Set a Big Goal. Give All to Meet It. This is Stupid.

The first two sentences come out of thousands of commencement addresses, not to mention inspirational foreign aid addresses. But they’re bad advice. Social entrepreneurs in foreign aid might learn from private sector entrepreneurs, who don’t stick to fixed goals.

A University of Illinois graduate moved to Silicon Valley with a great goal (perhaps inspired by the Illini commencement address) – develop security software for hot-selling handheld devices like the Palm Pilot. He assumed that enterprises were soon going to be using Palms as primary means of communication and sharing documents, and would need security to protect business secrets. “Any minute now, there’ll be millions of people begging for security on their handheld devices,” he thought. He was wrong – he never found a demand for handheld security software.

He could have kept trying to make his original idea work. Entrepreneurs that do stick to fixed goals are very good at least at one thing – wasting investors’ money. An idea for an online grocery startup, Webvan, managed to go through $1 billion before finally pulling the plug.

Illinois Man was different. He shifted to Plan B. Sell his cryptography software. Still no takers. We can skip over Plans C, D, and E, which all failed.

Plan F was a system for securely transferring cash from one Palm Pilot to another. He put a demo on the Internet so people could see how great it would be for Palm Pilots. People liked the web demo and started using it for real transactions, while the demand from Palm users still failed to materialize. eBay users started asking if they could put the web demo in their ads for people to pay them. There was no demand for the product, only for the web demo.

Illinois Man finally realized what might succeed. He forgot about Palm Pilots. Plan G was a system for making secure online payments for sites like eBay. His Plan G company was called PayPal, and his name was Max Levchin. eBay eventually bought PayPal for $1.5 billion. The story is from a new book by John Mullins and Randy Komisar, Getting to Plan B.

This principle translates to social entrepreneurship. Mohammed Yunus was trained as an irrigation economist. If he had stuck to fixed goals they would have involved irrigation. We would never of heard of him or of microcredit (at least until someone else without fixed goals came along).

Why is entrepreneurship so hard? It is always very uncertain what you can do well that the customers will want. Finding that sweet spot is a process of trial and error and gathering feedback. Research cited by Mullins and Komisar shows it takes 58 new product ideas to develop one successful product.

An even better book on this theme of searching for what works rather than sticking to the pre-conceived plan is Bill Duggan’s Strategic Intuition. Duggan uses a nice military analogy. Why was Napoleon such a successful general? Before Napoleon, military strategy was about how to take a fixed position from the enemy. Napoleon realized that the point of a war was to defeat the other army. He said, forget the targets, just keep the army moving relative to the other army until you are in the most advantageous position, then attack.

Of course, this advice about flexible goals might conflict with previous advice about specialization. Yes, you want to get the gains from specialization, but be flexible about what your specialization will produce for the customers. So you might be a health specialist, but which among many interventions that you could do will pay off? James Grant, a former director of UNICEF, knew he wanted to save children’s lives, but he was open to any way to do it. He and his staff stumbled on oral rehydration therapy, which has since saved millions of babies from dying from diarrheal diseases at a cost of about 12 cents per dose.

The economists’ version of this mentality is to keep doing and redoing your cost/benefit analysis. The rational next step is one with the highest ratio of benefits to costs. Many goals are set that ignore cost/benefit analysis altogether (Millennium Development Goals, for example). Other goals might be set with some vague notion of predicted costs and benefits, but these predictions are usually wrong. You have to be willing to adjust as benefits and costs turn out to be different that expected, and often shift to another activity altogether – Plans B,C,D,…Z.

Obviously the official aid world of MDG Plans and Poverty Reduction Strategy Papers does not have a clue about the entrepreneurship needed to solve problems.

Official aid doesn’t know how to operate in a world where most Problems are solved by entrepreneurs who originally intended to solve a DIFFERENT Problem. So it’s up to you private and social entrepreneurs.

The Anarchy of Success

In the latest issue of the New York Review of Books I have a review (ungated here) of: Leonard Mlodinow, The Drunkard's Walk: How Randomness Rules Our Lives

Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism.

The success of the East Asian Gang of Four—and now China—has exerted an irresistible lure to researchers of growth. Academic economists who were used to studying whether a politically difficult tax reform might make Americans better off by an amount equivalent to 0.1 percent of US GDP rushed into a field of inquiry that promises to explain how to increase your income seventeen times over. Theoretical breakthroughs in the late 1980s by Paul Romer (now at Stanford) and by Nobel laureate Robert Lucas helped inspire a remarkable effort by economists to find in the empirical data which factors reliably lead to growth. Yet hundreds of research articles later, we wound up at a surprising end point: we don't know.

