aid may not always transform societies, but it does enable people to live much better lives while those transformations are taking place.  And that represents a huge increase in the sum of human welfare.

I believe aid could and should work much better.  Living in a developing country, I see all kinds of waste and inefficiency in the aid system that makes me angry. But it makes me angry because I also see how much difference aid makes when it is used well.  I would like to see aid becoming much more transparent and accountable, so that it becomes subject to evolutionary pressures to improve.

This means, by the way, that I do not subscribe to the view that the aid system should be regarded as temporary.  In the UK we hope that people will be on unemployment benefit temporarily before they are able to get back to work, but we don’t expect the system as a whole to come to an end.  So I think that we should expect that at least for our lifetimes, it will be right and necessary that we transfer income from the richest people in the world to the poorest people in the world.  I do not know which countries will be rich, on average, in fifty years time, and which will be poor; but I expect that the world will still need, and I hope it will still have, a permanent system to help those temporarily in need wherever they happen to be.

Aid would work better in future if we accept that we will need a permanent system to provide temporary help to those who need it, and set about designing a better system to do that.

Read the full article here.

Related reading:

• Phil Vernon at openDemocracy (to which my article was a reply)
• Roger Riddell at openDemocracy
• Ranil at AidThoughts
• Chris Blattman – Could Aid Slow Growth

Though 35 per cent of Ethiopian children are malnourished, and 40 per cent are stunted when they start school, the number who die below the age of 5 is down 40 per cent on what it was 15 years ago. A shocking 381,000 children died from preventable causes last year but there is clear progress. Cases of malaria have been reduced by two-third since 2006, with the number of deaths halved thanks to the government spraying a million houses and the Global Fund and the Gates Foundation distributing a massive 20 million bednets.

“Who says aid doesn’t work,” spluttered Geldof as he leaves the clinic.

I’m not a fan of these aid-growth regressions, because they are technically difficult to do well (see David Roodman’s article on the problems.)  But they are important for one reason: they are a more systematic way of doing the popular “folk regression” offered by authors such as Dambisa Moyo and Bill Easterly.  When Moyo and Easterly point out that countries that have had high levels of aid have also suffered from slow growth, they are implicitly pronouncing on whether there is a statistical relationship between aid and growth.  But of course you would expect to see a lot of aid going to poor countries (rather as ambulances tend to be present at the scene of road accidents)  so these simplistic comparisons do not tell us very much about the effect of aid on growth. The more careful question to ask is whether, other things being equal, aid leads to higher or lower growth, and that is what this kind of statistical analysis investigates.  It is good to have confirmation that the folk regressions are wrong and that aid does, as best we can tell, lead to economic growth.

There are a few other interesting things about this paper:

• the paper uses the same data as the infamous and oft-cited Rajan and Subramanian paper which claimed that there was no effect on growth (which I criticised at the time here) and finds that, if the regressions are done more carefully, those findings were not correct;
• the effect of development aid on growth is probably understated by this analysis because it includes all aid (unlike the paper by Clemens, Radelet, and Bhavnani, which subtracts humanitarian aid and other aid which is not intended to lead to economic development and finds – as you would anticipate – much larger effects of aid on growth from the subset of aid that is actually intended to promote development);
• there is no sign of diminishing returns to aid in this analysis. (This is an unusual finding – generally studies have needed to include a diminishing returns term to generate a statistically significant relationship between aid and growth).
• the study uses donor-specific fixed effects (the only study to do so, as far as I am aware). I’m looking forward to looking at these in detail, as the estimates will give us an insight into which donors are the most effective.

(h/t Chandan)

Update: David Roodman, whom I regard as an authority on these matters, thinks that I am wrong and Bill Easterly is right.

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.

In Bangladesh, Adam Jackson has posted some interesting reflections on his visit to a health programme (in which DFID supports the government) and a Chars Livelihood Progamme.

Our health review team visited a District hospital where mothers who would never normally have access to safe delivery facilities had very recently given birth thanks to a voucher scheme funded by DFID and a number of other donors. Fifty miles away in the Chars I and the other workshop participants visited a village and met a number of women – some of the most vulnerable people on the planet – who had been given assets of their choice (typically a pair of cows) and had their homes raised on clay plinths above the seasonal flood level, as well as a range of other support to enable them to become self-sufficient. … Both of these programmes contribute to the Millennium Development Goals, and produce results that few people interested in the welfare of the poorest would argue with.

Adam makes the excellent point that both programmes work, albeit to achieve different kinds of objectives.  Working through Government may be slower and more uncertain, but in the long run it is an investment in Government systems which, in the end, Bangladesh will need as it becomes more prosperous and no long relies on foreign aid.  The Chars programme reaches people more quickly, but does not contribute to building lasting institutions.  Clearly, both programmes have an important place, and donors need to be better at understanding that we are working towards multiple objectives and need many different types of instrument.

We need to understand better than we do: (a) how much immediate development benefit do we give up, if any, and how much institutional improvement do we gain, by working through governments? and (b) can providing services through parallel channels such as NGOs actually do harm to the long-run evolution of national institutions, for example by hiring away skilled staff, or by reducing the focus on and accountability of government institutions which should, in the long run, be playing those roles?

Adam’s call for rigorous, transparent evaluation is welcome. I would add that it should be independent and more focused on impact and less on process than current evaluation.

… I lost my young sister. She died of HIV-related complications. She should still be alive today since she was on ARVs.

But ARVs go hand in hand with good nutrition. My sister could not afford proper daily meals since she was looking after a large extended family. Besides her three children, she was looking after six double orphans that our elder brother left behind.

Her story is commonplace in Zambia. The HIV and AIDS pandemic can be mitigated by people having proper access to medicines and food. Both have become bigger problems in the current world economic crisis.

It is such situations that prompt those of us in civil society to redouble our efforts to do more advocacy work, asking our governments, in Africa, not only to be accountable to the people, but to prioritise issues of poverty and unemployment in their economic policy frameworks.

Our governments, though, are also limited in their capacity to cope with the severe effects of the global economic crisis. This is where the rich countries come in. They should remain committed to their aid promises.

In 2007, the UK gave 20 percent of their total bilateral ODA in the form of budget support to 13 countries: Tanzania, Ethiopia, Pakistan, Ghana, Uganda, Mozambique, Vietnam, Malawi, Zambia, India, Sierra Leone, Nepal, and Nicaragua.

Of this list, only Ghana and India were classified as “free” by the annual Freedom House ratings on democracy (according to either the 2007 or 2008 rating). For the 11 other countries that did get British budget support, how much is there “country ownership” when the government is not democratically accountable to the “country”?

… There is nothing that says you have to give aid meant for the poorest peoples directly to their governments, if the latter are tyrannical and corrupt. With the examples above, which side are UK aid officials on, on the side of poor people or on the side of the governments that oppress them?

With all due respect to Aid Watch, I don’t think they have got this right.

