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.

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.

Adapting vaccines for low income countries

Dr Kamal-Yanni of Oxfam and Daniel Berman of Médecins Sans Frontières have responded to my earlier post which called for caution in trying to drive down vaccine prices.

They argue that vaccines which are developed for rich country markets should be available at the lowest possible price in developing countries:

… the return on the cost of most new vaccines comes from wealthy countries, since research and development (R&D) is targeted to those markets. Rotavirus and pneumococcal vaccines– two top priorities of GAVI were first developed for and have impressive sales in rich country markets. In 2008, Pfizer earned over $2.8 billion in annual revenue from the sale of its pneumococcal conjugate vaccine, Prevnar.  A New York Times article notes Prevnar sales are expected to top $5 billion annually by 2015.

For those vaccines that already earn multinational companies high returns on investments in the developed world, there is no risk to the viability of vaccine supply from low-cost production. In other words, companies will not necessarily abandon the market if the price is lower in developing countries if they are making healthy profits in rich markets.  Indeed, market segmentation is already a core principle, well established in the orthodoxy of innovator companies, therefore it is difficult to see why vaccine prices for such products should not be as low as they possibly can in the poorest countries and for the poorest people.

I completely agree with Dr Kamal-Yanni and Daniel Berman on the importance of the principle of ‘market segmentation’.  For products which serve people in industrialised countries and in developing countries we should encourage the practice of charging higher prices for richer consumers to cover the costs of research and development, so that the prices charged to poor consumers can be kept as close as possible to marginal cost. (I have written about that before, here and here.)  There is scope for a lot more thinking about how public policy can support and enable firms to practice this kind of price differentiation more extensively (for example, by using regulatory restrictions to prevent arbitrage).

But it does not follow, as Dr Kamal-Yanni and Daniel Berman suggest, that the prices of pneumococcal conjugate vaccines for developing countries should be ‘as low as they possibly can be’.  There are three reasons why it has been important to create additional incentives for private investment in pneumocooccal vaccines.

First, it is not simply a question of rolling out Prevnar in Africa and Asia.  Prevnar is a 7-valent vaccine which was developed for rich country markets and is not well adapted to preventing infection against the serotypes of pneumococcal infection which occur in developing countries.  The vaccines now being purchased under the Advance Market Commitment (AMC) are 10- and 13-valent vaccines which are better suited to the serotypes in developing countries.  Nor can vaccines which have been tested only in Europe and North America simply be distributed in other countries. The AMC has stimulated important research on the impact of pneumococcal vaccines in Africa and Asia (for example, gathering data for the first time on the impact on HIV-infected people).  It accelerated the process of obtaining regulatory approval.  It has also stimulated work on different ‘presentations’ (such as Pfizer’s 4-dose vial) which bring down prices and make it easier to get vaccines to people in more difficult environments.

Second, we want vaccine companies to scale up production very considerably to produce enough vaccines for people in developing countries.  We don’t have well-documented estimates of the cost of setting up a large-scale production facility, but informed speculation suggests that it costs somewhere between $100m and $400m.  Companies face a significant risk doing this: namely the possibility that they will spend the money on a new plant, and then get hammered by purchasers intent on driving down the price (for example, under pressure from Oxfam and MSF).   Once the plant is built, the producer has no bargaining power: they have capacity to produce millions of doses and nobody else to sell them to. This means the purchasers can force the price down to marginal cost, and so the producer won’t recover the fixed cost of the production facility.  To avoid that risk, the company may choose not to build the plant in the first place.  (This is known in economics as the ‘hold up’ problem.)   So if we want firms to build facilities to mass-produce the vaccines for developing countries, we have to agree a price in advance which covers this part of the fixed costs, and then resist the temptation to drive the price down once the plant has been built.

Third, the idea that we should just roll out the vaccine at the lowest possible price ignores the substantial benefits of further investment in research and production capacity, which will result in better and cheaper vaccines for everyone.  Merck is currently making a 15-valent vaccine for pneumococcal infection which – apparently because of the AMC – they plan to to produce at large scale at an affordable price for developing countries.  The AMC is attracting companies from emerging markets, such as FioCruz in Brazil (who have done a technology transfer deal with GSK) and manufacturers in India and China who are in late pre-clinical testing of formulations designed to meet the needs of developing countries.   Dr Kamal-Yanni and Daniel Berman compare the pneumo AMC with the Meningitis Vaccine Project, which has indeed been successful in many ways. But because the price has been set so low for the Meningitis A vaccine,  there is (as far as I know) no private investment in new and better vaccines, in contrast to the efforts being made to develop better and cheaper pneumo vaccines.