In 2007, the dean of growth research, Nobel laureate Robert Solow, said: "In real life it is very hard to move the permanent growth rate; and when it happens...the source can be a bit mysterious even after the fact."

In view of this acknowledged ignorance, how can there still be so many writers who claim to know how to promote growth? The Drunkard's Walk by Leonard Mlodinow offers a crucial insight. Humans are suckers for finding patterns where none really exist, like seeing the shapes of lions and giraffes in the clouds. It wasn't that economists had no explanations of what causes growth. On the contrary, we had too many. One survey of the field counted no fewer than 145 separate factors that had been found to be associated with growth. But most of these patterns were spurious, because they failed to hold up when other researchers tried to replicate them. Economists can say something useful about economic success, but we have to clear away a lot of false overconfidence before we get to that point.

In Bad Samaritans, Ha-Joon Chang is both a critic and a purveyor of such overconfidence. He rightly criticizes those who have made overly strong growth rate effects for free trade and orthodox capitalism, but then he turns around and makes equally strong claims for protectionism and what he calls "heterodox" capitalism, which includes such features as government promotion of favored industries, state-owned enterprises, and heavy regulation of foreign direct investment.

Chang and almost everyone else, have also been suffering from a fallacy, what Mlodinow (following Nobel laureate Daniel Kahneman) calls the Law of Small Numbers. This is a sarcastic reference to the Law of Large Numbers, in which you can have a high degree of confidence in the average value of a sample if the sample includes a very large number of observations. The Law of Small Numbers is when you stop short of having "enough" observations and show high confidence anyway. The Law of Small Numbers is our tendency to judge performance by too small a slice of experience.

Chang at one point suggests as evidence that free trade isn't working the fact that Mexico had only 1.8 percent per capita growth from 1994 to 2002—the period following the enactment of the North American Free Trade Agreement. Chang also picks and chooses episodes in which it appeared heterodox policies were doing well. But economic growth is so volatile across and within countries that it takes a very long time to decide what policies are having a positive effect on growth, which lies behind the failure of both systematic growth evidence and anecdotal evidence a la Chang.

One way to escape from the Law of Small Numbers is to seek to explain levels of per capita income already attained today rather than rates of growth. The level of income you have reached today frees you from small numbers because it reflects the outcome of your entire previous growth experience. So let's ask, who are the richest and the poorest countries now, and what is the difference between them?

The now-rich countries leaped ahead during a long period in which they were more free-trade and free-market (although Chang is correct they were far from perfectly laissez-faire) than the rest of the world. More important than the policies that Chang emphasizes, the now-rich countries had far better institutions and transport infrastructure that made free trade and free markets possible; the now poor countries historically always had a lot of “protection” through high transport costs and lousy infrastructure.

This big stylized fact just confirms the Western consensus around the basic concept of a state shaped by representative democracy, safeguarding individual rights and supplying crucial infrastructure such as transport, while rewarding entrepreneurship and technological creativity. Such common-sense ideas have stood the test of time over the very long run, both in their acceptance by the population in most economically successful societies (compared to their absence and rejection in unsuccessful economies) and in their pragmatic consequences for prosperity (as showed by the comparison to the poverty of states that lack most of the above conditions).

Despite Chang's air of desperation about the experts getting it right (something shared by some of Chang's free-market opponents), in the end, third-world growth seems to have been fairly expert-proof. Perhaps prosperity is not after all designed from above; perhaps it emerges from below, from the independent actions of many individuals who figure out their own paths.

Africa desperately needs trade links: a pictorial essay

In all the debates about free trade, we can forget sometimes that international trade is not optional for a very small, very poor country. If there are any kinds of returns to scale at all in many sectors, and casual observation and much research suggests there are, then a tiny domestic market will rule out any serious domestic production in many, many sectors (is the Gambia going to be making refrigerators any time soon?) So trade will be a necessity, specializing in what each small, poor country can do, and importing everything else. And what continent is full of small, poor countries? Africa, of course. Then it’s all the more distressing that Africa does not have much in the way of trade links – shipping routes, air connections, Internet connections (for both communication and moving goods) – with the global economy. This is best seen in a series of pictures.

