Why the world needs independent aid critics: the video

Easterly talks with the John Templeton Foundation on the need for independent aid critics to challenge the mainstream development industry,  and how successful development actually happens.

Fail fast

Failure is inevitable. Just be sure you fail fast, so you leave time to figure out how to succeed. UPDATE 5/31 2:35PM Sorry, just got around to giving credit to the original source, an interview with futurist/thinker Freeman Dyson by Wired magazine.

Say something about failure in experiments or businesses or anything else. What's the value of failure?

You can't possibly get a good technology going without an enormous number of failures. It's a universal rule. If you look at bicycles, there were thousands of weird models built and tried before they found the one that really worked. You could never design a bicycle theoretically. ... But just by trial and error, we found out how to do it, and the error was essential....

This brings up an interesting issue of where theory fits in. Presumably there was not a theory of planes before there were planes.

There was an attempt at a theory of airplanes, but it was completely misleading. The Wright brothers, in fact, did much better without it.

So you're saying just go ahead and try stuff and you'll sort out the right way.

That's what nature did. And it's almost always true in technology. That's why computers never really took off until they built them small.

Why is small good?

Because it's cheaper and faster, and you can make many more. Speed is the most important thing - to be able to try something out on a small scale quickly.

Fail fast.

Yes. These big projects are guaranteed to fail because you never have time to fix everything.

How the audience educates the lecturer: skepticism and freedom

On Wednesday night I gave a lecture at LSE called "We Don't Know How to Solve Global Poverty and That's a Good Thing." The abstract I wrote beforehand was:

This lecture argues that occasions when development economists were more certain about 'the solution to global poverty' have often led to harmful consequences for the world's poor in the long-run. Sceptical criticism is a creative force that redirects attention and effort away from centrally-directed expert solutions towards effective decentralised problem-solving.

Here are some responses: how economists don't understand the link between poverty and growth,  a criticism of my claims to ignorance, and a bit more sympathetic summary.

I feel kind of like I am on a long personal intellectual journey trying to figure out how to reconcile my compassion for the world's poor with my painfully honest realization that there is no reliable evidence on exactly what to do to end poverty. Each new public lecture is trying out a solution to the conundrum on a smart audience, and then they educate me some more to take the next step (which will be tried in the next lecture).

I am trying to convince people that rigorous skepticism is a creative force because most of the damage is done by overconfident people who thought they knew the answer when they didn't.  And such skepticism doesn't leave us empty-handed: it forces us back on what are our core values:  democracy, human rights, individual liberties, that we follow for moral rather than pragmatic reasons. Autocratic "pragmatic" claims to deliver development if you will just give up your rights don't survive skeptical scrutiny.

One thing I learned from the LSE lecture is not to even bother trying to make any "pragmatic" case for democracy, because that evidence is just as weak as everything else, and that we can only choose democracy based on our values (which is also how historically it was chosen; there are no cases of societies choosing democracy based on econometric results).

Rwanda’s coffee success story

A walking tour through some of the trendiest coffee shops in the NYU vicinity reveals a common element: creatively packaged, expensive Rwandan coffee for sale.

Given our long-standing interest in 1) good coffee and 2) the potential of entrepreneurship for development, this phenomenon clearly merited investigation. The work of Karol Boudreaux, who has been following the Rwandan coffee sector for several years, helps to sketch the outlines of a partially donor-funded development success story now unfolding.

The history of coffee in Rwanda is intertwined with the country’s political fortunes, and stretches back to the 1930s when the Belgian colonial government required Rwandan farmers to plant coffee trees, while setting price restrictions and high export taxes, and controlling which firms could purchase coffee. These policies helped create a “low-quality/low-price trap” that would bedevil the post-colonial governments that continued similarly heavy-handed policies. They also ensured a national distaste for the stuff—reportedly even today many Rwandans prefer tea.

In the late 1980s global coffee prices plummeted, and the economic devastation following Rwanda’s 1994 genocide wiped out what remained of the struggling industry. In 2000, there was no functioning infrastructure to wash and process coffee beans, meaning that what little coffee was produced was of poor quality.

Fast forward ten years to today: Rwanda has a National Coffee Strategy. Rwandan specialty coffee is winning international competitions, commands some of the world’s highest prices, and is sought out by Starbucks, Green Mountain Coffee, Intelligentsia, and Counter Culture Coffee. There is preliminary evidence that the coffee industry is creating jobs, boosting small farmer expenditure and consumption, and possibly even fostering social reconciliation by reducing “ethnic distance” among the Hutus and Tutsis who work together growing and washing coffee.

How did this happen? First, the Rwandan government lowered trade barriers, and lifted restrictions on coffee farmers. Second, Rwanda developed a strategy of targeting production of high-quality coffee, a specialty product whose prices remain stable even when industrial-quality coffee prices fall. Third, international donors provided funding, technical assistance and training, creating programs like the USAID-funded Sustaining Partnerships to Enhance Rural Enterprise and Agribusiness Development (SPREAD). SPREAD's predecessor started the first Rwandan coffee cooperative as an experiment in 2001, and the project continues its work improving each link in newly-identified high-value coffee supply chains.