For example, they say:

Ethiopia’s autocratic government, which is inexplicably the largest recipient of UK budget support in Africa, won 99% of the vote in the last “election”.

Nice point, except:

a. according to the official results of the 2005 election, the ruling party won 59.8% of the votes; the Coalition for Unity and Democracy got 19.9% and the United Ethiopian Democratic Forces got 9.5%.  I have no idea if those accurately reflect how people voted, but it is nonsense to say that the government received 99% of the vote;

b. the UK does not give budget support to the Federal Government of Ethiopia. Through the Protection of Basic Services scheme, which was introduced after worries about the election, the UK Government provides finance to local government (albeit through the existing financial transfer mechanism via central government).  As well as funding health and education, the project includes significant components to increase transparency and accountability of federal and regional parliaments.

Aside from getting the facts wrong, Aid Watch seem to be criticising this form of aid by slinging mud rather than by way of a proper analysis of the advantages and disadvanges. We should be asking what benefits arise from giving aid through government, and what harm may come from it. Aid Watch acknowledge the possible benefits: lower transaction costs, more coherence in development policies, building capacity of government. There is another crucial possible benefit: putting money through government budgets is also a way to make the government more accountable to its own citizens, rather than to a bunch of foreign donors.

But Aid Watch don’t try to spell out what the harm might be if aid is given to governments with unpleasant records on human rights or corruption.  I personally think there is a case to be made against giving money to many governments, for example if there is reason to believe that the money will not be spent on poverty reduction, or if it will sustain in power a government which might otherwise be booted out of office.  But let’s set out these reasons coherently, and let’s try to assess their importance relative to the possible benefits. Aid Watch seems to suggest that guilt-by-association is enough to damn the whole enterprise.

As it happens, the governments mentioned in this piece (Ethiopia, Vietnam and Malawi) all make demonstrably good use of the money they have received.  Here in Ethiopia the expansion of public services such as free education and publich health workers financed by Protection of Basic Services is transforming the quality of lives across the country; and Vietnam has made quite staggering progress in bringing down poverty.  Personally I think there are important questions to be answered about the quality of democracy in both countries: but that doesn’t mean I want to kill some of the citizens of those countries, or deprive them of basic services, by giving less effective aid.

The British Government’s approach of giving some aid in the form of budget support (too little, in my view) is motivated by evidence that in some circumstances this is an important way of building more effective, responsive and accountable institutions.  Developing countries don’t want to receive aid forever, any more than industrialised countries want to give it forever.  Building effective and accountable public services is a way of financing the delivery of public services in the short run, while at the same time making it more likely that countries have an exit strategy from aid in the long run.

That is not preferring governments to poor people: it is preferring poor people to giving aid in a way which maximises the publicity you get and covering your back but doing little to build accountable and sustainable public services.

Giving aid as budget support should not be promoted ideologically: it should be used where the advantages (in terms of better service delivery and the long term benefit to accountability and institutions) outweigh the disadvantages (such as the risk of sustaining a bad government in power).   Equally it should not be opposed ideologically.  Budget support has not been shown to be at any greater risk of corruption or of fungibility than other forms of aid (these are the two main arguments that are offered against budget support).   It should be assessed case-by-case.  Where it can be used, it represents a very powerful mechanism for both the short term benefits of service delivery and the long term benefits of institutional development.  Where it cannot be used, donors should be focusing on what they can do to help create an environment where it can be used in future.

If Aid Watch want to be taken seriously as an aid watchdog, then (a) they’d better get their facts straight and (b) they need to do some proper analysis of the costs and benefits of different choices for aid delivery in different contexts, rather than simply asserting that it is wrong to give aid to and through governments of which they disapprove.

Incidentally, last year Easterly and Pfutze (“Where Does the Money Go? Best and Worst Practices in Foreign Aid.”) ranked the UK as the best bilateral donor.  That doesn’t mean that the UK is perfect, by any means, and it doesn’t mean that they get every judgement right; but it does suggest that UK aid officials might not deserve the allegation in this blog entry that they prefer poor governments to poor people.

Declaration of interest: I used to work for the UK Department of International Development.
(Updated 23 March.)

Update: Kudos to Aid Watch. They have given me space on the Aid Watch blog to post this reply (the same as the post above) on their blog.  You might also want to check out the comments there.

That is why the G20 should consider declaring a development emergency for 2009. They should urge aid agencies to take every step possible to accelerate the disbursement of already approved funds. They should support staff and managers for taking risks to speed up the flow of money. Their representatives on the boards of these agencies should monitor progress. Poor countries need the money, and they need it now. Rich countries have already paid for this. Now they just need to demand speedier results.

I can see how that would help in the short run (though presumably the financial crisis may be leading many aid agencies to do the exact opposite – shifting expenditure “to the right” is one way that donor countries may be coping with fiscal effects of the crisis.

But I can’t see how that would help in the long run. What we need is an automatic fiscal stabiliser that increases aid to poor countries in a crisis. One way to do this would be set up entitlement programmes – safety nets below which nobody can fall – and accept that the cost of these programmes will automatically go up when the economy turns down.

Minouche makes two key points: first, social protection schemes seem to be working quite well; and second, that poor people suffer much more from volatility and shocks than others – and there is growing evidence of the permanent harm that they suffer following a temporary shock. That makes a pretty compelling case for widespread use of social protection to put a safety net under people so that temporary shocks do not reduce a family to poverty for not just one but sometimes two generations.

There is a new paper by John Page and Jorge Saba Arbache (here) which finds that child mortality, for instance, goes up when growth is low, but doesn’t come back down when growth accelerates agan. Primary school completion rates and life expectancy similarly go down when growth is low but don’t recover in periods of high growth.  The paper also finds that aid goes down during decelerations, adding to the volatility.

Minouche also says something I agree with and something I don’t agree with.

Here is what I think is dead right:

… attempts to orchestrate a tailored response to protect the most vulnerable will almost always lag behind the need.

This suggests the need for an automatic safety net response so that social protection kicks in automatically in the face of a shock.  I would like to see social protection schemes become “demand led” – that is, donors would agree the entitlement criteria with governments, and if, in the face of an economic shock, there are more people who fall below that threshold, then the amount of funding from donors should automatically increase. This would help to make aid counter-cyclical, instead of pro-cyclical.

Here is what I don’t agree with:

DFID does not see the money we have committed to social protection as a welfare programme, although clearly for some households it will provide this function.

Why not? I think there is a strong case for having a permanent welfare programme, which transfers money from the rich to the poor.  We should see aid not as a matter of temporary charity but the beginnings of a global system of social justice.   (I wonder if Minouche’s choice of words – attributing this view to “DFID” rather than herself, suggests that she secretly agrees?)

In the latest edition of the Development Drums podcast, I talk to Jonathan about his book.  He explains why he thinks that we need to take a more complete view of the positive and negative impacts of aid, and he disagrees with my view that aid can be made to work better.

