Posts tagged with: foreign aid

Blog author: jballor
posted by on Monday, April 10, 2006

Bryan Caplan at EconLog says that he has long wondered about the validity of the statistics of the spread of AIDS on the African continent:

The whole story had a quasi-Soviet flavor to it. The main difference: Soviet growth statistics were too good to be true, while African AIDS statistics were too bad to be true. Reflecting on the incentives cemented my skepticism: Just as the Soviet Union had a strong incentive to exaggerate its growth numbers in order to get the world’s respect, researchers and advocates had a strong incentive to exaggerate their AIDS number in order to get the world’s money.

He goes on to cite a recent Washington Post story that backs up his doubts. While Caplan may ultimately be wrong in his skepticism, I think it’s a responsible question to ask. Any system of charity or aid that faces an ongoing and high-level need should wonder about the incentives that it creates for people to take advantage of the system.

Update: More on “disease-mongering” at WorldMagBlog. I suspect there’s an analogous phenomenon in all the climate change, environmental disaster hubbub.

William Easterly, professor of Economics at NYU, has written a new book challenging the prevailing development orthodoxy of increased aid and the “big push” to combat poverty in the Third World. The White Man’s Burden: Why The West’s efforts to Aid the Rest Have Done So Much Ill and So Little Good, published by Penguin is to be released on March 20th.

I have only read a short bit of it so far, but what I have seen is refreshing. He questions the effectiveness of aid, pointing out that aid has been largely ineffective and more of the same is not the answer. In so doing he goes up against politicians such as Tony Blair and Gordon Brown, economists such as Jeffery Sachs, and rock stars such as Bono and Bob Geldof.

Sachs calls for increased aid and Blair speaks of a “big push” to bring about The End of Poverty. (Sach’s book is also v. interesting by the way) Easterly agrees with Sachs that extreme poverty is a tragedy, but while there is a lot of talk about poverty itself, he says there has been very little said

about the other tragedy of the world’s poor. This is the tragedy in which the West spent 2.3 trillion dollars in foreign aid over the last 5 decades and still has not managed to get twelve cent medicines to children to prevent half of all malaria deaths. The West has spent 2.3 trillion and still has not managed to get four-dollar bed nets to poor families

He contrasts the central planning inefficiency of the aid industry to the market’s ability to distribute 9 million copies of the sixth volume of Harry Potter books to the British and American economies in a single day.

There was no Marshall Plan for Harry Potter, no International Financing Facility for books about underage wizards.

Easterly makes the distinction between what he calls planners and searchers. Planners like Jeffery Sachs and Tony Blair advocate large scale attacks on poverty through aid and global initiatives. Planners operate from top-down schemes that are often well intentioned but have not worked. Searchers on the other hand avoid large scale plans and look for entrepreneurial solutions to solve problems that take into account incentives and accountability.

Despite the evidence, why do big plans remain so popular? Well, one reason of course is that planning schemes are inspiring. End poverty by 2025. Grandiose plans often have the support of big name politicians and celebrities and they promise a solution right away. Piecemeal solutions rarely inspire even when they work. Second, no one is accountable when the fail. And when they do fail the answer is do more of the same thing. The One Campaign is a perfect example. But popularity and good intentions are not a substitute for effectiveness.

A third reason is the prevailing allure of utopian schemes. Easterly writes that the planning approach to foreign aid is part of the what Karl Popper calls the “utopian social engineering” approach to problem. This approach has been tried and failed in diverse times and places such as the five year plans of the Soviet Union, the structural adjustment programs of the World Bank in Africa in the 1980s and 90s, and the “shock therapy” used on the transition economies after years of failed planned economies.

Utopianism is nothing new. Eric Voegelin saw Gnosticism and utopianism as the driving force of modern politics, and it appears to be the driving force of aid as well.

Maybe Easterly’s challenge will wake people up to the failures of planning and get them to respect the entrepreneurial capabilities of the people in the developing world. As Hernando de Soto has pointed out in The Mystery of Capital, there is no lack of entrepreneurial spirit in the Third World.

