Owen abroad

Archive for June, 2005

There has been quite a bit of interest today in two new studies by Raghuram Rajan and Arvind Subramanian from the IMF. I apologise for this rather technical posting, but it is important to understand that, while the authors are eminent economists, the econometrics underlying these particular papers is seriously flawed. Correctly specified, the model in fact produces the same correlation between aid and growth that countless other studies have found.

There was a press report about the study in today’s Financial Times, and also on Newsnight tonight. It has also been picked up elsewhere in the blogosphere. The first paper, Aid and Growth: What Does the Cross-Country Evidence Really Show?, challenges evidence of a link between aid and economic growth. The second, What Undermines Aid’s Impact on Growth, argues that the benefits of aid may be offset by an appreciation of the exchange rate.

The problems with the first paper are to do with the way the econometrics have been specified. The criticisms that follow are derived entirely from expertise of my colleagues – especially Michael Clemens. (Any errors are my own.)

The authors’ own results show that a number of small and sensible changes to the way they have specified their model would change their results. Each change would, by itself, only lead to a small and possibly statistically insignificant increase in the correlation between aid and growth; but if they are taken together, as they should be, the result would get a large and statistically significant positive relationship, as found in all the other studies of this topic.

Here are three examples of how the authors have missspecified the model and ignored the evidence in their own results. First, when they regress growth on aid, assuming a linear relationship between the two, they get a zero or negative relationship. They do this several times. But every growth model since the late 1950s and nearly every aid-growth study since 1995 has recognised that aid would have a nonlinear impact: that is, there would be diminishing returns to aid. If you don’t allow for this effect explicitly in your model, then an upside-down U-shape can look like a flat line. When Rajan and Subramanian allow for this (in part of one table): not surprisingly, the aid effect becomes positive in all cases and comes close to being statistically significant in many cases. Clearly, a non-linear specification is needed: but Rajan and Subramanian take no notice of this whatsoever. Second, much aid is either not aimed at growth (e.g. humanitarian) or is not expected to cause growth on the medium term, not even a few decades (e.g. aid to support democracy). When Rajan and Subramanian eliminate these types of aid from their measure and focus on "economic sector" aid: not surprisingly, the aid coefficient is positive and statistically signficant (though sensitive to the instruments chosen, as all instrumented variables are). Again, this is to be theoretically expected, but Rajan and Subramanian do not adjust their model to take account of it. Third, theory leads us to expect that it is absolutely crucial which other variables you control for, since many country characteristics are correlated with both aid and growth, and could lead to spurious negative correlations between those two variables if they aren’t accounted for. Rajan and Subramanian don’t meaningfully test the sensitivity of their results to which other variables are controlled for, they leave out variables which have been demonstrated in the literature to be correlated with both aid and growth (e.g. civil warfare and the occurrence of natural disasters) and wrongly include other variables (e.g. they control for government spending — presumably the very channel through which much aid acts!). Now while each of these effects is small by itself, if they were to make all of these changes simultaneously, as their own tables make clear, the effect of aid would be positive and significant. All of the changes are justified by theory and by 30 years of literature (to which they scarcely refer.) Just to be clear: Rajan and Subramanian’s own tables show that a well specified regression specification would reveal aid’s positive impact on growth. They would get results similar to those reported here which find a strong, positive, and statistically robust correlation.

There are other, even more technical problems about their econometric strategy. In particualr, they do not make a clear case that their instruments capture a large fraction of the variance in aid, i.e. that their instruments have "power", which is absolutely essential if one is going to claim that the coefficient on an instrumented variable is indeed zero.

