Links of Interest

How to Think About the World's Problems (by Bjorn Lomborg)

Getting Governance Right is Good for Economic Growth (by Dani Rodrik)

Douglass North's talk on The Natural State (HT: The Bayesian Hersey)

Answering the Critics: Why Large American Gains from Globalization are Plausible ( by Gary Clyde Hufbauer)

Rising Food Prices: Drivers and Implications for Development

Falling Short: Aid Effectiveness in Afghanistan

WB has huge confidence in Nepali people

Implications of fiscal disparities for federal Nepal

Seven Questions: The Child Laborer Who Became President

India lifts ban on cement export to Nepal

Three NYU Professors named intellectuals

CGD's The Growth Report 2008

The Commission on Growth & Development (CGD) has released The Growth Report: Strategies for Sustained Growth and Inclusive Development, arguing that developing countries can achieve fast, sustained, equitable growth if they engage with the global economy and have committed leaders.

Key findings:

--Fast, sustained growth is not a miracle – it is possible for developing countries, as long as their leaders are committed to achieving it and take advantage of the opportunities provided by the global economy.

--Developing countries also need to know the levels of incentives and public investments that are needed for private investment to take off in a manner that leads to the long term diversification of the economy and integration into the global economy.

--Spence argues: “The Growth Report also kills off once and for all the misguided notion that you can lift people out of poverty in the absence of growth. Growth can spare people en masse from poverty and drudgery. And with India needing to grow at a fast pace for another 13-15 years to catch up to where China is today, and China having another 600 million people in agriculture yet to move into more productive employment in urban areas, growth will lift many more people out of poverty in the coming decades.”

--Actions recommended by the Report to combat food price rises (once the current emergency situation is dealt with) include an end to export bans; more effective safety nets and redistribution mechanisms to protect people vulnerable from sudden shifts in prices; and a revitalization of infrastructure investment for agriculture. The Report also urges that policies that favor bio fuels over food be reviewed and, if necessary, reversed and that reserves and inventories be accumulated to relieve temporary shortages.

--The Report calls for establishing a mechanism to coordinate the policies of the growing number of influential countries and to safeguard the stability of the global financial system. Given the increasing economic importance of new global players, the document argues for a rebalancing of global responsibilities and representation.

--Just as the current credit crunch is affecting advanced economies, the Report also stresses the importance of a strong financial system in developing countries and argues for careful supervision of the banking sector to prevent banks expanding credit too far, and the removal of capital controls only in step with the financial market’s maturity.

--That growth is a crucial part of poverty reduction and the improvement of people’s lives. It is impossible for poor countries to lift large populations out of poverty without growth. Equality of opportunity and a focus on individuals and families, gender inequalities, and economic security, however, is critical to maintaining the support for growth oriented policies.

-- That growth is a long-term challenge that requires leadership, persistence, stamina, pragmatism, transparency and the support of the population.

-- That growth requires engagement with the global economy to import knowledge and technology, to access markets, and to generate a strong export sector – critical in the early stages of growth.

-- That growth must be inclusive. The Report highlights the importance of sharing the benefits of globalization, providing access to the underserved, and dealing with issues of gender inclusiveness. It notes the importance of infant and childhood nutrition to avoid long-term impairment in acquiring cognitive and non-cognitive skills, ensuring that they derive greater benefit from the education system and become more effective in the workplace.

-- That resources, especially labor, must be mobile. The Report also recommends a bridging of the divide between the formal and informal labor sectors by allowing export-oriented industries to recruit workers on easier terms than prevail in the formal sector but with the same essential worker protection in the areas of health and safety, working hours and child labor. It highlights the need to better manage the migration challenge and the results of changing demographics.

-- That growth requires high rates of investment, with the Report suggesting that overall public and private sector investment rates of 25 percent of GDP or above are needed.

-- That investment in education and health are particularly important. The Commission also calls for greater research into the measurement of students’ abilities in literacy and numeracy, and increased opportunities for women in the education system.

-- That money spent subsidizing energy consumption in developing countries is often misspent. Better to invest the resources in education and infrastructure. In addition subsidies bias the capital investment in long-lived assets away from energy efficiency and may negatively bias the structural evolution of the economy, the Report says.

Recommendations:

-- That industrialized countries finance the expansion of Africa’s tertiary education to make up for Africa’s brain drain. The report also recommends that industrialized economies implement promptly the time-bound trade preferences granted to manufactured exports from African countries to help them overcome the disadvantages of being late starters.