When governments and public authorities invest directly in developing and producing vaccines they need to manage carefully the possibility that there is, or may appear to be, a conflict of interest between these activities and their normative and regulatory functions such as licensing and recommending vaccines.  It is possible that some pharmaceutical companies may have been put off developing a new Meningitis A vaccine by the prospect of having to secure regulatory approval from public authorities who are themselves investing in an alternative vaccine.

We do not have to speculate too much about what would have happened if we followed the advice of Dr Kamal-Yanni and Daniel Berman and set the price of pneumo vaccines as low as possible.  We can see what happened when vaccines for Hepatitis B and Haemophilus Influenzae Type b (Hib) were developed for use in rich countries.   In principle, exactly the same ‘market segmentation’ principles should have applied in these cases. According to the view put by Dr Kamal-Yanni and Daniel Berman the firms could have recovered their investment in rich countries, and sold the vaccines at cost in developing countries.  But in practice that didn’t happen: it took at least fifteen years before those life-saving vaccines were available in developing countries.

It does not reflect well on the pharmaceutical industry that these vaccines took so long to be produced for developing countries.  But nor does it reflect well on public policymakers who failed to think about the incentives required to get them to do so.  Somebody has to bear the costs of getting regulatory approval, sorting out appropriate presentations for developing countries, and building large enough plants for mass production.  In some cases, such as pneumo, the vaccine itself may have to adapted. Firms are reluctant to bear these costs if they are unlikely to be able to recover those investment through sales, and if they perceive a risk that their high-price markets will be undercut by imports of low-cost substitutes manufactured for developing countries.

About two million people die each year of vaccine-preventable diseases.  Our reluctance to create incentives which make it profitable for pharmaceutical companies to serve these people is not “erring on the side of the poor”: it is erring on the side of ideology at the expense of the poor.

An alternative approach, favoured by Dr Kamal-Yanni and Daniel Berman, is to manage this work as a public sector led partnership like the Meningitis Vaccine Project.  These kinds of partnership and the AMC share some important characteristics: public authorities determine the strategic health goal, provide a subsidy to the private sector to develop and produce the vaccine, and set the price of the product. But there are important differences too. In the public-private partnership the subsidy is paid in advance to the chosen private sector partners, whether or not the vaccine is delivered.  In the AMC the subsidy is paid transparently though a higher price,  in proportion to the amount of vaccines which are actually delivered and used.  While the public-private partnership relies on the good sense and experience of the public authorities to choose appropriate partners and shape the vaccine development strategies, the AMC allows any firm – including pharmaceutical companies in emerging markets – to innovate and compete for part of the subsidy.  The AMC places more faith in the benefits of diversity and competition than the public-sector directed approach, and it links the subsidy directly to results achieved. While the public-private partnership puts public authorities in the possibly uncomfortable position of being both a producer of vaccines and the regulator, the AMC keeps those roles separate.

Dr Kamal-Yanni and Daniel Berman are concerned about “overly cosy relations” in GAVI, where pharmaceutical companies have 2 seats on the 27-member board, yet they seem less concerned about collaborations between the public and private sector which involve substantial grants to private firms, often with little transparency, which create a potential conflict of interest for public authorities.

I don’t have an ideological position on the respective merits of the private and public sector: each has advantages and disadvantages.  (I do plead guilty to having a bias towards more open, diverse and competitive approaches.)  You can make a case for developing medicines mainly in the public sector, based on the idea that the knowledge generated by R&D is a public good and ought to be free for everyone to share.   But that logic applies also to the development of medicines for families in rich countries. I notice that, in practice, most rich countries prefer to engage the resources, innovation and energy of the private sector, working alongside the public and non-profit sectors, in developing and producing new medicines.  Perhaps we want this kind of mixed economy because some people doubt that programmes directed by the the public sector alone will be able to deliver these products. I don’t want to live in a world in which we have one level of aspiration for technologies for our own health needs, which we choose to meet by a combination of public and private efforts, and lower aspirations for developing countries in which we rely on programmes funded and managed by the public sector alone.  But if we want the private sector to do this work too, we have to set appropriate incentives for them, rather than create conditions in which this cannot be a worthwhile business and then complain about their values when they don’t participate as much as we would like.

