UN Revealed to be Gigantic 66-year-old Hoax

“I can’t believe it lasted this long,” said “US Ambassador to the UN” Susan Rice, laughing, “Who would really believe that there is this magical agency that would, like, be responsible for solving all the problems in the whole world?  That nobody else can solve? Or even wants to?” “I really thought it would come out when that prankster Ban Ki Moon put Libya on the "reformed" Human Rights Council in 2010,” said Rice, “after there was a backlash against Libya CHAIRING the old Human Rights Commission. Who would fall for that?”

Ban, who in real life is a much-loved writer for 30 Rock, also bet “UNCTAD Secretary-General” Supachai Panitchpakdi three shots of Glenlivet that he would never get more than 15 crisscrossing arrows into one UN diagram. He lost the bet.

A team of investigative reporters finally broke the story after receiving a tip from a group of concerned Azerbaijani citizens who recognized their “Ambassador” as a child soap opera star from the 1970s. As details began to emerge, Ban and Supachai locked themselves in the General Assembly Complex, which was discovered to be 30 floors of luxury condos, restaurants, and health spas.

Reporters found in the rest of the UN building the remains of old mainframe computers.  These computers, manned by a few technicians, were created to run programs like the UN Automatic Document Software, which produced for many decades 300-page documents with language like:

As part of the efforts to strengthen the United Nations Economic and Social Council, Member States, …mandated the Council to convene a high level biennial Development Cooperation Forum to review trends in international development cooperation, …. promote greater coherence among the development activities of different development partners; ….as a key venue for global dialogue and policy review of the effectiveness and coherence of international development cooperation. … Forum also reaffirmed the demand for an inclusive and universally recognized space for discussions on international development cooperation…

UN Computers also ran the revolutionary Promise ReMaker Software, which every 15 years reiterates and reaffirms in stirring language the International Goals made 15 years earlier. Other programs issued new batches of imaginary data every year on per capita income, employment, gender, income distribution, and nutrition.

Josette Sheeran, the “World Food Program Executive Director,” who is really a heavily tattooed computer hacker from Boulder, Colorado, said “It’s amazing all these programs can now fit onto a single MacBook.” She sighed, “we didn’t want to move the huge mainframes out of the building for fear we would get caught.”

“Now the hoax is over,” said Rice sadly, “it’s a bit of a shame.” Sir Mark Lyall Grant KCMG, Her Britannic Majesty's Permanent Representative from the United Kingdom of Great Britain and Northern Ireland to the United Nations, agreed: “Now where are we going to send those problems we are too cowardly to address ourselves?”

On Sustainable Sustainability: A UN Prose Poem

UPDATE 2: Another proposal received from Unconfirmed Sources: Politicians supporting UN funding will be required to incorporate all of the text below into one of their own speeches to their own voters. UPDATE: Just got a new proposal from the Center for Unacceptable Common Sense: Anyone funding UN should internalize the effect of their funding on creation of UN prose. First proposed tax on you: you are required to read all 1000+ words below and recite once for every $100K of funding.

Experimenting with a new literary form, cutting and pasting phrases from a UN report into a work of prose poetry (from the UN 2008 report Achieving Sustainable Development and Promoting Development Cooperation):

productive and interactive discussions during the high-level policy dialogue with the international financial and trade institutions on sustainable development in the context of climate change, development cooperation and the threats to the global economy. Participants emphasized the need for greater coordination among the institutions.

A key message of the Forum was the need to build a broader consensus around the aid effectiveness agenda.

These events have served to deepen the discussions and promote consensus building in partnership with key stakeholders on issues in the Council’s agenda.

a Ministerial Declaration, which underscored the need for urgent, collective and collaborative action by all

members of the international community in several areas of global concern

Moreover, new challenges require urgent attention and collective action.

to facilitate inclusive policy dialogue and policy review on key development cooperation issues

to contribute to the latest efforts for promoting collective solutions, including strengthening governance, creating markets for sustainable development, strengthening global cooperation,

.. underlined the need to generate political will to put prudent policies into action

new challenges, many of which require our urgent attention and collective action.

