The Guardian development blog is running a series of end of year reflections on development, including one by me. Many of the articles are upbeat about progress in developing countries, but pessimistic about the short term economic prospects for the industrialised world and for global cooperation to tackle shared global problems.
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.
Duncan Green has been awaiting ”the inevitable response from Owen” to a recent post by Dr Kamal-Yanni of Oxfam and Daniel Berman of Médecins Sans Frontières about different approaches to getting vaccines into developing countries. The main point of disagreement is how vaccines first developed with rich countries in mind can best be made available quickly and at an affordable price in developing countries. This is an important issue because we have a poor record of making these vaccines available, which is part of the reason that 2 million people die each year of vaccine-preventable diseases.
There is a separate but related question of how we can get vaccines to be developed in the first place to protect against diseases which do not much affect people in rich countries. On this we apparently agree that it is a good idea to test commercial incentives such as Advance Market Commitments.
For vaccines developed primarily for industrialised countries, my view – which I expressed in an earlier blog post – is that we should use aid to make it more attractive, and more profitable, for pharmaceutical companies to invest in making these vaccines available in developing countries. The view of Dr Kamal-Yanni and Daniel Berman is that, on the contrary, we should “err on the side of the poor” by holding down prices, making these markets less profitable.
My ‘inevitable response’ is now on the CGD global health blog (and reproduced below). It is all a bit down in the weeds, but the main point is that it is simplistic to suggest that existing vaccines (for example, against pneumococcal infection) can simply be rolled out at marginal cost in the developing world. I explain why in in the blog post. Unless we do something to make these markets more attractive for the private sector, we will continue to see delays in access to vaccines in poor countries. In these circumstances, insisting on keeping prices down errs on the side of the ideology, not the side of the poor.
As always it would be great to have your views: comments are open on the CGD blog.
There seems to be some confusion about what the international definition of poverty actually means.
The Millennium Development Goal is to halve, between 1990 and 2015, the number proportion of people living in extreme poverty. The poverty line was originally defined as living on $1.08 a day (usually referred to as ‘dollar a day’ poverty). In 2008 it was recalibrated to $1.25 a day.
About 1.4 billion people live below this poverty line: that’s about a quarter of the people in developing countries.
If you have traveled in a developing country, you may have noticed that some things seem really cheap. Perhaps that bus journey only cost you 10 cents, or you remember buying beer for 30 cents. It is easy to assume that the reason people can survive on a dollar a day is that a dollar goes further in developing countries.
Apologies for being the bearer of bad tidings, but if that is what you thought you need to know that the poverty line is measured at purchasing power parity (PPP).
What does that little piece of jargon mean? It means that the calculations take account of this difference in prices. When we say that a quarter of the people in the developing world are living on less than $1.25 a day, we mean that they are living on the equivalent of what $1.25 would buy you in America. Not what it would buy you in Mali.
Look at this video made by the World Food Program showing how much food you can buy with $1, which in the video they say is worth 16 Ethiopian Birr. (That’s the current official exchange rate). The point of the video is to show that that it is very difficult to buy a day’s food with 16 Ethiopian Birr.
Unfortunately the WFP have got their sums wrong, because the poverty line is measured at purchasing power parity. The poverty line in Ethiopia, below which 30 million people live, is not 16 birr a day but 4 birr a day. (It was 3.44 birr in the 2005 data used to calculate the number of people living in poverty.)
A dollar buys you 16 birr at the official exchange rate
So if 16 birr doesn’t buy you very much, how can people possibly survive on the equivalent of 4 birr a day? Part of the answer is that the WFP video also distorts things in the other direction by buying food at a shop in Addis Ababa. Prices are much higher in Addis and you’d get a lot more food for your money in rural areas. (Unless my ears are deceiving me, the video also slightly exaggerates the cost of food in Addis: the shopkeeper tells him that the potatoes are 6 birr, which he apparently mishears as 12 birr.) But even in rural areas you’d still end up with less food for 4 birr than is shown in this video.
I’m sorry to single out the WFP (though they should know better). As I found out when I mentioned this on Twitter, a lot of people haven’t realized that poverty is measured at purchasing power parity. The world’s poor are possibly poorer than you imagined.
Progressive development thinkers have welcomed the announcement of new money for the Global Alliance for Vaccination and Immunization (GAVI), and support the partnership between governments and the private sector. A minority of NGOs have criticized GAVI on the grounds that it is too cozy with pharmaceutical companies. But we should be encouraging more, not less, engagement by pharmaceutical companies in the health needs of developing countries. Perhaps pharmaceutical companies have done more for the world’s poor than the aid industry?
This blog post originally appeared on the Center for Global Development Global Health Policy blog.
Maurice Hilleman may have saved more lives than any other scientist
Maurice Hilleman may have saved more lives than any other scientist. He developed eight of the vaccines widely used around the world: for measles, mumps, hepatitis A, hepatitis B, chickenpox, meningitis, pneumonia and HiB. Hilleman worked throughout his career at Merck, a pharmaceutical company.
Last week, donors pledged $4.3 billion to GAVI to help immunize 250 million children by 2015. Most of this money (over 80%) will come from four donors: the UK ($1.3 billion), the Gates Foundation ($1 billion), Norway ($677 million) and the US ($450 million). Other donors also generously doubled their previous commitments, and Japan and Brazil gave for the first time.
We should heap praise on donors for this. Childhood vaccination is among the most successful and cost-effective development interventions (pdf). When the Expanded Programme on Immunization (EPI) was launched in 1974, less than five per cent of the world’s children were immunized during their first year of life. Today, about 80% of children receive the basic package of six life-saving vaccinations (polio, diphtheria, tuberculosis, whooping cough, measles and tetanus), saving about 3 million lives a year.
And what a difference it has made. Smallpox has been eradicated. Polio may be next. The number of children dying of measles has declined by about 80% from 733,000 deaths in 2000, to 164,000 in 2008. It is easy to become complacent about success on this scale. Now that many fewer children die of these diseases, we are in danger of forgetting that they were ever a problem, and the role that vaccination has played in ridding us of them.
We have not only the medical technology, but also the health systems, skills and logistics to reach children across most of the developing world. So we could also reach children with vaccines which are still considered too new or too expensive to be widely used in developing countries, including those against pneumococcal disease, rotavirus, meningitis, hepatitis B, yellow fever, cervical cancer, rubella, typhoid, and Japanese encephalitis.
Backing vaccination with big money is an astute political move. Taxpayers understand the idea that every child should have the same vaccines as their own children; and vaccination programs clearly work.
This is not just good politics: it is good development policy too. DFID recently conducted an exhaustive review of the value for money for the taxpayer from 43 multilateral organisations. GAVI was one of the top-rated organisations, along with UNICEF and the Global Fund. Vaccination is one of the most reliably cost effective, life changing development interventions that money can buy. It ought to be a no-brainer.
Save the Children UK and ONE both ran impressive campaigns supporting a large GAVI replenishment, and the new donor commitments were welcomed across most of the mainstream development community. But a small number groups – notably Médecins Sans Frontières and Oxfam – have criticized the way that GAVI works. (For example, Daniel Berman from MSF appeared on Newsnight to criticize GAVI).
These groups are clear that they support the objective of greater access to vaccination; but they say that donors could make better use of the aid budgets by by pushing pharmaceutical companies for lower prices. They have accused GAVI of having too cozy a relationship with drug companies, which have two representatives on GAVI’s 27-person board.
Getting a better deal
MSF and Oxfam are certainly right that lower prices would mean that a given vaccine budget could go further: we could immunize more children, and so save more lives. If we think vaccination is important for development, we should do whatever we can to make it as widely available as possible. Oxfam and MSF say they want GAVI to take three steps:
first, full transparency about the prices GAVI pays; second, forceful action by GAVI to use competition to get a better deal; third, all pharmaceutical companies should step down from the GAVI Board because of their clear conflict of interest.
I have no argument with the first objective, and I’m glad to see that UNICEF has announced that it will be publishing vaccine prices on its website.
But the other two objectives (getting ‘a better deal’, and removing pharmaceutical companies from the GAVI board) are seem to me to be potentially reckless.