Lack of shipping routes going to Africa (except South Africa and Nigerian Oil):

Click here for a larger image.
Source: the excellent 2009 WDR “Reshaping Economic Geography” of the World Bank, Chapter 6

Scarcity of Airline Routes to Africa compared to rest of World (except South Africa):

Source

Scarcity of Internet Connections except South Africa (map of # of IP addresses in 2007):

Source

In short, Africa is disconnected from the global economy, which is very bad news for a continent that desperately needs international trade (the disconnection is both symptom and cause of the lack of trade). Lack of international trade = poverty for small economies.

This lack of trade links reflects many factors: rich country protectionism, domestic policies on customs & tariffs & foreign investment, poor port and road infrastructure, thus very high land transport costs within Africa, barriers crossing borders within Africa, Africa stereotypes that discourage foreign investors and out-sourcers, and so on.

There is some hope on the horizon for the Internet and communications issues, at least. High-speed fiber optic cables are connecting the east and west coasts of Africa to the rest of the world. And we all know about the famous cell phone revolution happening within Africa. Comparative advantage reflects your infrastructure quality and transport costs as well as your other endowments and experience. Perhaps the new broadband Internet connections will make possible all kinds of new businesses that economize on physical transport and use the Internet and cell phones instead. How about some kind of e-Africa.com, ready to open for business?

Beyonce's Secret for Greater Aid Effectiveness

One of the oldest ideas in economics is gains from specialization. Adam Smith talked about it 233 years ago. All of us are good at a small number of things and suck at most everything else. The economy as a whole produces more because we each specialize in what we do best and then trade with everyone else. We see Beyoncé specializing in music videos, which she trades to Bill Gates for his specialized production of software. We will get more of both music videos and software from Beyoncé and Gates than if each (without the possibility of trade) had been forced to supply their own needs for software and music videos.

Beyoncé would be forced to take time away from videos to try to figure out her own software, and Gates would have to divert time from software to learning how to sing and dance in a swimsuit.

Economists are often congratulated for their impressive grasp of the obvious. Yet if this principle is so obvious, why is it routinely violated in the aid world? It’s gotten worse with the Millennium Development Goals. Each aid organization tries to meet all MDGs and each fails to specialize. Therefore some aid agencies are forced to supply things they are bad at – the equivalent of Gates’ music videos – for which there is no demand.

UNICEF is working on swine flu, the traditional province of WHO, who is distracted by trying to do development research, which is the traditional specialty of the World Bank, who is in turn distracted by a new emphasis on children, which is the strength of – just to complete the circle – UNICEF.

Even very small aid agencies fail to specialize – Luxembourg’s $141 million aid budget was divided among 30 different sectors (out of a possible 37). The tiny Luxembourg budget also went to 87 different countries.

With high overhead costs for each separate activity for each country, the ratio of overhead costs to funds for the activity gets extremely high, sometimes over 100 percent. UNDP has one of the very LEAST specialized aid budgets by country and by sector, and it actually does have a ratio of overhead costs to aid disbursed of 129%.

One suspects overhead costs devoured even more of program costs for the $20,000 Greece spent on worldwide post-secondary education, the $30,000 the Netherlands spent on promoting worldwide tourism to developing countries, the $5,000 Denmark spent on worldwide emergency food aid, or the $30,000 Luxembourg spent on conflict, peace, and security. (Remember, these small sums may have been split even further among country recipients.)

One could think of many political economy reasons why aid agencies resist specialization. From my casual experience in a large bureaucracy (the World Bank), the primeval bureaucratic instinct is to give a tiny piece of the pie to every possible lobby group (internal or external). But what’s most clear is that it shows aid agencies lack of accountability, because it is such a wasteful practice that also drives the aid recipients crazy with duplication of efforts by every aid agency in every sector in every country.

So please, aid agencies, go back to Adam Smith, and try to capture some of those enormous gains from specialization. And NGOs, kudos for doing a much better job than official aid at specializing at what you do best, and please resist pressures to have a piece of everything.

Institutions are the secret to development, if only we knew what they were

Here’s an example of a simple rule. But is it as simple as it seems? A literal reading of the rule would ban a woman wearing a dress and sandals from entering the store, while it would allow either gender to wear a shirt, shoes, and nothing else. In a Northern beach town in the winter, this rule would be irrelevant. In the same beach town during the summer, if it were particularly carefree, the rule might be ignored.

This example gives a private rule, but it’s a good metaphor for official legal rules. All rules (such as those that make up a legal system) interact with non-rule factors, in this case the population’s clothing habits, the climate, an understanding of the intent of the rule-makers, and the degree of compliance by the population. So when we measure an “institutional” variable such as “rule of law,” we are really measuring some complicated mix of the legal and non-legal. An econometric finding that “rule of law” causes higher per capita income (a) gives little confidence that we have identified a clear relationship between the legal system and development, and (b) gives no guidance on how to modify the legal system to make development more likely.

