Saving Private Hayek

UPDATE: 3:30pm links to other reviews (all great) of the Fukuyama review at end of this post F.A. Hayek continues to be the most mis-characterized economist of all time.  As if Glenn Beck were not doing enough damage, now even someone I greatly respect -- Frank Fukuyama-- has gotten Hayek wrong yet again. In a review of a new edition of the Constitution of Liberty in the NYT book review, Fukuyama says at the end:

In the end, there is a deep contradiction in Hayek’s thought. His great insight is that individual human beings muddle along, making progress by planning, experimenting, trying, failing and trying again. They never have as much clarity about the future as they think they do. But Hayek somehow knows with great certainty that when governments, as opposed to individuals, engage in a similar process of innovation and discovery, they will fail. He insists that the dividing line between state and society must be drawn according to a strict abstract principle rather than through empirical adaptation. In so doing, he proves himself to be far more of a hubristic Cartesian than a true Hayekian.

To say Hayek's skepticism about government was based on "great certainty" is not just wrong, it is so much the opposite of  Hayek, it's like accusing Michele Bachmann of excessive belief in the Koran.

Hayek's view of knowledge was that it was partial and dispersed among many. The market gave individuals the incentives to apply this knowledge, and coordinated the uses of this local knowledge in a way that rewards each of us who knows best about any particular narrow area. (Frank notes this insight in an earlier paragraph, which makes the paragraph above even more puzzling.)  Government usually lacks both the incentives and the coordination mechanism. In government we don't know who knows best, so which knowledge wins the argument could often be wrong.

This does NOT imply the caricature that Hayek always opposed government action. As Fukuyama notes:

It may, however, surprise some of Hayek’s new followers to learn that “The Constitution of Liberty” argues that the government may need to provide health insurance and even make it ­compulsory.

A government based on individual liberty will have some feedback and reward mechanisms that would produce better government outcomes in such areas than under tyrannical outcomes, and will make possible some kinds of government innovation and discovery that Fukuyama likes. But the political feedback mechanisms even under liberty (like majority voting, protesting, freedom of speech, or lobbying) are much cruder and less likely to align individual and social payoffs than the market feedback mechanisms, so one should be cautious about the scope of activities in which government programs will be effective.  One should be particularly wary of large-scale government plans that require a type of centralized knowledge that Hayek argued forcefully does not exist (down with Robert Moses, up with Jane Jacobs!)

To sum up,  Hayek's skepticism about government was NOT based on his certainty, as Fukuyama would have it,  but on his awareness of his ignorance. (and everyone else's)

Us public intellectuals who are communicating ideas of Hayek to a broader public are NOT fond of ideas that highlight our own ignorance, so one prediction that can be made with a higher degree of certainty than usual is that Hayek will continue to be misunderstood.

UPDATE 3:30pm 5/9/11: Links to other reactions to Fukuyama: Pete Boettke, Don Boudreaux, David Boaz, Don Boudreaux again with more, and, intriguingly, Hayek himself. (HT to Knowledge Problem for bringing them all together.)

Controlled experiments and uncontrollable humans

Bill reviewed two much-awaited books for the Wall Street Journal last weekend: Poor Economics by Abhijit Banerjee and Esther Duflo, and More Than Good Intentions by Dean Karlan and Jacob Appel. The Good:

The books' signal achievement is in addressing two disgraceful problems that beset humanitarian aid. The first is that the effectiveness of aid is often not evaluated at all; the second is that even when aid is evaluated, the methods are often dubious, such as before-and-after analysis that doesn't take into account variables that have nothing to do with the aid itself. Humanitarian aid is usually flying blind. These books take the blinders off—de-worming does work, many other efforts do not.

But things are not as simple as they first appear. The authors are brutally honest about how difficult poverty-alleviation is....

...

In addition to testing out ideas, such field work also has the benefit of letting researchers chat informally with poor people—conversation that can be thoroughly illuminating. What looks like irrationality may just be the failure of outsiders to fully appreciate the problem...

....

“More Than Good Intentions” and “Poor Economics” are marked by their deep appreciation of the precariousness that colors the lives of poor people as they tiptoe along the margin of survival. But I would give an edge to Mr. Banerjee and Ms. Duflo in this area—the sheer detail and warm sympathy on display reflects a true appreciation of the challenges their subjects face. Messrs. Karlan and Appel are at their best in addressing the subtleties of behavior and testing them in the psychology laboratory and in the field. They have produced a remarkably readable and credible analysis of the intertwining of irrationality and poverty.

The Not-so-Good:

Unfortunately, the books also indulge another sort of irrationality: the demand for big, general statements even if you’re discussing limited, context-specific matters. The authors criticize over-generalizing and over-promising in the aid business, but they too often do their own exaggerating when it comes to what their methods can deliver. Both books end with overselling, “five key lessons” (Banerjee and Duflo) or “seven ideas that work” (Karlan and Appel), overriding their own previous cautions about sensitivity to context and the limits to each intervention. Other economists criticize overselling as a common fault of those who do these small experiments.

Read the full review (ungated) here.

Money buys happiness after all

Does happiness rise with income? Are people in poor countries less happy than people in rich countries? Much of what we thought we knew on this topic comes from a famous 1974 study by economic historian Richard Easterlin. Easterlin found that within countries, rich people tended to be happier than the poor. But contrary to expectation, rich countries as a whole were not happier than poor countries. And even stranger, in the US, when per capita income rose sharply from 1946 to 1970, bliss did not rise alongside it.

Easterlin resolved this seeming contradiction—known as the Easterlin paradox—by hypothesizing that “[t]he increase in output itself makes for an escalation in human aspirations, and this negates the expected positive impact on welfare.” That is, having more stuff actually tends to make people want more stuff, and doesn’t make them any happier.