Rajan and Subramanian second paper seeks to explain their findings by reference to the macroeconomic effects of aid flows, and in particular the "crowding out" effect of Dutch Disease. The point is that an increase in aid flows can cause an appreciation of the real exchange rate which then crowds out the very export industries on which a country may depend for growth. When I was at the Department for International Development (the UK aid agency), we did quite a careful study of this. The results were published here. The paper found that, sustained aid inflows raise incomes and welfare in the recipient country, but in doing so they generally cause some appreciation of the nominal and real exchange rates. This is a necessary aspect of the adjustment process. If aid is used effectively, this appreciation will not undermine growth, either in aggregate or in the export sector. We also found that temporary increases in aid require greater flexibility on the part of the recipient government, and that this effect was an additional reason why donors should ensure ensure that aid flows and their disbursement are sustained and predictable.

Rajan was quoted in the FT saying "We need to be careful given the chequered history of aid, that we do not place more hopes on aid as an instrument of development than it is capable of delivering." This is absolutely right: aid is not the whole answer to development. But the study which claims to contradict the substantial body of evidence that aid makes a significant contribution to economic growth in developing countries is seriously flawed at a technical level.

Some people who are against increasing aid say that, because foreign aid worth more than $450bn has been given to Africa and Africa remains poor, this is evidence that aid does not work. This argument is, of course, absolute rubbish, and you would think that intelligent people would be ashamed to advance it. Apparently not: it has been wheeled out again, this time by Marian Tupy (from the right-wing Cato Institute) on the Globalisation Institute website. It has also been put by Mark in a comment on one of my earlier postings. So let us try to deal with this once and for all.

First, the statistical evidence is clear that aid does lead to economic growth. To see why the naiive argument made by Dr Tupy and others is wrong, consider this thought experiment. Suppose your local Congressman made a speech saying that Americans spend $2 trillion a year on healthcare (which they do) and that people still get sick (which they do). Suppose your Congressman said that this is clear evidence that medicines and health care do not improve people’s health. You would think that was pretty stupid, wouldn’t you? You would want to know: what would have happened if we had not had healthcare: how much sicker would we have been then? The way to answer this question is to compare what happens to people who do get health care, and what happens to people who don’t, all other things being equal. That is what clinical trials for new drugs try to find out: do the people who take a new drug get better sooner than people who do not? So the fact that we spend money on aid, and Africans are still poor, does not tell us that aid doesn’t work. We need to know whether countries that get more aid do better, on average, than countries that get less, if you adjust for all the other things that might explain the differences. That is a statistical question we can answer. My colleagues at the Center for Global Development did a study (which you can find here) which looked at the relationship between aid and growth. This study excluded humanitarian aid (such as emergency relief) which is not intended to assist growth. This study finds:

From a different perspective, we find that higher-than-average short-impact aid to sub-Saharan Africa raised per capita growth rates there by about half a percentage point over the growth that would have been achieved by average aid flows. The results are highly statistically significant and stand up to a demanding array of tests …

But is this just one study? No. In a comprehensive survey of all the empirical research on this question, Mark McGillivray at the OECD (pdf file here) finds:

overwhelming evidence that aid increases growth and other poverty-relevant variables. By implication, therefore, it can be inferred that poverty would be higher in the absence of aid

So when you ask the right question, you find not that $450bn has been wasted, but that aid has made a considerable contribution to economic growth. If you want to draw well-founded conclusions from past experience of giving aid, you have to look at what would have happened without aid. The only way to do this is to compare countries that get more aid with countries that get less. All the rigorous statistical studies find overwhelming evidence that countries that get more aid – including in Africa – do better than countries that get less, other things being equal.

Second, aid is getting more effective Over the period up to 1985 (which is when the bulk of the $450bn was given), the foreign policy priorities of rich countries were dominated by the cold war. This extended to aid, which was often used to support allies in the fight for communism (Mengistu in Ethiopia) or against communism (Mobuto in Zaire) was used to prop up dictators, and much of the aid was stolen. Aid was also used to support commercial interests of donors, with aid being "tied" to foreign contracts for dams and power stations, many of which were totally inappropriate to the needs of the recipient. But since the end of the Cold War, the effectiveness of aid has increased as donors have begun to allocate money instead to countries who have the most poverty and which can make the most effective use of it. Countries in Africa such as Tanzania, Uganda and Mozambique have demonstrated that, with donor support, they can use aid to reduce poverty dramatically.