If I want to understand law and development, maybe I should get a good lawyer. Fortunately, I have one at NYU’s law school, Kevin Davis. He inspired all the thoughts above in a paper that mocks the “rule of law” concept used by economists (available in a preliminary ungated version here). You can also hear Kevin give a fantastic lecture on law and development on the occasion of his getting the high honor of being named the Beller Family Professor of Business Law.

Kevin points out that two current measures of “rule of law” used by economists in “institutions cause development” econometric research are by their own description a mixture of some characteristics of the legal system with a long list of non-legalistic factors such as “popular observance of the law,” “a very high crime rate or if the law is routinely ignored without effective sanction (for example, widespread illegal strikes),” “losses and costs of crime,” “corruption in banking,” “crime,” “theft and crime,” “crime and theft as obstacles to business,” “extent of tax evasion,” “costs of organized crime for business” and “kidnapping of foreigners.” Showing that this mishmash is correlated with achieving development tells you what exactly? Hire bodyguards for foreigners?

What if “institutions” are yet another item in the long list of panaceas offered by development economists that don’t actually help anyone develop?

Back to constructive thoughts on the next blog post!

Five simple principles for scaling up in aid

There is a lot of discussion in aid on scaling up small-scale successes in aid to reach many more potential beneficiaries. But what things can be scaled up? Here are some principles so simple that they would be embarrassing except that they are routinely violated in aid. (1) Scale up success not failure

The only reason for mentioning this is that the aid business has a strange habit of trying to scale up again things that have already failed. PROGRESA is the great success story of scaling up something after you had determined it was successful.

(2) Don’t scale up what you think is most important, scale up what you do best

There are lots of important issues, so why not choose the one that you do best? And let the people who are good at the other issues work on the other issues? Yet both official agencies and NGOs are often pulled away from what they do best by well-meaning politicians and funders who are focused only on final goals.

(3) You can scale up only what requires cheap, abundant inputs; you cannot scale up something that depends on expensive, scarce inputs

This is one of my problems with the Millennium Villages – they at least partly depend on world-class experts flying in to solve idiosyncratic problems of each village. World-class experts are a scarce resource that you can’t scale up.

(4) Things that you make routine are among the easiest to scale up

It worked for Henry Ford, McDonald’s, and WalMart, why not in aid? One of the secrets to success of the large vaccination campaigns that reduced child mortality was that relatively unskilled medical workers (in abundant supply) could give vaccinations as a routine activity. Of course, not everything can be made routine. For a more complex discussion about social service delivery in general, see the great paper by Lant Pritchett and Michael Woolcock.

(5) Evaluate whether you are still successful after scaling up

Scaling up often changes the nature of what you are doing, so evaluate whether the scaled-up version works as well as the original version.

I'm sure readers have other principles to suggest -- please do so!

Better life, liberty, and lager

Global infant mortality has halved since 1960. The poorest countries are steadily catching up to the richest on other critical measures of the quality of life: life expectancy, literacy, political and civil rights – not to mention beer production per capita. This blog tries to remind us all periodically that there ARE successes in development. Charles Kenny has a great book in the works that will shoulder THAT load from now on. Kenny is a clear-eyed and honest observer of development that I have admired for a long time. He summarizes his forthcoming book on his website, from which I got the statements in the first paragraph.

(He also points out that per capita income growth in poor countries has not lived up to expectations and we don’t have a clue why – another theme of this blog also – but I think he is too negative about this growth, which is respectable even if not matching development economists’ expectations. Anyway, he argues that other quality of life indicators are disconnected from GDP growth.)

Kenny argues that the rapid spread of technology and ideas have led to the happy trends he identifies. Technology and ideas have made, for example, good health, cheaper and easier. (Cheap technology: soap. Spreading idea: wash your hands.) I have previously noted that aid should get part of the credit for improving health, and aid could do even better on these improving things in the future as Kenny argues. Kenny summarizes his work:

Realistic optimism is the right attitude with which to face the issue of development… a recognition of the challenges still facing the world – significant progress to be made, limits to the likely speed of that progress…. But we should also acknowledge that the rapid and unprecedented improvement in global quality of life over the past fifty years provides some significant grounds for hope about the future.

What if we are just clueless whether we have a success story or not?

