Development and the supply side

I’m trying not to over-react to Tim Worstall’s naiive article over at Tech Central.

His core premise is right.  Supply side reforms are essential for economic growth and prosperity, in developing countries as well as in wealthy countries.  Measures to promote improvements in the supply performance of an economy will increase the welfare of its inhabitants and should be encouraged.

But on this sensible proposition, Tim jumps to a set of conclusions which have no basis in reality.

Tim’s conclusions, in a nutshell, are that countries should sort out the "infrastructure of the economy rather than simply pumping money in"; that donors should withhold aid from countries that do not liberalise telecomms; that Africans invest abroad and that the continent would not be short of money if the investment climate were better; that the only donor to understand this is the US; and that Africa needs "less Live 8". (Apologies if this abridged version does not do justice to the orginal – you can read the full article here to see if I have missed anything.)

So what is wrong with these conclusions?

First, donors have been working hard for decades on helping countries to improve the supply side and promote investment.  For example, the UK Government’s White Paper on International Development in 2000 set out a detailed set of measures, which were summarised as commitments to:

  • Help developing countries build the effective government systems needed to reform their economic management, make markets work for poor people, and meet the challenge of globalisation.
  • Work to reduce corruption, and ensure respect for human rights and a greater voice for poor people. […]
  • Work with developing countries to put in place policies that will attract private financial flows and minimise the risk of capital flight.
  • Work to strengthen the global financial system to manage the risks associated with the scale, speed and volatility of global financial flows, including through use of ‘road maps’ to guide countries on opening of their capital accounts.

In fact, every UK Government White Paper on International Development since the Treasury White Paper of 1960 has highlighed the central importance of improving the supply side.  The central importance of improving the supply side has been recognised by all aid agencies, and pretty much everybody working on development, for the last half a century.

Second, there is no single magic measure to improve the supply side.  Over the fifty years since decolonisation, there have been a range of fashionable ideas about how best to improve the supply performance of the economy. At various points, commentators have stressed the absolute priority of  investing in physical infrastructure, institution building, improving skills, raising productivity through improved health, economic liberalisation, commercialisation of public enterprises, support for financial markets and microfinance, support for small and medium sized enterprises, trade openness, and  macroeconomic stability.  The hard truth is that all of these are important components of improving economic performance and that any one of them, on its own, is not enough.  (The need for an interrelated set of improvements was a central theme of a book by my colleague Bill Easterly).

Third, supply side improvements are not typically cheap in the short run.  Virtually all the measures listed above require considerable investment in the short term. (The economic benefits exceed the cost, but the benefits come after the costs have been borne.)   Investment in physical and human capital are obviously expensive.  Institutional reforms require transitional costs (for example, to make redundancy payments, to invest in IT or retrain a workforce).  And as we know in developed economies, it is politically impossible to liberalise markets without finding some way to compensate those who lose the most from the change.  We have the utmost difficulty liberalising markets in very rich economies, in which we have the money to compensate the losers (think of airlines and broadband in the US, or farming in Europe); it is an order of magnitude harder if you are the finance minister in a country with no discretionary funds.  (Tim gives a particular example of telecomms liberalisation, which he seems to think is straightforward.  In fact, state owned telecomms companies provide a substantial share of domestic revenues in many developing countries, and are often an important source of foreign currency earnings. As a result, liberalising telecomms, which would clearly be economically desirable, is financially unfeasible for many developing countries.)

Fourth, making aid conditional on supply side improvements does not accelerate reform.  Much as we might want to believe that our views on how countries should be governed can be imposed by withholding aid from countries that do not make progress, there is absolutely no evidence that aid conditionality is an effective way of accelerating reform.  (See Tony Killick’s research for a full discussion of this, including a full discussion of the literature on conditionality.)  The leaders of developing countries for the most part understand full well the importance of supply side improvements in the economy; they lack the resources and the institutional and political infrastructure to deliver them.  Wagging our fingers at them and threatening to cut off the resources they need does not help them to make progress; understanding the challenges they face and helping them to navigate through them does.

Fifth, just because the supply side matters does not mean that other interventions are not important.  While improving the supply performance of the economy is vitally important, so is vaccinating children, promoting access to justice, tackling conflict, fighting corruption, educating the next generation, alleviating the immediate problems of poverty and hunger, reforming political institutions, investing in science and technologies that benefit people in poor countries, and the host of other things that contribute to international development, on which development assistance is spent. There is no basis in logic, and no evidence, to support the conclusion that because supply side improvements are important, that African countries would benefit from receiving less assistance in other ways. 

Sixth, Live 8 is a way of achieving higher levels of investment and economic growth, not an alternative to it. Tim’s heading ("Less Live 8, More Self Help") suggests that there is a trade-off between the goals of Live 8 and supply side improvements to promote investment and growth.  The goals of Live 8 are more and better aid, broader debt relief and more trade access: and these are all complements to the supply side improvements that are needed.  As the Africa Commission Report explained,  increasing resources available for infrastructure investment, education and health, economic reforms, technological progress, tackling conflict and promoting priv
ate sector growth, is an essential component of creating a virtuous circle of investment, employment and rising prosperity.  The Live 8 agenda of more resources and greater market opportunities are an essential contribution to the supply improvements that are needed.

Conclusion

From an uncontroversial premise that the supply side is important, Tim Worstall has built a set of conclusions and policy prescriptions that have no basis in the real world.  The donors and developing countries well understand the importance of improving the supply side. Not only is there no trade-off between this and providing more resources, the resources are used to fund the very reforms and investments that Tim would advocate.  The objectives of Live 8 are not an alternative to reform, they make a vital contribution to accelerating it. Withholding aid from countries that do not achieve the reforms does not help, and may well lead to slower progress. 