Third, nobody said aid is the only answer. Those of us who believe in increasing aid do not believe that it is the only answer to the problems facing developing countries. The Governments in poor countries will need to continue to improve; be more accountable to their people, create a better environment for private investment; and invest in human development such as education and health. But Governments in developing countries face almost unimaginable constraints: what would you do as Minister of Health with an average of $6 a person to spend on health care, for example? It is not that the governments do not know what needs to be done, but that they simply don’t have the resources even to start. It is not just Governments in poor countries that need to change. The rich countries must reform the trade rules to enable poor countries to have access to our markets. We should clamp down properly on corrupt businesses from rich countries, that pay the bribes and feed the corruption that is often talked about (very little of that corruption, incidentally, is financed by aid receipts; most of it comes from private companies in return for concessions to extract natural resources such as oil, diamonds, gold and llumber. Yet we don’t hear the anti-aid lobby preaching against private sector involvement because some of the money will be skimmed off by corrupt officials.) We should ensure that our intellectual property rights do not exclude the poor from access to medicines, while ensuring there are incentives to develop new vaccines and drugs. We should do more to stop global warming, the costs of which are mainly borne by people in developing countries, as creeping desertification destroys their environment.

Conclusion I am relieved to see that Dr Tupy has a degree in classics, not in economics. This argument is so evidently wrong that I am continually astounded by the number of people who seem to think that this is a clever or interesting point to make. The evidence is strong: aid has made a substantial contribution to raising prosperity, and saved millions of lives. (See here for some particular examples.) Furthermore, we are getting better at making aid more effective. We should not be deterred by a small, vocal minority whose argument against aid is completely without any sort of theoretical or empirical basis. I also want to pay tribute to Our Word Is Our Weapon, who has also comprehensively rebutted this argument.

Postscript: I have commented before, and do so again now, about my frustration that the Globalisation Institute does not have any facility for comments on their website. It is a blog only in name: in practice, it is just a website for them to parade their views in "transmit only" mode. Are they insecure, and fear withering criticisms? Or are they just arrogant, and not interested in other people’s opinions?

We did our usual morning run yesterday: up Claremont Canyon and down Strawberry Canyon. It is hilly, but rewarded by great views of the Bay on sunny days. One particular stretch of the trail is known as the "connector", because it links the upper and lower Strawberry Canyon fire trails. According to local folklore, the legendary mile runner John Walker, on an extended visit to Berkeley in 1975, did repeat sprints up the connector shortly before he broke the world record in the mile. (His record of 3:49.4 stood until 1979, when it was broken by Sebastian Coe

Global Voices Online has a roundup of what African bloggers are saying about the Live 8 concerts. Most of the African commentators are not complementary about the idea, or the way it has been executed. For example, Gerald Caplan, writing in Pambazuka, says:

These views reflect a common theme: they leave the rich world blameless for Africa’s multitude of problems. I greatly fear that Live 8 is inadvertently strengthening the notion that we in the rich world must be missionaries to save Africans from themselves. The truth is already being lost– the deep, comprehensive responsibility of western nations and western financial institutions for so much of Africa’s continuing underdevelopment and poverty.

It is widely known that economists predict that, under certain assumptions, competitive markets are efficient – that is, nobody can be made better off without making somebody else worse off. This result – which is knows as the First Fundamental Theorem of Welfare Economics – is the basis of the view held by economists since Adam Smith that competitive markets result in a socially desirable outcome, even though the market is composed of individuals acting in their own self interest.