There are, in principle, two kinds of ways to cut prices. One way is to reduce the cost of developing and producing new vaccines. These include simplifying regulations, shifting production to lower-cost places, and reducing or diversifying risk. The second way to cut prices is to squeeze producers, and so get a better deal for purchasers by reducing the profits of the pharmaceutical companies. We might be able to do this, for example, by using the market power of UNICEF (which purchases vaccines on GAVI’s behalf) to push prices down, or by bringing more suppliers into the market so that competitive pressures make it harder for any firm to make big profits.
The first kind of price reduction – reducing costs – is a net benefit to society (other things being equal). If we can do it, we should. There is a big and important agenda to pursue here. Long term commitments to GAVI, enabling long term contracts with pharmaceutical companies, are an important way to bring down the costs of production. GAVI can play an important role, and I would argue (indeed,I have argued) they should be doing it more. Amanda Glassman and colleagues set out a great agenda on this in a recent working paper.
The second kind of price reduction – transferring surplus from producers to consumers – is a zero sum transfer from the shareholders in pharmaceutical companies to governments and aid agencies. That may be desirable on distributional grounds but it may have long-term consequences which we come to regret.
We want pharmaceutical companies to develop new vaccines, and to improve existing vaccines. For diseases which hardly ever affect rich countries – like malaria – we want them to go ahead and develop the vaccine anyway. And when they invent a new vaccine for diseases which affect people everywhere, we want them to trial those new vaccines in poor country settings as well as industrialised countries and, if they work, to invest in manufacturing capacity to produce the millions of doses needed to vaccinate people across the developing world.
So this is the dilemma: we want pharmaceutical companies to invest more in developing and producing new vaccines and drugs for developing companies. But once they’ve done so, we want those products to be available at the lowest possible price, ideally free.
Be careful what you wish for
In simple economic models, we don’t need to think too hard about protecting the interests of companies. We encourage competitive markets, and let competition drive the price down to the marginal cost. That enables firms to make a reasonable return on their capital, leaving the rest of the surplus in the hands of the consumer.
But drugs and vaccines are different in a crucially important way. They are characterised by massive up-front costs of research, development and testing, and relatively low costs of production once the vaccine has been approved. These products are only profitable if the companies have some way to recover their up-front development costs.
So what should the price be? If the price is forced down to marginal cost – as it would be in unrestricted competition – the firm which has developed the product will never recover the costs of its investments. If we want the firm to consider doing this again (or indeed to consider doing it in the first place) then the price paid to the firm has to stay above marginal cost, at least for a time, so that the firm gets its money back.
An imperfect answer to this has been the patent system: to grant the firm a temporary monopoly so that it can keep the price above marginal cost and recover those development costs. But this way of paying development costs has huge disadvantages: namely that charging higher prices excludes some consumers from the product. That may not be a problem if the product is an MP3 song or a computer game, but it is a helluva price to pay when the product is a life-saving vaccine.
The other potential problem with paying above marginal cost is that firms may be able to make excess profits. We want firms to be able to cover their costs, and reward their shareholders for the risk they have taken, but we don’t want them to hold society to ransom if they have invented a life-saving drug or vaccine.
So we want a mechanism which gives firms a reasonable return on their investment but which does not allow them to make excessive profits. That in turn means neither allowing competition to force the price down to marginal cost, nor allowing firms to charge inflated prices.
Achieving both access and innovation
Oxfam and MSF want to see more manufacturing by producers in developing countries, as a way to bring the price down. Such a move has two effects: one good and one iffy. Moving production to lower-cost locations may bring down the total cost of production: that must be good. But companies are not going to invest in future vaccines if they know that they will be undercut by manufacturers making copies of the new product, having borne none of the development costs. So untrammeled competition may be good in the short run, if it brings down prices, but bad in the longer term if it chokes off future investment in these products.
The analysis of the vaccine market by Oxfam and MSF alleges that prices are too high. The entire policy agenda rests on the judgement , so it is unfortunate that the report offers no evidence to support it. All the report tells us is that ‘actual prices are not determined in a simple way by, or justified by, R&D costs’.
Just because Oxfam and MSF offer no evidence for their claim doesn’t mean that they are wrong. Perhaps we are paying too much for these vaccines, and the companies are making excessive profits in these markets. After all, a lot of other business are making a lot of money out of the aid industry. It is hard to tell, because these companies are extremely secretive about the actual costs of development and production (in a way that I find rather sinister and which certainly does not help their cause). I have no difficulty believing that many pharmaceutical companies would be trying to make profits from developing countries if they could.
Here’s why I don’t think that is very likely that they are. We don’t see firms lining up to develop new products to tackle the health problems of people in developing countries. We don’t see them rushing new products to market in developing countries. We don’t see them investing in the adaptation of existing products, or in the investment of large scale plant needed for large scale production. On the contrary: over the decades before GAVI was established, we saw fewer and fewer firms seriously engaged in medicines for developing countries. If firms are making huge profits on selling drugs and vaccines for developing countries, why isn’t there a gold rush?
That isn’t a very satisfactory basis for a judgement. But let’s consider the balance of risks. If I’m wrong, and we are overpaying for vaccines, the damage is that some of the aid budgets of rich countries is unnecessarily bloating the coffers of Big Pharma. But vaccines are a hugely cost-effective development intervention: even if we were paying twice as much as we should for them, they would still be saving lives more cheaply than almost anything else we do. And as news spreads of the handsome profits to be made, more firms and investors would be attracted into developing, manufacturing, registering and selling new products for developing countries. But if Oxfam and MSF are wrong, then driving down the returns to pharmaceutical companies will reduce their interest in these markets. There will be less research; less investment in large-scale production; and products will be brought to markets more slowly. The consequence will be that millions of people will be denied access to life-saving products. Given that we can never get the prices exactly right, I’d rather err on the side of making these markets too congenial for pharmaceutical companies, and so attract more businesses to the field, than making the environment too hostile for them and driving them away.
The MSF and Oxfam paper implies that they believe that prices should be pushed down to the lowest possible level, because this will increase access. If that is their view, they do not tell us how firms will be encouraged to engage in these markets in future; if that is not their view, they offer no insights into how they would prevent the price from falling too far or how we would know when we’ve got there.
The value of partnership
One way to achieve a combination of innovation and investment (requiring higher revenues for firms) with access for the citizens of poor countries (requiring lower prices paid by purchasers) is to use aid budgets to make up the difference. GAVI has a huge role to play in making this happen. Making developing country markets more valuable for private investment is a legitimate, high-value use of aid. But we put those benefits at risk if we have appear to have ideological objections to using aid to support good returns for pharmaceutical companies when they engage in developing countries. That is why I’m concerned about the recommendation that the pharmaceutical industry should be kicked off the GAVI board. Max Lawson of Oxfam calls this the ‘thorniest issue’.
GAVI was established as an alliance of governments, international organisations, donors, research organisations, firms and civil society working together to increase access to vaccinations. The 27-seat board has one seat for an industrialised country firm, and one for a developing country firm. Those firms are hardly over-represented: there are ten government seats. Civil society also has one seat – exactly as many as rich country pharmaceutical firms. Every member of the board has a profound interest in the decisions of the alliance – sometimes a shared interest with the other stakeholders, sometimes competing interests.
The benefit of having pharmaceutical companies engage in the alliance is obvious: they understand the economics of their industry better than anyone else. If we want to figure out what we need to do to get more vaccines produced for and distributed in developing countries, we have to work closely with the firms who do it.
That model is yielding benefits. Vaccines against pneumococcal infections have been rolled out much more quickly in developing countries, not long after they became available in industrialised countries, in stark contrast to the 15 year delay in the roll-out of previous vaccines for HiB and Hepatitis B. GAVI has brought together governments and firms to bring down the price of rotavirus vaccine for developing countries.
MSF and Oxfam are not entirely explicit about what they see as the main risk of industry participation but their main concern seems to be that firms have somehow overcome their numerical inferiority to capture the GAVI board, leading it to collude to pay too much for vaccines. If that were true, it would indeed be a matter for concern. But it depends again on their view that prices are too high.
Given their concern to bring down prices, and ensure access in the least developed countries, MSF and Oxfam could speak out more energetically against PAHO’s ’most favored nations’ clause which prevents vaccine companies from charging least developed countries a lower price than they charge in wealthier middle income countries like Brazil. Yet the NGOs seem strangely reluctant to take this on. Perhaps attacking the pharmaceutical industry is easier, if lazier, than challenging the policies of governments of emerging markets?