The Easterlin paradox has been crumbling, but is not altogether demolished, with new expanded datasets and recent research. A great summary of research collected in a newly published volume International Differences in Well-Being, edited by Ed Diner, Daniel Kahneman, and John Helliwell, plumbs voluminous new data (World Values Survey and Gallup World Polls from a larger set of countries) to update our knowledge.

One important refinement in these new studies is the distinction between feeling happy from day to day (more a mood, perhaps) and long term “life-satisfaction.” The Easterlin paradox does NOT reliably hold with “life-satisfaction.”

Bill lays out exactly which parts of the Easterlin hypothesis appear to be holding up over time, and which are collapsing under the weight of the new data, in a new review published today in the Lancet.

If the Easterlin paradox no longer holds true—particularly the lack of difference between rich and poor countries on average happiness—what are the implications for development policy?

Tea and the “narrative of Terror”

Even as [Three Cups of Tea] appears to provide a self-critical and humane perspective on terrorism, [this] article argues that it constructs a misleading narrative of terror in which the realities of Northern Pakistan and Muslim lifeworlds are distorted through simplistic tropes of ignorance, backwardness and extremism, while histories of US geopolitics and violence are erased. The text has further facilitated the emergence of a participatory militarism, whereby humanitarian work helps to reinvent the military as a culturally sensitive and caring institution in order to justify and service the project of empire.

From a 2010 article by Nosheen Ali{{1}}{{2}}, cited by Jon Krakauer in “Three Cups of Deceit.”

I have to admit I cringed when I read Mortenson's description of the Waziri men who he claimed kidnapped and held him for 8 days: “Six Waziri men with bandoliers criss-crossed on their chests slumped on packing crates smoking hashish from a multinecked hookah." The gang's leader is a nearly comic parody of the sinister swarthy villain, wearing "rose-colored aviator glasses" and a "thick black mustache that perched, batlike, on his upper lip."

The men come across as barely human savages as they "attack" their meal of roast lamb "with their long daggers, stripping tender meat from the bone and cramming it into their mouths with the blades of their knives."

One of his barbaric abductors was "a wild man with a matted beard and grey turban...shouting in a language [Mortenson] didn't understand."

What fully completes this disturbing picture is evidence that the kidnapping was fabricated out of an uneventful visit, with Mortenson the honored guest of his alleged abductors, one of whom is in fact a researcher at a Pakistani think tank.

The stereotyped, dehumanizing account of these alleged kidnappers is not an isolated occurrence, either. Ali argues that the whole book  recreates the "redemptive narrative of terrorism" advanced by the U.S. Military...while generating a simplistic portrait of Pakistanis that undermines their actual connection with Westerners. (To be fair, the book was mostly written not by Mortenson but rather by the journalist David Relin; "Mortenson" here refers to the dramatized character in Three Cups of Tea.)

Compare this version of the "other" to that present in another aid story, Mountains beyond Mountains: The Quest of Dr. Paul Farmer, A Man Who Would Cure The World. Both books are, as Ali points out, "stories of American humanitarian heroes engaged in international development" only Mountains beyond Mountains, well, isn't so demeaning:

Mountains beyond Mountains embodies a politicised and historicised humanitarianism. It links Haitian poverty and disease directly with structural processes, and details the various ways in which the US military–corporate complex has led to the repression and impoverishment of Haitians. Focusing on the ‘interconnectedness of the rich and the poor’, and on ‘transformation, not education’, Mountains beyond Mountains emphasises the relationality of the American self and Haitian other.

In Three Cups of Tea the relationality of the American self and Pakistani other disappears in a discourse of poverty and ignorance that is largely closed, self-evident and self- affirming—and thus orientalising.

[[1]] Unfortunately a gated link; NYU has a subscription.[[1]] [[2]] UPDATE: Here's the ungated version.[[2]]

The African Success Story

If there was a theme to the development stories I read last week it was that the good news about rising standards of living on much of the African continent is not getting the recognition it deserves in the mainstream imagination. In case you don’t agree that people have a negatively skewed image of Africa as a whole, try this experiment: Ask an educated, well-read (but non-Africanist) friend or relative to estimate what percentage of African countries are at war right now. Let me know what you find. I’ve done it many times and have never gotten anything but a huge overestimate.

Or take a look at the op-ed by rock musician (cum Africa expert?) Ted Nugent, actually published in the Washington Times (HT Wronging Rights):

There is no country in Africa that truly respects freedom or the rule of law. The majority of countries in Africa are in economic ruin because of political corruption and a history ugly with cruel despotism. That’s why starvation and disease are rampant. AIDS is projected to kill as much as half the populations of some countries. Genocide is a way of life. There is little light in Africa.

If you’re not inclined to accept Ted Nugent as representative of widely-held views on Africa (and please, don’t!) do note that his comment, in the same article, that “Africa is an international scab,” is only slightly grosser and more insulting than Tony Blair’s infamous sound byte calling Africa “a scar on the conscience of the world” that will only get “deeper and angrier” without our intervention.

Karen Rothmyer, writing in the Columbia Journalism Review (HT to reader Hemal Shah), says this sensationalized picture of an Africa relentlessly trampled by the four horsemen of the apocalypse is the fault of NGOs and aid groups, which

understandably tend to focus not on what has been accomplished but on convincing people how much remains to be done. As a practical matter, they also need to attract funding. Together, these pressures create incentives to present as gloomy a picture of Africa as possible in order to keep attention and money flowing, and to enlist journalists in disseminating that picture.