For the last twenty years, U.S. foreign aid funding has done little more than keep pace with inflation. Doubling our foreign assistance spending by 2012 will help meet the challenge laid out by Tony Blair at the 2005 G-8 conference at Gleneagles, and it will help push the rest of the developed world to invest in security and opportunity. As we have seen recently with large increases in funding for our AIDS programs, we have the capacity to make sure this funding makes a real difference.

No commitment to reform the institutions of US Foreign Assistance, however (unlike John Edwards).

Employees of the World Bank have been “expressing concern, dismay, and outrage” regarding favoritism shown by the bank and the Bush administration towards the one-time girlfriend of World Bank president Paul Wolfowitz, according to an internal memo circulated within the bank by the World Bank Group Association, which represents the rights of the bank’s 13,000 employees.

Nearly a third of the £2m spent on Scotland’s Malawi programme has gone on running costs, rather than helping those in need, BBC Scotland has found.

The amount is about five times the running costs for similar work carried out by a Westminster department [DFID].

The details followed a BBC request under the Freedom of Information Act.

The Scottish Executive insisted value for money was still being provided and said that costs were likely to be higher at the beginning of the project.

La Fondation pour le Développement Communautaire de Burkina Faso supports government schools and clinics, and it operates an agricultural training college. The programme in schools aims to increase school standards and performance, in part by providing health care for the children while at school.

The school was pretty good; though there were 85 children in a class, with just one teacher (and no assistant) and a total of 20 textbooks. The children were sharing desks and benches, and learning by rote; but at least they were in school and the teachers seemed genuinely interested in them.

The work of FCD in the schools – which is funded by the EC taxpayers – is impressive. By administering de-worming tablets in school, they have reduced the incidence of intestinal worms, increased school attendance and improved graduation rates. (There is robust evidence from elsewhere in Africa that deworming is one of the most cost-effective ways to reduce school absenteeism. If you are a taxpayer in a country that contributes to the European Development Fund you should be proud.)

The health clinic nearby was more disturbing. The photo to the left is where mothers give birth (about 1-2 a day). As you can see, the facilities are rudimentary. This is a clinic only an hour from the capital of Burkina Faso, so you would expect that it would be a bit better resourced.

A number of people we spoke to offered the same explanation for the parlous state of the clinics. Much of the money and some of the best staff are diverted to disease-specific programmes – such as for AIDS and malaria – and this is starving the basic health system of funds. (Laurie Garrett writes about this problem in the current edition of Foreign Affairs magazine.)

Sadly I had to return to London for work, so I couldn’t stay for the Le Festival Panafricain du Cinéma et de la Télévision de Ouagadougou (FESPACO).

Ougadougou is a very relaxed, easy city to visit, and has a great nightlife, as well as an agreeable climate.

We often complain that Africans need to stand up for better governance and for human rights.  So full kudos to the AU for doing so.

Tim Worstall also picks this up. 

Under President George W. Bush U.S. assistance to Africa has sharply increased, reaching $4.2 billion in 2005, nearly four times the level of 2000. This rapid growth is partly a result of a renewed sense that aid can fulfill humanitarian objectives and be a useful foreign policy tool—which helped encourage the creation of two major new aid programs, the Millennium Challenge Corporation (MCC) and the President’s Emergency Plan for AIDS Relief (PEPFAR). But the conventional wisdom says that the party of Jimmy Carter and Bill Clinton is a better friend to Africa than the GOP. Thus the scale of recent aid—and President Bush’s overall enthusiasm for Africa—caught many aid activists by surprise. 

The Republicans have in the past spent more on aid than the Democrats: Todd estimates that, based on past averages, the success of the Democrats in the mid-terms will cost Africa about $800 million. 

I think we forget the importance of the evangelical movement in the Republican coalition; and that the churches have continued to press for more aid for the developing world.  Furthermore, on trade policy, the Republicans are routinely less protectionist and less mercantilist than the Democrats. 

All of which shows that we should not make simplistic assumptions about politics in other countries.

This is likely to mean that I'll have to change how I blog; but I'm hoping to go on blogging about development in some form.

So that is why it has been quiet around here – we've been busy making arrangements to move back to London.  I'll miss CGD and Berkeley but I'm looking forward to being back in London and at DFID. 

The Make Poverty History campaign in 2005 focused on trade, debt and aid.  But even that is just picking some high profile targets.

Developing countries get a lot of advice – mainly unsolicited – about what they should differently, on almost every topic from growing more maize to improving the telephone system.  Some of the advice is good and governments would do well to heed it, if they can. Some of it is not good: our prescriptions may be ignorant, self-serving or ideologically motivated.

As we lecture others on what they should do differently, it behoves us to look long and hard at our own behaviour.  To what extent do our own countries – by action or inaction – contribute to the problems of global poverty? Rich countries impact on the prospects for development in poor countries in a wide variety of ways.  The current trade talks have drawn attention to the importance to the global system of trade rules, which disadvantage some producers in poor countries.  Reforms of trade could do much more to alleviate poverty in poor countries than many years of aid.  But what about our other policies?  We complain about corruption, but it is usually our own companies that pay the bribes, and our banking secrecy laws that shield the recipients.   We produce more than our share of the world's pollution, but it is poor countries that bear more than their share of the costs of global warming, from desertification in sub-Saharan Africa to flooding in Bangladesh.   We use patents to promote R&D into our own problems, even though they prevent the spread of life-saving new technologies.   We encourage free flows of investment to where the profits are highest, but discourage free flows of people to places where they can earn a living to support their families.   We call for an end to conflict in poor countries, but sell arms to the combatants, and buy the diamonds and minerals that bankroll the armies. 

The Center for Global Development (full disclosure: I am proud to say that CGD is my employer) produces an annual report that analyzes each rich country's total contribution to the fight against poverty.

The 2006 report has just been released, and the results are in the September edition of Foreign Policy magazine as well as on the CGD website.

The Netherlands tops the 2006 index, overtaking Denmark which fell back to second place.  They were followed by Sweden, Norway and New Zealand. The UK was 12th, one place ahead of the US and in the bottom half of the league. Japan was last among the 21 countries, mainly because its barriers to exports from developing countries are the highest, because of rice tariffs, and because its foreign aid is the smallest as a share of income.

A striking finding of the 2006 survey is that, despite the rhetoric that 2005 would be the Year of Development, there has been little progress across the range of policies that affect prospects in poor countries.  Indeed, Netherlands has moved into first place because Danish aid has been cut despite strong economic growth.

The UK comes top in two of the seven components, thanks to policies that promote investment in poor countries, and an outstanding environmental record.  The aid program, managed by DFID (disclosure: my past and future employer), is internationally respected, though less generous relative to national income than the Scandinavian countries.  Overall, however, the UK finishes in the bottom half of the league table, weighed down by extensive arms sales to undemocratic governments and tight immigration policies.

