Five simple principles for scaling up in aid

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

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

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

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

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

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

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

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

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

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

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

How it helps NGOs to treat them as selfish

Let me respond to one major strand of comments on my recent post, Are we allowed to talk about the self-interest of NGO officials? Is it just too cynical to talk about NGO self-interest? Among the kinder comments received were that I don’t “trust anything or anyone not explicitly out to make as much money as possible.” Or that yours truly “says that no one is straightforward about their motives, so I wonder what his truly are.”

Well, political economy analysis actually leads to a MORE sympathetic view of an organization leader – like an NGO official – than a Sunday School world where he/she is personally either altruistic or selfish. Political economy recognizes organizational and political constraints that could leave an official almost no choice on how to behave. For example, NGOs can’t do their work without funds. And fund-raising may require that you (as NGO-leader) take an over-simplistic approach to the problem, over-promise, or (as in the example of my original post) overstate the importance of YOUR issue relative to all other issues. All of these practices may undermine your effectiveness, or hurt the effectiveness of other NGOs. But the alternative could be that your NGO disappears altogether, which could be even worse for the poor, and which few people would accept easily.

Political economy analysis identifies the crucial incentives and constraints, and looks for ways to modify them and improve the outcome. For example, an individual NGO would have a hard time subjecting themselves to independent evaluation if no other NGOs did so. They might get a critical review that wrecks their funding while the other NGOs keep spreading puff pieces about themselves. We can beat up an NGO for not wanting to know if their aid works, (and we do, because it’s still bad!) but it is also important to advocate a “Code of Good NGO Practice” for ALL NGOs, which would include independent evaluation.

CHINDIAFRICA

Chris Blattman asked me to respond to his big picture piece on China, India, and Africa, which draws on TN Srinivasan’s lecture on China and India at a China development conference. I agree with all the explanations of the China, India, and Africa growth rates – except for the part about explaining growth rates. As I’ve previously argued on this blog, economists have no scientific evidence base for explaining or predicting year to year or even decade to decade variations in growth rates. Probably the best we can do is expect regression to the mean – the fastest growers will slow down, and the slowest growers will speed up.

Despite that obnoxious bit of scientific honesty, I still liked TN’s story of China and India, and Chris’ story of Africa. Maybe storytelling could be useful even without a firm evidence base. The success story of my steak fajitas with sweet corn salsa, despite my inability to follow a recipe or any other reproducible culinary procedure, might contain some useful inspirational lessons for you, even if not ones you could verify with a Randomized Trial.

TN’s story is plausible that China and India had a large CHANGE in per capita income in response to a large CHANGE towards better economic policies. This is also how I usually answer the ubiquitous China Question after every public talk (while still confessing that economists can’t rigorously explain or predict short-to-medium run growth rates).

Chris’ point is also plausible, that Africa’s long-term lag in state formation and technology (exacerbated by the slave trade and colonialism) played a role in its difficult development path. There are enough academic papers on this that I now have a whole section on it in my African Development class. The evidence on the long run is actually better than on short-run growth variations, because the Law of Large Numbers makes it easier to explain the very long run rather than the short run.

And then we can tell another CHANGE on CHANGE story (not rigorous), that Africa’s movement towards better macro and micro policy may be paying off with better growth in the new millennium. Along with tolerating a few inspirational stories, this also jibes with the longer run evidence in LEVELS that respectable economics goes with respectable development.

So perhaps the main takeaway, at a time of general gloom, and after the readers of this blog demanded more positive takeaways, is just that China, India, and (more modestly, new millennium, pre-crisis) Africa have been growth success stories. China and India have achieved an unprecedented mass escape from poverty. Africa has grown faster than ever before in its history. Even though Africa's growth is not as high as China and India, it may be even more impressive since Africa may finally be overcoming the long odds of a technological and state-buiding lag measured in centuries.

And storytelling (even though hard evidence may never be available) seems to confirm that these three successes had something to do with a movement towards good economics.

Are we allowed to talk about the self-interest of NGO officials?

Public officials might occasionally have other motives besides the altruistic pursuit of the public interest. In recent years, one of the boom fields in economics has been political economy (building upon a prior and related field called public choice). Both fields suggest that if we have a fuller picture of what drives public officials, which might include the desire to stay in power or personal gain, we would have a more realistic view of political outcomes. Of course, public officials also care about the public interest, and may be self-selected to be more altruistic than most. It’s too cynical to say they ONLY care about personal gain and power, and it’s too naïve to say they ONLY care about the public welfare. And, in recent years, we have started to view managers of official aid agencies with the same realism.

So why are we so reluctant to have the same realism about NGO officials? Many condemn any discussion of their motives being anything besides selfless devotion to the poor as hopeless cynicism. But why can’t we do political economy on NGOs?