Some problems and constraints still plague the Rwandan coffee sector. For example, transport costs remain high, and poor management at some coffee cooperatives points to a persistent need for good training and financial management skills.

Still, Rwanda’s revenues from coffee are still growing in the face of global recession, and these revenues bring real benefits to Rwanda’s rural poor.

Time for toilet deregulation?

UPDATE 10:34AM, 4/16 SEE END OF POST

Right now, India has more cell phones than toilets. That's the headline buzzing over the wires today, thanks to the latest phones-to-toilets ratio released by the United Nations. It's certainly a dramatic factoid. But it's not just true of India's 1.2 billion-strong population — this lopsided statistic is true around the globe, as well.

This is from the Change.org Global Poverty blog. The most obvious explanation:

And though the mobile sector has seen massive private investment — thanks in many countries to telecommunications deregulation — few corporations are clamoring to provide better sanitation for the poor.

(This picture is from an earlier Aid Watch blog reporting a happy encounter with the private sector toilet service industry in Ghana.)

UPDATE 10:34AM: I had underestimated the amount of interest and effort devoted to poor people's toilets in the story above. Somehow I had missed one of the hottest stories in the burgeoning lavatory sector (covered in the NYT, HT IdealistNYC): the Peepoo :

A Swedish entrepreneur is trying to market and sell a biodegradable plastic bag that acts as a single-use toilet for urban slums in the developing world.

Once used, the bag can be knotted and buried, and a layer of urea crystals breaks down the waste into fertilizer, killing off disease-producing pathogens found in feces.

The bag, called the Peepoo, is the brainchild of Anders Wilhelmson, an architect and professor in Stockholm.

“Not only is it sanitary,” said Mr. Wilhelmson, who has patented the bag, “they can reuse this to grow crops.”

The Peepoo is even endorsed by the WTO.  No, not THAT one, I mean of course the World Toilet Organization.

Please continue to forward me links for this rapidly exploding story.

You want cell phone entrepreneurs, we’ll give you cell phone entrepreneurs

Last week we posted some cool maps showing the spread of cell phones especially in Africa over the last decade. We called this “a triumph of bottom-up entrepreneurial success,” but you weren’t convinced. You thought it was foreign direct investment (FDI). Provide more evidence that entrepreneurs are part of this picture, you said. Aid Watch never declines a challenge: 1) OK, it’s true that 52 percent of the African Market is dominated by 6 multinationals: Orange (France), Vodafone/Vodacom (UK/South Africa), Zain (Kuwait), MTN (South Africa), Moov (UAE), and Tigo (Luxembourg).  But that other 48 percent is the battleground of dozens more, many of them home-grown.  (Also we heard a rumor that South Africa is located somewhere in Africa.) To give an example from The White Man’s Burden:

Entrepreneur Alieu Conteh started building a cellular network in the Democratic Republic of the Congo … when it was still in the midst of its civil war in the 1990s. He couldn’t get foreign manufacturers to ship cellular towers into the country with rebel soldiers around, so he got local men to weld scrap metal into a makeshift tower. Demand exploded for Conteh’s phones, and in 2001 he formed a joint venture with the South African firm Vodacom. One illiterate fisherwoman who lives in the Congo without electricity relies on her cell phone to sell her fish. She can’t put the fish in a freezer, so she keeps them alive on a line in the river until customers call to place an order.

Sudanese-born entrepreneur Mo Ibrahim is another example. His mobile telecom company, Celtel, had about 5 million subscribers in 13 African countries when it was sold in 2004 for $3.4 billion. 100 Celtel employees, most of them African, earned more than $1 million from the sale. Celtel is now part of Kuwaiti-owned Zain, which serves 40 million subscribers in 17 African countries.

2) Being a successful mobile operator often requires big infrastructure investments, so it’s no surprise many of the first telecom firms to enter the African mobile market have been large. Multinationals investing in Africa to provide millions of Africans with essential service is a GOOD thing. Yes, the market needs more  effective regulation, increased competition, and lower end-user costs, but those trends are now happening.

3) Multinationals spur smaller entrepreneurs. The Nigerian telecom sector has created some 450,000 indirect jobs since it was liberalized in 2000. And Uganda’s five mobile operators provide employment for more than 100,000 people, who work for the operators directly or indirectly, selling airtime or handsets. An Economist article noted:

In 2003 Ms [Mary] Wokhwale was one of the first 15 women in Uganda to become “village phone” operators. Thanks to a microfinance loan, she was able to buy a basic handset and a roof-mounted antenna to ensure a reliable signal. She went into business selling phone calls to other villagers, making a small profit on each call. This enabled her to pay back her loan and buy a second phone. The income from selling phone calls subsequently enabled her to set up a business selling beer, open a music and video shop and help members of her family pay their children’s school fees.

4) Finally, farmers and fishermen now check prices in markets across the country before selling their goods, while unbanked buyers can make payments with mobile banking technologies. Individual entrepreneurs are beneficiaries of mobile technology’s spread in a big way.