She also blames credulous, budget-squeezed and time-pressed journalists who are only too eager to accept aid agencies accounts and figures to support the stories of misfortune. And everyone knows that bad news is news, while the story line that things are spinning along just as they should is generally met with a resounding yawn (and don’t we know that here on Aid Watch).

So perhaps Charles Kenny’s new book, “Getting Better,” which I’ve added to my reading list, will provide an attitude adjustment. The book, reviewed last week in the New York Times, argues that life in Africa and in most of the developing world has improved in recent decades at rates unprecedented in mankind’s history. Although economic growth hasn’t always kept pace, people in Africa today can expect to live longer, healthier, happier, better educated lives than their parents or grandparents.

In his introduction, Kenny reminds us that

the proportion of the population of sub-Saharan Africa affected by famine averaged less than three-tenths of a percent. The proportion who were refugees in 2005 was five-tenths of a percent. The number who died in wars between 1965 and 2001 averaged one one-hundredth of a percent.

While the use of statistics like these requires a disclaimer that any number of people dying from famine or war is too many, they are a useful corrective to the sensationalized doom-and-gloom-filled images of Africa, which may be more firmly and widely held than we would like to believe.

Malaria, past and present

Paul Russell, the main architect of the Malaria Eradication Program, had promised the Eisenhower Administration that the DDT-spray teams would extend a hand of friendship to wavering Cold War allies, revive the entrepreneurial spirit of populations made dull and sickly by malaria, open up huge areas of fertile land for cultivation, pro-mote economic development, end poverty, and spur demand for American products. But the global DDT campaign turned out to be one of the most famous and costly failures in the history of public health. Although by 1970 the disease was eradicated in eighteen countries, most were already controlling it relatively effectively before the program began. Where malaria had been an unmanageable problem, the DDT program had little effect. After retreating for a few years, the malarious mosquitoes returned, now resistant to the chemical, and in some places killed more people than before. Third World poverty did not abate.

This paragraph comes from an excellent essay by Helen Epstein in the March issue of Harper’s.*

What I love about the piece—actually a book review of Sonia Shah’s “The Fever: How Malaria has ruled Humankind for 500,000 years”—is the way it shows the historical roots of a struggle still raging in public health assistance today.

As early as the 1920s, a group of researchers from the League of Nations put forth the theory that to fight malaria you also had to fight the social and economic conditions that caused it to flourish. Their recommended program of “rural uplift” called for swamp drainage, economic development, better housing, education, and health care in malaria-stricken areas. According to Epstein, this strategy had a steady string of successes, slowly eradicating malaria where it was tried in Italy, Borneo and the American South.

But scientists from the Rockefeller Foundation thought that mass-production of powerful insecticides (DDT) would be the silver bullet that would wipe out the disease, without having to improve people’s basic living conditions.

Recent anti-malaria campaigns like that of the Global Fund to Fight AIDS, Tuberculosis, and Malaria, are similarly “predicated on the optimistic notion that fighting malaria is easy;” that if we can just distribute enough insecticide treated bednets, malaria will become a thing of the past. But Epstein’s main takeaway is that malaria is ultimately a political problem as much as a medical one, and “local politics, rather than the charity of outsiders, determines how successfully it can be controlled."

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*The link is, unfortunately, gated. But if you are a student or professor, check to see if your university has electronic access to Harper’s- NYU does.

Don't be snobbish towards merchants & entrepreneurs, and you'll develop

Aid Watch interviewed Deirdre McCloskey, author of the fascinating new book shown here. Could you briefly state the thesis of your book?

Modern economic growth—that stunning increase from $3 a day in 1800 worldwide to now upwards of $130 a day in the richest countries, and anyway $30 as a worldwide average—can't be accounted for in the usual and materialist ways.  It wasn’t trade, investment, exploitation, imperialism, education, legal changes, genes, science.  It was innovation, such as cheap steel and the modern university, supported by an entirely new attitude towards the middle class, emerging from Holland around 1600.  (It has parallels in classical music and mathematics and politics, in all of which the Europeans burst out, 1600-1800.)

What led you to focus on dignity?

I was backed into a corner by the facts!  For half of my career I assaulted the notion that sociology and politics mattered for growth.  Now I seem to be condemned to spend the last half contradicting my earlier self: one minus one equals . . . zero!  Innovation, with its handmaidens of creativity and of persuasion, is not a matter of efficient allocation or the exercise of power.  Economics of the usual sort, whether Samuelsonian or Marxist, can’t get at why Europeans and then the rest of us started around 1800 to become insanely innovative.  A new dignity for innovation and its market applications can: that’s a sociological change, supporting sensible economic policies.  Look at China after 1978 and India after 1991.  So too, I say, Holland in 1600, England in 1700, the English colonies and Scotland in 1750, and on and on.  Praise God.

How does the concept relate to individual rights? Are they two sides of the same coin?

They are at least two coins that need to be paid up.  If a place has dignity for the bourgeoisie but not liberty to exercise it—think of Venice late in its history—then it will not innovate.  And having liberty without dignity—think of liberated Jews in Europe, and the dismal outcome in the Holocaust—then the liberty will prove in the long run a dead letter.  My libertarian friends want the politics by itself, Liberty Alone, to suffice.  I don’t think so: we need dignity, too.  We need the sociological admiration for innovation and markets, to protect and inspire the liberated.

What is (are) the top lesson(s) that development economists should learn from economic history but haven't?