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Adam Smith, The Wealth of Nations

But there is a less well-known Second Fundamental Theorem of Welfare Economics which is, in my view, even more important. This theorem states that any efficient allocation can be achieved as a result of competitive markets, given a suitable allocation of initial endowments. Why is this important? It tells us that there are many possible efficient market outcomes, not a single, pre-determined equilibrium; and the one we end up with depends on where we start. If you have a large endowment at the outset, you will probably be better off in the resulting market outcome. It tells us that we can and should think about what sort of society we want to live in, and that we can move towards that outcome that by changing the hands we are all dealt, and then allowing the free market to do the rest. In other words, growing inequality and economic injustice are not the necessary and inevitable outcome of liberalised markets. The First Fundamental Theorem tells us that a competitive markets will lead to a pareto-efficient equilibrium – but there is an infinite number of such outcomes. The Second Fundamental Theorem tells us that we can choose what sort of society we want, and that, when we have done so, we can still rely on competitive markets to deliver an outcome that is economically and socially efficient.

Please sign the One Campaign Declaration. The declaration is:

WE BELIEVE that in the best American tradition of helping others help themselves, now is the time to join with other countries in a historic pact for compassion and justice to help the poorest people of the world overcome AIDS and extreme poverty. WE RECOGNIZE that a pact including such measures as fair trade, debt relief, fighting corruption and directing an additional one percent of the U.S. budget toward meeting basic needs – education, health, clean water, food, and care for orphans – would transform the futures and hopes of an entire generation in the poorest countries. WE COMMIT ourselves – one person, one voice, one vote at a time – to make a better, safer world for all.

I suppose I’m flattered to be picked out by Tim Worstall as an example of someone who is both left of centre and in favour of free trade (even if it is in a post entitled "crazed loons"). However, in a desperate attempt to put some clear red water between me and the real crazed loons, I should like to point out four corollories of this which I don’t hear much from the right-wing free traders:

• While economists agree that a world with free trade would be better than with trade barriers, we have consistently underestimated or ignored the human costs of transition. We should be prepared to invest much more in enabling people to move with dignity from one living to another; invest in skills, infrastructure and social safety nets for those who find the transition difficult. Time and again, we have willed the ends but not the means, both domestically and internationally. In the case of poor countries, those transitional costs will have to be financed externally.
• Economists agree that trade liberalisation will bring significant benefits to the world as a whole, but the dismal science does not allow us to make particularly good predictions about how those benefits will be shared. In general, the economically strong are able to capture the gains from trade more effectively than the economically weak. So the benefits from globalisation will mainly accrue to the rich world. Both rich and poor will get richer; but the rich will get much richer. In order to restore the balance between rich countries and poor, we must agree collectively and globally to redistribute the benefits to the poor.
• Rich countries should not use their own trade barriers to try to cajole change out of poor countries. We should open our markets completely and immediately to poor countries, and to each other, whether or not poor countries do the same. (As Joan Robinson famously said, just because other people throw rocks in their harbour, that is no reason for us to throw rocks in ours.) I hope poor countries will do the same, but they should not be blackmailed; and we should not use the language of negotiations and trade-offs which becomes an excuse for delay.
• If you believe in free trade, as I do, and you believe in free movement of goods and services and of capital, then it follows that you should believe in free movement of people. The economic efficiency arguments for this leg of free trade are just as compelling. So, consistent with my views on free trade, I believe we should unconditionally remove controls on migration. (Note that if trade liberalisation is restricted to some factors of production – eg capital – but not others – eg labour – then the theoretical arguments for the unambiguous benefits of free trade no longer hold. If an economist thinks that free movement of people is undesirable or impossible, then she may well believe that the second best solution is not free trade in goods, services and capital.)

What have you done today about the genocide in Darfur? Try this. What have you done today about the avoidable and unnecessary death of 20,000 people each day of extreme poverty? Try this. Or this.

Should a free trader be in favour of allowing firms to charge different prices to different customers?