The worst-kept secret in aid: aid-receiving governments run the aid agencies

see UPDATE at end of this post

Thomas Friedman had a good NYT column about Karzai yesterday. {{1}} His column cleared up the puzzlement created by a Dallas News editorial and other very similar stories about how Obama’s visit to Afghanistan to get Karzai to clean up corruption was great for “seizing Karzai’s attention.” Now we know why there’s corruption in Afghanistan: Hamid Karzai just FORGOT to deal with it. Could one of our army doctors give him A.D.D. medication?

Friedman is more realistic about a phenomenon that has been long known in donor-government /recipient-government relationships:  the recipient is the one who runs the donor government’s policies towards the recipient government. The same happens in multilateral aid agencies. We saw this all the time at the World Bank, where the corrupt autocrats receiving our loans would let us know what conditions we should put on the loans to them.

Friedman has a pithy rule that donors routinely break:

Never want it more than they do.

Of course, when the donors want something more than the recipient, and the donors know they MUST continue the aid relationship, the recipient is in a strong bargaining position to ignore that something, and no amount of attention-seizing is going to work. As Friedman says:

If we want good governance in Afghanistan more than Karzai, he will sell us that carpet over and over. How many U.S. officials have flown to Kabul — the latest being President Obama himself — to lecture Karzai on the need to root out corruption in his administration? …. he believes he has us over a barrel and, in the end, he can and will do whatever serves his personal power needs because he believes that we believe that he is indispensable for confronting Al Qaeda…

Even in less fraught situations than Afghanistan, the donors have an extremely poor record enforcing conditions on recipients. Not only do they break the Friedman Rule, but the department for Country X in the aid agency MUST disburse its budget for Country X this fiscal year (or else it won’t get any budget next year). The recipient knows this and so can ignore the conditions. (For a more careful and technical development of this argument, see the classic paper on why aid conditions don’t work by Jakob Svensson).

The solution to the problem is as logically simple as it is politically difficult: give aid only to country governments who want IT more than we do.

UPDATE (4/1, 12:14PM): Karzai says to luncheon guests  that America is an obstacle to peace in Afghanistan. Well, THAT would really simplify the problem -- just remove the obstacle! 

[[1]]Just for the record, I usually think that whatever Friedman writes about economics is nonsense while what he writes about Middle Eastern/Central Asian politics is good. This may be because I know something about the former and nothing about the latter.[[1]]

Three Afghan success stories

Today, finally a break from the doom and gloom on Afghanistan! Clare Lockhart, the CEO of the Institute for State Effectiveness, spoke at DRI’s annual conference last month and gave three examples of what has gone right in the international effort to rebuild Afghanistan. These reforms and projects have lasted despite worsening security conditions and will—Lockhart says—form part of the foundation for the next generation of reforms in Kabul.

1) Hawala dealers implement Afghan currency exchange. In 2001, there were three currencies in circulation in Afghanistan, all produced illegally by warlords, with frequently fluctuating values that only the hawala dealers—the country’s informal currency exchangers—could decipher. To move to one unified currency, international donors recommended that Afghanistan switch to the dollar for two years in an expensive and lengthy process that would require the assistance of 15,000 UN bureaucrats. Instead, the Afghans decided to tap into the extensive networks of the local hawala dealers. Once enlisted, they were able to reach every village and change the currency in just 4 months. Clare commented:

To me that’s a lesson of instead of us looking at what’s not there and what do we need to bring in from the outside, how do we turn it around and learn how to …look at what is there. What are the assets that exist on the ground, what are the networks, what are the traditional and existing ways that people manage their daily lives? And how can those be harnessed to the urgent and important tasks of the day?

2) Aid underwrites risk so Afghan telecom can take off. Telecoms were reluctant to enter the risky, post-US invasion Afghan market. Donors had suggested that the Afghan government would actually have to pay the telecoms to provide service. Instead, the government and the international community came up with an innovative way to cover the risk and spur investment. OPIC- a US agency that promotes development in emerging markets- stepped in to write a risk guarantee for $20 million for the firms willing to compete for government licenses. The $20 million was never used, and after $1 billion investment in the sector, there are now more than 11 million phones in Afghanistan.

3) Village-level grant program taps village know-how. Afghanistan’s National Solidarity Program has provided grants to thousands of Afghan villages. The village councils choose how to spend the money, but must post their accounts publicly. Funds for the program are pooled into a locked trust fund that can only be replenished by donors once they’ve seen project audit reports. The program is growing as villages combine grants to take on larger projects, like an irrigation system or a regional maternal hospital, and although the NSP has developed some opposition from politicians who would prefer to be able to skim money off the top of these grants, it has also attracted wide support.

To hear Clare Lockhart tell these stories, listen to this 8-minute clip. If you have the time, it’s also well worth listening to her full presentation with slide show on the DRI website, here. [audio:http://aidwatchers.com/wp/wp-content/uploads/2010/03/Lockhart-Afghan-Success.mp3|titles=Lockhart-Afghan-Success]

We wouldn’t be Aid Watch if we didn’t note that Lockhart is also an outspoken critic of failures in the aid system. Her talk contains many tragic examples of aid failures in Afghanistan, which we’ll post another day on the blog.

