Thursday, September 03, 2009

Are the Limits to Development Financial?

The most recent posting on "Bill Easterly Watch" is telling of the types of advocacy and solutions that they (and indeed many in the aid world) seek from Dr. William Easterly's blog, and why I somewhat harshly note that they 'just don't get it':

Why the single minded focus on aid effectiveness when we know that the limiting factor in many instances is financial. Primary education, food production, disease control, health, infrastructure, are all in many instances limited by the funds available to be deployed on them.
Do we really "know that the limiting factor in many instances is financial"? If they had read William Easterly's books, like the Elusive Quest for Growth (Amazon), they might learn for example (to roughly paraphrase) that investments in education, while a potential catalyst once economic growth gets going, poorly correlates to economic growth. Their conclusion based on this questionable assumption is that what we need is "more and better aid".

They should have a look at governance indices like The Heritage Foundation's Freedom Index, the World Bank's Doing Business Index, Transparency International's Corruption Perception Index or the International Property Rights Index. While I won't rule out the possibility that it's a massive coincidence that the better a country performs on the various scales also correlates positively with greater the economic growth, I doubt this is the case. Further, not one of these indices cites "aid" as a factor in growth.

I'm not sure if there are any countries in the world that have industrialized as a result of aid initiatives. Indeed, I would suspect there are enough instances where quite the opposite is true - that aid has actually stalled economic growth encouraging the type of centralized solutions that developing countries need the least instead of reinforcing property rights, exiting government involvement where private industries can move in, freer trade and finally, better access to foreign investment.

No Mr. Turner, what we need isn't more and better aid. The problem with aid isn't Bill Easterly either as your blog's name somewhat churlishly suggests. Dr. William Easterly is simply one of the leading voices to call for greater accountability and question the role of aid in development with a growing body of work whose authors include Dr Easterly, Dambisa Moyo, Hernando De Soto, Brink Lindsey among many others.

What we need is less aid and better governance. Countries who nurture these conditions have greater access to foreign investment that greatly surpasses funds available through aid and is generally more accountable.


Students To End Extreme Poverty said...

Thanks for that. I haven’t read anything by Lindsey yet. Your arguments actually, in a way, get to the heart of what we’re saying.

People make faulty generalizations based on Professor Easterly’s writings (Moyo’s too) and from there infer because aid has not been directly tied to economic growth, governance and property rights are the primary issue.

So you disagree that aid should go for education, but you don’t mention any of the others. Presumably you agree? What about the many other parts of the argument?

The limiting factor is financial in stopping roughly eight million disease deaths annually, not governance or property rights. As it is for school, as it is for food production, clean water, and infrastructure, in many instances all over sub-Saharan Africa.

Development is hard, stopping people from dying from stupid things – like diarrhea which killed over two million children this year alone and costs ten cents to treat – is not.

We don’t have to wait on governance or property rights or foreign investment to stop those two million children from dying from diarrhea.

Again, I’d like to point out the difference between poverty alleviation and economic development. Primary education brings down HIV transmission and has cascading benefits in a number of spheres – which aside from contributing to poverty alleviation can contribute to long term development.

Poverty alleviation is vital to long term growth.

Rodrik, Ha-Joon Chang, Sen, and Stiglitz all have some excellent stuff on how foreign investment can be great in certain situations, though certainly not across the board without a variety of other mechanisms to ensure it is productive. Kind of like aid.

Again, I would like to highlight the importance of aid in concert with a number of another initiatives, not as a stand alone solution as you seem to be criticizing it as.

Aid from Japan to South Korea help lay the foundation for successful development, a point which seems to have missed Professor Easterly and Mr. De Soto. Aid to India drove the green revolution, despite the obvious problems associated with that, is credited with saving 300,000,000.

Of course governance is important, but it alone is not sufficient to explain impoverishment in many instances. Sub-Saharan Africa grows three percent slower than other developing countries even when controlling for governance.

Good luck getting foreign investment without basic infrastructure, education, health, food production, and clean water. Primary commodities might work but we all know how that can go.

Foreign investment and foreign aid are different tools and they serve different purposes. Of course foreign investment is important, but there needs to be incentives for investment, which aid can help create.

Finally, again, I would like to point out the shortfalls in using historical examples in aid from before ten years ago. Change your scope to the last five or ten and it is amazing what it has accomplished.

What did you think about Malawi tripling its food production over the last four years?

Clement Wan said...

Thanks for the reply. Given how futile aid has been in delivering sustainable changes and as your reply suggests, advocates for aid continue to discount the importance of governance and property rights. It's a simple fact of life that if you spend hundreds of millions of dollars, one should hope that you make at least someone happy for a given period of time.

Many of the symptoms of poverty that you noted are just that - symptoms - where economic growth and wealth become the greatest antidotes. That's why economic "growth matters".

I only used education as the starting point because I used to be one who believed that education was critical to the economic growth of a nation. It's not (this isn't to say at an individual level it isn't important or useful).

On the other issues you note, they are more easily refutable in pointing out that food capacity, disease control and even environmental issues like dealing with disasters, wealth creation is a sustainable antidote versus a band-"aid" solution. To achieve wealth and economic growth, governance and property rights must come first.

Development is hard - but the principles are easy. Infrastructure doesn't come first. There already exist incentives but it is rather unnecessary for those incentives to be "created" by governments or aid agencies. There are a number of firms out there open and willing to make capital investments in infrastructure - Hutchison Whampoa being one of them. Roads, highways, yes, even healthcare (there are a few examples of this on can make excellent investments.

Heck, even most of the basic diseases like dysentery that you point out are often quite easily preventable with rather limited costs as you note - but the lack of funds isn't the barrier. It's governance and the will of governments.

While I don't doubt that there are likely aid programs that do help - and I am a supporter of relief in unstable/war torn countries. Otherwise again, it would be crazy to think that with the billions being spent in aid, that there aren't at least some problems that are avoided/temporarily resolved.

You state: "Good luck getting foreign investment without basic infrastructure, education, health, food production, and clean water. Primary commodities might work but we all know how that can go." Wrong. Give me a supposedly "failed" market and I'll almost certainly be able to show you how government intervention created unintended consequences that led up to their failure.

You point to Malawi, but what happens with the subsidies dry up? Here's a more skeptical article:

I note the fluff of even the link you referenced doesn't show very basic numbers and goes on to claim such things as "it pays for itself" when no, it clearly doesn't if they still have to subsidize it. Compare and contrast this to India and China where market reforms have had much larger impacts than even the green revolution you cite. China's agricultural revolution was even more dramatic given their population size - going from a massive importer of food to now a massive exporter.

But let's even say for a moment that we agree that there should be greater aid. Better governance greatly improves the effectiveness and efficiency of aid. Unless your goal is just to spend money (which frankly is what it seems like for a lot of aid agencies with limited regard to accountability and efficacy), governance and propertly rights must come first.