At the same time, challenges also offer opportunities. The need to engage all key actors in this process is widely recognized. We must persist in pursuing truly concerted action

All countries certainly need policies and institutions that are flexible and tailored to their changing domestic and external circumstances and their individual challenges.

framework is not sufficiently responsive to development issues that cut

across multiple sectors such as human rights, gender equality and environmental sustainability. The Development Cooperation Forum should give due attention to these cross-cutting imperatives.

will enable the Council to move forward with firm commitment and strong political will to implement.

need to develop coherent and integrated approaches to development, which place the issue of sustainability at the center of development strategies.

have brought renewed dynamism to the implementation of development goals, by promoting greater

interaction among the different constituencies. The inclusion of civil society organizations, parliamentarians as well as local government and private sector representatives is essential in sustaining the engagement and commitment of all stakeholders in bridging the implementation gap.

..has become much more than just a month-long meeting in New York. The substantive session is a culmination of the various activities

..can benefit from the Council’s thorough work based on extensive regional consultations, global consultative forums and above all its broad-based engagement, which provides all perspectives to multilateral deliberations. I believe that Council’s deliberations and debates during this session would

greatly enrich discussions and outcomes of the important development related

conferences and events. The Council has shown that it is increasingly becoming better equipped to assess

progress on the ground and galvanize action at national, regional and international levels.

New global, regional and local approaches are needed given the unprecedented confluence of crises that at times require conflicting solutions.

Given the complex situation, he enumerated several policy options for governments to consider.

He stressed that policy makers need to respond flexibly,. No one country can overcome all the complex and

inter-related challenges on its own. Therefore, {he} called for international cooperation to help find global solutions to interrelated global problems. International institutions should not operate in isolation.

a unique opportunity to re-energize the mutual accountability framework

He appealed to governments and international financial institutions to take a more proactive approach to rapidly evolve coherent policy frameworks and incentives

Yet, in an interdependent world, many of the threats and challenges cannot be met by governments acting on their own. They require collective international action. Multilateral solutions, based on full participation and open dialogue, remain the best hope for providing a secure economic future for all.

We need a clear view of what is to be done at the global level, what at the regional level, and what at the national level. At the same time, short-term crises require their own strategies. we really do need a long-term strategy, aside from the immediateemergency needs

the international community agreed on a mutual accountability framework for development cooperation. Pursuant to that framework, developing countries have taken important steps to strengthen governance and improve the quality of their economic policies and institutions

..actively engaged in supporting the agenda outlined, working closely with countries and in partnership with bilateral agencies and multilateral institutions.

the World Bank looks forward to still closer partnership with the Economic and Social Council, to make the alliance between Council’s political message and the Bank’s comprehensive development focus even more effective and fruitful.

As part of the efforts to strengthen the United Nations Economic and Social Council, Member States, …mandated the Council to convene a high level biennial Development Cooperation Forum to review trends in international development cooperation, including strategies, policies and financing; promote greater coherence among the development activities of different development partners; and strengthen the normative and operational link in the work of the United Nations.

as a key venue for global dialogue and policy review of the effectiveness and coherence of international

development cooperation. … Forum also reaffirmed the demand for an inclusive and universally recognized space for discussions on international development cooperation. By giving voice to a wide range of stakeholders, including civil society, parliaments, local governments and the private sector, the Forum gave promise of becoming an effective global platform for representative, participatory and multistakeholder dialogue on major development cooperation issues.

Stakeholders are encouraged to continue to engage in the upcoming consultations and to interact with the

Council and the United Nations Department of Economic and Social Affairs to ensure that all voices are heard in the preparations for the Forum. The Department will also continue to provide impartial, professional and responsive policy analysis and review of gaps and obstacles to effective and coherent international development cooperation.

And in other news, the UK announced it was eliminating funding to four UN aid agencies.

Human Development Index debate…you still want more?

I suspect that we long ago exhausted the patience of our readers with our multiple rounds of debate on the Human Development Report's new methodology for its Human Development Index. At the same time, I feel an obligation to let the other side of the debate have their say as much as they want. So here is UNDP's new response to Martin Ravallion's response to UNDP's previous response to our original blog criticizing the new Human Development Index, as well, crazy.

Development is Uneven, Get Over It

UPDATE: out of 188 recorded songs on all Beatles albums, how many are now hits on iTunes? See end of post. This a 20 minute extemporaneous talk at UNICEF headquarters in New York on the topic of "Inclusive Growth". After the talk, there is a question, comment, and response session with the audience.  The full video is an hour, if you are really a masochist. (Try this link if the video player above doesn't work.)