Who ya gonna call? Entrepreneurs!

Just a decade ago it seemed we were stuck with landlines. State-owned telephone companies were largely entrenched, sclerotic organizations that provided poor, delayed, or simply unavailable service —even in some rich European countries, and nearly universally in poor countries. These maps (with data from 2001, 2004, and 2008) show how cell phones have quickly bypassed the dysfunctional landline companies and emerged as a triumph of bottom-up entrepreneurial success.

The measure is cell phone subscribers per 100 population, with darker shades of blue indicating movement from 0-20 to 20-30 to 30-40 to above 40 (above 40 is the dark blue shade that is most evident in all the graphs).

Note the darker blue color now encroaching on all sides of the African continent. This gives us hope that the dynamism of the bottom from entrepreneurs can overcome sclerosis at the top.

2001:

2004:

2008:

Data source: World Development Indicators

My pro-government rant

When I give talks celebrating individual creativity as a driver for development, there is always one or more questioners afterwards who asks nervously, “don’t you see ANY role for government?” The answer is: OF COURSE. Government provides public goods. You could argue that one good that has such large external benefits that it’s at least partly a public good is Education. Public education is a major contributor to American economic development.

These thoughts are prompted by cheering along West Virginia University’s epic victory over U. Kentucky last night in the NCAA basketball tournament. A government sponsored and funded university, West Virginia U played an important role in my family. It educated  both my grandparents and my parents (and, wandering off message, they each MET and married there, so I owe WVU thanks for existing at all). WVU allowed a poor fatherless boy a chance to get a Ph.D. in biology and realize the American dream (my father).

So here’s a chance to praise the Government for its role in development, and yes, development’s not ONLY about private individual dynamism.

How is the aid industry like a piano recital? A defense of aid

In 1991, India faced a looming balance of payments crisis. India’s leaders responded, making what are now generally agreed to be some very good decisions: they devalued the exchange rate and instituted a systematic set of economic reforms that lowered high trade barriers and eliminated repressive internal regulations, helping to dismantle India’s notorious license-permit Raj. These reforms averted what might have been years of stagnation or slow growth (avoiding the fate of a Mexico or a Brazil in the 1980s). The reforms also paved the way for the next decade and a half of accelerated growth, and helped some 300 million people escape extreme, grinding poverty. Lant Pritchett, Professor at Harvard’s Kennedy School for Government, argues that the aid industry deserves credit for these reforms and the associated huge improvement in human well-being, but not quite in the way you might expect.

It wasn’t that the World Bank and the IMF required India to make those reforms through conditionality. Instead, Pritchett says, it was the existence of a broad, international movement called “Development,” and an industry called “Aid” that created the conditions for Indian leaders to act as they did.

How so? First, many policy makers involved in India’s reforms spent their early careers working abroad for multilaterals, gaining exposure to ideas not prevalent in India at the time, and gaining experience watching these ideas either work or crash and burn in countries around the world.

Second, the aid industry funds the thousands upon thousands of obscure, detailed economics papers and studies that make up the knowledge base of the movement called Development. Without the painstaking work behind those studies, the movement of Development would never have a chance at producing those rare, brilliant insights with the power to transform hundreds of millions of lives.

To produce those fortuitous moments of brilliance, where the right policy meets the right person and the right opportunity, the movement called Development has to have the depth and breadth within it to produce detailed technical knowledge on a million different topics from tariff codes in India, to migrant remittances in Spain, to firm governance in Korea. Here’s where the piano recital part comes in:

I see the aid industry a lot like a piano recital. It’s kind of boring and it’s tedious and most of the people are wasting their time. But every now and again by God we make a difference and when we do make a difference it really transforms economies and lives for a very long time....

Any movement, be it development or classical music, has to maintain its core.  Music has thousands of young aspiring pianists performing bad recitals that no one but their parents want to hear, all for the purpose of producing just one virtuoso Vladimir Horowitz or one innovative Philip Glass. Aid projects that can’t demonstrate impact and economics papers read by an audience of ten are the development movement’s equivalent of a million and one timid and dissonant renditions of Für Elise performed in student piano recitals the world over. But they are the core that allows for the possibility of “transformational excellence” in a movement.

For Pritchett, what aid does best is to “form the base of the pyramid that creates the possibility of the top.” And the power of successes in development—the rare policy insight, or the competent handling of a potentially disastrous crisis—is so great, and has the power to transform so many lives, that those successes justify the existence of the whole flawed movement, many times over.

Agreements or counter-arguments, anyone?

You can watch Lant Pritchett’s full presentation from the 2010 DRI annual conference, in which he argues this case much more skillfully (and employing other entertaining metaphors), in the audio slideshow below. The audio file of the Q&A following the talk is also posted.