By Diane Bennett and Laura Freschi We had really intended this would be a feel-good story of success:

This month, while the G8 continued their vague pledges of billions in food aid, Eleni Gabre-Madhin was busy bringing a market-based solution to the problem of food security in Ethiopia, as the CEO of the Ethiopia Commodities Exchange (ECX). After years of studying Ethiopia’s agricultural markets, Gabre-Madhin hit upon a central commodities market as a way to end the country’s deadly boom and bust cycle, which has seen overproduction and low food prices one year and famine the next.

The ECX has been running for a little over a year now, and lists five commodities traded on its website—coffee, sesame, beans, maize and grains. With a central trading pit in Addis Ababa, eight warehouses throughout the country, and market data being transmitted through a network of electronic display tickers, text messages, TV, internet and radio, the ECX is designed to reduce the burden of high transaction costs and excessive risk on farmers and traders, and increase access to information for small-scale farmers in remote areas.

In 2008 when the ECX was launched, the Economist called it a “bold experiment to improve the efficiency of agricultural marketing,” and Eleni Gabre-Madhin herself has been lauded as a visionary and a pioneer. (Gabre-Madhin is being profiled tonight on the PBS program Wide Angle in an episode called “The Market Maker"—watch the preview here.)

Unfortunately, it’s not quite that simple.

From the start, the FT alluded to the potential difficulties of a market-based solution in Meles Zenawi’s aid-dependent Ethiopia, “one of Africa’s most state-dominated economies.” The Economist noted that 6 out of the 11 seats on the ECX board would be filled by government officials, which is a massive PR problem in a place where there is precious little trust in the government.

A quick trip down the rabbit hole of the Ethiopian (English-language) blogosphere unearths plenty of cynicism from bloggers distrustful of what they have come to see as a government scheme to get their hands into the farmers’ pockets. The government did little to quell these fears when they accused 6 major coffee exporters of “hoarding,” revoked their licenses, and grabbed 170,000 tons of coffee to sell off at auction to boost Ethiopia’s lagging forex supplies.

The ECX seemed like a great idea. But in the real world of complex politics and conflicting viewpoints, we really are at a loss to say whether ECX has already been a success, or whether it will succeed in the future. Unfortunately, there are a lot more development case studies that are in this category than in the well-trod “inspirational success” or “illustrious failure” genres.

--

Update: This post has been changed to correct a mistake in the second paragraph: "high food prices" was changed to "low food prices."

Respecting local values: Western confusion about African orphans

When a remote area of South Sudan was resettling from the long-running civil war in 2001, tens of thousands of returnees were threatened by the upcoming rainy season without food. A small team was dispatched to assess and prioritize the needs of internally displaced people (IDPs) resettling in a corner of South Sudan. (Sudan continues to have the largest number of IDPs in the world, even without exact numbers from half the country.) I was part of the team in a village of 1,000 residents, where roughly 30% were orphaned children whose parents had been killed in the war or died without medical care.

Our team was horrified when we learned that lions actively hunted in this area, killing children daily without protection of shelter or family. As a result, protecting the most defenseless residents became our immediate concern. Elsewhere in Africa, top-down Western aid builds orphanages in such situations, but I knew the Western and African concepts of family and “orphans” are different. There are already so many orphanages that the website orphanage.org lists dozens to solicit donations and encourages readers to check back because “orphanages are being added frequently.” You can even be an orphanage tourist for a week!

Ubuntu is an African concept of interconnectedness, of a collective belonging and understanding of interdependence. In different regions of Africa it has varying rights and responsibilities, and I was unsure of the application in this remote place. I asked the village’s women’s council about who was caring for the orphans and they admitted there wasn’t enough food to share. We went on to discuss food security and our NGO’s role in helping the IDPs resettle. We promised food assistance for their transition and planting resources and asked if they would they take these children into their homes as part of their family, since the orphans were from their tribe. They readily agreed it was their responsibility, as these were the children of extended family members. With this agreement in place, within weeks all but five children were connected to extended family members that cared for them as their own children.

True to our word, our NGO brought in emergency food supplies, then seeds and agricultural tools. A year later, insufficient rain created a temporary food crisis and we again brought in supplemental food supplies to help them get through. Our commitment was to the village, that they survive the transition to self-sufficiency.