I don’t want to scold development economists, who like economic historians seek the answer to our most important scientific question—the nature and causes of the wealth of nations.  I was trained as a Samuelsonian economist, and taught at Chicago for a dozen years in its most creative period, so I understand and admire the sort of economics that development economists use.  We all want growth to be a story of disequilibrium, misallocation, followed by a movement to a blessed equilibrium.  The trouble is that all you get that way are little Harberger triangles of efficiency gain—not enough to explain a factor of 10 or 30 per capita.  The real story is not, for example, the deeply Samuelsonian notion that The Institution Is It (Doug North is criticized in the book).  It’s that Creativity Is It, which is more Austrian than Samuelsonian, more historical than timeless.  What you can learn from the history is that stasis reigned until we discovered dignity and liberty for ordinary people, and in particular for the disturbing, irritating class of entrepreneurs.

What does your work imply for development today?

Politics and sociology, not psychology and economics, are what make growth possible.  You can kill an economy with a License Raj or a disdain for the bourgeoisie.  People have always been maximizers in markets, but have not always been joyful innovators.  Admiring economic novelty irritates the intellectuals, and giving rein to creative destruction pains the vested interests.  But both of them, dignity and liberty, seem to be necessary.

The myth of Ethiopia’s “natural” disasters

As Amartya Sen has shown, famines in our times are not true natural disasters, but more often the consequence of bad governments and their bad policies. Revisiting the era of Live Aid for a book review in The New Republic, David Rieff gives evidence of how the Ethiopian famine was framed as a natural disaster rather than a political one, so as not to “complicate” the picture for viewers:

… Michael Buerk’s first BBC report from the famine zone opened with the words, “Dawn, and as the sun breaks through the piercing chill of night on the plains outside Korem, it lights up a biblical famine, now, in the twentieth century.” Apart from the facts that it was dawn and there was a famine, nothing in what Buerk said was right. It was precisely not a biblical famine, in the locusts/great flood/visitation-from-God sense that Buerk was evoking. It was, rather, a man-made famine—the direct and in all likelihood inevitable result of deliberate policies in Addis Ababa by the Stalinist government of Mengistu Haile Mariam. That is to say, it was a famine that was more likely to occur in the twentieth century—the heyday of man-made famines—than at any other time in human history.

The book under review, by Peter Gill (also reviewed by Bill in the Wall Street Journal), takes stock of what’s happened and what hasn’t in Ethiopia since Geldof et al admonished us in 1984 to “pray for the other ones” living in a “world of dread and fear/ Where the only water flowing/ is the bitter sting of tears”:

[Gill’s] book is not just a look back at the great controversies of the famine years of the mid-1980s, but also an attempt to understand whether, as he puts it, “beyond the challenges of famine forecasting and hunger relief, are there [now] Ethiopian political institutions and policies in place to deliver the transformation known as ‘development’?”

The elision of the political causes of human suffering in Ethiopia has turned out to be a trend with more staying power than a few of the pop singers in Band Aid. Western governments, donors and academics have kept on admiring and abetting Meles even as he presided (this year) over an election of which Human Rights Watch said “the most salient feature ... was the months of repression preceding it,” and called the government’s performance “multi-party theater staged by a single party state.”

As Gill points out, in the development world, Sen’s celebrated argument in Development as Freedom that “no famine has ever taken place in the history of the world in a functioning democracy,” and its corollary, “that a free press and an active political opposition constitute the best early-warning system a country threatened by famines can have,” is considered to be proved, no longer open to dispute. But for Meles, as Gill reports, it is a neo-liberal myth, “not validated by historical facts.”

And today, despite some success in growing the Ethiopian economy:

[T]he food security of poor Ethiopians is anything but more assured today than it was a decade ago, and it is anything but clear that the country is any less dependent than it ever was on food aid from foreign donors.

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Photo credit

Addicted to misery?

by David Zetland, S. V. Ciriacy-Wantrup Fellow in Natural Resource Economics & Political Economy, UC Berkeley

While Bill and others were messing around with the New Yorker piece on Chinese development, they overlooked another piece in the same issue that may be even more significant (!) than debates over China's growth.

In "Alms Dealers" [sub reqd] Philip Gourevitch reviews Linda Polman's book, "The Crisis Caravan: What’s Wrong with Humanitarian Aid?" The central thesis of this book (as presented in the review) is that the people who deliver aid are addicted to horror stories and starving kids, and this addiction is fed by those who benefit from aid, whether they be local leaders, militias committing atrocities or even victims who don't wear their prosthetic legs because they can get more attention with their stumps.

This thesis has always made sense to me (see this this and this at my day-job blog, aguanomics). Polman is merely putting data (multiple anecdotes) to the theory.

Here's the simple version: If people give you money because of A, then you don't do anything to stop A. Even better, make A bigger so you get more money. Here's the refined version: Bruce Yandle's theory of Baptists and Bootleggers holds that Bootleggers quietly cheer Baptists' efforts to close liquor stores on the Lord's Day. Closed stores mean less competition for Bootleggers selling booze from their, uh, boots.

Although Baptists and Bootleggers may not be explicitly cooperating, they are seeking the same thing (a ban on legal alcohol sales) for totally opposite reasons. The Baptists are deluded into thinking that the ban will end alcohol drinking; the Bootleggers know that the ban is good for business and their profits.

Now, let's reword that for aid: "The Baptists Activists are deluded into thinking that the ban aid money will end alcohol drinking poverty; the Bootleggers warlords and corrupt politicians know that the ban aid money is good for business and their profits."

Who suffers? Drinkers pay more for their illegal booze, and they are not better off. Tax payers pay higher taxes, and aid beneficiaries are not better off.

What's interesting in Polman's book is the way that Bootleggers warlords and crooked politicians are actively making poor people worse off, to raise their profile and increase the flow of "do something!" money funneled through the Angelina-Bono-Geldof-Sachs pipeline.