One example is the way that aid has been increasingly fragmented into tiny pieces in recent years because there are increasingly many NGOs advocating different causes. Most of these causes are good ones, but the NGOs don’t take into account the negative effect of promoting THEIR cause on the OTHER causes. The political economy result is that, after feeling all the pressure, many aid agencies are trying to do many things at once to be effective.

I saw one recent example of shameless lobbying for one cause. A group known as Children’s Rights Information Network (CRIN) has a mission to put “children’s rights at the top of the global agenda.” CRIN began a campaign recently to lobby for appointments over 2010-2012 to more than 11 positions in international organizations (including the UN Secretary General) to be limited to those who have “the appropriate commitment, skills and experience to work effectively for children’s rights.”

Well, the World Bank lists “children and youth” as just one of 34 “major topic areas.” Moreover, the interpretation and practical value of “Children’s Rights” is still controversial – the World Bank did not even mention the concept in its exhaustive 2007 World Development Report on “Development and the Next Generation.”

Who is CRIN? It started as an alliance between Save the Children (particularly UK and Sweden branches) and UNICEF in 1991, and that’s pretty much what it remains today. Were the leaders of Save the Children completely indifferent to the large expansion that Save the Children would enjoy if Children’s Rights moved to the “top of the global agenda,” thanks to choosing the right people for 11 major positions? I think Save the Children really does care about poor children, but they could conceivably have less pristine motives. That’s not cynicism, that’s political economy.

The Idiot’s Guide to Answering Queen Elizabeth

Queen Elizabeth famously asked why economists did not predict the crisis. I wanted to add to the large chorus of responses, partly to save the reputation of mainstream economics as something still very useful to development, and partly to have a chance to reproduce this photo from my favorite Hollywood comedy The Naked Gun.

I can offer an Idiot’s Guide to answering the Queen because the subject is so far outside my area of specialization within economics, yet even an ignorant outsider like me knows the answer.

First, Your Majesty, economists did something even better than predict the crisis. We correctly predicted that we would not be able to predict it. The most important part of the much-maligned Efficient Markets Hypothesis (EMH) is that nobody can systematically beat the stock market. Which implies nobody can predict a market crash, because if you could, then you would obviously beat the market. This applies also to other asset markets like housing prices. If you think it is useless to be told you cannot predict the market, then you should change your Palace investment advisor. This knowledge will protect you from a lot of investment scams like Mr. Madoff’s and will also provoke a serious discussion of how to protect your Royal Wealth against risk in an uncertain world.

Second, economists did just fine pointing to fundamentals that were creating large risks of a financial crisis. Even an outsider like me heard long before the crisis hit about the dangers of opaque instruments like derivatives, excessive mortgage lending and leverage, and the bubble in housing prices. Economists have contributed a lot to understanding bubbles, but we can’t time exactly when they will burst (see EMH above).

So unlike some of my more venerable economist colleagues who are falling all over themselves apologizing to Your Majesty for OTHER economists (see for example your knighted subject Robert Skidelsky yesterday in the FT), I see nothing for which to apologize.

So please tell your subjects in poor countries to keep studying basic mainstream economics. This economics not only survived the crisis, it also is the proven set of ideas that get countries out of poverty.

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

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

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

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

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

Unfortunately, it’s not quite that simple.

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

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

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

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

The Soccer Theory of Globalization

by Daniel Kaplan, NYU graduate student in economics and supporter of Bafana Bafana Last season, when the British soccer team Liverpool FC played Real Madrid, the number of Spanish players in Liverpool’s team outnumbered those playing for Madrid. This is one illustration of an emerging trend: while soccer is already the most globalized of sports, it is also fast becoming one of the most globalized professions.

As labor mobility among soccer players has increased, there has been a decline in team inequality at the country level (documented by Branko Milanovic in this 2001 paper). Although traditionally dominant teams like Brazil, Italy, France and Germany continue to win, international tournaments are becoming far more competitive.

Cases in point: at the recent Confederations Cup in South Africa, Egypt beat Italy. And while Brazil eventually won the tournament, they had to fight back from two goals down against the USA (which had never before been in a major tournament final). What is behind the leveling of the international soccer landscape, and how could these lessons be applied to developing countries struggling to benefit from globalization?

Some “soccer economists” argue that nations that are worse at soccer have benefited from exporting their players to world-class foreign clubs, where they gain valuable skills and experience before returning to play for their home country This is similar to recent literature that questions the traditional Brain Drain fear, with the Brain Circulation alternative – skilled emigrants bring home skills and connections that could be as valuable to their home country as the skills brought back by exported soccer players.

