Lant Pritchett and the hot Indian shower

A great story from Lant Pritchett, writing in the comments section of David Roodman’s blog, about how the development industry sets goals and targets. The way we articulate our goals affects how we set about achieving them.

I was living in India and discussing arrangements for household water supply with some development colleagues of mine. After about half an hour of pretty fruitless discussion I said, “Let’s step back. Tell me your long-run vision of the household water sector in India.”

They said “Our vision is that India meets the target that every household lives within half a kilometer of an improved water source capable of providing 40 liters of safe per person per day.”

I said, “I see the problem. My vision of success is that every Indian can take a hot shower inside their own home.”  The difference is that one can imagine meeting the first goal “programmatically” or with a series of “interventions” while the latter clearly requires endogenously functional systems.

No one I know wants to have to go to a group meeting to take a hot shower. They want to turn the tap and it works.

Their whole discussion, on whether microfinance is an example of “aid building a thriving, disruptive industry that enriches the institutional fabric of nations” or “an unfortunate work-around for the failures of mainstream financial systems to serve the poor,” is worth reading.

Reasons to doubt new health aid study on fungibility

This post is by David Roodman, a research fellow at the Center for Global Development (CGD) in Washington, DC. A couple of weeks ago, researchers at the Institute for Health Metrics and Evaluation triggered a Richter-7 media quake with the release of a new study in the Lancet.

Here’s how the Washington Post cast the findings:

After getting millions of dollars to fight AIDS, some African countries responded by slashing their health budgets.

Laura Freschi at Aid Watch blogged it too.

I am not a global health policy wonk, and I don’t play one on this blog, but it may well be the case that I wrote the program that produced the headline numbers (for every dollar donors gave to governments to spend on health, governments cut their own spending by $0.43–1.17).

I find the results generally plausible. I also don’t particularly believe them. Let me explain.

The results are plausible because it is easy to imagine that health aid is partly fungible: governments can take advantage of outside finance for health by shifting their own budget to guns, gyms, and schools. I would. Wouldn’t you? Well, maybe except for the guns part.

The results are dubious because it is an extremely hairy business to infer causation from correlations in cross-country data. That’s why Bill once sighed about the:

1 millionth attempt to resolve the relationship in a cross-country growth regression literature that is now largely discredited in academia.

The variable being explained here is not growth but recipient governments’ aid spending, which is admittedly less mysterious. But skepticism is still warranted. Consider:

• The model may be wrong. The study assumes that aid received in a year only directly affects government spending that same year, even though it could take longer for the money to pipeline through—especially if recipients bank the aid to smooth its notorious volatility (hat tip to Mead Over; also see Ooms et al. Lancet commentary).
• The quantities of interest are health-aid-to-governments and government-health-spending-from-own-resources, which is calculated as total government-health-spending minus health-aid-to-governments (yes, the variable I just mentioned above). So if health-aid-to-governments were systematically overestimated for some countries and years, government-health-spending-from-own-resources would automatically be underestimated.For example, suppose the study is wrong, that there is no relationship between health aid and governments’ health spending from their own resources. Suppose too that health aid to some countries, as measured, includes payments to expensive western consultants. That money would never reach the receiving government, resulting in an overestimate of actual aid receipts and an underestimate of how much governments are contributing to their own health budgets. The analysis would then spuriously show higher health aid causing governments to slash their own health spending. In another Lancet commentary, Sridhar and Woods list four possible sources of mismeasurement of this sort.

Both these problems must be present to some extent, creating mirages of fungibility.

Understanding at least the latter problem of causality, the authors feed their data into a black box called “System GMM.” (They call it “ABBB,” using the initials of the people who invented it.) I am in an intimate, long-term relationship with System GMM, having implemented it in a popular computer program. I have worked to demystify System GMM and documented how, just by accepting standard default choices in running the program, you can easily fail to prove causality while appearing to succeed. I can’t explain why without getting technical, which is not to say that only I know the problem – it is very well known among economists with some minimum econometric competence – but NOT to everyone who actually uses the techniques. Suffice it to say that I sometimes feel like this black box is a small time bomb that I have left ticking on the landscape of applied statistical work.

Responsible use of this black box involves telling your readers how you set all the switches and dials on it, as well as running certain statistical tests of validity. The Lancet writers have not done these things (yet). Nor have they shared their full data set. So it is impossible to judge how well their claims about cause and effect are rooted in the data. If replicability is a sine qua non of science, then this study is not yet science.