-- In small states, the Growth Report recommends greater regional economic integration, and a spreading of the burden of public services, through partial union, helping reduce the high per capita costs of effective government. Good governance is also an important foundation on which regional cooperation and multinational integration can build, the Report says.

-- Better governance in resource-rich countries, and more balance and transparency between the returns to the entities exploiting the resources and the governments in resource-rich countries.

-- And increased investment in higher education and innovation as economies transition from middle income to high income status.

Links of Interest

Re-uniting development economics (Paper here)

Dollar a day revisited

Is Austrian Economics Heterodox Economics?

The Economic Cost of Failing to Educate Girls

Economic Growth and Education

Education Quality and Economic Growth

Preserving the open economy at times of stress

Easterly's Reinventing Foreign Aid

I could not hold on reading the first chapter of William Easterly’s new book Reinventing Foreign Aid. As usual, he blasts Jeffrey Sachs, the MDG and similar projects, and gets irritated with the star-studded aid campaigns for their ignorance to a completely faulty aid bureaucracy. He also draws attention to lack of accountability, transparency, decentralization, and one-sided imposition of priorities on behalf of aid recipients by large aid donors like WB, IMF, PRSP programs, UNDP, OECD, G8, etc.

As in previous book, he explains the planners and searchers dichotomy in foreign aid and argues that the planning mentality of big aid agencies foreshadows the priorities of aid recipients, often leading to outcomes that are primary concerns of aid donors before releasing money. He also argues that arguments like aid works for economic development are nontestable and nonfalsifiable, leading to so much of inconclusive debate on the efficacy aid despite emerging evidences show that highest aid recipients are the ones that grew least.

He kind of cherry picks quotes from reports released by aid agencies like WB, IMF, DFID, and UN, among others and blasts them for contradictory statements and analysis. Easterly’s main arguments are like this: “Aid does not work. Either overhaul and restructure it or stop it. Let searchers find their own priorities and destinies. Enhance aid bureaucracy’s quality and efficacy based on the priorities laid out by the aid recipients.” He repeatedly (and rightly) blasts the aid agencies for being like planners (top-down approach), putting their priorities before the priorities of the aid recipients.

Everything sounds good and he more or less argues vociferously against planning mentality of the aid agencies. He also summarizes core of each chapters written by a wide range of authors. However, he explains more about those chapters that argue against the current aid structure and, more broadly, aid intervention. He explains less about chapters written by Banerjee and He and by Duflo and Kremer who argue that aid intervention can be made more effective by conducting randomized controlled trials (RCTs) of its efficacy.

Here are some of Easterly’s main points:

[…]“Nevertheless, the aid agencies often seem to have in mind the kind of engineering problem that a dam poses when designing Planning solutions to the problems of poverty. They seem to assume a Leontief production function between aid inputs and development outcomes that lends itself to detailed planning (and makes it possible to come up with precise estimates for costs of attaining plan targets): ‘‘The starting point is for donors and aid recipients to agree on a financial needs assessment that identifies the aid requirements for achieving the MDGs. Donors then need to provide predictable, multiyear funding to cover these requirements, and developing countries need to implement the reforms that will optimize returns to aid.”

[…]Because of the insistence on working through governments, aid funds get lost in patronage-swollen national health bureaucracies, not to mention international health bureaucracies. In countries where corruption is as endemic as any other disease, health officials often sell aid-financed drugs on the black market. Studies in Guinea, Cameroon, Uganda, and Tanzania estimated that 30 to 70 percent of government drugs disappeared before reaching any patients. In one low-income country, a crusading journalist accused the Ministry of Health of misappropriating $50 million in aid funds. The ministry issued an astonishing rebuttal: the journalist had irresponsibly implied the $50 million went AWOL in a single year, whereas they had actually misappropriated the $50 million over a three year period.

[…]In the domestic politics of democracies, the people who vote are the same ones who receive the services. In foreign aid, this feedback and accountability loop is broken: the rich people who give the money or vote for foreign aid are not the ones receiving aid services. The poor have no way of registering their satisfaction or dissatisfaction with aid services by how they spend or how they vote. The bottom line is that aid agencies have more of an incentive to please the rich than the poor.

[…]The comprehensive ambitions of the planners have misfired badly, crowding out more sensible and pragmatic approaches that are humble about their own limitations. The world’s poor will mostly determine their own fate by their own home-grown institutions and initiatives, as much historical and contemporary evidence suggests.