To summarize the talk: success is intrinsically uneven, so development and growth is intrinsically uneven, not "inclusive". (See the earlier post about the fractal stubborness of uneven geographic wealth.) In this talk, I also mention how remarkably uneven success shows up in just about every field of endeavor. One way this shows up is in a "power law": there is such a strong negative relationship between the frequency of success and the scale of success that we have to use a logarithmic scale (i.e. a scale where every unit increase means multiplying by 10)  for both to be able to fit the extremes onto the graph, like the one below:

There is no evidence that large-scale redistribution programs can succeed without killing off growth, but targeting things like health and education to the poor has worked and could work even more. Lastly, the best thing of all you can do for "inclusive growth" is asserting the individual human rights of all, including women, gays, and religious, racial, and ethnic minorities. For more detail to fill out these ideas, please watch the video.

UPDATE: Answer to how many Beatles  hits out of 188 recorded songs on their 14 albums are hits today: 15. Even the most successful band in rock history could only produce a lasting hit about 8% of the time (please draw your own profound insights into the intrinsic unevenness of success and non-inclusive growth).

(Sorry about my really excessive Beatle-mania, it's a Baby Boomer thing, you wouldn't understand.)

PS highly imperfect methodology for measuring hits today: the popularity metre on iTunes gets maxed out for hits, all others (most showing zero popularity) are non-hits.

The accidental NGO and USAID transparency test

The following post was written by Till Bruckner, PhD candidate at the University of Bristol and former Transparency International Georgia aid monitoring coordinator.  An op-ed from Bill in Monday's Wall Street Journal mentioned Till's struggles with USAID; here Till provides the details. The aid industry routinely pushes institutions in developing countries to become more transparent and accountable. But a slow and almost comically incomplete donor response to a request to see some specific project budgets sheds light on exactly how willing donors are to apply such “best practices” to themselves.

As I described in a previous Aid Watch blog post, I filed a Freedom of Information request with USAID after ten international NGOs working in the Republic of Georgia refused to publish their project budgets. After a painful, 14-month struggle, including failing to respond at all to my first three communications, USAID finally released a set of documents covering project budgets of 19 UN bodies, NGOs and private contractors.

The documents are disappointingly full of blacked-out non-information. The level of disclosure varies drastically from one document to the next. Some budgets are provided in full, while others appear as blacked-out row upon row. In three cases, USAID even withheld the identity of the contractor itself. USAID explained this inconsistency saying that it was legally required to contact each grantee to give it “the opportunity to address how the disclosure of their information could reasonably be expected to cause substantial competitive harm.”

I wondered why USAID is legally bound to follow its grantees' wishes in deciding which information to withhold. Can the grantees of a US federal agency really compel that agency to keep the total amount disbursed, or even their very identities, secret? Why doesn’t USAID specify full disclosure as a grant condition? I have filed an appeal with USAID to address these questions, and will keep the readers of this blog updated.

Since according to USAID every piece of blacked-out information was withheld on request of the grantee, the budgets provide a fascinating glimpse into aid agencies' willingness to open their books. If USAID blackouts do NOT correspond to NGO requests, I would be happy to correct the record.

Perhaps surprisingly, the United Nations showed the highest consistent commitment to transparency. The budgets of the two UN agencies funded by USAID are both reproduced in full.

UMCOR, Mercy Corps, and AIHA emerge as the most transparent NGOs. These charities apparently felt that they had nothing to hide, and did not request USAID to black out any of the information contained in their budgets.

In contrast, Save the Children apparently asked USAID to withhold all information related to salaries. As even the aggregate subtotals for international and national staff have been blacked out, concerns about the privacy of individual staff members cannot have been the sole concern driving the organization's response. Still, the fact that all non-salary related budget lines remain visible put Save the Children in the middle ground in terms of NGO transparency.

CARE's response is harder to interpret as USAID inexplicably sent only an aggregated “summary budget” that leaves little to conceal. What information exists shows that CARE did not object to the release of unit prices for supplementary food items, or of aggregated staff and operational support costs. In contrast, CARE appears to regard its “indirect cost rate” and “cost share” as confidential. To hide this information, USAID also had to black out the budget's bottom line, thus leaving unclear how many taxpayer dollars were handed over in total.

The least transparent NGOs in this test are CNFA, World Vision, and Counterpart International. They apparently requested that USAID black out all information in their budgets except for the grand total. Apparently, these NGOs consider budget items such as “office furniture” (CNFA), “visibility items (t-shirts, caps, publications)” (World Vision) and “forklift expenses” (Counterpart) as confidential information whose release could cause them substantial competitive harm.