Let’s show some love to Big Pharma
My colleague Charles Kenny has shown that over the last century there have been massive improvements in the length and quality of life even in countries whose incomes have hardly changed. Countries with GDP per person of $300 in 1999 have approximately the same life expectancy (46 years) as people had in 1870 in a country with an income ten times as great. Charles lists five countries in which incomes fell by an average of 18 percent over forty years, yet life expectancies increased in all of them over the same period, by an average of 40 percent. How has this happened? In large part as a result of the development and use of vaccines, drugs and contraceptives.
Development of new medicines has almost always depended on a combination of public and private investment. As we know from the story of Maurice Hilleman, many of the most important breakthroughs have come from scientists working in pharmaceutical firms.
Chart showing how the relationship between infant mortality and income has changed over the last century
There is plenty of reason to maintain a healthy suspicion of pharmaceutical companies. There are plausible allegations of unethical clinical trials, misrepresentation of data, irresponsible marketing and corruption. I find the industry’s obsessive secrecy sinister. I don’t like the industry’s zealous protection of intellectual property rights, which inhibits the spread of ideas and society’s technological progress. I share the widespread suspicion of companies that are too big, too rich and too powerful. I’m sure that many pharmaceutical companies would be happy to gouge the market if they were given the opportunity to do so. Nonetheless, it is a shame that an industry which has done so much good for humanity – including in developing countries – is so widely vilified.
We have seen massive improvements in health in the last fifty years, far outperforming growth in incomes, as a result of new vaccines and drugs mainly brought to us by private pharmaceutical companies, on a platform of scientific research conducted in or funded by the public sector. You could make a pretty compelling case that the pharmaceutical industry has done more than the aid industry to improve the lives of poor people.
Conclusion
The decision last week by a group of donors to put a lot of money into GAVI to pay for vaccination was one of the very smartest, most humane decisions they could have taken. They have been generously praised from many quarters, and rightly so.
A combination of publicly-funded research and the market-driven engagement of pharmaceutical companies has resulted in the development and production of vaccines and drugs which have had a huge, positive impact on people’s lives in both rich and poor countries. We don’t want firms to be making excessive profits, least of all out of the aid budget. But I see no signs that this is what is happening. If anything, the opposite seems to be true. Over the years, partly out of an abundance of concern to increase access by keeping prices down, we’ve made things tough for firms wanting to sell to developing country markets. The result: not enough vaccines and drugs for diseases which mainly affect people in poor countries, and too slow a roll-out of new products. If we want to reverse that, we should be trying to make these markets more profitable.
Of course it is important to bring down the price paid by developing country governments, to prevent high prices from excluding poor people from access to these life-saving products. We should do everything we can to bring down costs – including looking again at how we can cut the regulatory burden, take advantage of low cost production, and reduce uncertainty. But we should be very cautious about driving down prices merely by squeezing pharmaceutical companies harder. We have to weigh our pleasure from poking the rich and powerful in the eye against the enormous damage we will cause if we drive firms out of these markets. A much smarter if less satisfying approach is to use aid budgets to bridge the gap between reasonable returns to the pharmaceutical industry and prices that the developing world can afford.
Declaration of (non) interest: neither I nor any programme on which I work is funded, or has ever been funded, by the pharmaceutical industry.
The interesting question in development is not whether aid works or does not work. Not surprisingly, the answer is that some aid works and some doesn’t. A more interesting question is: what kind of aid works best?
Nick Kristof has a good article (if a little simplified) in the New York Times today about randomized trials, which he describes as ‘the hottest thing in the fight against poverty’. This new wave of rigorous evidence about impact is helping us to understand which policies and programmes in developing countries work well (whoever pays for them) and which do not.
I especially enjoyed his digression about the importance of economists:
When I was in college, I majored in political science. But if I were going through college today, I’d major in economics. It possesses a rigor that other fields in the social sciences don’t — and often greater relevance as well. That’s why economists are shaping national debates about everything from health care to poverty, while political scientists often seem increasingly theoretical and irrelevant.
Economists are successful imperialists of other disciplines because they have better tools. Educators know far more about schools, but economists have used rigorous statistical methods to answer basic questions: Does having a graduate degree make one a better teacher? (Probably not.) Is money better spent on smaller classes or on better teachers? (Probably better teachers.)
I suspect not everybody will agree with this.
Someone working on the budget process in a developing country contacted me with the following question:
I noticed in your most recent post you mention that you are a budget wonk. I am currently working in [the budget section of an African government] as an ODI Fellow … But there is no formal training and no-one who can recommend useful reading on budgeting processes. I wondered if you had a reading list on budgeting that might be helpful? This could be anything from basics to more advanced material.
There is actually a lot of material out there, but it isn’t really all brought together in one place very well. Here is what I suggested:
- the World Bank’s Public Expenditure Management Handbook is a good starting point, but it is a strangely apolitical document that does not do justice to the politics of the budget process.
- That can be remedied with Legislatures and the Budget Process: the myth of fiscal control by Joachim Wehner.
- Allen Schick’s paper, “Why most developing countries should not try New Zealand’s Reforms” (updated link and corrected title) is a classic which should guide us when we think about the budget process in developing countries.
But perhaps I’m out of date. What do you think an ODI fellow working on the budget process in a developing country should read?
(And is it OK that we are sending ODI Fellows to developing countries to work on the budget process without some formal training, or at least a reading list?)
On the Oxfam blog, Max Lawson has an excellent guest post telling the story of how Malawi has used an extensive programme of fertilizer subsidies to generate seven years of economic growth, reduductions in poverty and child deaths.
Max cites a forthcoming paper by Andrew Dorward and Ephraim Chirwa (ungated version here). Dorward and Chirwa argue that:
Malawi’s agricultural input subsidy programme addresses a low maize productivity trap that leads to food insecurity and poverty, and constrains economic growth and, paradoxically, diversification out of maize and agriculture. This low productivity trap arises as a result of severe seasonal credit constraints affecting very large numbers of poor, food deficit farming families, together with thin and high risk, high margin input and maize markets. The key successes of Malawi’s subsidy programme arise where it relieves both affordability and profitability constraints to increased staple crop productivity from increased input use, and in doing this both raises land and labour productivity and improves food security for large numbers of poor households through some combination of increased real wages and reduced food prices.
The only part of Max’s post that I disagree with is his remark that ”we should leave our economic theory at the door and instead focus on what works empirically.” As Jonathan points out in the comments, economic theory tells us that government intervention may be an appropriate response to market failures. While recognising the success of the programme so far, we should not stop asking whether the same results could be achieved more cheaply and more sustainably with some other, even better approach.
A more relevant challenge is: why did some donors oppose this programme, and what have we (and they) learned from that error?
Dr Bingu wa Mutharika fought and won the 2004 election on a platform of guaranteeing food security. HIs proposals for a targeted subsidy was overturned by the Malawi Parliament in favour of a universal subsidy, which was introduced in 2005.
Election Poster for Bingu wa Mutharika
Donors are – on paper – committed to respecting government ownership and supporting the governments’ development programme. Yet despite clear national commitment, endorsed in a democratic election, donors generally opposed the introduction of fertilizer subsidies, consistent with the World Bank’s position throughout the 1980s and 1990s. The donors argued against the government’s proposed scheme because they thought it would be too expensive; it was insufficiently targeted on the poor; it would undermine private sector development; and because they doubted the capacity of the government to implement it.
When Malawi introduced its programme in 2005, the IMF and the US Government opposed it outright, on the grounds that it would damage the private sector. The World Bank, EU and UK Department for International Development adopted a more nuanced position: they argued that instead of a universal programme there should be “smart subsidies” which should be tightly targeted to reduce the costs, and that the programme should include an explicit exit strategy. DFID eventually supported the programme after extracting an agreement from the government that it would use private fertilizer suppliers. Some of the Scandinavian donors and UN agencies supported the programme from the outset, partly influenced by the apparent success of a local Millennium Villages Project.
The apparent success of the Malawi fertilizer subsidies is primarily a story about the Malawi government, not donors; though the scheme could not have been afforded, especially through the 2008 price hike, without donor funding. But it does give rise to two questions about donor policy and behaviour.