Here is Easterly about searchers and planners:

[…]The UN Millennium Project also suffers from the first problem: that planners do not really know the precise technology that translates inputs into outputs. The participants in the Millennium Project themselves know this obvious point—‘‘it is often difficult to precisely quantify the link between coverage of interventions and MDG outcomes’’—yet insist in the same sentence that somehow ‘‘national MDG planning involves mapping interventions to MDG outcomes.

I think there is something wrong with his extreme Hayekian views (see this as well) on “searchers” and “planners” because left to themselves, searchers would not even imagine to realize their own potential! Even if they do, it might take years to realize this (sadly, the poor people do not have the luxury of waiting for the right searchers for years!). Obviously, there is no doubt that the current aid structure is faulty but this does not mean that aid intervention does not work at all. Very selective aid intervention does work. For instance, Yunus (one of Easterly’s celebrated searchers) would not have been able to attend Vanderbilt University had he not received some form of financial aid and scholarship. Moreover, Yunus might not have been qualified to apply for higher education had he not attended primary and secondary school, funded by donors, in Bangladesh. Selective aid in education sector helps accelerate the emergency of searchers Easterly is talking about. Aid in education that is aimed at enhancing human capital surely works. What does not work is aid that is channeled through corrupt leaders, dictators, warlords, and those backed by special interest (especially business and corporate sector). Africa received this form of aid more than the workable form of aid. Selective intervention (not a wholesale one) in aid does work and it helps produce the searchers Easterly talks about.

Easterly also argues against “poverty traps” and doubts its very existence. He is going a bit far here because though there are doubts about countries embroiled in poverty traps, there should not be any doubt that individual households (a substantial number of them) in a poor, resource-stricken community could be in poverty traps arising from low education, lack of credit, poor healthcare, landlessness, and risk and vulnerability, among others.

Traps arising from different causes do exist but the question is whether it can be broken through aid and expert advice? Sometimes yes, sometimes no. Traps can be broken by selective intervention, a piecemeal intervention approach followed after diagnosing the causes of poverty and growth. Selective intervention has high feedback and accountability and is a piecemeal intervention approach based on recipient priorities and needs.

It can also be thought of as “little-P planning” that Easterly is talking about. Relying on searchers through repeated trial and error would be too expensive in terms of time and resources needed to create them. Through selective intervention, states can create an environment where Easterly’s searchers (“firms in private markets and democratically accountable politicians”) can emerge faster than it would take naturally (through trail-and-error experimentation). This is needed because private markets are always not efficient due to coordination failures and spillover effects, and democratically accountable politicians are hard to come by in the near future, at least in the politically messed up African continent. States can facilitate the rise of searchers by instituting reforms to create customized institutions that are consistent with history, culture, local capacity, resources, politics, socio-economic setting, and technology.

Easterly is, however, supportive of randomized trials to evaluate aid interventions but rues that this method is sidelined by aid agencies:

[…] Duflo and Kremer in chapter 3 discuss the methodology of randomized controlled trials (RCTs) to evaluate aid interventions. They argue, ‘‘There is scope for considerably expanding their use, although they must necessarily remain a small fraction of all evaluations.’’ The RCT is a welcome introduction of the scientific method into foreign aid and development, an area where wishful thinking, politically motivated conclusions, and pseudoscience have perhaps been more predominant than in other areas of economics. The RCTs are not a panacea, and they are not applicable to all areas of foreign aid and development, but they have already made a great contribution to the field of economic development.

Easterly’s suggestion: Easterly’s solution is to make the aid recipient masters and the aid agencies as quality service delivers:

[…] Having multiple searches for what works may sound like a lot to a planner, who thinks in terms of a top-down bureaucratic hierarchy. However, the great thing about searching is that it can be totally decentralized. A myriad of searchers are available in the field to look for what works for each piece of the puzzle. The aid system just has to be designed so that it rewards successful searches and scales them up to achieve widespread benefits for the poor.

[…] Another market-oriented step would be for the common pool [of aid money] to issue vouchers to poor individuals or communities, who could exchange them for development services at any aid agency, NGO, or domestic government agency. These service providers would in turn redeem the vouchers for cash out of the common pool. Aid agencies would be forced to compete to attract aid vouchers (and thus money) for their budgets.

Review of Sach's Common Wealth

Review Sachs will (not) like:

Sach’s essential thrust is how to eliminate poverty, indeed a noble goal, and to do so with our most “important responsibility [being] a commitment to know the truth as best we can, truth that is both technical and ethical.” One needs to add complete, for in discussing the global situation in relation to poverty, the distribution of wealth, the unequal relationship between the haves and have-nots, he covers much valid territory but no work on global economics can be fully valid, can fully argue about poverty and its causes, effects, and cures without including to a fairly large degree significant information on two parameters: militarization and corporate power.