Within a short time of our first visit, there were no more lion attacks on helpless children and we never heard another word about the hundreds of orphaned children. The village has grown to about 15,000 people and today they grow the food they need. By making a commitment to this village, we helped the village to take care of its own challenge. And there was no expensive, Western-style orphanage institutionalizing them until adulthood and no long-term expense. Furthermore, the culture of this village has remained essentially undisturbed. The village leaders can be proud that these children have become part of their ubuntu connections and been raised by relatives speaking their own language and taught the ways of their people.

When aid solutions are empowering and consistent with local values and culture, in my experience they are less expensive, sustainable and more respectful. Interventions can help people get back on their feet to find their own way, not one imposed by aid organizations with agendas or expensive, delaying overhead. Let’s stop pretending that aid work can be ignorant of local values and culture; this is an essential part of constructive aid work.

Here’s a US development program working – stop it immediately!

“[O]pen trade and international investment are the surest and fastest ways for Africa to make progress,” President Bush said when he signed an extension to the African Growth and Opportunities Act (AGOA) in 2004. Originally signed into law in 2000, AGOA removes US quotas and duties for thousands of products coming from some 40 sub-Saharan African countries.

AGOA has led to an overall increase of 8% in non-oil exports to the US, according to recent research. And Madagascar has been one of the program’s clearest success stories. The island nation’s exports tripled in the first three years of the program, led by strong growth in the apparel and textile sector. This sector remains vibrant in spite of the huge encroachments by China on African textile competitiveness since 2005, as well as the more recent shrinkage in global demand: textiles still account for 60% of Madagascar’s total exports, and 100,000 people are employed in the formal sector alone.

So why is the US now threatening to revoke AGOA in Madagascar?

The US government is using AGOA as a political lever to force President Andry Rajoelina’s questionable government to hold elections within the year. The textile exporters association says that the loss of AGOA would lead to downsizing and possibly even the collapse of the entire industry. Tens of thousands of jobs, and tens of millions of dollars of investment stand to be lost.

A letter that Aid Watch obtained addressed to the association of Malagasy textile exporters from the US trade rep warns ominously: “The recent events in Madagascar will be taken into consideration as the U.S. Government begins its review of Madagascar’s eligibility for AGOA in the coming months. As you know, respect for the rule of law is a condition of eligibility outlined in the AGOA legislation.”

The reasoning seems to be that political instability and violations of democratic procedures hurt the Malagasy people, so the natural US government response is to—hurt them more by taking away their jobs?

But a look at the AGOA eligibility requirements shows there is some room for interpretation. There must be, if non-shining examples of democracy like the DRC, Guinea, and Guinea Bissau get to stay on the list while Madagascar is kicked off. It turns out that the AGOA FAQ page contains a disclaimer: “Progress in each area is not a requirement for AGOA eligibility” [emphasis added].

So the USTR is not required to take Madagascar off the AGOA list, and it should not. Attorney and global regulations enforcement expert Jason Poblete said via email that “a country-wide sanctions regime is not likely warranted” and recommended a more targeted approach, such as adding the coup leaders to the list of "specially designated nationals" restricted from doing business with the US.

Another time for invoking Amanda’s Love Actually test— better for the USTR to do nothing, stay home, and watch a movie.

The Answer to Development Ignorance: More Complicated Advice by Experts or More Freedom for Entrepreneurs?

by William Easterly in the Financial Times (extract of full review)

Alan Beattie’s new book False Economy accurately reflects the collapse in self-confidence among economists on our ability to usefully recommend how “developing” countries can rapidly develop. And he’s right about the reasons for this: both success and failure have often caught us by “surprise”, the key word in the book’s subtitle: A Surprising Economic History of the World.

Beattie’s supremely entertaining and informative book is a great reminder that the details of success are often impossible to predict or prescribe: no one can work out how to achieve each component. The best response is not to have increasingly convoluted advice by experts, but to let individuals with local knowledge roam free by trial and error to find their own successes.

So in the end, the economics profession does have more sensible things to say about achieving long-run success than Beattie allows: (relatively) free individuals, free markets, free trade, free thinking, and institutions that support all of the above.

The Secret to Successful Aid

…is that there is no secret. One approach to a successful aid project just is to immerse yourself in the local community, put local people in charge who are themselves highly motivated, be adaptive and flexible to respond to whatever the local people think about how they can help themselves, so that you customize the “standard project designs” to fit local circumstances. Most aid projects fail because there is nobody in the field making all these necessary adaptations and fixing unanticipated problems as they arise. The moral of the story is: be a Searcher and not a Planner.