But there is also a homegrown story. As Dani Rodrik points out, the Egyptian team that beat Italy had a majority of players with experience playing in domestic, rather than foreign clubs. The USA team that similarly surpassed expectations has key players from both domestic and foreign clubs. So taking advantage of globalization perhaps requires BOTH strong domestic capabilities and international links.

One nation’s strategy for developing a strong domestic soccer league will be very different from the next. American kids who play under the supervision of soccer moms are different from the street kids in a Brazilian favela. Perhaps the venerable theory of comparative advantage needs to become more complex as each country learns to play to its strengths and use more of whatever are its most abundant resources to compete globally. And just like in soccer, it’s hard to predict who will win the game at any particular time in any particular industry. Except the nice thing about trade, unlike soccer, is that both teams win in the end.

The Pope, the G8, and the “Man in Charge” Fallacy

During the G8 meetings, Pope Benedict released a new encyclical saying “there is urgent need of a true world political authority.” This authority is needed:

To manage the global economy; to revive economies hit by the crisis; to avoid any deterioration of the present crisis and the greater imbalances that would result; to bring about integral and timely disarmament, food security and peace; to guarantee the protection of the environment and to regulate migration.

The Pope has fallen for the venerable “Man in Charge” fallacy. There is a “Man in Charge” of the global economy (or, according to the Pope, there should be). So all that we need is to get the right comprehensive set of recommendations to the Man in Charge to fix the global economy.

This a fallacy simply because: there is no Man in Charge of the global economy, There never has been, and there never will be. There is no Man in Charge of any national economy either. This is not about the debate about the role of government vs. markets, this is simply a statement of fact. There are government leaders, to be sure, but they are only one among many different power centers in the political system, society, and in the economy, all with sharply conflicting interests and tools to effect change, and so any individual leader has very limited power to change things. This is true of both authoritarian and democratic systems. You may want one of those leaders to act on a particular problem, which is fine, but you should not think that leader is the Man in Charge.

The Man in Charge fallacy contaminates much of the discussion in development economics. There is an endless search for the right comprehensive strategy to end global poverty, or to achieve national economic development. Such a search only makes sense if there is a Man in Charge, which there isn’t, who would have the power to implement The Strategy. Once you realize that all power is partial, you seek ways to achieve incremental beneficial changes and you end the unproductive search for the Complete Grand Plan to solve the problem all at once.

We pay excessive attention to G8 summits because we think the G8 is the eightfold Man in Charge. That this is a leap of faith is particularly obvious this year. The G8’s solution to the problems of the poor is apparently to bore them out of poverty through sheer wordiness. They reaffirm previous reaffirmations, amplify previous amplifications, and clarify previous clarifications.

Why do we all fall for the Man in Charge fallacy? We like to anthropomorphize a complex system of multiple power centers, bottom-up social norms, and spontaneous markets, innovators, and entrepreneurs, because it is scary to think of such a complex system with no Man in Charge. Pope Benedict XVI understandably thinks it’s possible to have a Man in Charge of the global economy since official church dogma says he himself is the Man in Charge of the church (although perhaps this is just as much a leap of faith). For the rest of us, maybe it goes back to our evolutionary caveman brain wiring, when there really was more of a Man in Charge of a simple hunting band during caveman times.

Once we free ourselves from the Man in Charge fallacy, all of us are set free to use whatever talents or levers of power are at our disposal to contribute our own tiny part of a solution to one problem – and there are so many of us, that many problems will be solved. We know this because, with the greatest improvement in standards of living and social indicators in the past half century in human history, we have already achieved an amazing amount with no Man in Charge.

Fourth of July Edition

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

What a turning point in history this statement was on the first Fourth of July 233 years ago. Yet this bold ideal was proclaimed long in advance of any practical chance of fulfillment. The author of these words was an owner of African slaves. Nobody at the time worried whether “men” was a generic term that also included “women.” Nor did anyone give any thought to whether it applied to people known at the time by words like “barbarians” and “savages.” Yet it worked pragmatically in the long run as an ideal that reformers could appeal to again and again.

So 87 years later, another eloquent writer and speaker could appeal to these words to fight for the end of slavery in the United States:

Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal. Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived and so dedicated, can long endure.

And slavery did indeed end, yet legal equality for African-Americans did not arrive. So 100 years later, another great American would say:

I have a dream that one day this nation will rise up and live out the true meaning of its creed: "We hold these truths to be self-evident: that all men are created equal."

And thanks to the efforts of the civil rights movement he led, African-Americans achieved legal equality.

“Created equal” is a principle yet to be accepted in most of the world, which perhaps has a lot to do with why most of the world is still not developed. Inequality of rights between elites and majorities, between ethnic and religious groups, between men and women is pervasive. But perhaps we can hope that this ideal still serves as a beacon that crusaders continue to cite in their ongoing struggle for the dignity and rights of every man and woman.