The Globalisation Institute thinks not, in the context of pharmaceuticals. Drug companies in the United States are trying to find ways to prevent pharamaceuticals from being imported from markets outside the US where they are sold more cheaply. Is that vested interests trying to protect rigged markets, or is it markets operating at their most efficiently? In the case of pharmaceuticals, I think that price discrimination may be the optimal, free market outcome.

For those who have not heard the term, price discrimination is when a producer charges different prices to different customers. A classic example of price discrimination is Easyjet, which uses sophisticated technology to adjust the price of seats on the plane to ensure that every flight is full. On other airlines, cheap seats for people who stay a Saturday night help to distinguish business travellers from people paying for their own fare. This works because airline tickets are non-transferable – you can’t travel on a ticket that I have booked, so I can’t buy up seats and then sell them on; and because the airline has some way to distinguish different customers’ willingness to pay (by observing when they book the flight.) Price discrimination is also used by other travel industries (Young Person’s railcard, off-peak fares, first class tickets etc).

Hardback books are a form of price discrimination: the price difference from a paperback is much bigger than the difference in cost; publishers use the publication of hardbacks before paperbacks to get revenue from institutional buyers (libraries etc) and from those who will buy the latest book at any price; before allowing the book on to the market at a lower price in paperback for high volume, lower price sales.

Here in the United States, coupons and mail-in rebates are used to enable firms to charge different prices to different customers. Low-income purchasers will clip coupons from newspapers and magazines, and so they observe a different product price than better off consumers who do not bother. (More than 40% of mail in rebates are never claimed.)

Other examples of price discrimination include the operation of multiple tariffs for mobile phones; low use pricing rebates for utilities; brand name outlet stores; end-of-season sales; packaging of branded products as supermarket own-brands, and student discounts for software.

Now in a perfectly competitive market, there is generally a single price, which should equal marginal cost. Firms would not want to sell below marginal cost, as they would lose money; and they can’t sell above marginal cost because another firm will undercut them. In that case the market clears at marginal cost. This is socially optimal, as it ensures that people will consume something only if they value it as much or more than it costs society to make it.

But in many markets – including those for pharmaceuticals and software – firms have to be able to sell goods at above marginal cost, because they need to recoup large fixed costs such as R&D. Patents and other Government interventions exist to make it possible for firms to charge above marginal cost without being undercut by a competitor. So in these cases, it does make financial sense for firms to sell to some consumers below the market clearing price but above marginal cost, if the firms can do so without losing revenue from consumers who are willing to pay more. Should we be in favour of allowing firms to do this?

For convenience, let’s call the consumers who would be willing to pay the market clearing price "rich", and those with a lower willingness to pay, "poor", though in practice that might not be an accurate generalisation. Suppose that a firm is able to price discriminate perfectly (sometimes called pricing down the demand curve) so that each consumer pays exactly what he or she would be willing to pay, right down to the consumer who is only willing to pay the marginal cost. How does that compare in economic efficiency to a market in which everyone pays the same price, set above marginal cost?

First, rich consumers will pay more than they would have paid otherwise. This is not an overall loss of welfare to society, as firms receive a correspondingly larger revenue from these consumers – this is a zero-sum transfer from rich consumers to firms.

Second, poor consumers who would have been willing to pay above marginal cost, but less than the single market clearing price, are better off, as they can now consume a product which they would otherwise have been denied. This is a net gain to society, as it prevents the welfare loss that would occur if some consumers were priced out of using something that costs less to produce than it is worth to them. (In the case of pharmaceuticals, the welfare loss from pricing somebody out of access to a medicine could be very significant indeed; and this exclusion is a pure social welfare loss if the drug costs less to make than the buyer is willing and able to pay.)

Finally, firms and their shareholders are better off, as they can make some extra sales at above marginal cost to poor consumers who would not have bought at the market clearing price but are willing to pay something above marginal cost.