I covered a number of these issues, focussing on the discretion that middlemen (aid workers and bankers) have in choosing what actions to take and how much effort to exert in my Public Choice article, "Save the Poor. Shoot some Bankers" [open access], but I was not cynical enough to endogenize poverty. Polman's claim that the people in the aid business are actively worsening things for aid recipients, to give themselves job security and more money, is dangerous and damning, but it is fair game for testing evidence for and against.

Even if we give the World Bank, USAID and NGOs a free pass as pure Baptists, then we still have to worry about cynical warlords and politicians who cut off arms and starve their people to keep themselves at the top of the news hour and as beneficiaries of  well-meaning donors who want to do something.

Photo credits (top to bottom): World Bank, USAID, UN

The Aid Trap: A reply

The following post was written by Glenn Hubbard and William Duggan, authors of The Aid Trap, which we reviewed last week. We are delighted that the blog site that Bill Easterly oversees, Aid Watch, has reviewed our book, The Aid Trap. And we are further delighted that on balance the reviewer agrees with what we say in the book. But the reviewer also makes one major objection that we have heard many, many times in the months since the book came out. We have not replied to this objection yet:  Aid Watch is perhaps the best venue for such a reply. So here it is.

First, here is the objection.

The Aid Trap proposes a ‘new Marshall Plan’ for the world’s poorest countries, along the lines of the original Marshall Plan’s support for the local business sector in Europe after World War II.  The Aid Watch reviewer – and many others – point out that poor countries today, especially in Africa, never had the business infrastructure that Europe had before the war.  Rebuilding Europe’s business infrastructure is very different from building a business infrastructure from scratch in poor countries today.  So our proposal for a ‘new Marshall Plan’ won’t work.

Now, here is our reply.

We begin by invoking Bill Easterly’s key distinction between ‘searchers’ (good) and ‘planners’ (bad). Aid planners design and fund projects based on what they want to happen, while aid searchers find something that works and do more of that. But of course, when your search yields something that works, you never apply it wholesale to another situation.  Easterly, correctly, makes that very clear. In this he echoes T.S. Eliot: “Immature poets imitate, mature poets steal.”

In the Aid Trap, we do not propose to ‘imitate’ the Marshall Plan. We propose to ‘steal’ from it. If you see nothing to ‘steal’ from the Marshall Plan for poor countries today, then you have no imagination. If you see a little to steal, then you have a little imagination. If you see a lot to steal, then you have a lot of imagination. That’s why the most creative aid pioneer in modern history, Muhammad Yunus, says this about our book:

The Aid Trap is not about the failure of conventional aid but provides the outline of a solution that can work if taken seriously. It is that rare prescriptive book, and the world must pay attention.

And Bill Easterly says we:

persuasively argue that thriving private businesses are the best hope for the world’s poor and have taken a practical and pragmatic approach to allow business to thrive.

Do you think that Yunus and Easterly do not realize that post-war Europe is different from poor countries today?  Of course they know that.  We have a whole chapter in the book giving some preliminary details on how to adapt the successes of the Marshall Plan to the very different situation today.  It really calls for a whole book devoted just to that.  But these details will fall on deaf ears unless you recognize that development calls for ‘searching’ and then creatively applying what you find to different situations.

We also cite more recent programs that support local business, also worth stealing from.  The ANDE and DCED networks alone provide plenty of worthy examples. But these programs amount to perhaps 5 percent of current aid – scaling them up to 50 percent, which is what poor countries need, calls for some larger coordinating mechanism that operates very differently from the core practices of the major aid agencies. That’s what the Marshall Plan offers.

We would also like to reply to a somewhat less common objection to our book, that the Aid Watch reviewer also makes: institutional reform in poor countries to help their local business sectors will make aid unnecessary, because private loans will supply the necessary capital. So you don’t need a Marshall Plan to channel the aid. Well, here’s the problem: you will never get lasting institutional reform without a middle class that comes from the local business sector. For better or worse, aid is not going away anytime soon:  the best you can do is channel more of it to the right thing – local business – as the original Marshall Plan did. Otherwise, it goes to the wrong things, as Aid Watch correctly and relentlessly reminds us.

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Related post: Could aid revive business instead of stamping it out?

Could aid revive business instead of stamping it out?

This post is by Claudia Williamson, a post-doctoral fellow at DRI. This is a central question of The Aid Trap, by Columbia professors R. Glen Hubbard and William Duggan. Instead of supporting development, the authors argue, aid creates additional hurdles. While aid ‘crowds out or corrupts the business sector,’ we remain caught in an aid trap because business doesn’t pull at the heartstrings the way charity does.

The first half of the book documents the historical roots of prosperity and poverty. While people in today’s rich countries rose out of poverty as it became easier to do business, bad institutions and policies in poor countries have created perverse business incentives (for example: it takes 361 days and costs seven times the average per capita income to go through the seventeen procedures required for a firm in Mozambique to get the government licenses it needs to operate).  Not only does aid support bad policies and the government that created them, but by decreasing the reliance on taxes for funding aid removes incentives for reform.  Why become a less corrupt, more business-friendly government when aid makes it unnecessary?

Aid stifles the private sector by hindering local entrepreneurship, decreasing reliance on market transactions and trade.  It is often more profitable to work for an aid agency or a NGO than to start a business. Locals get squeezed out of business when an aid agency shows up, so instead of competing with aid agencies most try and join them. Why buy grain from the local farmer when a NGO is giving it away for free?

The second half of the book describes Hubbard and Duggan’s proposed alternative, a modern “Marshall Plan” that would support business directly without channeling money to governments or through NGOs. An independent agency would loan money to local businesses, and these loans would be repaid not to the agency but to those local governments that have agreed to reform the business sector and spend the money on public infrastructure.