What does this transparency test tell us? First, USAID's mechanism for responding to Freedom of Information requests desperately needs an overhaul. It took USAID 14 months to respond to a simple information request. Ironically, in terms of FOIA responsiveness, USAID is less transparent than public institutions in the Republic of Georgia, as recently assessed by a local watchdog organization. And we are still waiting to hear why USAID allows its own contractors to operate in secrecy whenever they wish. All of this places USAID in an awkward position as it recommends greater transparency and accountability to Georgia.

Second, NGOs have publicly committed themselves to transparency and accountability, but their actions show that their interpretations of what this entails in practice differ widely. For example, World Vision is a full member of the Humanitarian Accountability Partnership, but still asked USAID to hide all of its budget information apart from the bottom line. The Georgian country office of Mercy Corps had earlier refused to release its project budgets, but its headquarters apparently has no such reservations. Save the Children is willing to release indirect cost rates but refuses to divulge even aggregate salary information, while CARE appears more relaxed regarding human resource expenses even as it fiercely guards information on its indirect costs rates. Both USAID and the NGOs have too often violated the elementary principles of transparency.

Are many dimensions better than one?

Over at From Poverty to Power, Duncan Greene hosted a fiery debate about how best to measure poverty, sparked by the release of the UN’s new Multidimensional Poverty Index. The new index will complement a simpler method used in the UN Human Development Reports which relies on uniformly-weighted variables measuring life expectancy, education and income. The new method, created by researchers at the University of Oxford, combines ten different variables (including malnutrition, years of schooling, access to electricity and toilets, type of cooking fuel used, and others) and assigns them different weights.

The Oxford researchers say this is the first index covering most of the developing world to be created using micro datasets (ie household surveys), and that it is useful because it “captures a set of direct deprivations that batter a person at the same time.”

The MPI also captures distinct and broader aspects of poverty. For example, in Ethiopia 90 per cent of people are ‘MPI poor’ compared to the 39 per cent who are classified as living in ‘extreme poverty’ under income terms alone. Conversely, 89 per cent of Tanzanians are extreme income-poor, compared to 65 per cent who are MPI poor.

On Duncan’s blog, Martin Ravallion of the World Bank asks why we should add up different measures of poverty into a single index rather than getting the best data we can on individual measures, especially when weights assigned to those measures are likely to be arbitrary and controversial. (Gabriel Demombynes at the Africa Can…End Poverty blog also has a good summary of the discussion).

What is the point of creating ever more complex measures of poverty? For one, they draw attention to the importance of facets of poverty besides low income, like lack of access to education or clean water. But coming up with better measures of who is poor and how they are poor really matters if it helps allocate resources more effectively to those who need them most. It might be informative to understand why (for example) many more Ethiopians are poor under the new index than using the conventional, under-$1.25-a-day measure. But it’s hard to imagine how to find the answer without unraveling the many strands that make up the multidimensional index.

This blog frequently asks whether we should trust the figures we purport to know (for example: the malaria data cited over and over by the Gates Foundation; post-economic crisis poverty forecasts from Ravallion and colleagues; new maternal mortality figures reported in the Lancet). Aggregating different poverty measures together could also mask weaknesses in the data. Better then to measure and meet each type of deprivation separately, as best we can.

CORRECTION: In this year's Human Development Report, the new index will be used as a complement to the existing Human Development Index, not as a replacement, as paragraph two originally stated.

NYT on HIV/AIDS crisis: “You cannot mop the floor when the tap is still running on it”

UPDATE 4:10pm 5/11: Bill responds to Gregg Gonsalves' comment on this post, at the END of the post. The New York Times ran not one but two articles (edit: make that four) on the global fight against HIV/AIDS last Sunday. As these pieces tragically recount, the international community’s hard won successes against HIV/AIDS are in danger. There is not enough funding to meet the demand for treatment among sick patients in Uganda, and expiring grants, frozen funds, and drug shortages have already or are expected soon to spread to Nigeria, Swaziland, Botswana, Tanzania and Kenya.

The last decade has been what some doctors call a “golden window” for treatment. Drugs that once cost $12,000 a year fell to less than $100, and the world was willing to pay.

In Uganda, where fewer than 10,000 were on drugs a decade ago, nearly 200,000 now are, largely as a result of American generosity. But the golden window is closing.

The reasons given for current and projected shortages include the global recession; a “growing sense” among donors that more lives can be saved more cost-effectively fighting other diseases like malaria or pneumonia; and the disappointing failure of the scientific community to find a cure or vaccine.

The most devastating breakdown of all comes down to failure to prevent enough new infections and a simple, brutal equation:

For every 100 people put on treatment, 250 are newly infected, according to the United Nations’ AIDS-fighting agency, Unaids. … “You cannot mop the floor when the tap is still running on it,” said Dr. David Kihumuro Apuuli, director-general of the Uganda AIDS Commission.