So overall welfare is increased by perfect price discrimination, because firms and poor consumers are better off; and the loss to rich consumers is balanced by a gain to firms; though price discrimination also has distributional consequences which benefit firms at the expense of rich consumers.

What about the rights of consumer and producers? You might think that when I buy something from you, it becomes mine, and I should be able to sell it to whomever I want. Isn’t that the free market? But an alternative view is that you should have the right to sell me something on condition that I use it myself and do not sell it to somebody else (which is what airlines and iTunes do); and if I do not want to buy it on those terms, then I don’t have to buy it at all. On this view, I have no right to make you sell me a good or service unencumbered by restrictions on whether I can sell it to someone else.

In the case of pharmaceuticals, price discrimination offers the best hope we have for allowing poor countries access to pharmaceuticals at affordable prices. If drug companies have to sell drugs at a single price all round the world, that will have be be a price which enables them to recoup their R&D investment. US consumers may pay a bit less; everyone else who can afford it will pay a bit more; and the majority of people in the world will have to do without the drugs at all because they will be unable to pay the uniform world price. But if pharmaceutical companies are able to sell more cheaply in developing countries than in rich countries, then developing countries will be able to buy drugs at or a bit above marginal cost and so they will pay something – even if it is much less than rich consumers – towards the cost of drug development.

If firms can find a way to sell to different customers at different prices, than I think that cannot be accurately described as "rigging" the market. Done well, it would increase overall welfare and increase economic efficiency. Nor does it trample on consumer rights: why should producers not be able to attach conditions to a good that they sell, provided they are transparent about doing so?

The only reason I can think of for opposing price discrimination is that rich consumers feel that they should not have to pay more for something than somebody else is paying. But that concern is nothing more than the politics of envy (to borrow a phrase from our right wing friends). If firms can find an honest and transparent way to charge more to people willing and able to pay more, and to charge less to people who would only buy at lower prices, for example by contract
ually restricting what those people may do with the goods once they have bought them, then good luck to them.

Grethe and I ran the Double Dipsea on Saturday – nearly 14 miles of gruelling, hilly trail running. Check the course profile. Here is the Marin Independent Journal’s review of the race.

It is sometimes argued that developing countries should protect their firms from international competiton (or should be allowed to do so) so that the firms can get big enough and efficient enough to compete in global markets. This is called "infant industry protection". Sometimes people say that the East Asian countries used this policy successfully. The trouble is that the firms often become dependant on the protection from competition, and do not ever become truly competitive. The result is that the population of the country have to pay more for those things than if they could buy them on world markets; and the industry never becomes a viable proposition. Penelope Hawthorne has posted a very good introduction to the infant industry debate. As she says, the overwhelming evidence from the postwar period is that open economies with more liberal trade policies grow faster and have more success with poverty reduction than closed economies.

A very timely reminder from John Naughton in the Observer. You rely on your hard disk to store your photos, your music collection, your address book and quite a lot of essential personal data. What are you going to do when (not if) your hard disk fails?

… about three years ago, millions of such ‘ordinary’ users began buying digital still- and video-cameras and MP3 players. And all of a sudden, their hard drives began filling up with images, movies and music that really mattered to their owners because they documented their lives.

… For the average user, backing up 80Gb of data is not a trivial task – it’s the equivalent of 120 CDs or 17 DVDs. Which is why I suspect that much of this precious personal information – all those photographs, movies and music collections – has been wholly entrusted to electromechanical devices that are certain to fail.

And I raise the matter now because some of the disks holding this stuff are coming to the end of their service life. If I’m right, the next few years are going to see a lot of anguish from computer users who have suddenly realised that hard disk failure involves more than just inconvenience and loss of face.

This is already happening. I have heard of computer repair stores where people turn up in tears with failed hard disks having lost all their wedding photographs, or pictures of their children growing up, because a hard disk has gone south. Sometimes the data can be restored, often it cannot.