The Aid Trap’s focus on private markets and the need for change in the business environment is a laudatory move in the right direction for helping the world’s poor. But the authors’ new Marshall Plan raises some obvious questions

As the authors acknowledge, post-war Europe is very different than most poor countries today. Reconstruction is completely different than building from scratch. Most European countries had a healthy private sector before the war, implying that many of the barriers to business in today’s poor countries were absent. Removing these barriers is part of the new Marshall Plan, but transforming bad institutions into good ones remains elusive. And if such barriers were removed, wouldn’t private financing find it profitable to provide loans as we see in India or China, possibly making the new Marshall Plan unnecessary?

Despite this, the book as a whole is a great description of the current gridlock in the aid debate, and a creative attempt to get out of it.

When financial crises are devastating to a country's long-run prospects

I've commented previously on Carmen Reinhart and Ken Rogoff's great book, This Time is Different: Eight Centuries of Financial Folly, arguing that if financial crises are so common and the world keeps growing anyway, then they must not be so damaging  in the long run. I had been meaning to check what the authors themselves thought of this argument, but am only getting around to it now. Here is my email exchange with Carmen Reinhart:

Bill to Carmen: What do you think of the argument that your results suggest that financial crises are really not so enormously damaging in the long run, since you have confirmed they have happened repeatedly in both rich and poor countries alike. Or to put it another way, the US economy in particular has kept reverting to its long run trend path for two centuries despite all the crises you document. All the best, Bill

Carmen to Bill: On the long run effects being non-catastrophic I would tend to agree for most crises.

1. I think I would separate out cases where the crisis led to major policy reversals (epitomized by Argentina--perhaps also Spain in the 1800s)

2. I would also examine the 1930s depression case separately.  For many emerging makets it took more than two decades (no exaggeration-there are several cases where it took even longer) to get back to pre crisis GDP levels.

I guess the gigantic question is whether the current crisis fits into either of Carmen's categories 1 and 2.

Separating the wax from the gold: social accountability in Ethiopia

This post was written by Helen Epstein, author of The Invisible Cure: Why We Are Losing the Fight Against AIDS. I was heartened to see that Shanta Devarajan, the World Bank’s Chief Economist for Africa, blogged about my article Cruel Ethiopia in the New York Review of Books.

The article—and Dr. Devarajan’s blog—deal with the extremely delicate and complex relationship between economic and social development and human rights. He and I agree that there is no simple formula to explain this relationship. However, in order to help the poorest people realize their basic right to development, and to ensure our aid dollars are spent as effectively as possible, we need to try to understand it. That’s why I was troubled by this section of Dr. Devarajan’s blog.

Ethiopia has done well in reducing poverty and child mortality, and increasing primary completion rates because their system of delivering basic services has various elements of this accountability built in.  Local districts receive resources based on clear, data-driven formulae that can be independently verified (by third-party civil society groups). The allocation of these resources within the district is decided in community meetings, with the final budget posted on a central bulletin board for the community to see.

If only this were true.

Dr. Devarajan is describing the “social accountability” component of a World Bank-Ethiopia program to support health, education and other social services. In general, social accountability programs train community groups or NGOs to carry out surveys of local government budgets, monitor the quality of services such as clinics and schools, and publicize problems such as corruption or absenteeism among teachers and health workers. In an ideal world, these groups then work constructively and openly with local government officials to find feasible solutions to these problems.

Social accountability programs can be an extremely powerful mechanism for holding local authorities to account, building local democratic mechanisms, improving education and access to safe water, and even saving lives. A World Bank-sponsored evaluation of two such programs in Uganda found that one increased the amount of public education funding that actually reached schools nearly four-fold, and another increased the survival of children under five by one third, with no additional direct funding for health services.

When I first visited Ethiopia in late 2008, I was eager to see how the social accountability program that Dr. Devarajan refers to was working. But during the four visits I made to the country over the next 12 months, World Bank and other officials repeatedly told me the program had been only a small scale pilot program, that it had ended in 2008, and that an expanded program was planned, but would not start until after the elections in May 2010. So I am not sure what program Dr. Devarajan visited. Even in the pilot projects, the monitoring was not, by and large, done by “third party civil society” groups. Nearly all the NGOs were ruling party affiliates.

There is no automatic relationship between development and human rights. But it’s worth asking whether development can ever occur in a society where a government is deaf to its people. It seems to me that development takes root in societies that listen, either because the people truly have power, as in a democracy, or because the government is afraid of what would happen if they demanded it.

More well-deserved Crisis Recognition for economists: Carmen Reinhart and Ken Rogoff

The NYT Business Section on their book, This Time Is Different. It's nice when a fat book covering 800 years of financial crises can be summed up in one 4-word title, and then the message of the text in one 3-word response: No It's Not.

Or as the authors put it, We've Been Here Before.

The authors and the article both understandably concentrate most of the discussion on Implications for Today's Crisis. These days you can't even talk about broccoli without discussing Implications for Today's Crisis.

But the book will surely remain a classic long after the crisis ends, and then its long-run message might include a development angle: We've Been Here Before, But We Got (and Stayed) Rich Anyway.

Grass roots soccer, African style

In honor of the opening week of the World Cup we bring you these images of grass roots soccer from photographer Jessica Hilltout. Over nine months, Jessica made two trips through Africa—one up the south coast—South Africa, Lesotho, Mozambique and Malawi—and one through a swath of West Africa—Ghana, Burkina Faso, Niger, Benin, Togo and the Ivory Coast.

During her trip she took pictures of worn shoes, tattered jerseys and hand-made balls, capturing the spirit of the sport and its players through these small, homely objects.