Blogged at:

• Center for Global Development Blog (from the horse's mouth)
• Foreign Policy blog
• Michael Stickings
• Pienso
• ThinkMojo
• Andrew Brown

News reports at:

• The Guardian
• The FT
• The BBC
• Reuters
• Foreign Policy magazine
• The Japan Times

It seemed a good idea at the time.  The SF Marathon starts at 5.30am, so we would stay at David's appartment in the city, and I would cycle to the start.  It was, after all, only a few miles and mainly downhill.   And in any case, this was only a training run: I had not trained for this marathon, had not tapered, and did not expect to do a good time.  I just wanted the practice, and this was a good way to do a long Sunday run.

It all went according to plan.  Cycling along Market Street, I reminded myself not to let my wheels get caught in the tram tracks, as Dave Parrish did last year.  How stupid would that be, I asked myself, to crash on the way to a marathon? (You can see how this is going to end, can't you?)  A few minutes later, I saw the perfect bike rack to lock to, on the other side of the road.  I started to edge across, focused on waiting for a break in the oncoming traffic, until my back tyre dropped into the tram tracks and the bike went from under me.  I left a lot of skin and blood from my knees, hip and shoulder on the road, and limped to the other side of the road.  All this at 5am, in the dark.

Perhaps more driven by adrenaline than common sense, I started the race anyway. I was hobbling – my hip was (and is) severely bruised and my knee was bleeding, but you expect to hurt in a marathon (maybe not so much in the first mile).  

At about 17 miles, I got the most severe stitch I had ever experienced: I imagine this was because I was running unevenly because of my hip; but it might have been the gel that I took at mile 15. I was stooped on the ground.  A police motorcyclist offered me a lift to the medical tent at the finish line.  I declined, and walked and jogged as far as Leah and Nathan, who had selflessly got up early to support the runners.  I chatted to them for a few minutes while the stitch cleared, and then set off again up Haight Street, hoping that I might catch some of the runners that I had been with before the stitch began.  (I did, but not until the 25 mile mark).

When I got to the finish, the crew in the finish area rushed me to the medical tent to treat my injuries.  What had happened to me, they wanted to know?  I told them that it had all happened before the race even began. I think they were relieved that the race was not to blame for the state I was in. 

All in all, this was a horrible run: it hurt every step of the way.  I was pleased to finish in 2:54:20 – not bad for a hilly course, with no taper, and carrying injuries.  I reckon I can knock a few minutes off that in a serious marathon.

The World Development Movement has a handy tool to help the ethical football supporter decide which team to support.

As I type, Tunisia is beating Saudi Arabia – according to the WDM, this is good news as it means that the 3rd most supportable team is beating the 29th most supportable, on measures such as carbon emmissions, corruption and military spending.

The Government has concluded that it will not be able to get its controversial draft Mental Health Bill through Parliament to make these changes, because of criticism of the measures from mental health experts and civil rights groups.

So instead they are going to introduce similar measures by amending the existing Mental Health Act 1983 and Mental Capacity Act 2005.  The main difference is that patients who are locked up without their consent will be given a right to appeal. As things stand, Parliament will need to approve the amendments.

How much easier this will be for Ministers when the Legislative and Regulatory Reform Bill gives the government power to introduce these measures without having to obtain Parliamentary approval.  Then it won’t matter whether Parliament agrees or not. Much more efficient, you see?

Here is me on my morning run in Boulder yesterday. This is at the top of Bear Peak, from which there are great views over the Rockies.

Unfortunately I lost Grethe’s phone somewhere down the trail coming down. But the views were definitely worth the cost of replacing it.

Richard Brennan et al report the findings of a nationwide household mortality survey conducted between April and July, 2004.   The national crude mortality rate of 2.1 deaths per 1000 per month was 40% higher than the sub-Saharan regional level – about 38,000 excess deaths per month.   The total death toll from the conflict (1998-2004) was estimated to be 3.9 million.

To put that in perspective, twice as many people die preventable deaths each year in the Congo as died in the Asian Tsunami last year.

The proximate cause of the vast majority of these additional deaths is infectious diseases which could be easily prevented or treated, if security and humanitarian assistance were provided.

Dr Brennan comments:

"This is the fourth in a series of surveys since 2000 that have consistently drawn the same conclusion-Congo is the deadliest crisis anywhere in the world over the past 60 years. It is a sad indictment on us all that, seven years into this crisis, ignorance about its scale and impact is almost universal, and that international engagement remains completely out of proportion to humanitarian need. Major governments, the United Nations, the African Union, humanitarian agencies, and the international media must all play a role: improved security is essential to lower the death toll; greater political engagement is urgently required; the parties to the conflict must be held to account; and the level of humanitarian aid must be increased dramatically. The citizens of DR Congo must finally be given the chance to live their lives in peace and security, and to achieve their full potential".

On these figures, the conflict in the DRC has now taken more lives than any since the Second World War.

The rich countries could, with pitifully little effort, step in to prevent further conflict, provide security for the people of DRC, and provide the essential humanitarian support needed to end this slaughter.  But we won’t.

This is a very interesting question, worthy of a longer reply than I’m going to give it here. But here is an outline of what we might do.  I’d welcome other suggestions in the comments section.

1. Ensure that further liberalisation gives priority to changes that will benefit poor countries (eg removing agricultural subsidies, removing tariff escalation, unconditionally ending all quotas and tariffs on exports of LDCs, simplifying phyto-sanitary standards) rather than those which are primarily designed to benefit rich countries.
2. Give priority to extending the logic and practice of globalisation to the market for labour, to complement liberalistion of the markets for goods and for capital.  Even small increases in migration would be of huge benefit to poor countries.  The asymmetry of our policy rhetoric on free trade for goods but growing anxiety about the movement of people verges on hypocrisy.  We can’t expect others to accept our arguments on the benefits of globalisation if we remain adamantly opposed to those parts of it that we are uncomfortable about.
3. Massively increase investment in global public goods, such as R&D into scientific innovation that would help the poor (a green revolution in Africa, new vaccines, solar power etc), conflict prevention and reductions in environmental degradation.   By definition, the costs of these public goods should be paid by the world community as a whole, and not by individual countries; and rich countries should be investing much more of their wealth on them.
4. Give more aid.  We know that aid works, on average.  There is remarkable consensus about how much aid is needed to meet the Millennium Development Goals, and it isn’t very much.  A doubling of aid would have a huge impact on developing countries, and the cost to rich countries would be negligible within the context of public spending.
5. Increase knowledge sharing.  I am concerned that the gradual extenson of copyright and patents into more and more of commercial life makes it hard for poor countries to appropriate technology from rich countries and close the gap. This has been a mechanism through the ages by which the poorest have been able to catch up with the richest: my sense is that we are making it harder than ever for this to happen.  I think we have to find ways to ensure that poor countries have access to knowledge itself, and to knowledge-intensive products (eg computer software, pharmaceuticals, complex machinery) at tiered prices – the R&D costs should be paid by rich consumers, and poor countries should get access to these products at marginal cost (ie almost nothing).  It harms us not in the slightest for them to do so.