Joe Stiglitz preaches markets to poor countries!

Stiglitz in the current issue of Vanity Fair is afraid how poor countries will respond to the global crisis and the record of American hypocrisy on economic policy (like what America prescribed for itself in 2008-2009 vs. what it prescribed for Asia during 1997 crisis). All of this will tarnish market economics so much, fears Stiglitz, that poor countries will turn away from markets altogether in favor of some heavy-handed state planning and socialism. Stiglitz, who is not usually considered market economics’ best friend, is right to be scared.

It’s rare for your regular working-class economist to be the FIRST to worry, so forgive me if I point out that I expressed almost identical fears to Stiglitz’ fears nine months ago in the Wall Street Journal. (On the minus side for crystal ball-gazing, one of my star exhibits for socialism noveau was Honduran president Zelaya, who was just overthrown last weekend.) And then I worried some more about this in Foreign Policy (January/February 2009).

One of the reasons to be worried is the precedent from the 1930s Depression – not the usual worry about a huge wave of global protectionism. No, the worry is about the intellectual precedent that the Depression so discredited markets that government planning and intervention became the default model of development economics for the next 30 years – the 1950s through the 1970s.

I’m thrilled to have a heavyweight like Joe Stiglitz to make this case better and more credibly than I could (along with providing a cheap excuse to recycle a couple of my old columns). The issue now is not subtleties about the right type of financial regulation, global vs. local standards, or calibrating fiscal stimulus. The issue in development now is the revival of the big markets vs. state planning debate. Let’s hope it comes out differently this time than it did for early development economics after the Depression.

The Tipping Point: Fascinating but Mythological?

The “tipping point” is a popular concept covering a whole range of phenomena (and a best-selling book by Malcolm Gladwell) where individual behavior depends on the behavior of the herd.

Its original application was to racial segregation. Nobel Laureate Thomas Schelling developed a beautifully simple model for this. Suppose that whites have different degrees of racism – some would “tolerate” higher shares of nonwhites than others. Schelling showed that the less racist whites would still wind up exiting during tipping because of a chain reaction. At first only the most extreme racist whites exit. But their departure causes the white share to go down, making the second most extreme racist whites uncomfortable, so they also exit. The white share goes down some more, and so now even less racist whites will be uncomfortable being a white minority, and they will wind up exiting too. So the remarkable prediction of the tipping point model is that just a little bit of integration that directly bothered only the most racist whites wound up causing ALL of the whites to exit. So even if the typical white was perfectly happy with integrated neighborhoods, these neighborhoods would be so unstable that the final outcome would be extreme racial segregation. The segregated nonwhite neighborhood will remain permanently nonwhite. Segregated white neighborhoods (with a white share ABOVE the tipping point) will also be stable, because virtually all whites will tolerate a very small nonwhite share. So segregation happens through a chain reaction even though the average white did not want such extreme segregation.

It’s easy to imagine development applications for the tipping point idea. Suppose that people decide to get highly educated based on what is the share of highly educated people in the population. After all, it’s only worthwhile being educated if you can talk to and work with a lot of other highly educated people. If the share of educated people falls below a tipping point, a lot of people will stop getting highly educated, which decreases even further the incentive to get highly educated, and we get the same kind of chain reaction that happened in segregation. So a whole society can tip from high education to low education, below a certain “tipping point” of the share of the highly educated in the population. Assuming that low education causes poverty, this is a “poverty trap” story of low education and underdevelopment.

The tipping point stories are fascinating, but do we observe them in the real world? I got intrigued with this question a while ago, and eventually published a paper testing the predictions of the tipping point story (ungated version here) for its original application: racial segregation of US neighborhoods (reminder to self: my job is not only to blog, also to be a full time academic researcher that must “publish or perish”). The basic prediction is that mixed neighborhoods are unstable but segregated neighborhoods are stable. Data on American neighborhoods from 1970 to 2000 rejected these predictions – it was the segregated neighborhoods that were unstable. There was as much “white flight” out of all-white neighborhoods as there was out of mixed neighborhoods, and there was a white influx into segregated nonwhite neighborhoods. Neighborhoods are still very segregated in the year 2000, but not because of tipping. Maybe segregation exists because most whites really do want segregation, not because of a chain reaction due to herd behavior.

Of course, this is only one test of the tipping point for racial segregation over one time period. Maybe the tipping point is real in other contexts. But think twice and check for evidence before you accept popular stories like the Tipping Point.

Rulers, communities, and revolution

by William Easterly “Whenever any form of government becomes destructive to [the pursuit of liberty], it is the right of the people to alter or to abolish it.”

These inspirational words may have been in the mind of courageous rebels who revolted recently against tyrannical Rulers.