In one of the first villages she visited, in Mozambique, she gave the local team a brand-new ball, one of 30 she had brought with her as replacements for the home-made samples she collected. When she came back the next day, it had already begun to come apart. “They had already stitched it,” she wrote. “I felt terrible. The white lady gives them a ball with a shorter life span than any of the ones they make.”

These pictures are a welcome antidote to the commercialism and hype that come along with the FIFA tournament.  From the introduction of Jessica’s new book of photographs, by football historian David Goldblatt:

In South Africa, the world will see that the continent, at its leading economic edge, can build world-class infrastructures and run major global events. This is a good thing, but what the world may not see, and that would be everyone’s loss, are the World Cups that are played every day by teams, friends, communities all over the continent; the leading informal economic edge of Africa where they are making balls, marking pitches, scoring goals, and above all, pleasing themselves. If somehow, the corporate carnival should make all this invisible, we are lucky that Jessica Hilltout’s photographs can take us some of the way there.

Preview the book here, see more of Jessica's video slideshows on vimeo, or read the journal of her trip (caution: this last link requires a fast connection).

NOTE: There is a video embedded in this post. If you can't see it, click here instead.

Paying for school on $2 a day

When James Tooley first discovered low-cost private schools for the poor in urban slums and rural areas in India, Nigeria, Ghana, Kenya, and China, aid agency officials and local government administrators did not receive the news warmly. Most flat out denied that such schools existed. Even if they do exist, said the experts, they can’t possibly be any good. School owners that run for-profit schools in shantytowns and poor villages are just exploiting poor communities. Their teachers are untrained and poorly paid. Their buildings are cramped, dark and filthy. Worst of all, kids don’t learn anything there—they come out “half-baked,” one education official told him.

But what Tooley found, in four years of site visits and a five-country study described in his book The Beautiful Tree, throws a wrench in this familiar-sounding reasoning. Between two-thirds and three-fourths of students in the impoverished areas he studied were in fact attending these allegedly nonexistent schools, even when public options were available.

Why on earth would a poor family just getting by on the meager wages they earned fishing or pulling rickshaws choose to pay between $1.50 and $7 a month to send their children to private schools if they didn’t have to? In some isolated villages, the closest public school was still too far away, or impossible to get to during the rainy or cold seasons. For other families, the hidden costs of “free” education outweighed the very low cost of schools in their communities (in Kenya, for example, one parent described high up-front costs for a building maintenance fund and two complete school uniforms required by the public schools in her area).

Most reasons that the parents gave for their choice had to do with what the World Bank calls the “short route” to accountability (as opposed to the “long route” which works through the political process). Because school owners’ profits and reputations in the community depend directly on whether parents are happy with their children’s schooling, they paid attention to parents’ complaints. Because teachers in private schools can be fired, they were less likely to be late, idle or absent.

The most surprising thing to those of us who harbor prejudices (hidden even to ourselves?) that illiterate, unschooled parents can’t possibly know more than education experts, is that these parents were making smart, informed decisions. Not that the private schools were perfect—far from it: many of the schools Tooley visited were tucked away in poorly lit, dilapidated, smelly buildings without toilets, and teachers there did lack government training certificates, and were paid less than in the public system. But Tooley found that in low-cost private schools, across the board, classroom sizes were smaller, and teachers were much more likely to be found teaching during an unannounced visit. They are also achieving better results: the students in private schools outperformed their public school peers in nearly every subject they were tested in.

Tooley’s is just one study, and this post has given only a very general outline of its findings. (For a more in-depth look, buy the highly readable and entertaining book, or delve into the academic papers). But one lesson seems clear: Tooley’s work should open the door to more open-minded research on how private schools for the poor can play a part in achieving education for all.

China in Africa myths and realities

In recent years, journalists and pundits in the West have looked on China’s economic engagement with Africa, including foreign aid, with growing alarm. An NYT op-ed a few years ago called China a “rogue donor,“ giving aid that is “nondemocratic in origin and nontransparent in practice, and its effect is typically to stifle real progress while hurting ordinary citizens.” Other negative stories about China in Africa include China abetting genocide in Darfur by supplying arms in exchange for Sudanese oil; propping up corrupt government in Zimbabwe; swooping in to undo the anti-corruption work of the IMF or the World Bank in Angola or Nigeria with offers of no-strings-attached loans; and generally ignoring environmental, safety and labor standards on projects in Africa.

So the idea that China’s aid to Africa could be in any possible way better, more credible, or more effective than Western aid to Africa may be a hard sell. But Deborah Brautigam, author of the new book The Dragon’s Gift: The Real Story of China in Africa, argues that focusing only on the China threat makes us blind to the real opportunities Chinese engagement offers for African development.

Part of the problem, says Brautigam, is that there is very little information about what China is really doing in Africa, and in this vacuum, “myths sprang up and were rapidly accepted as facts.” Brautigam fills this void and dispels, or at least complicates, some commonly held beliefs about China in Africa.

In other areas she finds evidence to back up criticism of China’s Africa policies, but argues that we should not see China’s stance towards Africa as static; it is evolving and can sometimes be influenced by international pressure. Throughout, some of Brautigam's best insights come from asking "compared to what?":  The book seeks to compare Chinese aid to Western aid as it really is, not as we wish it were.

A few examples of China myths and partial truths:

1) China targets aid to African states with abundant natural resources and bad governments

Actually, China gives money to almost every single country in Sub-Saharan Africa, excluding only those that don’t acknowledge the One China policy. There is little evidence that China gives more aid to countries with more natural resources or specifically targets countries with worse governance. China is not alone in its interest in natural resources in Africa, and natural resources are not the primary motivating factor for Chinese aid: like all donors, US definitely included, China is motivated to give aid by a mix of political, commercial, and social/ideological factors.