There is a separate question of how to pay for the measures with a fiscal cost (namely, more aid, more investment in global public goods). Paul’s comment is, I think, aimed at those who advocate new taxes (eg a Tobin Tax, departure tax).  He says If you are seeking to dictate to democratically elected governments how to run their economies I don’t think you are right. I basically agree with him on that. The costs are so trivially small that governments can absorb them within their normal budget process. The cost to the UK would be about a fifth of what David Davies proposes to save with his fiscal rule – it would mean very slightly smaller reductions in income tax.  Governments should decide on the case for new or different taxes on the economic advantages and disadvantages of the tax, not on the basis of the merits of the cause for which the revenues would be hypothecated. As it happens, I am not persuaded by the case for taxing foreign exchange transactions (a Tobin Tax); but I am in favour of taxing aviation fuel; both for microeconomic reasons, not because of how the money might be spent.

So that is my agenda for how we might ensure that we continue to deepen and extend globalisation and at the same time ensure that the poor secure the majority of the benefits.  I’d welcome comments or other suggestions in the comments below. 

Update 11 November: See Chris Dillow at Stumbling and Mumbling, who adds asset redistribution to the list of possible measures.

My take on this is that microfinance, provided on a commercial basis, is self-evidently good. But that does not mean that we should welcome the stampede to subsidize microfinance. There are not strong arguments – either in principle or from evidence – that this is the best way to use scarce resources to help poor countries to grow.

Here I look at six reasons why microfinance is no panacea.

This is the International Year of Microcredit, no less, and throughout the world ten thousand microfinance institutions service some 40 million customers. Grameen Bank of Bangladesh, the world’s largest and most successful MFI, serves more than five million clients.

Donors and foundations are climbing on the bandwagon.

• On Friday, the founder of EBay, Pierre Omidyar and his wife Pamela gave $100 million in eBay stock to Tufts University to create a fund that will invest in international microfinance, or lending to people who are too poor to qualify for traditional loans.
• On the same day, Bill Clinton launched a new microfinance fund based on $75m from several multinational companies, charities and government development agencies.
• The Shell Foundation has announced $100m in micro loans.

We celebrated the blogswarm that supported Kiva. And here among the self-appointed experts in the blogosphere there is rare consensus between the Globalisation Institute, WorldChanging, NextBillion, Global Growth.org, the PSD blog, Adventures in Ethical Consumerism, Dan Drezner, Cafe Hayek, Unitus, Atlas Blogged, and others.

So presumably we have good theory and evidence to suggest this is an effective way to help the poor? Err … not exactly.

Microfinance enables people to lift themselves out of poverty. It is bottom-up, empowering people to lead their own development instead of top-down development. Support for microfinance removes market failures that put barriers in the way of the poor. What’s not to like?

Let’s be clear: access for the poor to financial services is definitely a good thing. Access to credit can help households to increase their consumption, reduce risk and increase food security, reduce malnutrition, and empower women. (ref: Khandker)

But saying that commercially provided microfinance is good is not the same thing as saying that it is a good idea for donors, philanthropists or governments to subsidize microfinance. Here’s why.

First off, it is not clear that there is a market failure to correct.
On Friday, The Financial Times (who should know better) said this:

In practice, however, there is a market failure: capital does not flow to start-ups in poor countries. The returns are not high enough to compensate for the risk.

That isn’t a market failure. If the returns are not high enough to compensate for the risk, then the market is doing exactly what it should by excluding the poor from access to credit.

(An aside: the fact that some people are too poor to obtain goods or services that we wish they could afford – such as food, water, credit, health care, transport etc – is not a market failure in the economic sense.)

If the market incorrectly perceived the risk, or if there were government regulations or taxes that made credit unaffordable, then there would be a market failure, and there would be a case for policy intervention to correct it. But in this case, the best approach would be to correct the market failure directly. If governments have better information than markets about default risk, then they should publish it. If there are taxes that make credit unaffordable, they should be abolished. It is very unlikely that, if there is a market failure, the best approach is to provide subsidized loans.

Second, subsidies for microfinance suffer the same shortcomings as other industrial subsidies.

Most microfinance institutions get some or all of their funding from grants or loan guarantees from individuals, philanthropists, foundations, and governments and international institutions such as the World Bank.

When developing country governments subsidize businesses through export subsidies, import tariffs, public procurement, grants or tax breaks, they are roundly denounced as interventionist and corporatist. They are not praised for supporting bottom-up, market-led growth. It is economically inefficient to use public money to distort the market. So why are subsidies to the cost of capital for small businesses any different?

Third, these subsidies may stifle competition that would improve financial services for the poor.

The poor desperately need access to affordable credit and insurance markets and other financial services. They are most likely to get that as the financial services industry, through a process of competition, drives out costs and produces effective and affordable services that meet their customers’ needs.

If we have donors and governments supporting uneconomic microfinance institutions, that evolution of the financial services industry isn’t going to happen. (The obvious parallel is domestic firms behind a protectionist import tariff which have no incentive to become competitive in world markets). The unintended consequence of well-meaning support for the microfinance industry may be that it delays the very evolution of the industry that the poor most need.

Fourth, increased access to credit may not significantly improve productivity in the absence of complementary inputs.

Almost all studies of access to credit find that most loans taken by the poor, especially in the rural and informal economies, are NOT taken for the purpose of investment in businesses but to finance consumption. This is not a bad thing – the poor benefit from the insurance that access to credit provides; but it suggests that hope that microfinance will enable people to grow their way out of poverty may be too optimistic.

There are few really good empirical studies of the effect of access to microfinance on investment; but such as there are show that returns to access to credit depend crucially on access to other complementary production inputs such as seeds, irrigation, or transport. Without the presence of these other factors of production, access to credit has little or no impact.

(Another aside: even in cases in which the borrower is formally a woman, there is a great deal of evidence that women only rarely control the use of the loan.)

This fourth point is not an argument against microfinance (which, as you will recall, is unquestionably A Good Thing): but it is an argument that microfinance is a complement to, not an alternative to, all those other policies to improve the opportunities for the rural poor (many of which are despised as "top down" interventions by the most articulate advocates of microfinance).

Fifth, there is an opportunity cost to these subsidies.

The total subsidy to Grameen Bank is about $20 per person per year, or $0.22 per dollar-year borrowed. (Schreiner, 2003) It seems likely that this is good value for money in the sense that the recipients of the subsidized loans use them in ways that produce a surplus of more than the cost. But there are many development investments for which funds are not available (because aid resources are scarce) that would yield a positive return. The question is whether the return to subsidizing credit for the poor is the best possible investment compared to, for example, the purchase of vaccines, teacher training, building roads, R&D into more productive crops, or the cost of peace-keeping in conflict-ridden countries.

Measuring the impact of microfinance is hard to do. An individual who takes the initiative to access credit is likely to have above average entrepreneurial skills; and will typically have a higher income than someone who does not access microfinance. It is difficult statistically to separate the effect of this entrepreneurial trait from the impact of access to credit. As far as I know, there are no studies using fully random assignment to measure the effectiveness of microfinance schemes which would permit a comparison with other development interventions.