First, are donors still labouring under too simplistic a view of the role of government in the economy? Donors continue to be sceptical of agricultural subsidy programmes (which is rank hypocrisy, given the subsidies they provide their own farmers). This seems to be partly because we have an insufficiently rich analysis of the nature of the market failures and how they are best addressed; and partly because donors still suffer from the sustainability delusion, which requires them to oppose perfectly sensible government policies and programmes for which there is no identifiable exit. If the UK government were only allowed to implement inherently time-limited policies there would be no National Health Service.
Second, how should donors reconcile their own views of a policy with their commitment to respect country ownership? Donors are committed to support developing countries’ own development strategies. But what happens if they disagree either with the thrust of those policies, or with particular details? Should they refuse to finance them? Should they act as “critical friends”, identifying the shortcomings of the policies and seeking to get them changed? Should such opposition be private or public? How is that consistent with respecting country ownership? If they do try to change the policy how are they held to account when – as was apparently the case in Malawi – they are wrong?
I’d like to suggest two ways in which donors can better respect country ownership. First, where they have an opinion about a policy, they should produce publicly their analysis and evidence, to allow this view to be discussed as part of the public debate, rather than exert political and economic power behind closed doors. Second, there should be a version of the Salisbury Convention in aid: if a government is pursuing a policy for which it has an explicit mandate in a reasonably democratic election, the donors should not try to undermine it.
UPDATE: Smart commenters below ask two questions. First, is it premature to say this has been a success, until we have a year of bad rains? Second, were the donors as hostile as my blog post suggests? If you have insight into either question, please leave it in the comments below.
A perennial question in development economics is whether economic growth, by itself, is enough to reduce poverty.
The question came up in the most recent edition of Development Drums. Claire Melamed argued that the fact that so many of the world’s poor now live in middle income countries (which, by definition, have experienced a reasonable amount of economic growth) suggests that growth by itself is not enough to reduce poverty. Andy Sumner, in the same programme, said that there is some evidence that economic growth tends to increase inequality in societies that are already unequal, whereas the benefits will be more broad based in societies in which the starting point is more equal.
This graph by Maxim Pinkovskiy and Xavier Sala-i-Martin is very interesting. It shows the growth rate and the number of people living on less than a dollar a day in sub-Saharan Africa. The data are notoriously incomplete, but on the basis of these estimates, as the authors say (apologies for the econ-speak): “Poverty seems to co-move with GDP almost perfectly.”
Graph by Maxim Pinkovskiy and Xavier Sala-i-Martin
This graph implies pretty strongly that if you want to reduce poverty in Africa, you should concentrate on economic growth.
The entire article is well worth reading for its upbeat assessment about both growth and poverty reduction over the last fifteen years. They say:
The sustained African growth of the last 15 years has engendered a steady decline in poverty that puts Africa on track to meet the Goals by 2017. If peace is established in the Democratic Republic of Congo, and it returns to the African trend (which is what happened to other African nations that were formerly at war), Africa will halve its $1/day income poverty rate by 2013, two years ahead of the 2015 target.
Moreover, African poverty reduction has been extremely general. Poverty fell for both landlocked and coastal countries, for mineral-rich and mineral-poor countries, for countries with favourable and unfavourable agriculture, for countries with different colonisers, and for countries with varying degrees of exposure to the African slave trade. The benefits of growth were so widely distributed that African inequality actually fell substantially.
Shanta Devarajan asks if we have found Development 3.0
Shanta Devarajan, the World Bank Chief Economist for Africa, describes in an important new blog post the evolution of development policy in terms of changing ideas about market failures and government failures. In the 1950s and 1960s, he says, development was about addressing market failures by providing public goods, addressing externalities, and redistributing income to poor people. Starting in the 1970s, attention shifted to government failures such as weak capacity, rent-seeking, political patronage and corruption. Today, he says, many of the most egregious failures have been addressed, but the remaining failures directly hurt poor people.
On Shanta’s view, these failures arise from two kinds of imperfection in the public sector: that governments have difficulty monitoring and enforcing performance (leading to absentee teachers, clinics without drugs, etc) and imperfections in the political system which prevent it from serving the poor.
Shanta says that changes in technology and the rise of civil society can change all this:
Our understanding of government failure has coincided with two other developments. One is the rise of civil society’s voice in public discourse. The second is the technology revolution in poor countries. There’s a message here. Can we use technology and the voice of civil society to address these government failures? Rather than imposing conditions, we can empower poor people to monitor service providers. With some 80 percent of Africans having access to a cell phone, it is not difficult to have parents (or the students themselves) send an SMS message if the teacher is not in school, or there are no drugs in the clinic or the purported road maintenance program is not happening. This could do more for helping governments and donors get value for money than all the fiduciary controls we put in place. While we are at it, why don’t donors (including the World Bank) use technology to have the beneficiaries monitor and supervise development projects?
Can this work? Is social accountability a new model for development?
There is increasingly good evidence that transparency and accountability make a significant difference, in some cases surprisingly transformational. There is an increasingly impressive collection of individual case studies, rigorously evaluated, which demonstrate the effectiveness of this approach. For example, Jacob Svensson and Martina Björkman conducted a randomized field experiment in Uganda to test the effect of increasing community-based monitoring. They found that when communities more extensively monitored providers, both the quality and quantity of health services improved, including reducing infant mortality by a third.
There have, however, been no significant comparative studies bringing this evidence together. Until now. Rosemary McGee and John Gaventa have just published an extensive review of literature and experience across the field. There is a lot of material to digest, but here is the core of what they find:
…there are a number of micro level studies, especially in the service delivery and budget transparency fields. These begin to suggest that in some conditions, the initiatives can contribute to a range of positive outcomes including, for instance,
- increased state or institutional responsiveness
- lowering of corruption
- building new democratic spaces for citizen engagement
- empowering local voices
- better budget utilization and better delivery of services.
Reading the study, my conclusion is that we know rather more about the impact of greater accountability than we know about what we can do to bring that accountability about.
I currently work on transparency, because I think makes an important contribution to the ability of citizens to hold governments and donors to account and so improve service delivery and accelerate poverty reduction. There have been some good examples of how this can work in practice, which are summarised in Appendix 1 of this cost benefit analysis for the International Aid Transparency Initiative (page 23 of this pdf; disclosure: I’m a co-author). The most famous example is this study of the impact of information on funds flowing to schools in Uganda which found a strong relationship between transparency and funds flowing to schools, though the evidence was subsequently challenged. So while there is increasingly good evidence to confirm the intuition that transparency plays an important role, we need to understand a lot better how, and in what circumstances, transparency works, and particularly to understand better what else needs to be in place.
One issue on which Shanta is clearly right is that role that technology can play in supporting greater accountability. We know that technology does not end poverty, but we are seeing more and more examples of how technology – especially mobile telephony and text – has enabled and supported changes from mobile banking to wholesale agriculture markets. Just as technology underpins changes in markets (think of newspapers, or bookselling), so it can underpin changes in political economy and social accountability.
So is this, as Shanta says, Development 3.0?
Development is a long, slow, uncertain process and the road is bumpy and winding. Transparency and accountability are not a one bound and we are free solution, any more than the ‘big push’ or the Washington consensus which Shanta labels Development 1.0 and 2.0 respectively. But this time there is an important difference. The ‘big push’ and the Washington consensus were blueprints for a better world. Social accountability, by contrast, does not start with a preconceived idea of how resources should be used or services should be delivered: it seeks to change the dynamics of the system to make it more responsive and more likely to converge by itself on solutions which better serve poor people in developing countries.
A big challenge will be whether development agencies themselves are able to adapt. Their models for project cycle management are based on a top-down view: you specify the world you are trying to create (the “goal”) and then you articulate a series of outputs and activities which you expect will bring this about. It will be a big change – intellectually, organisationally and culturally – to modify their systems, incentives and procedures to a world in which donors work instead to help the citizens of developing countries to determine their goals and priorities and build their own systems to achieve them.
If what Shanta is calling Development 3.0 means that instead of offering a one-size fits all solution we should work to close the broken feedback loop so that communities themselves can find the answer, then I think this may indeed be a change of perspective on development worthy of a major version number.
A Robin Hood is superficially attractive because it seems to offer:
- higher taxes on the wealthy
- a curb on speculation and market volatility
- more money for aid and global public goods.
But as I explained in February the Robin Hood tax isn’t a very good way to achieve any of these perfectly reasonable objectives. They would be much better pursued separately.