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.

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.

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.

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?)

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.

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.

1. higher taxes on the wealthy
2. a curb on speculation and market volatility
3. 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:

1. 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);
2. 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.

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:

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).

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.

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

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.

It is extraordinary how much resistance there is within development agencies to rigorous evaluation of development interventions.

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?

1. 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.
2. 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.
3. 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.
4. 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.
5. Immigration – In the 18^th Century, a third of Europeans moved to America, to the benefit of both continents.  In the 20^th and 21^st 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.
6. 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.
7. 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.
8. 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.

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.

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.

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

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

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

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

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

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

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

Stand and Deliver!

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

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

Reducing volatility

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

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

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

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

Raising money for good causes

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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

Where we agree: trade is good for growth

I am pretty sure that everyone agrees with the following:

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

The direct impact of foreign aid

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

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

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

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

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

How big could the Dutch Disease effect be?

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

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

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

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

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

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

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

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

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

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

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

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

Empirical findings

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

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

Conclusion

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The United States Declaration of Independence asserts:

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

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

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

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

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

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

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

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

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

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

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.

Here’s a sample:

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

In the paper I argue that more planning and coordiation among donors will not overcome the political constraints that prevent better aid.  The aid system is in a political equilibrium which we need to try to change; we won’t solve aid’s problems by trying to move away from the equilibrium.  This means making more use of market and network mechanisms to change incentives within the aid system. We need to stop thinking of grand new designs of the aid system and start putting in place mechanisms that force evolution in the right direction.

I’ve listed a set of measures, from the commonplace (untying aid, for example) to the unusual (tradable missions permits, or a tax on proliferation pollution) to illustrate the ideas.

I’ll be discussing the paper at the Overseas Development Institute (ODI) on Friday, and on a forthcoming episode of Development Drums.

I’m looking forward to comments and feedback.

we are all in this together.

This is a powerful message.

When 15 million people  face starvation in East Africa this Christmas, let us say:

we are all in this together.

When twenty thousand children die tomorrow from easily preventable and treatable diseases, purely because they don’t have enough money to buy drugs that cost cents to produce but for which we charge rich world prices, let us say:

we are all in this together.

When the developing world demands proper compensation for their part of the atmosphere, which we have filled up with carbon emissions far beyond our share, resulting in the risk of destruction to entire nations, let us say:

we are all in this together.

When the people of the Niger Delta demand a share of the wealth lying beneath their ground, and an end to the environmental destruction caused by our oil companies so that we can drive our cars and cool our houses, let us say:

we are all in this together.

When we complain about corruption in the developing world, forgetting that all the money that pays for those bribes comes from us, and then choose not to prosecute our own companies that pay the bribes, let us say:

we are all in this together.

When we continue to be one of the largest manufacturers and exporters of arms in the world, fuelling conflict all around the world, but are more concerned about a hundred jobs on the Isle of Wight, let us say:

we are all in this together.

When people are forced to leave their homes, their family and their country because they lack freedom or face persecution, or because they cannot find work that pays them enough to support their family, and they look for a new beginning in rich countries, and we decide how we will treat asylum seekers and immigrants, let us say:

we are all in this together.

When the world’s poor demand fair payment for their coffee, cocoa, and minerals, and for their labour which provides us with the cheap clothes and electronics which we take for granted, let us say:

we are all in this together.

When the world economy recovers, companies of the rich world begin to prosper, when bankers get their bonuses again and the rich start to become richer, and we decide how to share the proceeds of that growth within and between nations, let us say:

we are all in this together.

The World Business Report podcast is here.  The discussion about the Tobin Tax was in the edition for October 7th, 2009 – it will be there for a few days.  Alternatively you can download just the relevant part of the programme here.