Instead of increasing aid and more top-down plans decrease regulation and barriers to starting businesses, and let local entrepreneurs and the markets find solutions that far away planners have been unable to accomplish.

Bono and the One Campaign want us to sign a petition encouraging the government to spend 1 percent of the U.S. budget for aid to developing countries. The One Campaign states that this would “transform the futures and hopes of an entire generation of the poorest countries.”

Now I admire the intentions of Bono to fight against poverty and he puts his money where is mouth is. But how do we know that increased aid will make a difference? How will the money be spent? Billions of dollars of aid have poured into developing nations, often with minimal if any positive results. Why does increasing something that really hasn’t worked going to make it better. I would understand and support it if we saw results that aid really makes a difference in providing a foundation for sustainable growth that would enable developing nations to lift themselves out of poverty, but this has not been the case. Aid often goes to the hands of corrupt leaders or gets squandered away. Further it is too often connected to ideology that has little or nothing to do with development or poverty, e.g., population control. How many millions of dollars a year go into population control programs despite little or no evidence of a causal relationship between increased population and poverty? In fact, population can often be a positive element for economic growth. See Jacqueline Kasun’s book The War Against Population or Julian Simon’s the Ultimate Resource.

But what if the problem is not insufficient aid, but something else?
According to Hernando de Soto the problem is the Mystery of Capital. There are billions of dollars of “dead” assets in the developing world. Assets that cannot be turned into capital and thus can’t be an engine for economic growth. There is also a lot of saving in the developing world. De Soto writes:

Even in the poorest countries the poor save. The value of savings among the poor is, in fact, immense—forty times all the foreign aid received throughout the world since 1945. In Egypt, for instance, the wealth that the poor have accumulated is worth fifty-five times as much as the sum of all direct foreign investment ever recorded there including the Suez Canal and the Aswan Dam. In Haiti, the poorest nation in Latin America, the total assets of the poor are more than one hundred and fifty times greater than all the foreign investment received since Haiti’s independence from France in 1804.

He then writes:

If the United States were to hike its foreign aid budget level to the level recommended by the United Nations—0.7% of national income—it would take the richest country on earth more than 150 years to transfer to the world’s poor resources equal to what they already possess.

Because these assets are not properly documented with legal title etc, they cannot be turned into capital to start businesses and create wealth like they are in the developed world where we do this every time an entrepreneur mortgages his house to start a business. Now DeSoto’s work is not a panacea, but it addresses some serious problems that need to be addressed. It also recognizes that rule of law, private property, and economic and entrepreneurial opportunity are needed for development.

The One Campaign is exciting, and it is supported by host of cool people. But although it feels good it doesn’t mean that it is the answer. The problem is a lot more complex than the One people make it out to be, but their way has been tried and tried to little avail. Maybe government aid isn’t the answer after all.

Bono and Sachs: Does The Edge feel left out?

Although I am a year behind here, I have just started reading Jeffrey Sachs’s The End of Poverty: Economic Possibilities for Our Time, paperback just released by Penguin (with a foreword by Bono!). I’ll avoid the urge to comment on everything that strikes me this or that way in the book–and I most certainly am not going to try to go head to head with Sachs on economic matters. But, being a student of language, I would like to point out a subtlety some might consider benign, but I suspect is of relevance. It exists in the following passage from the Preface to the Paperback Edition: (more…)

Blog author: jballor
posted by on Friday, February 10, 2006

Forbes is featuring a slideshow highlighting a series of the most corrupt countries around the world, based on findings from Transparency International. The list of the “The Most Corrupt Countries” includes Chad, Bangladesh, Turkmenistan, Myanmar, Haiti, Nigeria, Equatorial Guinea, Cote D’Ivoire, Angola, Tajikistan, Sudan, Somalia, Paraguay, Pakistan, Kenya, and the Democratic Republic of Congo.