This analysis was confirmed by this new research published today by Neil McCulloch at the Institute for Development Studies. He finds that:
- a significant proportion of a foreign exchange tax would be passed on to consumers (so it would not be not a tax on the wealthy);
- most empirical evidence shows that higher transactions costs are associated with more, rather than less, volatility.
He also finds that a financial transaction tax is feasible and that a tax on foreign exchange transactions could raise £7.7 billion in the UK, or $26 billion if implemented worldwide.
Unexpectedly, he then concludes that the UK Government should implement a currency transaction tax.
If the Robin Hood tax is not a tax predominantly borne by the wealthy, nor will it reduce market volatility, what’s the case for it?
If we want to increase our spending on aid and global public goods – which I support – we should do so by way of making the case in the public spending process. Development activists should not try to bypass the systems of democratic control of spending priorities, nor should they advocate taxes which do not make good tax policy on either distributional or microeconomic grounds.
Suppose you had $1 million to spend on tackling climate change. How would you spend it to get the best bang for your million bucks?
Would you spend it on stopping the slash-and-burn of forests? Perhaps on switching to nuclear energy? More energy-efficient buildings? Building cleaner power stations?
According to a recent paper by David Wheeler and Dan Hammer, climate change experts at the Center for Global Development, the answer is (drum roll): you would do much, much better to spend your money on a combination of family planning and girls’ education in developing countries.
This table, based on data in their paper, shows how many tonnes of CO2 would be abated for your $1m:
| Intervention | Tonnes of CO2 saved |
| Family planning & girls’ education combined | 250,000 |
| Family planning alone | 222,222 |
| Girls education alone | 100,000 |
| Reduce slash and burn of forests | 66,667 |
| Pasture management | 50,000 |
| Geothermal energy | 50,000 |
| Energy efficient buildings | 50,000 |
| Pastureland afforestation | 40,000 |
| Nuclear energy | 40,000 |
| Reforestation of degraded forests | 40,000 |
| Plug-in hybrid cars | 33,333 |
| Solar | 33,333 |
| Power plant biomass co-firing | 28,571 |
| Carbon Capture and Storage (new) | 28,571 |
| Carbon Capture and Storage (retrofit) | 26,316 |
The logic, of course, is that if there are fewer people on the planet, then we will generate fewer greenhouse gas emissions. Population policies are important because there are many people in developing countries who want smaller families, but don’t have access to the family planning services they need to achieve this. Education is important because educated girls want (and are more able to insist on) smaller families. That’s why these interventions are important and cost effective, both individually and especially when done together.
Win – win
This approach is particularly attractive because, in addition to helping to slow global warming, there are other, very significant benefits for the citizens of developing countries of access to family planning and to education for girls.
The other day I reported here that if donors invested about $180 million a year to provide modern contraception to every Ethiopian woman who wants it, this could set off a virtuous circle of rising income per capita, lower desired family size, greater use of contraception, lower numbers of children, and so rising income per capita. My back of an envelope calculation found that a decade of access to modern family planning would have roughly the same effect on incomes in Ethiopia as the entire international aid programme in Ethiopia does today.
As well as environmental and economic benefits, there are important social and health benefits for women and their families, which strengthen the case for these investments over and above the cost-effectiveness figures shown above.
Making choices
Of course in an ideal world we would do all of these things. But although it is inconvenient to acknowledge it when you are busy trying to save the world, resources for averting climate change are limited. We should make informed choices to reduce carbon emissions in the most cost-effective and sustainable way we can with the resources available, to secure the biggest and broadest benefits. These figures from the Center for Global Development imply that investment in family planning and girls’ education would be a far better investment than the UN Reducing Emissions from Deforestation and Forest Degradation (REDD), which aims to spend $30 billion a year on incentives for developing countries to reduce deforestation and forest degradation.
We would get three or four times as much bang for our buck – in terms of climate change benefits – from population policies and girls’ education as we would from even the most cost-effective investments in forestry (stopping slash-and-burn), and in addition we’d get the broader economic and social benefits for the people of developing countries.
So why isn’t this, in fact, where we are spending the climate change money? Something to do with the power of industry in the environmental lobby? (Update: See Eliot’s comment below)
(The figures in the table above are calculated from Table 2 and and Table 5 of The Economics of Population Policy for Carbon Emissions Reduction in Developing Countries, David Wheeler and Dan Hammer, Center for Global Development Working Paper 229)
Peter Gill's new book, Famine and Foreigners
Peter Gill talks on the latest Development Drums podcast about his new book, Famine and Foreigners: Ethiopia Since Live Aid.
The Ethiopian famine of 25 years ago killed more than 600,000 people. Peter Gill was the first journalist to reach the epicenter of the famine in 1984 and he returned at the time of Live Aid to research the definitive account of the disaster, A Year in the Death of Africa .
Twenty five years later, Peter Gill has returned to Ethiopia to tell the story of what has happened since then in Ethiopia. His book draws on interviews with leading Ethiopians and with foreign aid officials. He interviewed Prime Minister Meles Zenawi and the leading development economists, Joseph E. Stiglitz and Jeffrey Sachs. Most important of all, Gill has traveled throughout the country and interviewed many of Ethiopia’s citizens.
In this edition of Development Drums, I ask Peter to recall what happened in the famine of 1984, and how Ethiopia has changed in the quarter of a century that followed.
You can listen to Development Drums on your computer at the website (http://developmentdrums.org) or download it (from here) to your MP3 player. You can subscribe to Development Drums on iTunes free of charge (search for “Development Drums” in the iTunes store).
Today is World Food Day. That means there are plenty of articles and statements today by the agricultural lobby calling for more investment in food production and agriculture. People who work in agricultural research call for – surprise surprise – more investment in agricultural research. EU and US farmers who grow more food than they can sell demand that aid budgets are used to ship their surplus as food aid (even though, according to MSF, it is “nutritionally substandard”). A lot of words will be written about the need for more food production to tackle hunger.
On this World Food Day, I urge you to take a little time to read instead Amartya Sen’s classic book, Poverty and Famines : An Essay on Entitlement and Deprivation, written 30 years ago and for which he was awarded the Nobel Prize in economics. Rarely has a book got to the nub of an issue so clearly in its first two sentences:
Starvation is the characteristic of some people not having enough food to eat. It is not the characteristic of there being not enough food to eat.
This is a fundamental insight. People are hungry not because not enough food is produced but because they are too poor to buy it. In Sen’s language, the poor do not have enough entitlements to enable them to eat. Sen argued that, in most circumstances, instead of giving food to the poor we should give them cash to enable them to buy the food they needed. This would both give people access to food, and strengthen local markets and improve the livelihoods of local food producers.
Official Nobel Prize portrait of Amartya Sen
In a subsequent book, Sen argued that famine is a political issue more than a problem of food production. ‘It is not surprising that no famine has ever taken place in the history of the world in a functioning democracy,’ he wrote in Development as Freedom.
Yet we still talk about hunger as if it were, at heart, a problem of food production. (For example, see these remarks yesterday by the Director General of the UN Food and Agriculture Organisation, calling for a 70% increase in food production). When we understand that hunger is a problem of poverty, the policy options look quite different.
But how do we tackle poverty?
Three quarters of the world’s poor live in rural areas, and most depend on agriculture for their livelihoods.
The agricultural lobby sees a way to restate their case. Perhaps they can accept that hunger is a problem of poverty, not food production. But the fact that the majority of the world’s poor work in agriculture means, they say, that the best way to improve the incomes of the poor, and so reduce hunger, is to increase agricultural productivity. More adventurously they claim that more effective agriculture can drive the whole process of development, by increasing farm incomes, leading to rising savings and investment and so kick-starting industrialisation.
This is a plausible story, but it is not as persuasive as the alternative interpretation of the high correlation between poverty and agriculture: the fact that most poor people work in agriculture suggests that the best way to escape poverty is to get out of agriculture.
When people leave farms and get jobs in manufacturing their incomes are both higher and more secure. Demand for food in the cities grows; the number of people working in agriculture falls; food prices rise; and the remaining farmers get higher incomes. Rising incomes enable farmers to invest more in irrigation, fertilizer, machinery and seeds. Agricultural productivity rises, not as a consequence of direct efforts to improve agriculture but as the indirect consequence of industrialisation. On this view, industrialisation will drive improvements in agriculture, rather than the other way round.