(My solution to this is that I have an additional two external hard disks, each of which makes a nightly full backup of my data. I’m working on the assumption that they will not all fail at the same time.)

Jonathan Power writes in Prospect about his return to Tanzania.

There is no doubt that aid works. The proof of that can be seen in both Tanzania and Uganda from the times when they were given little or no aid. Nothing moved. Look at both countries now and you can see aid projects delivering. Even the Asian tigers, with their undemocratic but capable "development" states, could not have got going without aid—the Americans put South Korea and Taiwan on the road to success.

Hat tip: my Dad’s blog.

I’m quoted in today’s Scotsman newspaper about the forthcoming G8 meeting.

Above all, however, he vowed to concentrate on the plight of Africa and climate change. The priorities have not changed. This week he and Gordon Brown face the task of making good on their progress so far. "The [UK's] objectives for the summit are ambitious but achievable if our political leaders are willing to give sufficient priority to them," said Owen Barder, a former official from the Department of International Development who works at the Washington-based Centre for Global Development. "In Whitehall parlance, they are ‘stretching’. The aid and debt targets are achievable: compared to other public spending programmes, only modest additional resources are needed, and straightforward institutional changes would improve the impact of aid. The trade objectives will be more difficult." ‘Stretching’ is an apt description of Blair’s negotiating stance. Despite the ground-breaking deal to relieve 100% of debts owed to international institutions by the world’s poorest countries, a number of Britain’s G8 partners remain reluctant to go further.

Alex Singleton moved from the Adam Smith Institute to set up The Globalization Institute (which as far as I can tell is just him, with a couple of guest appearances from the irrepressible Tim Worstall). Sweetly, Mr Singleton refers to himself as "we" – The Royal We – presumably to bolster the illusion that he is in charge of an organisation. That’s OK with me. I always thought Walter Mitty was harmless. For the record, I’m also just an opinionated bloke with a laptop. But it does frustrate me that the Globalisation Institute blog does not accept comments (unless I have missed something). Some of what "The Royal We" writes is such tosh that it richly deserves to be thoroughly fisked. The latest posting is an example. We are told that a poll has found that:

The majority of people do not believe the Live 8 concerts and demonstrations at the G8 summit will have any significant effect in tackling poverty in Africa, according to a new poll. In a survey carried out by YouGov/Sky News only 16 per cent of respondents thought the concerts in London and cities round the world would make a significant difference. Only 6pc believe the demonstrations outside the summit at Gleneagles in July, called for by Bob Geldof and Midge Ure, will have any real impact on poverty. Instead nearly three-quarters of people believe decisions taken by governments in Africa have the biggest impact on the continent’s economy and standard of living.

Well, doh! I don’t suppose that even St. Geldof thinks that having a rock concert in Hyde Park or a demonstration in Edinburgh is, by itself, going to reduce poverty in Africa (if only it were that simple). The point of the concert and the demonstration is to put pressure on the G8 Heads of Government to make decisions which will enable those governments in Africa to take the decisions which three quarters of those polled believe – rightly – are so important for reducing poverty. If we reduce trade barriers, give debt relief, and give more and better aid, then Governments in Africa can get on with doing just that. And that will only happen if the governments of the rich world believe that it is in their political interests to do so. And that is the point of the concerts and the demonstrations. Perhaps this is too complicated for the Royal We to hoist in?

The barking-at-the-moon lunatics who are against government provision of any goods and services that private citizens will buy themselves if they are put under enough duress, will be very pleased to see this latest privatisation in America. Marines’ families have been asked to provide service-people with equipment:

Besides the essential flak jacket with steel "trauma" plates, the shopping list for the young Marine included a Camelbak (water pouch), special ballistic goggles, knee and elbow pads, a "drop pouch" to hold ammunition magazines and a load-bearing vest.

For those of us who think that there are some things that Government should do, and that equipping their soldiers properly is one of them, this is a complete outrage. I don’t understand why politicians are not being held to account.

