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.

Partial respite for the Nepali garment sector

The Nepali garment, which has been on decline especially after the end of MFA in January 2005, has finally got a market, India. More here.Yes, yes, India borders Nepal but the latter has not been able to realize the huge market potential there. Now, as abroad market is being taken over by competitors from Bangladesh, Sri Lanka, Cambodia, and Vietnam, Nepal has focused on catering to the nearby Indian market. This is a classic case of comparative advantage in labor (labor cost in Nepal is 30% cheaper than in India). India is one of the countries who have been eating up Nepali garment market in the US and the EU. Despite having cheaper labor, Nepali garment market is lagging behind because of high transportation cost. Nepal is landlocked and freights have to be transported via road to the nearest India port. In terms of markets abroad, India has a comparative advantage.

However, in terms of satisfying Indian domestic market, Nepal has a comparative advantage because the transportation cost (plus taxes) is lower if Nepali producers focus exclusively in the Indian market. Making customized products that are consistent with the purchasing power of the emerging Indian middle class and lower middle class would help Nepali garment sector to once again resurrect and contribute foreign exchange as it had done before 2005.

At a time when Nepal's worldwide garment exports are experiencing a massive downturn, India has emerged as one of its largest buyers with an import volume almost matching that of the USA, the number one customer.

Due to comparative advantages in terms of production costs and geographical proximity besides a vast market, the export of Nepali garments to India has shot up in recent months despite a 30 percent fall in overall exports during the first four month of the current fiscal year.

Prashanta Pokhrel, president of the Garment Association of Nepal (GAN), said exports to the southern neighbor had surged with major Indian retail chains outsourcing and placing orders for more Nepal-made apparels.

“We estimate that garment exports to India in the last four months of 2008 are in the same quantity as our shipments to the US which imported clothes worth around US$ around US$ 7 million during the period,” Pokhrel told the Post.

“India has become a lifeline for Nepal's garment industry which would have collapsed hadn't it emerged as an alternative to the US market,” he added.

Links of Interest

Poverty tops list of severe effect on child's health

In place of drums and samosas

Scrabulous, Scrabble, and Economic Development in South Asia

Is It Africa's Turn? Progress in the world's poorest region

States must act locally in a globalised world

Does the food price crisis enhance the case for self-sufficiency?