If this second view is right, if you want to tackle hunger, reduce poverty, and improve food production you should focus your investment on more rapid industrialisation and job creation, not better farming.
I am not against investing in agriculture. Better access to existing technologies, and the development of some new technologies, could make a big difference to the lives of farmers in developing countries. But I am against promoting the romantic idea of happy peasant farmers. Farming in developing countries is an unremitting, unrewarding life and it is likely to stay that way for many generations until industrialisation pushes up farm incomes. And we should not accept uncritically the claim that agricultural productivity is an especially important driver of poverty reduction and industrialisation.
So on World Food Day let us remember Sen’s insight that hunger is not a problem of food production but of poverty. The fact that most poor people work in agriculture suggests that a good way to escape poverty is to get out of agriculture. So the best way to reduce hunger and help people out of poverty may be to focus not on improving agriculture, but rather on helping people who want to leave agriculture into more rewarding work.
A misty morning in Dessie
Sharing marsoup with friends in Dessie
There is always a lot going on early in the morning in Ethiopia. The air is cool in the highlands as the mist burns off, and in the towns people are busy walking to work or school, delivering goods, or going about their business before it gets warm.
At 7am this morning we were sitting at a table outside the Aytegib Cafe in Dessie watching the bustle of the town and having breakfast before setting off for Weldiya. The streets are shared by pedestrians, donkeys, cars and a few lorries. We had checked out of our motel where our own vehicle had been right at home among the half dozen white Land Cruisers parked in the courtyard labelled with the various brands of local NGOs and aid agencies. Now at the cafe on the main road, we had ordered ‘marsoup’ – a local breakfast speciality which is a kind of thin omelette served with local honey – and machiato coffee, the ubiquitous availability of which is one of the welcome legacies of Italy’s brief and unwelcome stay in the country.
As our coffees were arriving, the night watchman from our motel appeared at our table. Had we, by any chance, left this rather fancy smartphone in our room? Indeed we had.
It is characteristic of Ethiopians that the staff in the motel had not pocketed an expensive phone, worth two to three times the average annual salary in Ethiopia, but had instead immediately set out, at some inconvenience to themselves, to return it to its owners. The watchman bustled back to work without expecting a tip or reward, and before we were able to give him one. It is also characteristic of Ethiopia that the hotel staff somehow knew where to find us, even though we had not told anyone that we were stopping in town for breakfast.
Building works in Dessie
The overwhelming feeling in Dessie is that it is friendly and laid back. The town is roughly half orthodox Christian and half Muslim. The two communities live closely together – including marrying between religions – and many families are partly Muslim and partly Christian (you’ll notice this from people’s full names, which are often partly Christian and partly Muslim).
All across Ethiopia, Christians and Muslims have generally had very good relations, dating back to 615AD when followers of the Mohammed (including his wife and cousin) were given refuge by the Aksumite King, Negus Armah or Aṣḥama ibn Abjar. Ethiopians say that, as a result of the respect that was shown for his followers, Mohammed gave instructions that Ethiopians were not to be harmed, and that this is why the communities have lived together peacefully ever since.
I had not been to Dessie for eight years. It was then, and is now a big, bustling, university town in the highlands, famed within Ethiopia for the beauty of its women. It is recognisable still, but it has grown substantially: there are a lot of new buildings, roads, churches, mosques and shops. But it retains the same laid back friendliness, and feeling of people getting along, that it has always had.
Regular readers will have noticed that things have been quiet around here for a while. I’ll be back to blogging properly in a while.
In the meantime, I am dead impressed by this collection of very accessible briefs from the House of Commons Library (of all places). The briefs are easy to understand, and they will be useful for people who are trying to write good analysis as well as for people who want to understand the statistics that they are reading.
Here are links to the briefs (all of which are pdf files):
- What is a billion? And other units
- How to understand and calculate Percentages
- Index numbers
- Rounding and significant places
- Measures of average and spread
- How to read charts
- How to spot spin and inappropriate use of statistics
- A basic outline of samples and sampling
- Confidence intervals and statistical significance
- A basic outline of regression analysis
- Uncertainty and risk
- How to adjust for inflation
- Chart format guide
Hat tip: Flowing Data and Lone Gunman
There was an interesting article in last week’s Economist about the use of prizes to promote innovation. It was supportive of the idea in general, but it seemed to gloss over the economic arguments. I think it is a shame that the Economist did not take the opportunity to explain the economics of rewarding innovation, and in particular to explain in economic terms why our current arrangements do not do a good job of creating incentives for innovation that benefits developing countries.
You can think of patents as a kind of prize. When you invent a new product, the government gives you the right to operate a temporary monopoly. This enables you to charge more than the marginal cost, and the premium is your “prize”. This arrangement has the huge advantage that it links your reward to the amount people are willing to pay for your invention, so it encourages innovations that people actually value.
This kind of prize as a reward for innovation may be fine for a new kind of vacuum cleaner, or for Lady Gaga’s latest album. But it has two big disadvantages which are especially relevant for people who live in developing countries.
First, the use of patents prevents some people from benefiting from the new technology if they are unable to pay the higher price. If a company develops a drug for heart disease, or a more efficient form of solar panel, the patent will enable them to charge much more than marginal cost for their product. That’s how the inventor gets paid. But the result is that millions of people will not be able to afford that product – though they might be able to afford it at marginal cost. The temporary monopoly results in fewer people benefiting from new technologies than ought to benefit, in the sense that those people would be willing and able to pay the marginal cost. This is potentially a big welfare cost to society as a whole. It means, for example, that people may die of heart disease because they can’t afford the high price of the drugs, even though they could buy the drug if it were sold at marginal cost; or they can’t use new fertilizers or seed technologies, even though the benefits to them of doing so exceed the cost.
Second, if we reward inventors by granting them temporary monopolies, we only create incentives to develop products for which there are likely to be enough consumers wealthy enough to pay a monopoly price. Nobody will invent a vaccine against malaria, or a cassava plant that resists mosaic virus, based on the possible rewards they will get from charging high prices to its consumers. So the patent system is a prize for people who invent cures for baldness, but not a prize for people who invent ways to prevent the spread of malaria.
For these reasons, other incentives, such as prizes, Advance Market Commitments, and similar mechanisms, may be effective either as alternatives or complements to the patent prize of a temporary monopoly, especially for technologies that would have benefits in developing countries.
The Economist quotes Tachi Yamada, the president of Global Health at the Gates Foundation, as suggesting that Advance Market Commitments or prizes may not work well for drugs that require a long time to develop:
Tachi Yamada of the Gates Foundation is a big believer in giving incentive prizes, but gives warning that it can take 15 years or more to bring a new drug to market, and that even AMC’s carrot of $1.5 billion for new vaccines may not be a big enough incentive. No prize could match the $20 billion or so a new blockbuster drug can earn in its lifetime. So, in some cases, says Dr Yamada, “market success is the real prize.”
This seems to reflect the suggestion that is sometimes made that Advance Market Commitments may not be appropriate for for early stage drugs, but the economics of this argument is faulty.
It is clearly true that the reward for bringing to market an early stage medicine, such as an AIDS or malaria vaccine, would need to be higher, both because of the greater uncertainty and risk of failure, and because the rewards are further in the future. So an AMC for an early stage product would probably need to be larger than for a late stage product that just needs some tweaking for use in developing countries and some investment in bigger production facilities. But let’s not overstate this. The median total market size for new chemical entities that pharmaceutical companies actually bring to market is about $3-$4 billion. Most medicines are not $20 billion blockbusters. So $3-$4 billion is roughly the market size that the private sector considers sufficient reward to develop new medicines. We don’t need to match the blockbusters. An AMC of $4 billion might well be enough to incentivize the development of a malaria vaccine: and let’s not forget that if it turns out not to be enough, it won’t have cost the funders anything.
Furthermore, just as the firms discount the prize by the risk of failure, the funders should similarly discount the cost. If there is a 25% chance that no vaccine will be developed (because the technology is uncertain) then firms will discount the “prize” – that is, the value of the committed market – when they make their investment decisions. But in this case, the expected cost to the funders of a $4 billion pledge is $3 billion, and this is what they should include in their value for money calculation. That means that even though the nominal amount that has to be promised for an early stage product needs to be higher for a given impact on R&D, to take account of the probability of failure, the expected cost to funders is not higher.