The presenter, Mike Johnson, introduces the discussion by saying that James Tobin (a Nobel prize winning economist) proposed the tax as a way to finance efforts to combat poverty and disease. That isn’t true: James Tobin proposed the tax as a possible way to reduce speculative transactions.  The idea of linking the tax to development spending is a subsequent embellishment by campaigners against global poverty.  James Tobin said in an interview in Der Spiegel in 2001:

Ich habe nicht das Geringste gemein mit diesen Anti-Globalisierungs-Revoluzzern.

(My translation: “I have nothing at all in common with these anti-globalisation revolutionaries.”)

When is innovative finance good?

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

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

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

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

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

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

When is innovative finance not good?

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

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

Conclusion

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

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

In a few moments we’ll discuss why this is true and why it matters. But let me offer two apologies.

To those for whom this is a statement of the bleedin’ obvious, sorry for wasting your time.  Please feel free to skip down to the reasons why this important.

And to those for whom this is a shocking revelation, I am sorry to puncture the bubble. This reality is not the result of a conspiracy between aid agencies and commercial interests but an unavoidable consequence of the fact that aid is provided from abroad.

In what sense is all aid used to pay for imports?

Suppose a rich country gives $100 million in aid to a poor country.   The recipient may be a person or organisation, or the government. Sometimes the aid is given as money, sometimes as goods and services (such as food aid, or technical expertise).  If the aid arrives as imported goods and services, then the aid has been used, by definition, to pay for imports.

But suppose the aid comes not as goods and services but as foreign currency.  The only value of that foreign currency is that it can be used to buy imports from abroad.

Of course the recipient might do something else with the foreign currency, like sell it or save it.  But in the end the foreign currency has to be used to pay for imports, or it is worthless.

Suppose you send $100 to an NGO in Nairobi.  That NGO might want to use your donation to pay its rent. The NGO has to sell the $100 and get Kenyan shillings to pay its rent.  The people who buy the $100 want the dollars at least as much they wanted the equivalent amount of Kenyan shillings. Why? So that they can buy something from abroad, either today or in the future (or sell the dollars on to someone who will).  Instead of using their Kenyans shillings to buy something locally, somebody at the end of the chain must be selling their shillings and using the $100 to buy something from overseas.  So the impact of your donation on the NGO has been that it can pay the rent (which of course is not an import); and the net impact on Kenya as a whole is that imports have gone up by $100.  The additional imports are of value to someone in Kenya, and because you originally gave the claim on those additional resources to an NGO, the NGO was able to use the value of those additional imports pay its rent.

The same argument applies to aid given as budget support to governments. We may expect that the recipient government will use the money to employ teachers and nurses, or to build roads.  None of that may be imported.  How does giving foreign currency to a government help it to employ teachers?  The answer is that we have given them something of value – a claim on imports – which they can trade in the economy to get the money they need to enable them to pay teachers.  But since the thing of value we have given them is a claim on imports, the government can only use it if somebody somewhere in that economy wants the imports enough to give up some local currency in return.  The aid is in the form of additional imports, even if the ultimate importer is not the original beneficiary of the aid.

It maybe that someone will save the foreign currency – perhaps the Central Bank will use it to increase its reserves, or a firm might keep some dollars in a safe. But these savings have value because the money can be used,  by someone somewhere, at some time in the future, to pay for an import.

This should all be uncontroversial – it is, after all, just another way of describing the national accounts identity.  Aid is a capital inflow; and an increase in capital inflows must be matched by an equal and opposite current account deficit.   So when aid goes up, either imports must increase, or if imports stay the same, exports needed to pay for imports must go down.

Why does it matter that all aid ends up as imports?