I’m not sure what words were on their minds, though, because some of the rebels were dogs and toddlers.

Welcome to the Great NYU Play-In Revolution that occurred at 5pm on Sunday, June 7, 2009. A community living in a high-rise NYU housing complex rose up in revolt after the Rulers tried to crack down on such criminal behavior as kids playing with balls and skateboards in the plaza around the high-rises.

When the Official History of the Revolution is written, it will be noted that the Rulers had long been trying unsuccessfully to crack down on kids having fun. Small metal signs indicated that ball-playing and skateboards were forbidden. The high-rise community had however long ago evolved different norms – kids can have fun – and so the community ignored the signs for many years.

Local child tells anti-ball-playing
signs to get stuffed But recently, the Rulers escalated matters -- by erecting many big, expensive, glossy signs (at a time of severe financial austerity at NYU) to replace the few small cheap metal signs against fun. As often happens, the de facto power-monger operated in the shadows – some unknown official in NYU Housing (an authority unaccountable to the community) decided on the Oppressive Signs. The threat of enforcement loomed. It was at this point that the Great NYU Play-In Revolution broke out.

As the crowd gathered, the Rulers responded with a show of force, but ultimately backed down before the impressive show of people power.

What does this (ridiculously whimsical) example teach us about institutional rules in development? Some have had a simplistic view of institutions in development as deriving only from top-down formal rules and laws. This example and much research indicates otherwise.

First, formal rules that are incompatible with community norms often have no effect (this extends to things like trying to have registered land titles when the local community already has customary allocation of land rights, research on paper land titles in Africa confirms they have little effect on anything).

Second, if the rulers are especially oppressive they could enforce the incompatible formal rules by force, which would make communities worse off. But in a free society, the community can resist the rulers, which is part of the benefit of a free society.

Third, most rules we live by in a free society are more the product of community norms than they are of formal laws. (Fancy version: Rules emerge out of complex social interactions in a spontaneous order.) This is a good thing, as it makes the rules more responsive to local circumstances and needs. Down with arbitrary rules, up with community norms.

Reader survey results: probabilities, halos, and leaders

What a relief to talk about something other than my distinguished colleague Prof. Sachs.... over to you, Dambisa Moyo! Now back to real work: the reader survey generated a great response – thank you readers! It confirmed a well known psychology experiment, but also contained surprises I did not expect.

The question was which was more probable, (A) or (B)?

(A) a country succeeds at economic development, or

(B) a country succeeds at economic development with a wise and capable leadership.

60 percent of you readers voted A, and 40 percent chose B. (Interestingly, a small sample on my Facebook page voted in the same percentages on the same question.)

On one level, A is the right answer, because B is a subset of A. A contains all successes, both (1) those achieved with wise leadership, and (2) those achieved with any other means. B only contains (1), and so is less likely than A. Well known psychology experiments find the same thing -- that many people have what is called the “conjunction fallacy” (again from my continuing Mlodinow and Kahneman obsession) that would cause them to choose (B). A set of outcomes that fits a plausible story is thought to be larger than one unrestricted by ANY story, even though ANY restriction on the set of possible outcomes always makes that set less likely than an unrestricted set. An explanation usually trumps no explanation, even if it gets the probabilities wrong!

But on another level, the reaction of many readers made me aware of how I had phrased the alternatives too sloppily, which taught me something about how the language we commonly use is often fuzzy on exactly what probabilities we are talking about. I think many of those who voted B were interpreting the question differently: when is development success more likely? With good leadership (B)? Or when the quality of the leadership is unspecified, and so could be either good or bad (A)? Obviously (B). Neither our brain wiring nor our education is good enough to give us linguistic precision about probability and randomness. So my sloppy language created a coalition in favor of (B) between an incorrect answer and a correct answer! How many such coalitions exist on development issues?

There is another related bias that is, called the “halo effect,” often discussed in recruiting job candidates (and also the subject of a great business book). An interviewer who quantifies one positive trait in a candidate excessively assumes that the candidate also performs well on other traits. Later quantitative evaluation finds the traits are not as correlated as the interviewer (or any of the rest of us) assume. So, for example, a beauty queen is not as likely to be a nice person as you think (could this be an excuse to mention the hilarious Miss California parody by Lisa Nova?).

What does this have to do with development? Well, a country that performs well on GDP per capita is also assumed to perform well on having wise and capable leadership. The latter is hard to quantify, so in many cases, our halo effect bias never gets corrected.

So sloppy language about probability, the conjunction fallacy, and the halo effect all make us assume that if the country has a good economic outcome, there is also a good political outcome (wise and capable leadership), even if we have no independent evidence that the leadership is wise. We do this in all countries (and assume bad leaders in unsuccessful countries), and then we notice a strong association between quality of leaders and development success! Therefore (adding the correlation=causation fallacy for good measure, which has its own cartoon) good leaders cause success! This amounts to the most elementary fallacy of them all – circular reasoning – which is still amazingly common in development debates.