UPDATE 4:10pm 4/11 from Bill: I am responding to Gregg Gonsalves’ comment below

Dear Gregg,

First, on the complementarity between treatment and prevention, let’s clear up some things. There is some complementarity, conceivably a lot, but it’s definitely not perfect. Treatment is not necessary and sufficient to do prevention. Prevention will remain a separate goal that needs at least SOME direct attention even if there is a lot of complementarity.

Second, I think to move forward we all have to move out of our defensive positions.

You see my plea for attention to prevention as an attack on treatment programs. There is some justification for this, as I and others have argued, and still would argue, that treatment was used as an excuse by aid and political actors in both the West and Africa to ignore prevention. This is because prevention is both politically and technically more difficult than treatment. But suppose you disagree with this argument – that’s fine. Suppose we all even gave up that argument and said let treatment programs alone. Suppose that none of us blame treatment at all for the inattention to prevention.

Could you then discuss prevention without spending most of your effort defending treatment? Prevention is now not working, as you acknowledge yourself. You are right that there are no obvious new solutions now, but some solution must be found sooner or later – bottom up, top down, or sideways – because you acknowledge that prevention has to work to end the AIDS tragedy. Could everyone involved in AIDS therefore agree there needs to be a new focused conversation and effort on prevention?

Regards, Bill

Is “Delivering as One” failing to deliver? The case for a market-based approach to UN reform

The following post is co-written by Sandra Sequeira, Professor of Development Economics at the London School of Economics and visiting scholar at DRI, and Christian Schornich, who works for the United Nations. The proportion of aid channeled through the UN system shrank from ten percent to five percent over the last eight years. And yet the UN’s massive bureaucratic machinery is not being downsized accordingly. In fact, a complicated web of programs and agencies with a whopping 7,000 overlapping mandates—sometimes even working at cross-purposes— have in recent decades defied numerous bouts of reform.

Three years ago, the UN launched a new initiative entitled “Delivering as One,” meaning that in each country there would be one leader coordinating all agencies in the field, one budgetary framework, and one operational support system. The goal was to increase efficiency, cut waste and pass on administrative savings to programs.  Eight countries from Mozambique to Cape Verde volunteered to pioneer this reform. While cutting the fat out of the UN system is a commendable goal, a deeper issue failed to make it to the discussion table: should reform only represent a centripetal force towards becoming one, or a centrifugal force that propels multiple agencies to compete in the market for aid and justify their relevance?

Since the beginning of “Delivering as One,” no departments have been merged and not a single program has been cut. Three years into the process, administrative savings are yet to be calculated because there is no budgetary framework that clearly accounts for the overhead costs of the different agencies and programs.

There is a real danger that the search for “Oneness” has already become just another episode in a series of floundering reforms, where “harmonization” and “integration” really mean covering up inefficiencies and keeping underperforming agencies and programs afloat. But here’s an alternative: the UN could seize the opportunity to rethink its mandate based on its comparative advantage in the current market for aid, and stick to it.

What would happen if the UN stopped thinking of itself as a world government in the business of only providing public goods, where cost-effectiveness is not necessarily the bottom line, and started thinking of itself as an organization actively competing with other agencies in the market for aid? The landscape of aid agencies has changed dramatically since 1945—the UN is now forced to compete against McKinsey when providing technical support to Latin American governments, with the Gates Foundation when fighting HIV/AIDS in Africa, and with the US military when building schools in the foothills of Afghanistan.

The aid market is segmented by fields, and competition varies significantly across them. There are "natural monopolies" which require agencies like the UNHCR to secure the rights and well-being of refugees across political borders, UNRWA, the International Atomic Energy Agency, the International Court of Justice or the WTO. In these fields, a UN monopoly is justified by the high political and fixed costs of setting up an inter-governmental cooperation mechanism, by decreasing marginal costs of providing the service, and by positive network effects.

Other agencies like the United Nations Industrial Development Organization (UNIDO) and the United Nations Development Program (UNDP) operate in highly competitive markets. In more extreme cases, the UN even competes against itself via the International Fund for Agricultural Development (IFAD), the Food and Agriculture Organization (FAO) and the World Food Program (WFP); the United Nations Development Fund for Women (UNIFEM), the Joint United Nations Program on AIDS (UNAIDS), and the United Nations Population Fund (UNFPA); the United Nations Conference on Trade and Development (UNCTAD) and the International Trade Center (ITC), among others.