Lant Pritchett: The Best of Aid

Lant Pritchett Q&A

[audio:http://aidwatchers.com/wp/wp-content/uploads/2010/03/11-Afternoon-QA-Lant-Pritchett1.mp3|titles=Q&A Lant Pritchett]

Best in Aid: The Grand Prize

As long as there are disasters, there will always be people who want to help by whatever means first strikes their fancy. There will be those who insist on giving shoes (including such high profile experts as Jessica Simpson and Kim Kardashian). Still others offer used yoga mats, or baby formula. Ports and roads clogged up with shoes and yoga mats cannot deliver essential medicines, food and supplies. Then there are those who swoop in to adopt children before their extended families have had time to locate them; or just show up to ‘help’ as unskilled volunteers, adding to the confusion and occupying jobs that could go to locals. And there will always be organizations around to capitalize on those uninformed good intentions.

But now there is a small but growing chorus of voices dedicated to equipping individual donors with information on how to help effectively in a crisis. This movement has the power to harness the generosity of individuals, change ingrained giving practices, and create positive pressure on NGOs and aid agencies to demonstrate the impact of their work.

That’s why the award for Best in Aid goes to…the Smart Giving movement, nominated by Saundra Schimmelpfennig of the blog Good Intentions are Not Enough.

This year, a week after the Haiti quake, Stephanie Strom of the New York Times wrote a story on the “unprecedented effort” to teach Americans to resist the impulse to send the wrong goods to Haiti.  Many advocated just sending something very much needed and which has a low transport cost to value ratio: cash. The advice to send cash “appears to be reaching a tipping point,” wrote Strom. Some Americans saw first-hand the piles of unneeded clothing donations in the aftermath of Katrina, or heard about aid distribution problems after the Asian tsunami. Now, people are hearing the message from politicians and policy makers spreading the word on Smart Giving to Haiti in real time, in time to prevent mistakes that cause unnecessary suffering and tragedy.

Contrast Strom’s story with the high profile stories that have appeared consistently since the current surge in interest in global poverty started earlier this decade, like this NYT headline:

Coverage of both global poverty and disasters always stressed the same thing: how much was needed in TOTAL donations. It was never about the danger of the WRONG donations. Today it is.

Saundra Schimmelpfennig herself appeared in the NYT article, and many other news sources (among them CNN, NPR, USA Today, Canada’s CBC radio, WNYC, The Daily Beast, The San Francisco Chronicle, and the Christian news magazine World) sought her advice on everything from the dangers of adoption in the immediate aftermath of a disaster, to how to evaluate disaster relief volunteer opportunities. Here on Aid Watch, guest blogger Alanna Shaikh’s post on how not to help in Haiti, called Nobody wants your old shoes, became the blog’s second most popular and most-widely circulated piece ever (the first was a satire, which we’re no longer allowed to talk about).

The campaign against relying on overhead ratio as a measure of charity effectiveness is also part of the good giving message. In collaboration with six other nonprofits, Tim Ogden of Philanthropy Action launched a campaign last December to convince donors to dump the overhead ratio - the measure of how much money goes to programs versus administrative costs - as a primary means of evaluating the effectiveness of a charity. “We’re finally at a point where people do have an alternative,” said Ogden. In the last few years, organizations like GiveWell, Philanthropedia and Great Nonprofits have emerged to give people more useful information about charities, and to pressure charities to devote the resources to collecting that information and making it public.

Finally, the intensity of the debate on evaluation with randomized controlled trials in the academic world, and new organizations like 3IE (the International Initiative for Impact Evaluation) and DIME (the Development Impact Evaluation initiative at the World Bank), are other facets of the same movement. Behind the heated debate on what methods of evaluation to use, we see a much larger point – many more donors now insist on serious EVALUATION and ACCOUNTABILITY than used to do so.

As we’ve said on this blog before, accountability is not something that anyone accepts voluntarily. It is forced on political actors, aid agencies, and NGOs by sheer political power from below, from well-informed advocates for the poor and listening to poor people themselves. All of this may still be in its early stages, but since aid really CANNOT work without serious accountability, the Smart Giving movement is the best news to come along in aid in quite a while.

UPDATE: (3/20, 8:21am) the Center for Global Development reacts to our inclusion of 3IE, which was their brainchild.

The Economist Debate on Finance for Good or Evil: Round 2 Turns Up Heat

The debate now going on at the Economist is providing one of the most exciting and insightful looks at What We Learned about Finance from the Crash. The debate is very relevant for the role of finance in development (which Levine has devoted his career to studying). Debate is now on round 2 and you can vote for your favorite. Stiglitz has a small lead at this point; my vote still goes to Levine. Joe Stiglitz:

while many of the recent innovations may well have contributed to the bonuses of those in the financial sector, or even the short-run profits of the industry, the link between these innovations and overall economic performance remains unproven....Naked credit default swaps (CDS), betting on the death of other firms, opened up new incentives for doing mischief, with a greater chance of not being caught and less certain punishment....The contrast between the surfeit of so-called innovations that are socially unproductive or worse, counterproductive, and the dearth of innovations in {more productive} areas is striking....