We do know that investment in these public goods – such as vaccines – produces huge benefits, far exceeding their costs. The returns to microfinance would have to be very large indeed to justify their position as the intervention of choice for well-meaning donors. And yet the best evidence we have is indifferent on the impact of access to credit. (ref IFPRI, 2000)

Sixth, subsidies for microfinance is no more "bottom up" or less interventionist than many other government and donor policies

Here is The Economist:

What makes microfinance such an appealing idea is that it offers “hope to many poor people of improving their own situations through their own efforts,” says Stanley Fischer, former chief economist of the World Bank and now governor of the Bank of Israel. That marks it out from other anti-poverty policies, such as international aid and debt forgiveness, which are essentially top-down rather than bottom-up and have a decidedly mixed record.

Eminent though Stan Fischer is, this does not bear a moment of reflection.

All economic growth will come about because of the efforts, investments, courage, luck and skills of individual people, working to improve their lives and those of their families. This process requires access to a range of complementary inputs, such as skills, market infrastructure, inputs for their production (eg seeds, tools, labour), access to credit, good health, information, and security.

When countries receive debt relief or aid, they can use those resources either to provide those goods and services which are needed to enable the private sector to have successful businesses (eg investing in security, education or health), or to help to reduce the obstacles that the government has erected (eg taxes).

Providing public subsidies for credit is no more "bottom up" than providing subsidies for road-building or education. Indeed, it is arguably more interventionist than many other policies, since it takes governments and donors from the business of ensuring efficient supply of public goods such as transport infrastructure or security (which would be undersupplied by the free market) into the business of subsidizing services that should be efficiently provided by the market.

Conclusion

Lest I be misunderstood, let me repeat that the poor need access to credit, insurance and other financial services. That they cannot afford these services demands policy action; in just the same way as the fact that they cannot afford to access food, education, health care, transport, communications, security, housing.

But it does not follow that well-meaning donors, whether rich philanthropists, governments or international institutions, should subsidize credit. If there are market failures, we should identify and correct them. If there are not, we should allow the market to work, and concentrate instead on good public policy: correcting market failures, ensuring the affordable supply of public goods, and creating an environment by which the private sector can invest and grow. It is not at all clear that subsidizing microfinance is a high priority for helping the developing world to grow its way to prosperity.

I would add the following six tips:

11.  Retain your own voice.  Blogging has evolved as a form of personal expression of ideas and experience,  and that gives it much of its unique value.

12.  Use trackbacks to continue the conversation.  These create a link in the blog you are commenting on, to your own comments.   Emerging blogging etiquette demands that you only trackback to a post that you also link to in your post.

13.  Use blog-reading software to read blogs.  It is much quicker and more convenient than surfing from one blog to another in your web-browser.

14.  Use the "excerpts" section of your blog software wisely.  Many readers skim the excerpts to decide what to read.  Make it self-contained and interesting.  Excerpts that are intended to tease are annoying.

15.  Link generously.  Links are our community’s currency and our main social asset.   Give credit it where it is due.

16. Bloggers hate rules.  Try to codify blogger etiquette at your peril. 

Hat tip: Bloggers4Labour 

On aid and debt relief, in respect of the new money aspect, I am somewhat puzzled by some of the people who have been claiming that it is all recycled money. It is absolutely clear to me that the EU commitment is additional, the Japanese commitment is definitely additional, and as far as I am aware, Canada and the US are agreeing to double their aid from their present position. Although people keep saying that there is an issue about whether it is new money, it seems to me certainly true that it is, at least the vast bulk of it.
…
If we deliver on what has been promised, yes, we can say that the millennium development goals will be met; but, obviously, we have got to deliver on it.

Here are the numbers of the additional pledges made during 2005. The UN Millennium Project estimated that in 2010, ODA would need to be $152 bn (in 2003 prices)  That’s about $160 in 2004 prices. 

My estimate based on DAC projections is that $114 bn had been pledged by September 2004 for 2010; which has been increased during 2005 to pledges totallying about $128bn.  That is an increase in pledges during 2005 of just $14 billion. Of that, the bulk ($9 billion) is due to promises from Germany and Italy, both of whom have cautioned that their increases are subject to fiscal priorities at the time.   There would need to be an additional $33 billion pledged by 2010 to reach the UN Millennium Project estimate of what is needed.

It is true that if $128 billion were achieved, this would be an increase of around $50 billion compared to 2004 levels. But at most $14 billion of that increase is additional money pledged during 2005, and it is not safe to count on about half of that.

… the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

John Maynard Keynes, 1935, The General Theory of Employment, Interest and Money, Chapter 24.

And by golly there is a lot of it here in the United States.  This is partly because Congress has much more power over the budget than does the British House of Commons. The British system has a rule that only a Minister can propose increases in expenditure or taxation; it is for the House of Commons then to decide whether to grant the money needed. In the US, by contrast, Congress can insert additonal spending in almost any bill.

President Clinton was briefly given the power to veto particular items (the "line item veto"), and he used it 82 times in 1997 to delete unnecessary expenditures in 11 spending bills. The savings to taxpayers total nearly $2 billion over five years. But the Supreme Court struck down the line item veto in 1998, and now the President has to accept the pork inserted in the Budget by Congress, or send the whole thing back. 

In August 2005, Congress passed, and President Bush approved, a transportation bill stuffed with pork. The bi-partisan pressure group Taxpayers for Common Sense identified 6,371 pieces of pork – at a cost of $24bn.  These included $450m for two bridges in sparsely populated Alaska and $2.3m for landscaping along the Ronald Reagan highway in California.  There was also funding for a snowmobile trail, a deer-avoidance system and something described as "dust control mitigation" on rural roads in Arkansas.

And that is why this porkbusters campaign is such a good idea: use the blogosphere to identify a comprehensive list of pork. Instapundit explains:

Identify some wasteful spending in your state or (even better) Congressional District. Put up a blog post on it. Go to N.Z. Bear’s new PorkBusters page and list the pork, and add a link to your post.  Then call your Senators and Representative and ask them if they’re willing to support having that program cut or — failing that — what else they’re willing to cut in order to fund Katrina relief. (Be polite, identify yourself as a local blogger and let them know you’re going to post the response on your blog). Post the results. Then go back to NZ Bear’s page and post a link to your followup blog post.  The result should be a pretty good resource of dubious spending, and Congressional comments thereon, for review by blogs, members of the media, etc. And maybe even members of Congress looking for wasteful spending.

Of course, one person’s pork is another person’s essential infrastructure project or welfare payment, and I’m not sure who will decide if each entry truly qualifies. We’ll have to see whether the quality of catalogue can be maintained.  I’d be inclined to have a community voting system to determine which spending is the most egregiously porky.