The UN's search for comparative advantage could be compared to a government deciding which services to provide directly and which services to privatize. Areas in which the benefits of competition can be high through the creation of incentives to deliver high-quality services at the lowest cost possible are prime fields for “privatization.” In these segments of the market for aid, the UN could act as the "aider of last resort" instead of a frontline participant. This would mean specializing in areas in which there is a clear need for large-scale interventions, but where no private corporations, NGOs, civil society or development consulting agencies dare to go. While this would be the path less traveled, it may be the only one that leads to meaningful reform.

UN Human Rights and Wrongs

Last Friday’s post “Poverty is not a human rights violation” spurred a very healthy dialogue on rights, including a response from Amnesty International , which mentioned the UN Declaration of Human Rights. I will not be a last word freak and answer Amnesty directly. But let’s talk about rights at the UN. The UN publicizes such positive rights as “right to water,” “right to housing,” “right to health”, etc. These rights sound wonderful, while not imposing any specific obligation whatsoever on any specific actor to do any specific thing for any specific poor person. It is impossible for the UN or any other body to allocate responsibilities for observing the “right to water,” and also decide who will be first in line among the 884 million people now without clean water. So even if the UN creates international pressure to observe these “rights,” the pressure is diffused across so many potential actors with unclear responsibility that it has no effect, accomplishing nothing for poor people.

What about the UN’s record on the more traditionally defined “negative” human rights, like freedom from state killings and torture? These human rights are a lot easier to specifically address – the UN could denounce human rights violations, identifying the violator and the victim each time. Here international pressure could have more of an effect, because it is applied to very specific wrong-doers to stop very specific actions against specific victims -- some of whom are in the Amnesty International 2009 report

According to Amnesty, among those who could appeal to the UN Human Rights Council are:

--the families of the 100 Cameroonian demonstrators that dictator Paul Biya’s forces killed in February 2008, shooting some in the head at point blank range

-- the family of Paltsal Kyab, 45, a Tibetan from Sichuan province, who died in Chinese police custody on May 26, 2008, after having been present at a protest march on March 17, 2008. The Chinese government did not allow his family to visit him in detention. When his family members went to claim his body, “they found it bruised and covered with blister burns, discovering later that he had internal injuries.”

---the 49 people the Egyptian government arrested after violent protests on April 6, 2008 in Egypt. The trial began in August 2008 before “the (Emergency) Supreme State Security Court…The defendants said they were blindfolded for nine days and tortured by State Security Investigation (SSI) officials …{including} beatings, electric shocks and threats that their female relatives would be sexually abused…Twenty-two of the defendants were sentenced in December to up to five years in prison.”

So such victims could appeal to the UN Human Rights Council for their rights vis-à-vis the governments of Cameroon, China, and Egypt – except that the governments of Cameroon, China, and Egypt are MEMBERS of the UN Human Rights Council. The UN is perpetrating a sick joke on such victims, by filling the Human Rights Council with human rights violators. This travesty is already well known, but that doesn’t mean anyone who cares should stop talking about it.

So here’s the scorecard on UN human rights. On something like “the right to water,” where it is impossible to identify who is violating such “rights,” the UN talks big. On human rights violations like killings and torture, where the UN knows precisely who is the violator, the UN sometimes shows up on the violator's side.

Why So Scared of “Free Markets”?

The debate of the last few days on this blog reminded me again of how strong is the visceral negative reaction to an argument for “free markets” (those dreaded words are practically an epithet by now) in development. Part of this may be justified; let’s explore this in a Q and A. Q. Isn’t the case for markets a purely ideological one, which just serves to protect the interests of the rich?

A. True, it often has been. There is an ideological camp that will twist evidence to support free markets. They overpromise on how soon and how much development "markets" will deliver. They coerce other countries to accept "markets," bypassing the democratic process, which leads to a xenophobic backlash. And some in this camp do just want to defend the rich against ANY policy that hurts the rich even if it is a “free market” policy, so some are hypocritical.

However, beware of the fallacy called “Affirming the consequent.” If you are a Nazi, Then you like Wagner’s operas. It does not follow that: If you like Wagner’s operas, Then you are a Nazi. Similarly, suppose we agree: If you are a free market ideologue, Then you will defend free markets. However, it does not follow that If you defend free markets, then you are an ideologue. My posts presented evidence for markets as a development strategy. Feel free to disagree with the evidence, but don’t jump to the “ideologue” conclusion (see earlier blog discussion of how “ideologue” accusations are used as trump cards to try to win an argument).