(Jacob Silberberg/AFP/Getty Images)

“Under its current president, Nigeria is making a determined effort to clean up its act. President Olusegun Obasanjo has surrounded himself with a dozen senior government officials who are firmly opposed to the corruption that remains rampant. The president has begun issuing a monthly list of the amounts doled out to each of 33 states and more than 600 municipalities, so the funds can be monitored at the grassroots level. So far, it hasn’t had much impact.”

Blog author: jballor
posted by on Thursday, February 9, 2006

The traditional formula for understanding the relationship between the developed and the developing world is the following: Aid = Economic Growth. That is, foreign aid spurs economic development in poorer nations.

A new study released by the National Bureau of Economic Research challenges this wisdom, however. “Aid and Growth: What Does the Cross-Country Evidence Really Show?” by Raghuram G. Rajan and Arvind Subramanian shows that “regardless of the situation — for example, in countries that have adopted sound economic policies or improved government institutions — or the type of assistance involved, aid does not appear to stimulate growth over the short or long term.”

Findings like this should cause advocates of aid-oriented programs like the ONE Campaign and the Micah Challenge to reassess their efforts. One way to change things would be to focus on actual outcomes rather than simply looking at the inflow of aid. The ONE Campaign by definition is focused on the front side, the supply of aid, rather than any actual effects of the aid: “We believe that allocating an additional ONE percent of the U.S. budget toward providing basic needs like health, education, clean water and food, would transform the futures and hopes of an entire generation of the poorest countries.”

A summary of the NBER paper states, “Challenging the simplistic but seductive view that increased assistance from rich countries is likely to put many poor countries on the path to prosperity, a new study on the impact of foreign aid finds ‘little evidence’ that it ever has a positive effect on economic growth.” So the real-world formula looks something like this: Aid ≠ Economic Growth.

“Rajan and Subramanian observe that there is a tendency in analyzing the impact of aid for economists to take sides and conclude that it is good or bad for growth. But the authors argue that neither assertion is valid because the data supporting either argument is so ‘fragile’ that with only minor tweaks, it can yield the opposite result. For example, they take an analysis.”

The important thing to realize is that past aid programs have had no provable positive effect. The conclusion is not that aid has no part to play in future development, but simply that it cannot be the only answer, and as part of the solution, “the aid apparatus (in terms of how aid should be delivered, to whom, in what form, and under what conditions) will have to be rethought.”

Blog author: jspalink
posted by on Monday, February 6, 2006
“Stop sending us your used clothes”
“Why 30 grams of fat is good for the poor”
“Look closely and you’ll see the Virgin Mary in this tortilla”

Acton is wrapping up a three-month project that had print advertisements running in several publications: WORLD, Crisis and the Michigan Catholic. The idea is to get people thinking about the economic consequences of trade policies and the power of entrepreneurial creativity. We’ve received a lot of feedback on this project, most of which was highly positive — with a few critical zingers. (Thanks to those of you who allowed us to use your names in the comments.) If you haven’t had a chance to see the ads, please visit the special Web page we built around this campaign for more information. We’d like to get your insights. Please email us at home [at] acton.org

I fully agree with your underlying point/message. I liked the “used clothes” ad very much. But… As a non-Catholic, I am uncomfortable with the tone of your “Virgin Mary” ad (though it might play well in media markets with a large proportion of Catholics). The “30g of fat” ad also sends mixed messages — while I agree that the appearance of McDonalds is a sign of a degree of stability, protection of private property & investment, and openness to foreign direct investment and other commerce (all very good), I don’t think that American fast food is much of a blessing to the world, least of all the underdeveloped world. Freer markets and protecting the lives/property of agriculturalists would certainly help feed and enrich these people better than new McDonalds branches in major cities would (these countries are far too heavily urbanized as a result of welfarism and statism).
~ Steve Daskal

I think your ads are tremendous. As you know, I’m sure, the provision of food aid to Africa also is detrimental to the local food production market, in the same way as the sending of used clothing. Thank you for these!
~ Philip Sawyer

Great ads. They communicate a difficult concept in a respectful manner. It makes me want to know more about Acton. Keep up the good work.
~ Name withheld