Now would anybody like to go back and reread the “Asian success mythology” discussion, and think from yet another angle about whether East Asian successes were due to wise and capable leaders? And maybe if the leaders were not so perfectly wise in East Asia, we don't necessarily want to imitate everything they did?

I guess the lesson in the end is to be precise about probabilities, and demand independent evidence on the whole "wise and capable leadership" thing, rather than just assuming it when things turn out well.

Dani Rodrik’s moody industrial policies – the final questions

Dear Dani, Thanks for your reply to my post.I am a bit frustrated with your statement that industrial policy just has different effects in different countries. If we just say “it works” with good outcomes and “it doesn’t work” with bad outcomes, then there is no way of contradicting this with evidence. ANY policy could pass this test. This kind of “theory” fits past data but cannot predict future outcomes – how do we know what side of the bed industrial policy will wake up on tomorrow?

I know you don’t actually fall for this, but I don’t understand how you actually get around this problem with your “growth strategies” approach. If the effects of every policy are different in every country, what is your evidence base for recommending any particular policy in any country ever?

This jibes with the observation that tons of effort to replicate East Asian Tiger success elsewhere has not actually worked to produce Tiger-like success anywhere else.

Your work has done a lot to convince us all about our inability as “growth experts” to make general recommendations on how to raise growth. But then you seem to recommend more intensive use of “growth experts.” I would go in the other direction and find approaches to development that don’t require these clueless “growth experts,” like systems with a lot of local feedback and accountability – lots of political and economic competition with freedom of choice of consumers, investors, and voters.

Best regards,

Bill

Confused American liberals and conservatives need to get out more

Two recent discussions, one by the “conservative” Gary Becker (brought to my attention by Economist’s View) and the other by the “liberal” Alan Wolfe (which I saw at Cafe Hayek) BOTH seem confused about their own political creeds. This is apparently because of the peculiar way the US political system deals with people who like individual liberty. Becker claims them for the “conservatives” and Wolfe’s “liberals” are happy to get rid of them. One good thing about being a development person is that you travel the world and get to talk politics with a bunch of different nationals. You realize the global definition of liberal and conservative is different than the American one and a lot more commonsensical. So commonsensical that even dictionary.com gets it mostly right: A Liberal is “favorable to progress or reform, as in political or religious affairs.” A Conservative is “disposed to preserve existing conditions, institutions, etc., or to restore traditional ones, and to limit change.” So, for example, Conservatives in Latin America are associated with the old-guard Catholic Church and in Islamic countries with traditional sexual mores and roles for women. Liberals in both places are more enthusiastic about more recent religious practices and sexual and gender norms.

Neither definition says anything about individual liberty. Liberals could violate liberty in their eagerness to change things that individuals DON’T want to change, and conservatives could violate the liberty of individuals who DO want to change.

So Becker (of whom I am otherwise a big fan) faults conservatives for – being conservative. They and Miss California are not flexible enough on “gays in the military, gay marriage, abortions, cell stem research.” Yes, that’s what happens when you prefer – as Conservatives always do -- state-enforced tradition to values that the current generation of individuals might freely choose.

Wolfe says that liberty-loving Hayek would “seek to straighten out the crooked timber of humanity by forcing everyone into a mold established by the market.” To Hayek, who wrote an article called “Why I am not a conservative,” the “market” was just one of many arenas where individuals were free to choose, sometimes overturning tradition, other times choosing to stick with tradition, and in yet other cases making gradual progressive changes. So Wolfe’s statement is logically nonsensical, something like “Hayek would force everyone into a mold where they could be whatever they want.”

The Food’s Not Much, But the Lavatories Are Fabulous

I was startled during a meal at a non-luxury restaurant out in the boondocks in Ghana when my Ghanaian hostess suggested I check out the bathrooms. Lo and behold, they were indeed incredibly clean and hygienic. The reason seemed to be given by the following sign outside the lavatory. Apparently this private firm had won a lot of bathroom-cleaning contracts as a way to promote its own cleaning products for the homes of the Ghanaian middle class (I wish some entrepreneur in the US would think of this for our disgusting gas station bathrooms).

Now I’m not going to take a cheap shot and say this demonstrates the superiority of the private market to solve problems – especially when the private sector restaurant we were eating at was unable to supply most of the dishes that were listed on the menu (although those dishes that were available were fine). Maybe it’s a symptom of the information problems of a poor economy that the free market does well at supplying some goods (the frequently cited but still amazing penetration of cell phones and the internet into Ghana is another one), but misses out on others.