Ross Levine:

There is no reason to believe that the centuries-old synergistic connection between financial and economic development recently ended... Mr Stiglitz overemphasises the impact of financial innovations on the crisis and underemphasises the role of policymakers in triggering financial abuses....Repeatedly, and many years before the crisis, a prominent task force organised by Timothy Geithner (then president of the NY Federal Reserve) warned of the dangers {of Credit Default Swaps (CDSs)}. But senior officials did nothing. This was not a failure of information, nor of regulatory power; and, it does not reflect an inherent evil with CDSs. It was a failure of high-level policymakers to respond....In contrast to Mr Stiglitz, what has disturbed me the most is the resistance of some within the financial policy apparatus to recognise the malfunctioning of the regulatory regime during the decade before the crisis. The authorities failed miserably to fulfil their core responsibility...

Take seriously the power of networks (or just look at some COOL maps)

A few days ago, I met a guy because he was my wife’s girlfriend’s boyfriend. He turned out to be a high ranking official who had some fascinating inside stories about aid and corruption in an African country (which I won’t name to protect his privacy). A local aid worker friend recommended an orthopedist to treat my wife’s badly injured ankle while we were in Addis Ababa. The orthopedist was able to give my wife relief (at full American prices, which went to his NGO) and then he asked if I knew that crazy aid criticizing NYU professor.

One of the best hiring decisions I ever made was to employ my friend’s wife’s neighbor’s daughter.

More and more people are discovering the power of social networks (consult the avalanche of popular books on connectedness and shrinking degrees of separation). Being well-connected to other people, who are in turn well-connected, is a powerful way to get information, to reduce search costs for employment or trade transactions, and to create strong incentives to behave well and protect your own reputation. Formal research in economics celebrates the economic payoff to social connectedness (aka social capital). Phenomena like the Hasidic diamond merchants of 47^th street in Manhattan show the power of business networks based on ethnicity and family. Ethnic networks are common in Africa, like the Hausa traders in West Africa, or Luo fish merchants in Kenya.

The scorn usually shown for Nepotism and the Old Boy Network is so 20^th century! The 21^st century view is to respect the value of social connections wherever they come from!

OK, I’m exaggerating. You need to balance the value of social connections against accountability mechanisms, merit-valuing incentives, and ethical rules, so I don’t just hire my good-for-nothing cousin with other people’s money. Also you need to worry about people who are frozen out of networks through no fault of their own. But that is OFF MESSAGE, so I am going to ignore all that today.

Venture capitalists rely heavily on social networks to assess reputation and to make new deals. And so do social entrepreneurs. Someone tipped me off to xigi.net, which is a fantastic web site for facilitating networks among social entrepreneurs:

xigi.net (pronounced 'ziggy' as in zeitgeist) is a space for making connections and gathering intelligence within the capital market that invests in good. It’s a social network, tool provider, and online platform for tracking the nature and amount of investment activity in this emerging market.

OK, I confess, what really got me to look at this site was the hyper-cool network maps that show connections between the social entrepreneurs. Check out the map for the deservedly well-connected Ashoka folks of Bill Drayton (this is a screen shot, but you have to visit the map on the xigi site to explore its cool functionality).

The point is that part of the effectiveness of Ashoka is because they are so well connected, and they make all their partners in turn more effective in turn by being connected to the well-connected Ashoka.

We could keep dreaming: social networks could be a powerful vehicle for spreading information and evaluations about existing aid projects and actors. The Internet makes this much more feasible that it used to be. GlobalGiving.org is one initiative that tries to implement this idea. Oh, and I happen to know about and trust GlobalGiving because I have known the two founders ever since we worked together on Russia in the early 90s.

I had never heard of xigi.net until a couple days ago. I heard about it from my wife’s girlfriend, the one who had the aid and corruption story-telling boyfriend.

Democracy and development look different from inside a jail cell

One of my most inspirational experiences lately was to meet with an African democratic opposition leader whom I had long admired from afar. He earned his credentials the hard way -- he spent years in jail under the dictatorial government of his country.

While in jail, he read the foreword to one extremely popular book on The End of Poverty. The author thanked the dictator who had jailed the opposition leader for the dictator's "help and guidance" on the book, naming this same autocrat as one of "Africa's new generation of democratic leaders."

He also was not a big fan of statistical regressions that tell poor people when they are allowed to have democratic rights. He can't understand why there's a double standard: real democracy for rich countries, yet doubts about whether poor societies deserve to be free. Not to mention active support of aid organizations for authoritarian leaders. One aid organization gave their representative an award for creative financing of this same dictator while this opposition leader was in jail.

He knew that I am  in favor of democracy for poor nations, and he encouraged me to do better at making that case, partly on idealistic grounds and partly on pragmatic ones. I feel like I have let him down by not making more progress on this longstanding debate.

I am keeping the country and opposition leader unspecified, for fear of further harassment of this courageous activist by his country's "new generation of democratic leader."

Coincidentally, I read today a superb article by Carl Schramm on democracy and capitalism in the Fall 2009 Claremont Review of Books (alas the article itself is not available online). Among other things, Schramm takes down Thomas Friedman for his book "Hot, Flat, and Crowded."  Schramm says:

This is what happens in free market democracies, Friedman tells us -- an unacceptable mess ensues when there are no expert overseers to direct our affairs.

According to Schramm, Friedman's ideal system seems to be if

intellectual elites could rule us in a benign autocracy. And it likely would be benign, because intellectuals are ... so nice.

You can keep all your experts, I'll take one real democratic opposition leader anyday.