Thank you for the ads. I especially identified the one titled “Stop Sending Your Used Clothes.” As a Kenyan I witnessed how the used clothes market wiped out all the three textile industries that were located in my city, Thika. Even though the used clothes were cheaper and allowed poor people to afford more clothing, it increased poverty in the area because as each industry closed down, unemployment went up impacting many families. Many of these textile industries had hired a lot of women workers. This meant that when these women lost their jobs they could no longer support their families. Many of these women were forced to either depend on men or turn to prostitution. The city began to witness an increase in the AIDS epidemic. There is a high correlation between AIDS and poverty. Poverty does not only strip off people of their dignity but it also makes it difficult for people to make good moral choices. AIDS will only be fully! eradicated when poverty, particularly among the most vulnerable,(women and children) is eradicated.
~ Name withheld

You are doing good work. You are exactly correct with the ad message. I hope they are well heard.
~ Larry Spears

As a student of both moral philosophy and economics, I have been greatly encouraged to see your ads. They are professional, research based, and just the type of thing to make a liberal’s jaw drop. They challenge some fundamental assumptions made by liberals that are completely false. After years studying under a very liberal faculty, I rejoice every time I see a relevant, timely message encouraging free market ideals. The beautifully designed posters are much more effective than some of the lame and unprofessional “research” I have seen from other organizations. Thank you!
~ Name withheld

Quite honestly, I think they are disgraceful, sinful, anti-Catholic and an abomination if one knows anything about charity and economics at all. But I suspect you really don’t care what people think.
~ Name withheld

I think this is a long overdue and an excellent way to start educating Catholics about vital essentials of economics! Keep up the good work!
~ Name withheld

Jay Richards’ previous post on Richard Rahn’s article “Not Rocket Science” illustrates Huxley’s famous statement about a fact destroying a theory.

Jay quotes Rahn’s lists of the politicians and development experts who support increased foreign aid.

It’s no longer just politicians and economists. Bono’s One Campaign is designed to get the developed nations to contribute 1 percent of their GDP to foreign aid for the poorest countries. No doubt Bono and many other supporters have good intentions. But good intentions don’t fight poverty. Economic opportunity, entrepreneurship, and free trade do.

Using the Heritage Foundation/WSJ “Index of Economic Freedom” Rahn lists example after example of the success of countries who liberalized their economies, and failures of those that haven’t.

The economically freest societies are the most prosperous, and the most economically repressive societies are the poorest.

Ireland 30 years ago was among the poorest countries in Europe. It then made a major shift toward freeing up its economy — e.g., its maximum corporate tax rate is only 12 1/2 percent (it ranks No. 3 out of 157 countries in the index). As a result, it now has the second-highest per capita income in Europe and is far ahead of the old leaders like Germany (No. 19) and France (No. 44). (Note, when I refer to per capita income, I do so using the Purchasing Power Parity measure which accounts for local price differences.)

In Eastern Europe, Estonia is economically the freest (No. 7), and Romania the least free (No. 92), though the latter is now making progress. Both countries started out at roughly the same level 16 years ago, but now Estonia has almost twice the per capita income of Romania. Much of the credit for Estonia being the most successful transition country goes to its brilliant and able free-market former prime minister, Mart Laar.

On the other hand, the biggest recipients of development aid over the last quarter-century, for the most part, have gone nowhere economically. Egypt (No. 129), the biggest recipient of development aid in the last quarter-century, is a prime example, with a per capita income about 5 percent of Ireland’s.

Despite the evidence you will continue to hear Kofi Annan and the others clamoring for more aid and more generosity. Instead of aid, they should start asking to reduce tariffs and subsidies and encourage and assist developing countries to set up market economies guided by the rule of law.

Hernando de Soto’s book The Mystery of Capital illustrates that what is needed is not more aid, but the ability to turn assets into capital and less government regulation and interference in the economy.

The One Campaign is right to care about the poor in Africa and elswhere. Perhaps if we could get Bono’s good intentions and passion behind sound economics we might see some real change.