Of course, the “aid economy” is still much worse. Lacking any market or democratic mechanism to get feedback from the customers on what they want, there are even more extreme disparities between hits and misses on aid-supplied goods. One lightly used aid-financed road is a 4-lane highway in perfect condition, while the major Accra to Kumasi thoroughfare is a two-lane road riddled with potholes. Aid-financed buildings are always abundant, but some of the little things that make the buildings fully functional are missing. I saw a health clinic that was missing beds for the patients and tables for the nurse to work on (which was still much better than the well-documented problem of health clinics lacking medicines or health workers). The nurse’s solution was inventive – she kept moving one bed back and forth between the maternity ward, the post-natal recovery room, and the regular patient room, and she hijacked a table from the local aid-financed kindergarten. I am reminded of the old Soviet factory managers that creatively adapted to the perennial shortages in a centrally planned economy – much like the chronic shortages in an aid-financed economy.

It goes on. Food storage rooms are missing enough pallets to keep the food off the floor so it doesn’t rot. Some villages got a mass bed net distribution two years ago, but now some nets are torn, have been washed too many times because the village is so dusty, or some villagers missed getting nets altogether because they were absent on bed net distribution day. Moreover, the bed net villagers in an informal chat indicated other needs that seemed even more pressing to them than nets – they lack any reliable form of transport – to the capital, Accra, which is vital to them for business. Their only hope is to wait hours and hours by the road for some form of transport to come along. And more than anything they wanted – guess what – clean lavatories. There was not a single functioning lavatory in the village, and the villagers seemed well aware of the adverse health consequences of not having lavatories.

This is not to take away from the valiant aid efforts that did supply some critical goods, but it is clear the aid economy is a non-market system that has the same chaotic mixture of over-supply of some goods and shortages of others, common to other non-market systems. As the restaurant example above indicates, however, the free market is also uneven in supplying goods in poor economies. The difference is that we know in the long run, from the historical experiences of other countries, markets get more reliable and get wider and deeper coverage as a country develops (i.e. as transaction and information costs fall, and as markets get thicker with rising consumer demand). And for public goods, increasingly democratic systems with an active citizenry demanding services from their government create a kind of “political market” for public goods that does eventually succeed in creating better and more public services.

Unfortunately, history equally suggests that the non-market systems like the aid economy never do resolve their allocation problems of feast-or-famine. Aid may be a short-term expedient for some critical needs, but already in Ghana far more people are getting their needs met through private markets. Every visitor to Ghana or any other poor society has to be struck by the amazing number and diversity of small producers and retailers visible at every turn of the road – the “Royal Metal Works,” the “God is Able Provisions Store,” the “Urban Fashion and Business Center,” or the simple bald advertisement “Cement is Sold Here.” There is a lot more hope for the villagers and urbanites of Ghana from improved functioning of markets and of democratically-accountable public services than from the aid system. I’m willing to bet that the market will eventually compel the restaurant with the clean lavatories to have most of the items on the menu.

Liberty Land Amusement Park

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

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

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

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

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

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

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

When Will There Be Good News? Does it Help There Already Was Some?

In the midst of the general doom and gloom, fears about how the crisis will affect poor countries, and fierce criticism of markets, states, and aid agencies, perhaps it’s healthy to step back to the big picture, to recognize there has already been some very real good news. The graph below shows some overall statistics for the developing world:

This graph has a mixture of good news that all of the much-criticized triad of markets, states, and aid can take partial credit for. Markets obviously get at least some credit for the reduction in global poverty and increase of global average income. States supply public goods like education, water, and health, and there has been progress on all of these. Aid deserves some credit for successes in health, as already stressed in a previous blog post.

One group that doesn’t deserve much credit is “development experts,” because there is a terrible crisis of confidence in development economics now, where we all freely confess we don’t really know what to advise governments on how to speed up development.

Positive stories are also important to correct unbalanced stereotypes, like the one discussed a couple of days ago by June Arunga on this blog about the rich American woman who couldn’t believe Africans had cell phones. The figure below shows the huge cell phone boom in Africa (the world’s most rapidly growing cell phone market). This one is a success for resourceful African entrepreneurs, like Alieuh Conteh who started a cell phone business right in the middle of the civil war in the DR Congo, with makeshift cell phone towers made out of pieces of scrap metal welded together. He got millions of subscribers and eventually sold the company for a ten-figure sum.

Yes, there is a terrible crisis now, not to mention that all of these indicators are still deeply unsatisfactory, so we all keep criticizing and holding accountable the market, state, and aid actors who fall so woefully short. But let none of us forget how much development already happened over the last half-century, which may inspire us with hope that more step-by-step improvements in markets, states, and aid could make even more development possible.