Fundamental Lunch-Napkin Equation Valuing Development Expertise

I had a lunch with my boss a long,long time ago at the World Bank Research Department to discuss my research. He listened impatiently to my description of my various research papers and finally burst out, “yes, but what would you tell the Finance Minister to do tomorrow?” I got asked this question what seemed like thousands of times while I was at the Bank. It’s still at the heart of the Bank’s approach to development today, shared by many others. It is fairly simple to calculate the following:[1]

 

All these probabilities are likely to be low. Multiplied together, the overall probability of my advice paying off is pathetically, infinitesimally low.

 If my boss forced me to answer me that question, today I would say to the Finance Minister: “Disregard us World Bank experts. You already know that principles of economics help solve economic problems.  You already know you should be democratically accountable to your own citizens. You’ll muddle through.”

 I didn’t yet have the courage or wisdom to give that answer at that lunch long ago, so my Bank research department career lasted a while longer after that.

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[1] This equation is partly inspired by a different equation that Pete Klenow suggested for the value of economics research in the Brookings volume “What Works in Development: Thinking Big and Thinking Small”

The secret to success is failure

When Jacqueline Novogratz, founder of the Acumen Fund, was in her early twenties, she turned down a promotion on Wall Street and went to the Cote d’Ivoire to open a new branch of the African Development Bank focused on microfinance for women. But the West African women she was supposed to work with shunned her. They talked about her derisively in her presence, letting her know exactly what they thought of an untested, unmarried, American woman with poor French skills being sent to lead them. They intimidated her, locked her out of the office, and (Novogratz suspects) actually gave her food poisoning to scare her away. It worked. On her next assignment, in Nairobi, she spent hundreds of hours analyzing the loan portfolio of a young microfinance organization. Presenting her results, she recommended a drastic restructuring. A week later, she found her handwritten report had been “lost,” and all her work destroyed.

Any other 24-year-old might have gone home. For Novogratz, these heartbreaking episodes led to some profound revelations:

“I wanted to help,” she writes, “but that didn’t matter to anyone but me.” “Donors could convince themselves to give to nonperforming organizations based on a few good stories. The world needed something better than that.”

But the failures didn’t end there. She spent two months reviewing a UNICEF-funded loan program for income-generating projects in Kenya. She found hundreds of broken maize mills, empty schools and unsold baskets: countless “well-intentioned projects gone wrong,” a system riddled with kickbacks, and no accountability. In the end, government officials found her report “too pessimistic.” A World Bank official in Gambia rejected her proposal to lend to small businesswomen instead of giving them grants, using then-conventional wisdom that the very poor couldn’t pay back loans.

As Tom Watson, the founder of IBM, famously said, “if you want to succeed, double your failure rate.”

Because eventually Novogratz found big successes, like the bakery in Kigali where she helped a group of unwed mothers wean their operation off charity and become a real business. And Duterimbere, a micro-lending organization strong enough to survive the genocide in Rwanda.

Not to mention the success of the eight-year-old Acumen Fund, which Novogratz calls a “nonprofit venture capital fund for the poor.” Just as Acumen absorbs the depth and breadth of her experiences and the advice of her mentors, the strength of this deeply personal book lies in its rejection of simplified narratives, easy truths and personal dogma.

Novogratz has emerged as a leading voice of a “middle way” in development thinking: “Philanthropy alone lacks the feedback mechanisms of markets, which are the best listening devices we have; and yet markets alone too easily leave the most vulnerable behind.” She writes:

I’ve learned that many of the answers to poverty lie in the space between the market and charity and that what is needed most of all is moral leadership willing to build solutions from the perspectives of poor people themselves rather than imposing grand theories and plans upon them.

So read this book! It documents in wonderful detail this resounding and inspirational conclusion.

The Age of the Development Expert

Foreign Policy magazine just released its top 100 Global Thinkers for 2009. Twelve out of the top 100 were what is loosely called “development experts:”  Ashraf Ghani and Clare Lockhart (20), Paul Collier (36), Jeffrey Sachs (39), William Easterly (39), Esther Duflo (41), Muhammad Yunus (46), Amartya Sen (58), George Ayittey (76), Paul Farmer (83), Jacqueline Novogratz (85), Andrew Mwenda (98).

 With the obligatory caveats about the more well-deserving who were omitted and questionable rankings, it is nice to see the diversity of the list: female and male, Central Asian, South Asian, African, European, and American, pro-aid and anti-aid, self-confident experts and those who don’t believe in experts (e.g. me), and even good experts and bad experts (kidding)?!

The secret to aid is people

Editors' Note: This will be the last Aid Watch post until Monday after the holiday weekend. Happy Thanksgiving! Which attribute of an aid project makes it more likely to succeed:

1. It will have rigorous evaluation based on some output indicators to make sure it’s working, OR
2. It is staffed by people who really, really want it to succeed?