Q. Don’t defenders of markets understand the role of the government to provide public goods, like institutions and infrastructure?

A. Yes, of course they do. The frequency with which this question comes up itself illustrates the strength of the negative reaction to pro-market arguments. Is it really likely that a Ph.D. economist would never have heard of public goods?

Q. So why criticize the Rosenstein-Rodan 1943/Collier and Unido 2009 argument for state-led industrialization?

A. These arguments argue for an industrialization “poverty trap” because of increasing returns in industry, which requires vigorous state “coordination and planning” in the poorest economies to escape. This is way beyond the “state covers public goods, market covers private goods” consensus of mainstream economics. In development, there were many attempts at force-fed industrialization based on this constantly-recycled idea (especially Africa, Middle East, and Latin America), which failed. Historically, industrialization arose in initially poor countries which have since become rich, with the common theme a heavy reliance on both domestic and international market opportunities and decentralized private entrepreneurship. First, we had UK, US, the rest of Western Europe, Australia, New Zealand, then Japan, then late industrialization in the European periphery (Ireland/Greece/Spain/Portugal), East Asian Gang of Four, and most recently China and India. Some of these cases had some kinds of industrial policies in common with the failures mentioned above, but they also had a heavy reliance on markets in common with other successes, to pass the ultimate verdict on scaling up successes. If you have a successful case that follows both policies A and B, and A has a record of success elsewhere and B has a record of failure elsewhere, shouldn’t you give more credit to A than B for the success of this case?

Q. What about Dani Rodrik’s questioning of the Jong-Wha Lee results on the negative effects of Korean industrial policy?

A. Dani, You are right to call me on this when I have other papers scornful of identifying policy effects from cross-country growth regressions. I thought the Lee paper deserved a little more consideration because it was NOT a typical cross-country regression; it was such a rare attempt to study within-country and cross-period effects of a policy regime, it had a parsimonious specification that alleviates the usual concerns about data mining; and and in particular it is even more rare to do all this to systematically test Korean industrial policy variations across period and industry. Lee’s systematic empirical approach contrasts with the anecdotal quality of most discussions of Korean industrial policy. Another paper by E. Kim in JDE in 2000 tends to confirm Lee’s results on Korean cross-time, cross-sector variations in response to industrial trade policies. Beason and Weinstein had a 1996 paper in RE Stat that also questions the conventional wisdom about positive effects of industrial policy in Japan.

Q. But hasn’t the current crisis discredited “free markets”?

The history of markets is one of periodic crises (especially financial crises) and recoveries, including major episodes of creative destruction, but with steady positive long run growth despite severe fluctuations around the trend. The huge fallibility of human actors makes the case for markets stronger, not weaker. The market itself triggers the corrective actions by both public and private actors when these actors do stupid things, like give too many mortgages to people who were not creditworthy and then try to cover it up with fancy securitization. The collapse of financial markets was a severe wake up call to change this stupid behavior; creative destruction is wiping out firms that made huge mistakes (despite some well-publicized cases of individual CEOs getting bonuses despite their stupid actions). New firms or restructured firms will not make the same mistakes (even if they find new mistakes to cause some new crisis). Since we recovered from all the previous crises of capitalism, it seems likely we will recover from this one. A knee-jerk rejection of markets (especially in poor countries) will likely postpone rather than accelerate the recovery, which made the anti-market arguments of the Collier/UNIDO report particularly ill-timed.

Asian Success Mythology

The blog yesterday provoked a lot of healthy debate about my claim that industrialization is mainly market-driven rather than state-driven, using Korea, China, and India as examples of industrialization out of poverty. I know I am going against the conventional wisdom of the great Asian “developmental state,” authoritarian and heavily involved in planning industrialization. So let me explain why. When I said we can only test what works on average, I am talking about what propositions are testable and falsifiable, using Karl Popper’s definition of what is “real” science. There is no way to test policies if you allow what works to be different in every year and every country, since a hypothesis about ANY policy will always fit the data perfectly under this assumption. I am not implying imposing the same blueprint everywhere, since “what works” is usually too general and can only guide general policy orientation. Of course, I agree that context matters a lot and so policy-makers should use whatever alternative sources of information or political instinct they have available to adjust the policy orientation to local circumstances.