All of these generalities came to mind when I visited the project Women’s Trust in Pokuase, Ghana yesterday, which I had also visited two years ago. I had a favorable impression then, and even more yesterday. An American, Dana Dakin, decided to start an NGO to help poor women on the occasion of her turning 60. The result, Women’s Trust, is a micro-credit initiative just for the medium-sized town of Pokuase on the outskirts of Accra. It seeks out female entrepreneurs and backs them with its small loans (the initial loan is less than $50, then increases with successive loans). The permanent staff is Ghanaian, led by the formidable Gertrude Ankrah, including accountants, loan officers, and computer whiz kids.

One success story is Sarah Ankrah (Ankrah is a very common name here), who received a 3000 Ghanaian cedi loan (at the time 1 cedi was equal to 1 dollar). Sarah now runs the largest bakery in Pokuase. Every day she gets up at 2am to go through 8 large bags of flour to have bread ready for her customers first thing in the morning. Women’s Trust microloans allowed her to grow by avoiding the extortionate rates charged by the flour suppliers (a 9% interest rate for a loan of only 2 weeks), which had previously eaten away most of her profits. Now she employs 8 women and 4 men. Her son Sammy became the first member of the family to go to college. Sarah perceives her market as “unlimited,” and is dreaming now of buying a delivery van to scatter her loaves far and wide. She repaid the 3000 loan and took out a new loan from Women’s Trust of 4000.

Sarah Ankrah and her workers cut up and shape the dough.

Similar success stories abound. Women’s Trust has diversified into new areas as opportunities arise. Bright kids from Pokuase whose school careers and life prospects would have ended prematurely get scholarships. Mothers bring in their babies to Women’s Trust to be weighed as a check on good nutrition. A handicraft operation crochets strips of plastic from recycled garbage bags into colorful handbags (two large orders from the US have already been received).

This kind of aid project is based on a lot of personal, face to face interaction, developing trust and a shared vision, so it is small scale, it has to let things proceed at their own pace, it can’t meet rigid pre-set output targets, it could never be judged by a rigorous “randomized controlled trial” methodology. In short, it involves the kind of tacit knowledge and individual adaptation that could never be converted into a routinized project implemented by the official aid bureaucracies. It breaks all the rules, and it works.

Skepticism Takes the Day Off

When you see men voluntarily breaking rocks in the hot sun to build their village’s community center, you think they must really want it. I saw this on a visit to a project by The Hunger Project in the Eastern Region of Ghana. The Hunger Project believes in people helping themselves.

Sure the skeptic would naturally seek more systematic and rigorous evaluation, and could think of plenty of things that can go wrong in any aid project. But let’s give skepticism the day off and salute the people who work so hard to help themselves and those who help them do so, against tough odds.

A salute to Dr. Naana Agyemang-Mensah, the hard-driving Director of the Hunger Project-Ghana, who works long hours to mobilize communities to help themselves. To the midwife in the birthing room in the completed community center, who lowers the mortality risk for mother and baby. To the microcredit bank in the community center, who gives loans to the members and makes sure they repay. To the food bank volunteers, who store food for the hungry season until the harvest.

Another salute to Professor George Ayiteey, whose Free Africa Foundation distributes insecticide-treated bed nets to the dusty remote villages I visited today. To G.B.K. Owusu, the local coordinator, who follows up with the chiefs and residents of each village to make sure the nets are reaching them (see net in use below).

And finally, once again to the men at work in the hot sun to build their own community center – a better image for aid than the stereotypical helpless child.

Liberty Land Amusement Park

Individual liberty is a precise concept and a powerful ideal. It has an enormous moral appeal – “all men are created equal, and are endowed by their creator with certain inalienable rights, that among these are life, liberty, and the pursuit of happiness.” Jefferson wrote these words even though there was only liberty for propertied white males at the time in the US, but these words would serve as a beacon through American history, which Lincoln would invoke to motivate the Emancipation Proclamation, and which Martin Luther King would invoke to end Jim Crow and get de-facto voting rights for blacks.

Freedom also has pragmatic appeal. I think the case is strong that many of the accomplishments of economic development are due to liberty – such as the cornucopia of consumer goods through economic freedom, technological innovation through scientific freedom, and holding states accountable for a minimum quality of public goods through political freedom.

Yet the word “liberty” is also much abused and used as cover for many less glorious causes – like promoting an amusement park in the example above (maybe next year’s Davos could have participants go first to “Refugee Run” and then to “Liberty Land.”) Bush used “liberty” as a cover for invading Iraq. To many others, individual liberty is a code word to promote selfish greed or right-wing ideology. We have to rescue the inspiring ideal of “liberty” from these abuses.