This question came out of a tour of maternity and family planning clinics of Marie Stopes International in Addis Ababa. The dedicated staff of Marie Stopes courageously confronts a sensitive issue responsible for about a third of the deaths behind Ethiopia’s high maternal mortality rate – deaths of mothers during unsafe abortions. Marie Stopes workers offer safe abortions consistent with Ethiopian law. They also provide the whole package for reproductive choices AND safe childbirth for women: contraception alternatives, testing and counseling for HIV, prevention of mother to child transmission of HIV, prenatal care, and a clinic for difficult, life-threatening deliveries referred from Ethiopia’s official hospitals. (Although I’m NOT a fan of family planning fanatics who decide on behalf of the poor that they should have less children; I AM a fan of family planning people who respect their clients enough to just give them more choices.)

One afternoon’s visit is not enough to verify a great aid project, and my brief stop at the Marie Stopes project is pathetically inadequate. But since informal site check-ups are much cheaper and more universal than more rigorous methods like randomized controlled trials (RCTs), which will only EVER be available for a small sample of aid projects, it’s worth pointing out a few advantages of the humble site visit.

First, a site visit tells you something about clean, well-maintained, high quality facilities, whether medicines and equipment are available, not to mention whether the health workers are present and whether there are patients waiting because they value the services. A government hospital in a regional town failed many of these same tests during another brief visit during this trip.

Second, gut instincts tell you at least a little something about the attitudes of the PEOPLE involved, workers and patients.[1] At Marie Stopes, I was very impressed with the eloquence and dedication of our host, Sister Shewaye Alemu, an Ethiopian who is the Addis Ababa Area Manager.  The Danish country director of Marie Stopes (the only non-Ethiopian employee), Grethe Petersen, told me her mission was to be the LAST non-Ethiopian country director of Marie Stopes.

RCTs, on the other hand, don’t have a good way of getting at the intangible human element in aid projects –is there good team spirit and morale? Are there good relationships between management and workers, and amongst coworkers, and between workers and patients? There are no scientific recipes on how to DO human relations, just tacit knowledge on managing people, and personal attributes like trust, humility, patience, and respect. Getting to know the people involved can give you a sense of how well this intangible stuff is going.

RCTs could possibly identify the right actions, but if PEOPLE’S motivation to get good results is low, these actions will not be implemented in the right way, or not at all. This will usually be obvious in a site visit.

I am not saying that getting to know the aid workers and more rigorous methods like randomized controlled trials are mutually exclusive – both have value. But even one brief visit to Marie Stopes in Addis was enough to increase HOPE in the potential for determined PEOPLE to make a difference in aid, and was strangely more persuasive than randomized trials.

Think of the analogy to the private sector: venture capitalists don’t do randomized trials but they DO talk to the entrepreneur and inspect the operation in situ. We need venture capitalists and entrepreneurs as well as randomized experimenters in aid.

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[1] A related observation: the best evaluations of actual project implementation I have ever read BY FAR are written by anthropologists, such as James Ferguson’s all-time classic on a World Bank project on Lesotho.

What must we do to end world poverty? At last, an answer

OK, that’s too good to be true. There has been a search for sixty years for the right answer. Now most economists confess ignorance how to raise the rate of economic growth -- how to progress more rapidly towards development and the end of poverty. To get out of this dead end, I would respond to this question with more questions.

First, who is “we”? It seems like whoever “we” are, “we” must have unconstrained power to implement “the answer”, so “we” sounds like authoritarian leaders (national autocrats or World Bank officials dictating conditions).

Second, are “we” going to allow poor people to choose their own paths? Of course not, because “we” already know the “right answer” for them.

So this question only makes sense in approach to development that is authoritarian and paternalistic, using Top Down Planning, which in fact has been the prevailing – but unsuccessful – approach to development for six decades.

The paradox of development economics is that Development does NOT require any one person (Expert, Leader, or Aid Official) to have a comprehensive understanding of how to achieve Development (sort of like how evolution managed to happen on its own before Darwin).

(I am drawing on a lecture I gave here at NYU.)

Why is it so hard to figure out how to raise growth? Nobel Laureate Friedrich Hayek once suggested a possible answer:

The growth of reason is based on existence of differences. . . . {between} individuals, possessing different knowledge and different views. [I]ts results cannot be predicted . . . . [W]e cannot know which views will assist this growth and which will not.

Growth is innovation, and you can’t know in advance how to do the innovative thing, or else it wouldn’t be an innovation. Development is BOTTOM-UP outcome of lots of unpredictable individual successes and failures.

But this is not a counsel of hopelessness; in fact, it means economists can still say lots of useful things. You want an environment that is favorable for “searchers:” the private and social entrepreneurs who figure out these innovations. You want to create as many opportunities as possible through comparative advantage, gains from trade, and gains from specialization. This means individual rights, property rights, and not too much interference with markets or free trade. Public goods like infrastructure, health, and education are necessary, but arise best in response to demand, not determined by bureaucratic supply. This means a democratically accountable government. Individual freedom and democracy also allows social entrepreneurs to flourish.

Institutions are necessary to make markets work, but institutions also evolve from the Bottom Up, with pro-market institutions arising from values like individualism, trust, and respect for others.

So the paradox of development economics is that it’s the study of how to get rich without knowing how. As Hayek put it:

It is because every individual knows so little and… because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it.