Here is a characteristically thorough and well-informed fisking dished out by Jim, at Our Word is Our Weapon, demolishing a recent paper from the so-called International Policy Network which claimed that "foreign aid does more harm than good". And while you are there, read Jim’s excellent rebuttal to the argument that because aid has been delivered to Africa over the last 40 years, and many Africans are still poor, therefore aid doesn’t work. (It is astonishing how common this argument is; I don’t hear anyone saying that, because the US spends about 2 trillion dollars a year on health care and people still get sick, we have clear evidence that medicine does not work.)

Tim Worstall has an interesting post in which he argues that redistribution is made harder by having big government. I agree with him that:

• the poor pay too much in tax
• the state takes an unnecessarily large share of national income
• income tax should be used as a tool for redistribution

But:

• he ignores the role of spending in redistribution; public spending – for example on pensions & benefits – is much more important for reducing inequality than taxes. Overall, taking indirect and direct taxes together, the tax system is not redistributive; and all the redistribution caused by government is the result of the redistributive effect of public spending. About half of the government budget is handed back as grants, not spent by Government on goods and services. So if you care about inequality, on the whole you want more, not less, public spending.
• he asserts (without offering any evidence) that a progressive income tax system is harder to achive if revenues are a larger portion of national income. Presumably the problem is meant to be that it is hard to tax the rich proportionately more than the poor, which is what a progressive tax system requires, as the tax take increases – but it is not clear that this is in fact a constraint on the extent of redistribution through income tax at the current rates of tax.

Both of these make it very unlikely that the size of the Government is in fact an important determinant of the extent of redistribution. I think Tim and I would agree that income tax would be improved if we could broaden the base by reducing tax exemptions and allowances and reduce tax rates – a policy which Nigel Lawson pursued with some success and which this Government has largely reversed. This tends to be progressive because many of the tax breaks and allowances benefit vocal middle class lobbies more than they do the poor. Many people on the right argue for flat taxes, and for tax to shift from direct to indirect tax. Either of these would make it harder to pursue redistribution through income tax, an objective which Tim seems (unexpectedly, to me at any rate) to embrace.

A commendable speech by Condi Rice (full text here). Perhaps she read my post yesterday? She said:

For 60 years, my country, the United States, pursued stability at the expense of democracy in this region here in the Middle East — and we achieved neither. Now, we are taking a different course. We are supporting the democratic aspirations of all people. … We know that different societies will find forms of democracy that work for them. When we talk about democracy, though, we are referring to governments that protect certain basic rights for all their citizens — among these, the right to speak freely. The right to associate. The right to worship as you wish. The freedom to educate your children — boys and girls. And freedom from the midnight knock of the secret police.

I was impressed too by the unexpected humility with which Rice discussed the US’s slow progress to universal suffrage and democracy. What the speech lacks, however, is any sense of what will change on Monday morning, when Rice gets back to the office. If we are now backing democracy instead of stability, what is going to be different in US relations with Saudi Arabia and Pakistan? We shall see.

President Bush made this statement on the elections in Iran:

Iran is ruled by men who suppress liberty at home and spread terror across the world. Power is in the hands of an unelected few who have retained power through an electoral process that ignores the basic requirements of democracy. The June 17th presidential elections are sadly consistent with this oppressive record. Iran’s rulers denied more than a thousand people who put themselves forward as candidates, including popular reformers and women who have done so much for the cause of freedom and democracy in Iran.

I welcome this plain talking about the need for democracy. But I would like to see it applied consistently. Where are the strong denouncements about lack of democracy and human rights in Saudi Arabia, Pakistan, and Uzbekistan? (And, even less likely, Israel?) This inconsistency matters because it is difficult to take these criticisms seriously as a principled stand for democracy and human rights when the US ignores similar or worse lack of democracy in countries that it find strategically useful. They just seem to want to pick a fight with Iran.