[...]Sachs on occasion mentions these various organizations in passing but only the World Bank receives a spot in the index, with four mentions that are nothing more than passing references and have no influence on his arguments. The WTO, OECD, and IMF receive no index listing and only minimal passing mention in the text, an error of such huge proportion for the knowledgeable reader that it essentially destroys his arguments and perspectives however logical and rational they might seem at first.

To ignore the effects that the WTO and IMF have had in restructuring global economies by their imposed rules of engagement (while not necessarily ‘forced’ onto the countries involved, there is much in the way of coercive threats that can be intimated or stated to make ‘compliance’ much easier) with the result of large agricultural losses (consider Haiti and its loss of rice production, similarly in Mexico with its loss of corn production – with other factors involved to be sure) as the involved countries are forced to pay back huge debts at the expense of their own people. That includes the loss of community social services, education, health and welfare, job safety and other factors that Sachs argues for in his presentation.

[...]So this poverty and all the poor youth it creates leads to “state failure”. But now look at the main failed states that are presented: Afghanistan, Iraq, Somalia, Pakistan…oh my gosh…all the countries that have been invaded, attacked, occupied, and otherwise abused by the United States and earlier imperial powers! For ending the poverty trap he then has the audacity to use Afghanistan as the example, as it “exemplifies the end of the line for desperately poor countries when poverty, overpopulation, and environmental degradation are allowed unchecked for decades.”

For a supposedly intelligent man, this is an incredibly stupid statement!!!

More here.

Red flag on red!

I can't figure out what the Maoists' economic policy would be after they take over power in Nepal. This one is definitely not business friendly- they murdered a local businessman.

Enraged by the abduction, torture and murder of businessman Ram Hari Shrestha, locals, relatives of the victim, members of the business community and sister organizations of various political parties on Saturday demanded formation of a high level probe into Shrestha's death.

They also demanded stringent action against the perpetrators of the heinous crime and asked the CPN (Maoist) leadership to immediately halt their "excesses".

Expressing solidarity against the brutal murder of the capital-based businessman, the sister organizations have also demanded guarantee of people's security, a public
apology from PLA supremo Pushpa Kamal Dahal and a pledge from the Maoists to
make public the murdered man's body.

After abducting Shrestha and inflicting extreme torture on him during his captivity of over two weeks, PLA commander at Shaktikhor Kali Bahadur Magar a.k.a. Bibidh admitted that his men had killed the man.

More here

Reinventing Foreign Aid by Easterly

New book "Reinventing Foreign Aid" by Easterly. I am eagerly waiting to get one copy for myself on July.

The urgency of reducing poverty in the developing world has been the subject of a public campaign by such unlikely policy experts as George Clooney, Alicia Keyes, Elton John, Angelina Jolie, and Bono. And yet accompanying the call for more foreign aid is an almost universal discontent with the effectiveness of the existing aid system. In Reinventing Foreign Aid, development expert William Easterly has gathered top scholars in the field to discuss how to improve foreign aid. These authors, Easterly points out, are not claiming that their ideas will (to invoke a current slogan) Make Poverty History. Rather, they take on specific problems and propose some hard-headed solutions.

Easterly himself, in an expansive and impassioned introductory chapter, makes a case for the "searchers"--who explore solutions by trial and error and learn from feedback--over the "planners"--who throw an endless supply of resources at a big goal--as the most likely to reduce poverty. Other writers look at scientific evaluation of aid projects (including randomized trials) and describe projects found to be cost-effective, including vaccine delivery and HIV education; consider how to deal with the government of the recipient state (work through it or bypass a possibly dysfunctional government?); examine the roles of the International Monetary Fund (a de facto aid provider) and the World Bank; and analyze some new and innovative proposals for distributing aid.

Contributors:
Abhijit Banerjee, Nancy Birdsall, Craig Burnside, Esther Duflo, Domenico Fanizza, William Easterly, Ruimin He, Kurt Hoffman, Stephen Knack, Michael Kremer, Mari Kuraishi, Ruth Levine, Bertin Martens, John McMillan, Edward Miguel, Jonathan Morduch, Todd Moss, Gunilla Pettersson, Lant Pritchett, Steven Radelet, Aminur Rahman, Ritva Reinikka, Jakob Svensson, Nicolas van de Walle, James Vreeland, Dennis Whittle, Michael Woolcock.