In general, I’m an admirer of much of the United States’s system of government. But their inability to exert any sort of fiscal discipline is not an advertisement for their budget process. Perhaps the blogosphere can help to shed some light on the worst excesses and put pressure on Congress to do better?

Let’s get this straight.  Trade barriers make a country poorer and should be abolished irrespective of whether other countries have the wisdom to do the same thing.  "We’ll only stop throwing rocks in our harbour when you stop throwing rocks in yours" is not the policy of a rational person.

But it is more than daft, it is cynical. George Bush said in his UN speech:

Today I broaden the challenge by making this pledge: The United States is ready to eliminate all tariffs, subsidies and other barriers to free flow of goods and services as other nations do the same. This is key to overcoming poverty in the world’s poorest nations.

And Tony Blair speaking today said:

going to have the World Trade Organisation in Hong Kong, that has got to be done properly, we have got to get a good strong deal out of that …  it is the test of whether international cooperation is prepared to live up to the demands of the inter-dependent international community we live in today.

Neither the EU nor US has the slightest intention of making a significant reduction in trade barriers.  These carefully phrased bluffs are designed never to be called. We will go on shovelling taxpayers’ money into the trough for agricultural and economic interests, with catastrophic consequences for the word’s poor, while blaming other countries for the lack of progress.  Here’s the White House’s press spokesman speaking in April last year: 

And we will be defending U.S. agricultural interests in every forum we need to, and have no intention of unilaterally taking steps to disarm when it comes to this.

We won’t get anywhere if we go on thinking of this as a negotiation. There is no analogy with disarmament: trade barriers are not something we might reluctantly give up as a price we have to pay to obtain the benefits of actions of others.  They are a form of self-harm which we should cease immediately, while earnestly hoping that others do the same.

Some say that  tariffs and subsidies give us "leverage" that we can use to accelerate reduction by other countries.  In which parallel universe is that true?  Meanwhile, back in reality, our tariffs and subsidies give other countries all the excuse they need to go on doing the same.  If you really want to put pressure on other countries, do yourself a favour and get rid of of trade barriers.

Credit, though, to BlairWatch, who highlights a recent article in the Guardian.

And to my father, Brian Barder, who resigned from the Special Immigration Appeals Commission in protest at the Government’s attempts to use the immigration system to imprison people without a fair trial (which the High Court subsequently found to be illegal) and whose blog is an essential resource for anyone interested in civil liberties.

And to Tony Hatfield, who continues to plug away on this. 

And to Stephen Grey, a remarkable journalist who has probably done more than any other British journalist to hold the Government to account (see his website, online news article here, radio transcript here, newspaper article here).

And we should acknowledge Kenneth Clarke for raising the issue in his recent speech on foreign affairs. 

Apologies to anyone I’ve missed (let me know in the comments section if there are other great blogs about this.) 

The British Government should not condone, tolerate, participate in or benefit from torture. Full stop.

If he does end up holding an enquiry into the events, I predict this will be his undoing.  It is always the cover-up that creates the political scandal.  Some evidence will come to light during this enquiry which will be uncomfortable for the administration, and it will not be properly reported.  And that will, in time, be the scandal that finishes him.

So it was interesting to see this article on BBC News Online, which is based mainly on an interview with Bill Easterly, making essentially the point that a number of us were making:

"It is axiomatic that flooding the market with food drives down the price for local farmers," Mr Easterly says. …

Mr Easterly and others are not arguing that the solution to perverse incentives lies in withholding emergency aid.

They contend that it could be made to work better in a number of ways, including:

• Providing compensation to local farmers
• Making sure aid stops when things improve
• Giving cash rather than food

But the most effective move would be to focus less on emergencies and more on chronic problems. Mr Easterly says this could be done cheaply in the Sahel.

Quite so.

We should pause also to reflect on the bravery and selflessness of those in the services who are working round the clock to help.

FEMA has recommended this list of charities for those who wish to give donations; see also Stygius and  Instapundit. (I personally think that in a country as rich as the United States, it is the responsibility of Government, not charity, to meet the needs of people affected by disaster. Should ordinary working folk on moderate incomes give what they can so that the Federal Government can cut taxes for the very rich? I don’t think so.)

The blogosphere has already begun to discuss whether anyone is to blame: cuts in investment in flood defences; reduced capacity of the National Guard; climate change.  In due course, there should also be a debate about whether it is sensible to restore the city of New Orleans at all, given its vulnerability to natural disasters, or whether, like Pompeii, it should remain a memorial. 

There will be plenty of time for all that. For now, let’s focus on getting help to those who need it.

it’s a fairly basic theory of mine about how the world works that the further away from the people any bureaucracy is the worse it does. Some twit trying to impose silly rules via the parish council quickly gets reminded, in the most personal and upfront manner, of quite how silly those rules are. Local councils are similarly amenable to personal pressure….derision down the pub for example. As bureaucracies become further and further away, regional, national, continental (and in the uber example, global,) there is less and less of this correction.

I am generally in favour of the principle of subsidiarity (which is that decisions should be made at the lowest possible level) but I don’t think that the problem with trade policy decisions is that they are made by people who are insufficiently politically accountable.

The political economy of trade policy is that trade restrictions (such as tariffs and quotas) are of large and transparent value to a small number of producers, who are typically well organised and vocal. There are many more losers – namely, the consumers who pay the costs of protectionism – but though the loss is large in total, the cost to each consumer is small, and disguised in the form of higher prices.

Politicians who represent farming constituencies are generally vigorous supporters of agricultural subsidies and protectionist quotas on agicultural imports. Politicians in industrial constituencies usually advocate tariffs on imports that compete with their voters’ factories. Politicians that represent the consumers who lose out from these measures tend to give much less priority to trade issues, as their voters are relatively apathetic.

So the political force for protection is stronger than the force for liberalisation, and governments continue to implement trade barriers, even though it would be in the interest of their citizens overall to remove the tariffs and quotas.

The "democratic deficit" in this case is not that the decision-makers are too far from the people; it is that there is an asymmetry between the political pressure from the beneficiaries of trade restrictions and the political pressure from the losers.   

Paradoxically, this may be a case where taking the decisions further from the political representatives of those most directly affected would be beneficial.  There is a parallel with the case for creating an independent central bank (which I guess Tim would be in favour of) – there may be benefits from consciously putting these decisions in the hands of people who are somewhat removed from the political fray and who can be given incentives to pursue the broader public good, rather than having to respond to the more immediate and vocal complaints of the losers. Tim may want to believe that politicians who are more directly accountable to their voters would take better decisions; on this issue, I fear the opposite is true.

Even if Tim were right and there was reason to think we would get better trade policy decisions at lower levels of government, it is impractical.  All but the most extreme Eurosceptics support the EU single market.  And that in turn requires that there are no tariffs and quotas between European countries, and a common external tariff.  To devolve trade policy decisions back to national governments would add a significant burden on Europe’s businesses.