Amartya Sen on Moralism, Maoism, and Capitalism

Professor Sen has an article on Capitalism beyond the Crisis in the current New York Review of Books. He has a shorter summary in the Financial Times today. I share the universal respect for Professor Sen, but must respectfully disagree on some of his take on capitalism in crisis:

He points out that even Mr. Free Market Invisible Hand, Adam Smith, was aware that you need more than self-interest to make capitalism work. You also need moral values like trust, honesty, and prudence (none of which has been too obvious in the financial sector lately), so business people can do transactions without cheating each other. His story is that free market proponents forgot all that in the run-up to the current crisis. If this is true, free market proponents are amazingly lazy, not bothering to read the zillion articles by economists on precisely these values in the last 15 years. The interesting question is where do these values come from? As this recent research shows, they COULD still arise even in a world of pure self-interest, since self-interested individuals could rationally find ways to bind themselves to norms of good behavior so that they can do repeated transactions with each other (probably helped along by pre-existing norms based on culture or human evolution -- see previous post on values). A norm of trust can sustain a free market driven by the profit motive (usually supplemented by formal institutions). And why do the values sometimes break down? Unfortunately, a norm of distrust is also another possible equilibrium, in which you expect everyone else to be untrustworthy and so you are untrustworthy too. A bunch of cheaters could catch everyone by surprise, destroy trust, and we jump to the bad equilibrium. I don’t know if this has anything to do with the current crisis, but I suspect this type of analysis, as practiced by tons of recent research on values and norms, is more useful than moral sermonizing to those (probably nonexistent) economists who didn’t know you need trust as well as the profit motive.

One last footnote: Professor Sen shows some rather surprising nostalgia for Maoism (in the NYRB but not the FT) over the current Chinese system. He is upset the gains in life expectancy slowed down after China moved from Maoism towards (at least partial) free markets. I would have thought you might also want to count the greatest escape from poverty in human history with the change from Maoism to partial capitalism. I also wouldn’t have thought that you would want to bring up Maoist China in an article on moral values. (Great Leap Forward/Famine/Cultural Revolution/50 million killed by Mao, am I missing something?)

Does Respecting the Individual Promote Prosperity?

I am covering in my Ph.D. development class today a fascinating new body of research by economists that studies the effects of cultural values on economic development (see some references at the bottom). To drastically oversimplify, values across different cultures lie along a spectrum between two separate poles: (1) valuing individual autonomy, believing in equal treatment of individuals, reliance on formal law, the same moral standards apply to all, enforcement of morality is between individuals vs. (2) seeing the individual mainly or only as part of the group, different standards of treatment for group insiders and outsiders, morality only applies to interactions within the group, group enforcement of moral standards, reliance on informal rather than formal institutions.

To continue the drastic oversimplification, the values closer to the first pole are more consistent with the kind of good government associated with democratic capitalism, while values closer to the second pole are more associated with authoritarian and collectivist politics and economics. Measurement of all this stuff is a tricky issue, but here are two illustrative associations:

Then it also turns out this same measure can predict which countries are richer or poorer:

I’m sure there are several issues that occur immediately to readers: (1) the huge variance around the fitted line, and (2) possible reverse causality from development/democracy to values.

On (1), in defense of the statistical associations shown, scatter plots always look terrible if you are not used to them. This is a remarkably strong statistical association by normal standards. However, it certainly is true that culture is not destiny as there is a huge variance of outcomes for the “group values” cultures. Singapore succeeds despite collectivist values, for example. One interesting bit of research suggests that “group values” cultures will export products that don’t require as much impersonal contract enforcement, and thus values is part of what makes you specialize, and specialization is away of getting around cultural “disadvantages.”

On (2), the research suggests that values are determined by more long run factors, such as a long history of despotic rule (yes there is reverse causality from despotism to values but it operates over a very long time), and also intriguing clues about long run cultural values that are contained in linguistic structure within each culture (do you have to say the subject pronouns “I” and “he/she”, as in English, or can you drop them, as in Spanish, along with whether there are different forms of “you” depending on the status of the person you are addressing). Using these determinants of values, researchers have made some progress on establishing a causal link from values to development/democracy.

So the bottom line (again drastically oversimplified) could be something like “the value of individual liberty promotes prosperity.”

So all of the discussion we have already had on this blog on how aid agencies seem to have so little respect for the poor as individuals seems more relevant than ever.

References (not responsible for my simplifications!):

Guido Tabellini, Institutions and Culture, Presidential lecture presented at the meetings of the European Economic Association,Budapest, August 2007. (Tabellini talks about “generalized vs. limited morality” and “trust & respect”)

Licht, Amir N., Chanan Goldschmidt, and Shalom H. Schwartz (2007), Culture rules: The foundations of the rule of law and other norms of governance, Journal of Comparative Economics, 35 659–688.