2) The Chinese don’t hire Africans to work on their projects

This depends on how long a company has been working in Africa, and how easy it is to find appropriate local labor. Ultimately, it also depends on African governments themselves, who have the power to dictate what proportion of project staff must be local (as Angola and the DRC have done). Brautigam also points to the stark contrast in standard of living between Chinese workers and managers in Africa, who tend to live in extremely simple conditions, and Western advisors, who more typically live in expensive housing or hotels. While Western experts may be fewer, they cost their projects a lot more.

3) China outbids other companies by flouting social and environmental standards

This one’s true but evolving…Brautigam portrays China as “on a steep learning curve,” struggling with environmental and corporate social responsibility issues at home and abroad. She gives some evidence that China and Chinese companies are becoming increasingly sensitive to international perception on these issues and may be inching towards international standards.

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This Wednesday (February 10) NYU’s Development Research Institute and the Wagner School are co-hosting a lunchtime seminar and book launch event with Professor Brautigam. Click here for more information and to RSVP.

UPDATE: This event has been cancelled due to inclement weather and will be rescheduled. People who have already RSVP'd will receive an email when a new time is confirmed.

Decade Ender Edition: We interrupt this blog for a brief self-promotional announcement

People from Ohio are not supposed to trumpet their own achievements. Ohioans have this belief that if you do the Unforgivable Sin of Self-Praise, a tornado will immediately strike and wipe out you and your entire family. "Pride goeth before a fall" is the state motto. Still, when you are labeled an "aid skeptic" and make enemies everywhere, if you don't praise yourself, who's going to? On top of that, I will appeal to a technicality of quoting others praising me, is that alright Ohio? If not, at least tornadoes are uncommon in downtown Manhattan in the middle of winter. So just to note that the World Bank included my book on the PSD blog's Top Ten Books of the Decade. No, not the White Man's Burden, but my lesser known earlier 2001 book (paperback 2002), The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics. Some insiders, not necessarily including the author, actually like the first book better than the second. And there's nice poetic justice here, since the 2001 version of the World Bank forced me onto the exit ramp out of the Bank because of that 2001 book.

Then BOTH my books made the Top Ten Pro-Liberty Books of the Decade. Thank you liberty lovers, I love Liberty for All also, and thanks for giving me 20 percent of the whole decade liberty franchise. Good thing I didn't waste time on a 3rd pro-liberty book.

So for those who procrastinated on Christmas gifts, or maybe celebrate Orthodox Christmas instead, it's not too late to click on the above links and raise my Amazon rankings!

Christmas Charity Gift-Giving Video Edition: Peter Singer and I on Bloggingheads.tv

Today, the New York Times-sponsored Bloggingheads.TV put up a 45 minute video discussion {video link: Peter Singer & William Easterly on Bloggingheads.tv}, where Peter and I discuss imposing tough love on the global poverty charities who take your Christmas gifts and donations.  I had given a critical review of Peter's latest book in the Wall Street Journal. Yet, Peter and I wound up agreeing that there is just as big a moral obligation on you to make sure your favorite charity gets the money to the poor,  as much as there is for you to give the money in the first place. Let's see, if I follow Peter's logic correctly, I think that implies that you have a sacred moral &  religous obligation, equivalent to rescuing a drowning child, to WATCH THIS VIDEO. After a lot of  criticism of NGO and offical aid lack of accountability and impressive fecklessness, including colorful insults and stories, we did get around eventually to making some positive recommendations on how you can give effectively, including specific charities (such as Women's Trust in Ghana) and monitoring web sites (such as the site Good Intentions are Not Enough).

I hope this is not too much of a distraction, but I have to confess I really don't like talking to a camera, as will probably be apparent in this video (ouch). I love talking to real people in person, even 600 at a time, but talking to a machine is something that is still a work in progress for me. Maybe I should take lessons from one of the celebrity actors who work on aid -- now that is an area where they could use their skills productively!

Anyway, the message does come through loud and clear from both Peter and me: give, and, equally important, make sure your gifts reach the poor. Sounds so simple, and yet you have to work hard at the details to get it right.

“What works in development?” Apparently not markets for books on “What works in development”

A previous blog highlighted the book Jessica Cohen and I edited "What works in development" (self-promotion disclaimer: I was just an organizer; the attractions were stellar academics heatedly debating the pros and cons of Randomized Experiments in development). We got a nice response from readers (the blog post was the 2^nd most popular on Aid Watch since we launched the new site October 14th), and many seemed to want the book. However, for markets to work, we need not only demanders but also rational suppliers. Here something has gone wrong, not quite sure what. After the book jumped up the ranks at Amazon and Barnes & Noble, it sold out at both sites and is indefinitely out of stock.

As for the enigmatic publisher, Brookings Institution Press, finding the book on its web site is a bit of a challenge. It is not in the “New Releases” section, which has 6 books published in 2008. It is not in the section on “Poverty and Development. ” You would have more luck looking at the Brookings Global Economy and Development Program website, which features the book, but that requires a bit of inside knowledge.

To save you endless searching, I spent half the day tracking it down for you. The Brookings link is here. Maybe this will help Amazon find the book from Brookings as well.

Sorry for whining, but when you have worked hard at facilitating something that the customers seem to want, it’s a bit frustrating to having recalcitrant suppliers get in the way.

After all this, you can actually order the book online from the Brookings Institution Press, allowing for 1 to 2 weeks delivery.  Otherwise, you could get Sarah Palin’s insights on What Works from Amazon, delivered tomorrow.