The same point can be put another way. A high probability of failure makes all investment in R&D less attractive, but it does not make AMCs relatively less attractive than other forms of funding. When the probability of failure is high, the expected return from each dollar spent encouraging innovation is lower. This is true if that dollar is spent up-front in the form of research grants of the kinds normally given by aid agencies and foundations (since the higher probability of failure reduces the expected benefits of the grant), or in the form of a prize or promised market (since the higher probability of failure reduces the expected benefit to firms, and so reduces the incentive for them to invest in R&D). The effect is the same either way. Higher probability of failure is clearly bad, but it does not make AMCs relatively less efficient as a way to pay for research for early stage products.
Whether an AMC for an early stage product is good value for money depends ultimately on the value of the product. If donors were to spend $4 billion buying a malaria vaccine for use in developing countries, it would be a hugely good investment, saving millions of lives a year at a fraction of the price of many other interventions. It would result in huge savings on trying to prevent malaria in other ways, or treat to treat malaria; and the resulting reduction in the burden of malaria would have huge economic benefits for developing countries. Given that there is no question that donors would want to spend at least $4 billion paying for a malaria vaccine to be used across the developing world, it is inefficient for them not to say so right away, and thereby create incentives for private sector investment in accelerating its development. The risk of poor value for money in aid spending comes not from making the commitment, but from failing to do so.
When Dr Yamada says that “market success is the real prize”, he seems to be missing the point that market success is not a good way of rewarding innovation for developing countries. If we rely on market success, in the form of a temporary monopoly, to reward innovation then we will exclude half the world’s population from being able to access technologies developed with rich markets in mind, such as drugs against cancer and heart disease, clean energy, new agricultural technologies, or new software. And “market success” creates no incentive to develop technologies which primarily benefit the world’s poor such as a vaccine against malaria or a variety of cassava that resists the mosaic virus, because inventors know that the people in poor countries cannot afford the monopoly prices that would enable inventors to recover their costs.
Esther Duflo explains in a TED talk how we can bring aid evaluation from the “middle ages” to the 21st century.
It is extraordinary how much resistance there is within development agencies to rigorous evaluation of development interventions.
The development policy debate focuses too much on aid. Aid policies may help to improve the living conditions of people in developing countries, but it is development policies that will result in lasting transformation. If we are serious about promoting long-term change, we should talk less about aid, and more about the other rich-world policies and behaviours that affect developing countries.
Rich countries have many reasons for wanting to help poor countries. The main three British political parties speak in their manifestos of Britain’s obligations to the developing world (Lib Dems); moral duty, common interest and poverty emergency (Lab); and enlightened self interest and commitment (Cons). The combination of motives – moral concern for others and self-interest – is a strength of the development cause, not a handicap.
These motives translate into two broad classes of objectives for development policy:
- One view is that development assistance should help to accelerate economic and institutional change in developing countries. The idea is that temporary support from outside can be a catalyst for permanent changes in developing countries. As economic growth takes off, developing countries will no longer need our help. This view is attractive both to donors, who do not want to go on giving aid for ever, and for recipient countries who do not want to continue to be aid dependent. For shorthand we will call this the transformation objective of development assistance.
- Another view is that development assistance can improve people’s lives today. This is most obvious in the case of humanitarian relief, for which the objective is to provide food and shelter; but more generally a lot of aid is used to send children to school or provide basic health care. On this view, the development process is long and hard, and one role for outsiders is to enable people to live better lives while this process is happening in their country. Let’s call this the solidarity objective of development assistance.
It is entirely reasonable for countries, organizations and individuals to care deeply about both the transformation and the solidarity objective, and they can coherently pursue both objectives at the same time.
From time to time, people try to make connections between these objectives, positive and negative.
The claim of a positive connection is the idea that spending money on health and education is an investment in the human capital of a country, and that this will, in time, lead to faster economic growth. Some point to significant investments in education in fast-growing Asian economies as evidence that education spending will promote growth. Others say that improving health will lead to a demographic transition, in which falling infant mortality leads to smaller family sizes and greater investment in each child. Both of these stories are appealing, though unfortunately neither is very well supported by the evidence.
The possibility of a negative connection is that the things that donors do to support people in developing countries as a matter of solidarity may actually slow down the political, social, institutional and economic changes that the country needs for transformation. It may sustain unaccountable governments in power; undermine the social contract between citizen and state; hollow out fragile government institutions; cause appreciation of the real exchange rate and so choke off exports; or create a culture of dependency that dims demand for social change. Again, the empirical evidence for these (quite plausible) ideas is pretty thin (pace the claims of Dambisa Moyo).
Are we using the right tools to pursue our two types of objective: tying to catalyze transformation, and at the same time to help people live better lives? I think we are focusing too much on aid and not enough on development policies.
It is quite straightforward to see that aid can help meet solidarity objectives. It is used to provide clean water and food, and to finance public services such as health and education. There is quite good evidence that it is effective, though there is much more to learn about how to do it better.
It is much less clear that aid achieves our transformation objectives. The statistical evidence linking aid to economic growth is, at best, uncertain (see The Anarchy of Numbers by David Roodman). This does not mean that there is no relationship – it is much harder to demonstrate a statistical connection when there are few countries to observe, and so many factors as well as aid that are likely to affect whether a country achieves economic lift-off. We can think of aid being to growth what venture capital is to start-ups: many investments will fail, but the huge benefits from the few that succeed may make the losses worthwhile.
I personally have my doubts that aid makes much difference to the prospects for economic and social transformation. Countries change from within, through long, slow, organic processes, and it is hard to see how money and advice from outside can make much of a difference to that. Consider our own history, and the decades and centuries that it has taken us so far to construct our social and political institutions.
If we are serious about promoting transformation, we need to look beyond aid to how we can change the environment in which developing countries are struggling to change their economic, social and political institutions. Transformation is much likely to take root if we create conditions in which it is likely to succeed.
What are the development policies that might contribute to this?
- Trade policy – As well as duty-free, quote-free access for all developing countries to our markets, we have to dismantle the complex rules – such as rules of origin and phyto-sanitary standards – which make exports complicated.
- Agriculture policy – We have to stop dumping subsidized agricultural over production abroad, especially as our aid conditions prevent developing countries from competing with us. We also have to stop using food aid as a welfare system for European and American farmers.
- Climate change – If anthropogenic global warming is a reality, as is the consensus among scientists, then the harm we are doing to developing countries through climate change will become one of the most important obstacles to development. Probably the most important thing we can do to accelerate development is to stop our own carbon emissions.
- Conflict – We make and sell the guns that are used in conflicts in developing countries. We buy the oil and minerals over which groups are fighting. We sustain the unaccountable leaders in pursuit of our geo-strategic interests. If we were serious about development, we would by now have stopped the Lord’s Resistance Army in Uganda – it would be a simple matter for a well-resourced army.
- Immigration – In the 18th Century, a third of Europeans moved to America, to the benefit of both continents. In the 20th and 21st century we have introduced historically unprecedented restrictions on the movement of people – notwithstanding our rhetoric about globalization. These restrictions may be the single most important factor which explains why poor countries have not been able to converge on rich countries.
- Intellectual property – Another constraint on the ability of developing countries to close the gap is that there are historically unprecedented constraints on their ability to appropriate technologies. For centuries, new agricultural techniques such as crop rotation spread through word of mouth. During the industrial revolution, America and Europe were able to use technologies from Britain. When Henry Ford invented the assembly line, the idea was rapidly adopted everywhere. But today’s technologies – from business software to pharmaceuticals and biotechnology – are protected by patents that make it impossible for other countries to adopt.
- Corruption – We often think of corruption as a problem of developing countries, but this ignores the fact that the money for corruption comes from, and often returns to, industrialised countries. Rich western companies pay bribes, in return for access to contracts or minerals. To his eternal credit, President Jimmy Carter introduced the Foreign Corrupt Practises Act, which made it harder for American companies to pay bribes abroad. But there is much more we could do, if we were prepared to take on the vested interests of our own multinational companies, to reduce corruption in developing countries.