Dropping Haiti’s debt = sending old shoes

The following post is by David Roodman, a research fellow at the Center for Global Development (CGD) in Washington, DC. Last week my colleague Michael Clemens blogged in this space about the “The best way nobody’s talking about to help Haitians.” So as a complement, here’s what I think is the worst way that everybody’s talking about to help Haitians: cancelling Haiti’s debt.

I am not suggesting that Haiti’s foreign creditors should stick to their guns in order to teach the country a lesson about the sanctity of international debt contracts. Canceling or reimbursing Haiti’s debt payments over the next, say, five years, just as was done after the Asian tsunami, would make eminent sense. That would constitute debt relief but would not require debt cancellation.

Why not just cancel the debt outright, as the One Campaign, the Jubilee Debt Campaign, and Oxfam have demanded?

• The benefit would be low. Most outstanding loans to Haiti are repayable over 25–40 years and charge 2%/year or less in interest. So while the face value of Haiti’s debt is impressive—some $1.25 billion, not counting the $114 million in new IMF credits—the debt service over the next few years will be tiny. The IMF projects (table 7) the cost at $18 million for fiscal year 2009/10, rising to $34 million in 2011/12. Even those figures are high since the U.S. government is paying the $9 million/year interest on Haiti’s loans from the Inter-American Development Bank. Perhaps half the rest is owed to Taiwan and Venezuela, whose susceptibility to press releases from western NGOs is uncertain. So as little as $25 million in debt service may be in play over the next 3 years.
• Lobbying for debt cancellation crowds out other more important issues. Activist groups and politicians have limited time, staff, and political capital. Instead of fixating on dropping the debt, why don’t activists and politicians campaign to hold public and private donors accountable for avoiding the mistakes of past disaster relief efforts? Why don’t they take on textile interests in order to open our borders to “Made in Haiti”? Why not, as Michael argued, push for a Golden Door visa that would allow at least a few tens of thousands more Haitians into rich countries to work?

Reforming trade and migration policies, even getting donors to respond more effectively to disasters, requires confronting entrenched interests. But activists are at their best when they take on the tough fights. We owe it to Haitians to strive for what is best for them, not easiest for us.

A couple of weeks ago here on Aid Watch, Alanna Shaikh blogged under the title, Nobody wants your old shoes: How not to help in Haiti. Beyond the specific advice, she was voicing a big idea close to Aid Watch’s heart: so many aid efforts go awry because the giver decides what the receiver needs.

I fear that calls to cancel Haiti’s debt are the old shoes of political activism. Debt relief will hardly help Haiti recover from the quake. And in a crisis, if you’re not helping, you’re in the way. Let us do the equivalent in the policy realm of sending cash, by advocating reforms that will do far more to alleviate the suffering.

Arvind Subramanian replies to his (and our) critics

Today, David Roodman at the Center for Global Development responded to our guest blogger Arvind Subramanian's post (and forthcoming paper) on the effects of aid on manufacturing exports. Here, Arvind replies:

I cannot think of a more thoughtful follower of, and contributor to, the aid effectiveness literature than David Roodman (Aart Kraay is another). So, I am really very pleased with his bottom line assessment of my paper that he trusts this paper “more than most” in the aid growth literature.

That said, there is one point about his blog that merits a response. David gently chides Bill Easterly for his tweet where Bill interprets and presents our paper as showing that aid is bad for manufacturing exports. David’s point is that our paper strictly speaking only establishes a relative effect—that exportable sectors grow slower than non-exportable sectors —and not a total or overall effect: that aid leads to slower growth in exports as a whole.

But two points are worth noting. In a longer version of the paper, that I will post on my web-page, we do find evidence that aid leads to slower growth of the manufacturing sector as a whole. For methodological reasons, this result is less strong than our core result about relative effects. But, we certainly don’t get the empirical result that aid raises growth in all sectors that David claims (rightly) is theoretically possible.

Perhaps more important, Bill’s tweet does capture the spirit of our paper. Whether and how manufacturing exports can be an engine of overall growth is still debated. But the historical experience is strongly suggestive that if export sectors grow slowly or grow slower than other sectors, overall growth is affected. So, our paper could be interpreted not as a lament about the effects of aid on export sectors but as a celebration of its effects on non-export sectors. But, in my view and also in the historical record, between export and non-export sectors as an engine of growth, there is no contest.