Here are some consequences

• Aid to developing countries is a fiscal stimulus for rich countries.
  If the cause of the economic crisis was that rich countries were consuming too much relative to how much they were producing, the only possible way out of that is for rich countries to increase production faster than they increase consumption, and that means increasing exports.  Increasing aid does that.
• The question of how much aid “ends up” in a developing country is a red herring.
  All aid “ends up” as goods and services imported from abroad.  The right question is whether they are the most valuable goods and services, and who benefits from them.
• Effective aid must inevitably increase the current account deficit of recipient countries.
  Hare-brained schemes to “sterilize” the effect on the balance of payments could only work by preventing the aid from being used.  A worsened current account is the accounting counterpart of increased aid.  Unless you are a paid-up mercantilist, you’ll know that getting more imports for nothing, or not having to export as much for the same amount of imports, is a good thing.  (Of course, if the aid is used for things that increase the country’s productivity, that might increase exports and so improve the current account, but that is a second-round effect which might or might not offset the direct effect.)
• The only significant difference between budget support that some donors give today, and the old balance of payments support they used to give, is the nature of the political dialogue that accompanies it.
  In the old days, donors were happy to be told that the money would be used for imports (what else could it be used for?).  Today, by calling it budget support, donors feel able to get more engaged in how the government allocates its overall resources.   It is weird that auditors seem to think this is a riskier business, when the economics is the same.

First, taking something for nothing, without permission, and with no compensation for the person who created and owns it, is wrong. Simple as that.

With respect, it is not as simple as that.

The reason this looks plausible is the use of the word “taking”.   If I take something from you, that implies that I now have it and you no longer do.  If it was yours to start with, that would be unfair (or, in Mr Mandelson’s word, “wrong”).  But the challenge for making good policy about intellectual property is that the goods in question are non rival – meaning that one person’s consumption does not come at the expense of another person’s consumption of the same good.  If I make a copy of a song and listen to it on my MP3 player, that in no way reduces your ability to listen to it.   So I have not “taken” it from you.  We can both listen to it.  The marginal cost to society of my listening to the song is zero.

Mr Mandelson may have meant by “take” the idea that if I neglect to pay you for something, you lose out.  But this isn’t necessarily wrong.  As Chris Dillow points out, if I give a lift to a friend, I deprive a taxi company of revenue.  The taxi company might not be very happy about that. They might lobby the Business Minister over cocktails on a yacht, requesting that taxi companies be given a monopoly on giving rides in the area they serve.  (After all, they have spent a lot of money on cars and offices.)  The Business Minister should tell them to get stuffed.   There is no basic right to make money on your investments, and being deprived of potential revenue is not the same thing as a cost.

As I explained in more detail here, the economics of non-rival goods is quite different from the other kinds of goods.   Intellectual property rights are a social construct to create temporary monopolies which, unlike other forms of property, worsen rather than increase static allocative efficiency.  For non-rival goods, allocative efficiency requires that the price is zero, but dynamic efficiency may require some sort of remuneration for the creators of the products.  A society may choose to restrict access to a product as a way to create financial incentives for innovation. This may be worth doing if the welfare gains from the incentives to innovate exceed the welfare costs of reducing access to the products.  But that trade-off does not automatically and necessarily come down in favour of having intellectual property rights, nor is the creation of intellectual property rights the only or the necessarily the best way to create incentives to innovate.

This is not a wholesale argument against intellectual property rights.  But it is an argument against the daft claim that intellectual property rights are just the same as rights to rival goods such as physical property.   Property rights for rival goods increase, or at any rate do not diminish, allocative efficiency and hence welfare;  property rights for non-rival goods decrease allocative efficiency, and that is a welfare loss that has to be justified by a welfare gain elsewhere.

We do need to reward and incentivize innovation and creativity appropriately.  But I am struck by the lack of imagination and innovation in the current debate about how we do it.  Intellectual property rights are one approach, but they have important drawbacks.  We should not forget other possible approaches – such as prizes, buy-outs, or public funding – which might secure many of the same benefits without the costs.

There are three questions to answer:

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

My answers are explained below the fold.

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

a. Should we spend more on reducing global poverty?

Regular readers of this blog will know that I believe that aid works, though not as well as it should.  I believe we have obligations to our fellow human beings around the world, and that we have it within our power to alleviate suffering and promote shared prosperity.  Aid is not the measure of our common humanity, but it may be the cost of it.   I would much rather promote the well-being of the world’s poor through more open trade policies, open immigration policies, changes to intellectual property rules, reductions in environmental damage and changes to our policies on peace and security.  But (a) we aren’t in fact doing any of those things; and (b) we should be giving aid at the same time, especially as it is a natural complement – e.g. to more open markets.   We should spend what it takes to eliminate global poverty – it is easily affordable – and if we can do it with less aid, all well and good.  So yes, let’s spend more on aid, but let’s remember this is a means to an end, not an end in itself.

b. Should we tax financial transactions?