There are many people who spend much of their time working to help governments in developing countries to improve their economic performance; and they have good understanding of the importance of improving the supply side. There is a wealth of experience, evidence and analysis, and we are continuing to learn.  It is downright insulting to be lectured by Tim Worstall on the basis of nothing more than his homespun economics and first principles.  And we owe it to hundreds of millions of people who are, quite literally, dying from poverty, to base our policies and approach on evidence and experience.

7 thoughts on “Development and the supply side”

  1. Pingback: PSD Blog - The World Bank Group - Private Sector Development

  2. Owen,
    As you know, writers of pieces do not do the headlines.

    Rather more to the point the piece was not a critique of aid agencies (although the quote from The Economist could be seen as one: ” “These are our main bottlenecks,” says Emma Ralijohn, who co-ordinated Madagascar’s application to the MCC. “Other donors never tried to solve these problems,” she adds.”…if everyone’s been concentrating on the supply side so hard why hasn’t someone looked at something so obvious as the registration and transfer of land?)

    Rather my target was the Make Poverty History people (largely synonymous with but not exactly the same as Live8)who had, as part of their manifesto, this:

    “Aid should therefore no longer be conditional on recipients promising economic change like privatising or deregulating their services, cutting health and education spending, or opening up their markets: these are unfair practices that have never been proven to reduce
    poverty.”

    We might disagree conditionality (and no, I didn’t suggest that aid should be conditional. I suggested that privatisation of telecoms would be a test to see how serious an oligarchy was about desiring development.) but both you and I would agree that

    “privatising or deregulating their services […] or opening up their markets: these are unfair practices that have never been proven to reduce poverty.”

    is complete cock and something that should be raged against constantly.

    “(Tim gives a particular example of telecomms liberalisation, which he seems to think is straightforward. In fact, state owned telecomms companies provide a substantial share of domestic revenues in many developing countries, and are often an important source of foreign currency earnings. As a result, liberalising telecomms, which would clearly be economically desirable, is financially unfeasible for many developing countries.)” is interesting…but the MPH crowd would, presumably, if aid was used to liberalise such services, insist that aid was just being used to benefit greedy capitalists….when in fact the major benefits come in increased GDP growth.

  3. Tim

    I was very glad to read your comment, in which you make it clear that you were not intending to criticise aid agencies, or suggest that liberalisation of state enterprises is the key to economic development.

    I assume that you will be publishing correction on TechCentralStation to make your views clear. To save you the effort, I have taken the liberty of drafting a possible article for you:

    “I am concerned that some readers may have misinterpreted my comments in my recent article (“Less Live 8; more self help”, August 4th 2005) in which I highlighted the importance of supply side reforms for development.”

    “When I said, ‘there’s one aid agency that seems to have already understood this … it does seem that the Bush administration actually has the right idea about development aid’ this might have been thought to mean that other agencies have not given this sufficient attention, or that the US administration has given it more attention than other donors. In fact, I meant to make clear that this issue has been recognised by all the main donors over the last half a century, and that they have devoted considerable effort and resources to it, with considerable success.”

    “When I said ‘Sort out the supply side; get the infrastructure, institutional and social right first, then, who knows? Will further aid even be necessary?’, this was in no way intended to imply that aid flows for other purposes (such as vaccinating children) should be reduced or might not be necessary. I realise that there are many challenges in developing countries, including improving the supply performance of the economy, that efforts are needed across a broad range of issues if we are to make progress; and that investments financed by development assistance are making an essential contribution to these.”

    “When I said ‘If you don’t liberalize the telecoms market … then no more money’, this was not intended to imply that a country that does not liberalize its telecoms market should get no more money. That was absolutely the last thought in my mind. Obviously what I meant was that there may be strong short-term political and fiscal pressures that prevent telecoms liberalisation, and that donors should build partnerships with developing countries to understand these better and so help to alleviate the constraints to enable them to accelerate reform.”

    “I note that the pesky sub-editors have headed the article “Less Live 8″, which might be taken to imply that I disagree with the goals of the Live 8 campaign. It should be clear to any careful reader – which obviously does not include the editors at TCS – that I support the goals of Live 8 to increase aid resources and increase debt relief, as this will facilitate the supply side reforms that are necessary. ”

    “It should have been clear that my criticism was aimed at the Make Poverty History campaign, even though I did not mention them anywhere in my article. It was certainly not my intention to cast general doubt on the effectiveness of development assistance.”

    “I want to make clear that I believe that most African leaders are decent, intelligent and well-informed, but that they face policy choices which are almost unimaginably difficult, as they are severely limited by the fiscal, economic and political environment in which they operate. I understand that the last thing they need is to be lectured as if they are schoolchildren by armchair critics, especially ones who have never set foot in Africa. I intend to make it clear in my writings that there is overwhelming evidence that development assistance is highly effective in reducing poverty and I will support its expansion to enable economic development to be accelerated across the developing world.”

    That should do it. I look forward to seeing this in your name on TCS. …. don’t mention it at all, it was a pleasure.

  4. “I want to make clear that I believe that most African leaders are decent, intelligent and well-informed”

    Reeeeaaaally? No, seriously, shall we take a poll? Some African leaders, yes. Most? No.

  5. “I want to make clear that I believe that most African leaders are decent, intelligent and well-informed”

    Reeeeaaaally? No, seriously, shall we take a poll? Some African leaders, yes. Most? No.

  6. That’s my view, yes. I’ve been impressed time and time again. And dismayed by the circumstances in which these people have to work.

Leave a Reply

Your email address will not be published. Required fields are marked *