Liberty just means the individual’s right to choose his or her own course as long as they do not harm others. The invasion of Iraq obviously does not fit this definition – it didn’t respect liberty for Iraqi individuals. And there is no presumption that the individual’s own course has to be selfish greed -- individuals could also choose altruism towards the poor, or sacrificing themselves on behalf of some larger group.

Nor is “liberty” automatically associated with the Left or Right, because neither ideology really accepts it. The Left tends to restrict your economic choices, while the Right tends to restrict your moral choices. (The Left won’t leave you alone in the marketplace, the Right won’t leave you alone in the bedroom.)

In development, liberty is spreading de facto (as the share of nations that have either political or economic freedom or both keeps rising steadily) but is still not really recognized as a guiding ideal. This is a shame, when our generation has already seen the greatest expansion in liberty in human history, at the same time as the greatest decline in the global poverty rate in human history. Obviously, correlation is not causation, and both trends could be driven by some third factor, but I think there is plenty of other research that would suggest the rise in liberty and the gradual ending of poverty are closely related.

Maybe Liberty Land could add a development ride called “Free the Poor!”

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.

Some cite good news on aid

A paper forthcoming in the Journal of Economic Literature states: "There are well known and striking donor success stories, like the elimination of smallpox, the near-eradication of river blindness and Guinea worm, the spread of oral rehydration therapy for treating infant diarrheal diseases, DDT campaigns against malarial mosquitoes (although later halted for environmental reasons), and the success of WHO vaccination programs against measles and other childhood diseases. The aid campaign against diseases in Africa … is likely the single biggest success story in the history of aid to Africa..."

"The well-known Kremer and Miguel paper showed a strong effect of deworming on worm infection rates in a district in Kenya, which reflected not only direct effects on children receiving the drugs but also surprisingly strong externalities to others in the same school or nearby schools."

"Breastfeeding, immunization against diarrheal diseases, micronutrient supplementation and oral rehydration therapy (ORT) have all been found to work in randomized trails in the fight against diarrhea....Case studies suggest ORT is another health aid success story, accounting for a substantial drop in diarrheal mortality since 1980."

Who is this wild-eyed aid optimist? Oops, it's me.

The point is that even those of us labeled as "aid critics" do not believe aid has been a universal failure. If we give you aid agencies grief on failures, it is because we have seen some successes, and we would like to see more!

How About a Free Press to Hold Aid to Africa Accountable?

Courageous independent Ugandan journalist Andrew Mwenda was featured in a mass circulation magazine last weekend, getting some well-deserved recognition.

Mwenda has been in and out of jail for his criticism of the (aid-supported) authoritarian Ugandan government. He was a recipient of the International Press Freedom Award for 2008.

Mwenda started his own independent newspaper (known appropriately as the Independent) in Uganda, after complaining the government was curtailing the freedom of the newspaper where he previously worked.

He also is a frequent critic of aid agencies’ operations in Africa for tolerating corruption and poor results, which caused Bono to heckle him in a famous confrontation at the TED conference in Tanzania in 2007.

A free press is an important way in which we hold our governments accountable in rich democratic countries. Why shouldn’t Africans have the right to freedom of the press as well?

Mwenda will be speaking at the NYU conference “What Would the Poor Say? Debates in Aid Evalution” this Friday, February 6.

Begin it Now: The Inspirational Success of Ashesi University in Accra, Ghana

Ashesi (which means “beginning” in a local language) is a remarkable private university begun in 2002 by a returning Ghanaian expatriate, Patrick Awuah. A recent column in the Seattle Times interviewed Awuah and profiled the university: “So far, its four graduating classes have had a 100 percent placement rate. Most graduates have stayed in Africa, and some have even started companies that are hiring Ashesi students.”

Half of the students are on scholarship. I have visited Ashesi myself on several occasions and have been humbled and inspired by the dynamism of the students and faculty.

Awuah said he was inspired by the words of Goethe: "If there is anything you can do, or dream you can, begin it. Boldness has genius, power and magic in it. Begin it now."

Now the campus is expanding rapidly, building on success. The Ashesi website gives its vision: “to educate a new generation of ethical, entrepreneurial leaders in Africa; to cultivate within our students the critical thinking skills, the concern for others and the courage it will take to transform a continent.”

Despite widespread international publicity as a homegrown success, Ashesi has yet to receive a single dollar of official aid (one famous official aid agency turned Awuah down when he refused to raise his student-teacher ratios to what he saw as unacceptable levels).