- International governance – In our own nations, we have long ago dropped the property qualification for representation; but internationally we do not think that it is strange that representation in our main institutions is based on wealth and power. This matters because again and again, the interests of developing nations are ignored, or treated only as a footnote. From banking secrecy to internet peering arrangement, the rules of the game are set by the wealthy in their own interests. Changes to these practices which would be irrelevant to most of us, but could make a huge difference to the prospects for development, are resisted by powerful vested interests from industrialized countries.
It is entirely reasonable that industrialized countries want both to promote transformation in developing countries, and to help people there to live better lives while that process is taking place. Aid has been proven to be an effective instrument for meeting our solidarity objective, but it is far less clear that it is a significant driver of transformative change. Our political rhetoric focuses on the idea that development policies should promote transformation. Yet it seems unlikely that aid is the most useful tool we have for achieving this. If we are serious about transformation we should invest more time and effort in creating the global environment in which economic and social change are more likely to succeed, by changing our policies and behaviours on issues like trade, agricultural policies and immigration.
Many people who work in development are directly or indirectly dependent on aid. Government development agencies gain their bureaucratic position from the size of their budget. International NGOs get a lot of their money from aid budgets or from private charitable giving. Partly as a result, the debate about development too often shifts to aid: whether it works, how much is given and by what means. These are important questions, but primarily for the important goal of helping people in developing countries to live better lives while they are waiting for, and helping to build, a more prosperous and fair society. If we are serious about accelerating the transformation, it is our development policies, not aid policy, that we should be discussing.
A new article published in The Lancet by Chunling Lu with Chris Murray, Dean Jamison and others, has caused quite a stir in development circles. They use data on health aid and government spending on health to estimate that for every $1 given in health aid, the recipient government shifts between 43 cents and $1.14 of their own spending to other priorities. (If the aid goes to NGOs, by contrast, government health spending appears to increase.)
Even if the quantitative analysis is correct (which is by no means certain, given huge gaps in information), it is far from clear that this is a problem that needs to be solved. Furthermore, of the five recommendations in the paper, three are irresponsible sectoral special pleading which deserve to be rapidly dismissed.
This story has spilled over into the mainstream press (for example, in The New York Times) as a result of a sensationalist AP story headed “Health Aid Made Some Countries Cut Budgets“. The story breathlessly reveals:
After getting millions of dollars to fight AIDS, some African countries responded by slashing their health budgets, new research says. For years, the international community has forked over billions in health aid, believing the donations supplemented health budgets in poor countries. It now turns out development money prompted some governments to spend on entirely different things. … “When an aid official thinks he is helping a low-income African patient avoid charges at a health clinic, in reality, he is paying for a shopping trip to Paris for a government minister and his wife,” said Philip Stevens, of the London-based think tank International Policy Network.
The language used by the authors is less inflammatory, but the opening sentence makes it clear they think there is a problem:
Government spending on health from domestic sources is an important indicator of a government’s commitment to the health of its people, and is essential for the sustainability of health programmes.
As summarized in their press release, the authors make five recommendations to deal with this alleged problem:
- adoption of a clear set of reporting standards for government health spending as source and spending in other health-related sectors
- establishment of collaborative targets to maintain or increase the share of government expenditures going to health
- investment in developing countries’ capacity to effectively receive and spend health aid
- careful assessment of the risks and benefits of expanded health aid to non-governmental sectors
- study of the use of global price subsidies or product transfers as mechanisms for health aid
The first recommendation is fine: I’m all for the adoption of reporting standards for spending by donors and by governments, and for those standards to specify the source as well as the destination of all spending. (The authors may not be aware of the progress that is being made globally on this under the International Aid Transparency Initiative). It is also hard to be against investing in the capacity of developing countries to receive and spend health aid, though I wonder what this means in practice. The other three recommendations are irresponsible, for reasons we shall come to below.
Let’s start with the problem we are trying to solve. It is far from clear that the behaviour of developing countries described in the paper is anything we should be concerned about. Of course health advocates who earn their living from health spending in developing countries are up in arms at the news that their various wheezes to capture a big chunk of available development finance and redirect it to their cause may not have been a complete success. But those of us who take a more objective view of the relative priorities of different types of development spending can be more sanguine.
There are at least four reasons why the findings of the paper should not be a cause for concern.
First, it suggests that governments are reprioritising their spending in the light of the aid they are receiving. I think this is a good thing. Exercises to find out what poor people actually care about, such as Voices of the Poor, routinely find that the poor place put a lot of value on security (of person and property), but this does not usually excite people who work in development. Donors find it more attractive to finance health services than to pay for essential services such as a national statistical office or the efficient functioning of courts. If we are willing to pick up the bill for health care then it is not only reasonable but desirable that developing countries should use the fiscal space we have created to invest more in important national priorities that don’t happen to be of interest to their donors.
Second, increases in aid for health may well come at the expense of other forms of aid which developing countries are right to try to offset. (I say “may well” because of course we don’t know what would have happened to total aid if health aid had not increased so rapidly.) Donor fads come and go: this year it is agriculture. When developing countries see health aid rising, but the donors losing interest in infrastructure, the most sensible thing they can do is make an offsetting shift in their own budget allocations. When the donor pendulum swings back again, recipient countries will have to make the corresponding shift in the opposite direction.
Third, as eloquently pointed out by Sridhar and Woods in the Lancet, the desire to force changes in the spending priorities of recipient countries runs directly contrary to the evidence about what makes aid effective, and a series of international agreements, especially the Paris Declaration (2005) and Accra Agenda for Action (2008). In the face of evidence that aid is most effective when there is ownership by the recipient country, donors and multilateral agencies committed themselves to align their aid with the systems and priorities of recipient countries. It is not OK for health sector lobbyists to ignore this because they don’t like the priorities actually chosen by developing countries.
Fourth and finally, we say that we want to see capable, accountable and responsive states in developing countries. Making, passing and executing budgets is the very heart of a capable and accountable state. That is why in the UK, as in many other western-style democracies, a government which cannot pass its budget (“carry supply”) is deemed to be unable to govern. If resource allocation priorities are determined elsewhere, then the government is one in name only. We cannot expect governments to be accountable to their citizens for decisions that they have not made. If we want accountable states rather than puppet client states, we should rejoice, not complain, when they demonstrate a willingness to make choices of their own.
Sectoral advocates may say that we should not accept the priorities determined by developing countries, especially in countries in which there are weaknesses in democratic accountability or technical ability to execute budgets. They might say that the government represents the interests of an elite, not the majority of the country’s poor. Of course that may be true in some countries: but there is no reason to think that donors’ priorities, also driven by vocal lobby groups and vested interests, reflect the real needs of a country or its poorest people. We should avoid getting into the situation in which well-heeled foreign academics and lobbyists from international NGOs with no accountability to people in developing countries are treated as a more representative voice of the poor than their own government.
What is most shocking about this paper is that it betrays a combination of ignorance of, or indifference to, decades of experience about what works in development. The three most egregiously inappropriate recommendations amount to setting input targets, bypassing government by using NGOs, and giving aid in kind rather than in cash. The paper’s authors should pause to reflect on the fact that progressive development thinking has fought a long, slow, painful campaign to shift away from exactly this kind of aid, and for very good reasons. Aid that leads to long-term, sustainable change must be based on real ownership of the developing country and help build rather than undermine or marginalise national institutions.
To be fair to the authors, the press release is quite measured, and it begins by highlighting the commitment to health by developing country governments. It also highlights the most important and sensible of their recommendations, the need for greater transparency. But the paper also irresponsibly creates the impression, amplified by the Associated Press, that health aid has somehow been wasted, and that donors should try to address this in ways that would be a couple of steps backwards on the long slow road to more effective aid.
Thim Harford lambasts the Robin Hood Tax campaign:
The basic proposition of the RHT is that it is a tiny tiny tax which will raise a humongous sum of money. Nobody is really going to have to pay it – ‘coz it’s so very tiny – but if anyone does, it will be bankers. (If you think I am exaggerating go and look at the video again.) The tax may or may not be intended to reduce volatility. My tentative answer is: the RHT is a very large tax with an uncertain incidence. We don’t know who will pay it, but $400bn is a lot of money so let’s not act like it’s going to come from nowhere. It might reduce volatility but the balance of both theory and evidence is that it won’t.
I have much more confidence in my other conclusion: that the RHT campaign has little or no interest in the evidence.
My view on the Robin Hood Tax is here. Duncan Green does not agree.
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