Adair Turner apparently believes that there are financial activities which are “a socially useless activity” and which should therefore be discouraged by taxation. However, the test for imposing a tax on an economic activity should not be whether it is socially useful, but whether it imposes costs on the rest of us.   Presumably somebody wants the financial transactions in question, which is why they are willing to pay for them.  If we want to impose a tax on them to discourage them, we have to explain what harm that does the rest of us.   (Readers may be able to think of other activities undertaken by consenting adults that have no wider social benefit, but also do no social harm: should we tax all these too?)

Tobin believed that a tax on transactions might increase financial stability.  That is the makings of a case for taxation, because financial stability is a public good.  (Tobin explicitly distanced himself from the anti-globalisation supporters of his tax.)  But it is not obvious that a Tobin Tax would increase stability.  Are markets with fewer, larger transactions likely to be more stable than markets with more market players, and more frequent, smaller transactions?

In the end, this is an empirical question. If it really is true that markets with higher transaction costs are more stable than markets with lower transaction costs, then a Tobin Tax looks attractive. If not, not.

c. should we link aid to revenues from a tax on financial markets?

This is where I part company most sharply from those who think that it would be a good idea to use a Tobin Tax to finance international development.

My reservations are part theoretical, part practical.

The theoretical objection is this.  Good public policy demands that governments spend the taxpayers’ money in the most effective ways to increase the sum of human happiness; and that they raise the money in ways which are either beneficial (e.g. by taxing bad things such as pollution) or at worst, in ways that do least harm.   These should be separate decisions: linking a particular form of revenue to a particular form of spending unnecessarily constrains those choices.   We should evaluate the case for aid spending on its merits; and we should evaluate the case for a tax on financial transactions on its merits.   If we link one to the other, we may find ourselves pushed into less effective forms of spending, or less effective forms of tax.

And here is the practical objection.  It has been clear from the current financial crisis that we need aid to be counter-cyclical – that is, we need more of it in a downturn; whereas in fact it is proving to be cyclical – that is, industrialised countries find it convenient to cut back on aid when things are tough.  Turnover in financial markets is pro-cyclical. That means that if a tax on turnover is a primary source of aid finance, aid will become more cyclical, which is the opposite of what we need.

Conclusion

We concede too much ground when we advocate a Tobin Tax to pay for international development.   We have profound obligations to help our fellow human beings, and we can do so at little cost to ourselves.  Our obligation is to see to it that people have the  food, water and shelter they need, access to security, health care and education and to a decent quality of life.    If this costs more money than we are spending, so be it.  The sums are small.  If we can achieve these things with less aid, or no aid at all, all well and good.   This is solid ground which we should defend.  When we argue that the money should come from a Tobin Tax, or an airline duty, we implicitly move the debate to measuring our solidarity by the amount of aid we give, rather than what we seek to achieve, and implicitly concede that aid at the levels required to achieve these simple things cannot be afforded without additional taxation.

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

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

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

Well, up to a point, Lord Copper.

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

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

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

Thanks to the Freedom of Information Act, he has been able to obtain a copy of this despatch, and he has published it online. At the time, it was regarded as controversial and radical.  Circulation within the Foreign Office was limited.

Perhaps my judgement is clouded by filial loyalty, but today it strikes me as forward-looking and far sighted.  He wrote:

Such grotesque disparities in the human condition are an inevitable source of conflict and instability. It is a century since British people ceased to be willing to tolerate massive inequality of wealth and income within their own society.  The time has surely come when we should tackle an even more offensive situation in the global village.

My father made a compelling case in 1991 for doing more to ensure that Africa shares in the benefits of globalisation and rising prosperity. As he predicted, the need has become greater the longer we have neglected the challenge.

I’m proud to follow in his footsteps in demanding change; but dismayed that I have to do so. If only they had listened then we might not have to be making the same case today.

When that folded (presumably on account of talking rubbish) he now seems to write leadrs for the Daily Telegraph.

The always excellent Chris Dillow explains why Alex is talking rubbish again, this time about about domestic economic policy:

Alex Singleton claims that today’s cut in Bank rate will prolong the recession. I think he’s confused.