What the bloggers said

Phil at Actually Existing gives a historical perspective to the current position. Simon Holledge at Skakagrall gives a Scottish context, saying that Lords Reform is an essential stage in a series of constitutional reforms that may eventually bring real democracy to every part of the British Isles. Mary Reid and Matt Bowles say that 94 years is long enough to wait for reform.  Jim Bliss – an irishman – is amused by the absurdly anachronistic system of governance still being employed by his former colonial oppressors

Will Howells asks why we need a second chamber at all, but that if there is one agrees with Tim Holyoake and Sara that it should be elected by some sort of proportional representation. Keith Wilson and (with some reservations) Chris Applegate support the Second Chamber of Parliament Bill. 

Sandra Gidley (an MP) can’t understand why this is taking so long. Richard Allan (who used to be an MP) is perplexed that anyone would choose appointment rather than election. Talk Politics calls for a plebescite so that the people can choose how they wish to be governed. Kerron Cross, Malcolm Clark, Stephen Linlithgow and Stephen Glenn all argue that Lords Reform would be a fitting tribute to Robin Cook, who died on August 6th, 2005.

Many of the posts complain about patronage and cronyism.  Carolyn Roberts asks why Andrew Lloyd-Webber has a seat in parliament.  Justin of Chicken Yoghurt argues against jobs for life. Paul Davies and The Woodland Path agree. 

Brian Barder (my Dad) argues that the second chamber should reflect the increasingly federal nature of the UK political system, and refers to his contributions to the Selection Committee on Lords Reform.

Only a few bloggers argued against an elected second chamber (though this is a biased sample, as this mass blogging was part of an Elect the Lords campaign.)  Nosemonkey  advocates reform of the Lords argues against direct election.  He says that the job of the second chamber is to scrutinize legislation, that the public would not tend to elect the most expert people, and that a joint committee of both houses should make appointments. Tim Hicks replies that democracy is better than the alternatives.  Tim Worstall vents his contempt for politicians of all sorts and wants something random instead. John Band at the Sharpener and Jamie at Blood and Treasure argue for a lottery to choose the membership of the second chamber. Nick Barlow thinks a third of the second chamber should be elected every General Election.  Oliver Pell thinks that there is a choice between a democratic House of Lords and an effective revising chamber. Talk Politics calls for elections with a small number of appointees who would be politically independent. Stuart Parr at Wonko’s World thinks that elections are a way for party managers to increase control and argues for a hereditary chamber because it would be more random.

Cavalorn thinks that elections give an illusory sense of power, though The Disillusioned Kid, also from an anarchist perspective, supports anything which increases popular participation.

James Graham says it is important for reformers to work together, and if necessary compromise, to ensure that the coalition for reform remains united.

There were not many new ideas.  Bishop Hill thinks it is a problem that all the parliamentarians are in London, and suggests a virtual parliament instead. Tim Worstall proposes a hereditary seco
nd chamber in which the person raised to the peerage does not get to sit in the house: only his or her offspring.  I proposed a second chamber elected by non-geographical interests, such as vocational groups – about which more in my companion piece setting out a proposal for reform.

The New Politics Network also has more brief a round-up of blogs on House of Lords reform.

Themes

Reading these blogs and the comments on them, there were a number of common threads, though none of these was universal.

1. The commentators were almost all in favour of having a a second chamber that acts as a check on the House of Commons. Only a few contributors entertained the possibility of a unicameral (ie one chamber) system.  Most thought the second chamber should provide an alternative point of view, perhaps with the benefit of more expertise and experience than the lower house. Some thought it should be able to stand up to protect the rights of minorities against populism.
2. Almost all the contributors felt that the second chamber should not simply mirror the House of Commons in its composition. In particular, there was  a strong feeling that the second house should not be subject to the same party disciplines of the lower house. Proposals to ensure that it has a different, more independent composition, using a different electoral system, and/or changing the timing so that the second is not elected on the same timescales as the House of Commons.  The desire to ensure that the second chamber was independent of the party discplines of the lower house was also a key argument for the minority of contributors who favoured either a hereditary system or a lottery.
3. Many of the blogs argued that an elected second chamber could be used to broaden electoral representation. This might be achieved with some form of more proportional representation such as Alternative Vote or Single Transferable Votes.  Some thought that the second chamber should reflect the federal nature of the United Kingdom (rather as the United States and South Africa both use their second chambers to give equal representation to each state or province). This might be thought to balance the perceived iniquities of the first-past-the-post system used to to elect the House of Commons.
4. There was noticeably strong distaste for the patronage implied by a system of appointments to the second chamber, with a number of individual appointments mentioned as examples of cronyism or corruption. Appointments were also thought to to be problematic because they lead to a chamber that is both unrepresentative and insufficiently politically independent of the House of Commons.  An advantage of appointments, however, is that they enable the second chamber to include people of real expertise and experience.
5. Some, but not all, the contributors argued that the second chamber should be elected to provide it with democratic legitimacy. While some worried that an elected house might be subject either to populism (celebrities rather than experts) or simply another venue for the operation of political parties, so providing no independent check on the House of Commons, most contributors thought that legislators should have a democratic mandate.

International context

The Elect the Lords campaign has an interesting international comparison:

• 65 countries in total have a two-chamber parliament.

• Of the 46 countries that wholly or mostly elect their second chambers, 29 are established democracies.

• By contrast, of the 19 countries that wholly or mostly appoint their second chambers, just 5 are established democracies.

• Of the 46 countries that mostly or wholly elect their second chambers, 28 hold direct elections (in the case of established democracies, 19 out of 29 hold direct elections).

• The UK is the only established democracy to appoint its members for life terms of office. The tiny African Kingdom of Lesotho is the only country in the world with a comparable second chamber to the House of Lords.

Conclusion

The current position is very hard to defend – and none of the bloggers attempted to do so.  There is a surprisingly broad consensus on the characteristics we want from a reformed second chamber. Yet there is less agreement about how best to achieve those goals. Because we do not agree on what the new system should be, we seem to be stuck with a system that nobody likes. 

You may also be interested in a companion piece about my proposal for an elected second chamber based on vocational constituencies, which I believe is one way to meet many of the goals for a reformed House of Lords identified by this discussion.

1. Don’t stop here. Just because the hereditary peers are largely gone does not mean we have ended up where we want to be.

2.  Elect the upper chamber in rotation – eg a third of the house every 2 years. With fixed election dates. 

3.  Have non-geographic constituencies. Base them on other characteristics such as occupation (doctors, financial services, retailing) and activities (churches, sports clubs, motorists, geeks) and let members of those interest groups elect people to represent them. We all have interests other than where we live.

4.  Cut the crap from both Houses: no more wigs & tights, archaic processions, Black Rod, voting lobbies, "Right Honourable and Learned Friend", late nights. etc.
 

* Note for American readers: "ha’porth" = "my 2 cents" though the exchange rate was different in those days.

<i><b>Update 21 August: </b>I have added two new posts. One summarises the various blogs on House of Lords reform. The other sets out this proposal (bullet number 3 above) in more detail.</i>