So my general claim is that heavy reliance on markets is associated with long-run success, using as data the Asian successes, the earlier European and North America/Australia/New Zealand successes, the failure of non-market central planning in the Communist Bloc, and the failures of statist policies in Latin America, the Middle East, and Africa. It is true that Asian successes used state intervention more than the earlier European examples, but on average state intervention does poorly across all countries, so we have no Popper-standard evidence that state intervention contributed to their success. So my claim is based on evidence, not ideology.

We could also test industrial policy using within-country data. A well-known old study by Korean economist Jong-Wha Lee ("Government Interventions and Productivity Growth," Journal of Economic Growth, 1(3), September 1996, 391-414) found that government-favored sectors in South Korea actually had worse productivity growth than those that were not government-favored.

There is also the fact that South Korea (which had populist policies in the 1950s), India, and China had rapid growth after they shifted towards much LESS state intervention in the economy. I’m not sure that this one would pass the Popper test, however, since economists’ attempts to explain short- to medium-run shifts in growth have not been very successful world wide.

Now, let's go back to country data and look at the suggestion that we focus only on the success stories in East Asia. This has indeed been the predominant approach and has reinforced what I think is the fallacious conventional wisdom on the "industrial policy success" in East Asia. Looking only at the successes causes "survivor bias" about what really works.

Suppose we have a group of drivers leave New York at the same time to drive to Washington, and we interview the first 5 drivers who arrive in Washington. We find that they drove Lamborghinis at 150 mph, weaving in and out of traffic down the New Jersey Turnpike and I-95, out-running Highway Patrol cars who tried to stop them. Are they models for success getting from New York to Washington?

No, because since we only studied the “successful” first 5 drivers to arrive, we didn’t know about the vast majority of Lamborghini “failures” – the drivers who got into fatal accidents or were caught by the Highway Patrol and jailed for insanely reckless driving. On average, this approach was a disaster. On average, soccer moms driving mini-vans outperformed the Lamborghini drivers, if we study BOTH successes and failures.

So Asian success either happened in spite of statist industrial policy, not because of it, or industrial policy was an incredibly risky strategy that usually fails but occasionally has big successes, possibly in East Asia.

Either view would help explain why a huge amount of effort spent imitating East Asian success stories has NOT successfully replicated that success anywhere else.

So I stand by my claim that the 66-year-old idea of state-promoted industrialization has failed, and that it was irresponsible of Collier and UNIDO to resurrect it as a “major conceptual breakthrough.”

The UN’s 66-Year-Old Virgin

The UN has just announced a big new idea in the war on global poverty, in its just-released Industrial Development Report 2009. In the words of the United Nations Industrial Development Organization (UNIDO) Director General, Dr Kandeh Yumkella, “Our Report represents a major conceptual breakthrough on how to tackle global poverty through sustainable industrial development.” What was the breakthrough idea? Take government action to reap increasing returns to scale to industrial production, to get out of the free market’s “poverty trap” of low-scale industrial production.

The only problem with this major conceptual breakthrough is that it is 66 years old. It was presented in almost the same words in one of the first and most famous articles of development economics, by Paul Rosenstein-Rodan in 1943:

Paul Rosenstein-Rodan 1943	UNIDO report 2009
“It is generally agreed that industrialisation of "international depressed areas " …is the way of achieving a more equal distribution of income between different areas of the world by raising incomes in depressed areas ….”	“Industrialization is integral to economic development… [For] the bottom billion, manufactured exports are likely to offer more scope for long term productivity growth than either agriculture or natural resources.”
“If we create a sufficiently large investment unit by including all the new industries of the region, external economies will become internal profits out of which dividends may be paid easily.”	“Because they still do not have industrial agglomerations, they are unable to be competitive against countries that have…there is a threshold of competitiveness to be surmounted. Once that threshold is crossed, growth is explosive.”
“If the industrialization of international depressed areas were to rely entirely on the normal incentive of private entrepreneurs, the process would … be very much slower.”	“There is an important role for public action, as purely market-driven processes will yield prolonged stagnation.”

Professor Rosenstein-Rodan in 1943 can be saluted for thinking of a creative new theory. Today’s authors (such as lead author Paul Collier) seem a bit less creative for recycling the exact same theory, especially after 66 years of experience that contradicted every prediction of this theory. Initially very poor countries like South Korea and more recently China and India had no trouble with industrial growth through market forces, and virtually every attempt at state-forced industrialization has failed. UNIDO endorsed many of these state industrialization attempts in the countries that, as a result of many such failures, Collier now calls the Bottom Billion.

Recyling old failed ideas after 66 years might be another small hint that UN accountability is a wee bit deficient.