Monday, September 23, 2013

Development, bad incentives and El Salvador

Incentives in development are sometimes perverse. Autocrats/dictators can get rewarded for creating policies that make their people poorer such that developed countries contribute greater amounts of aid that gets siphoned off to offshore accounts. Recently the US gave El Salvador $277 million in aid (WSJ):

Last week the U.S. government's Millennium Challenge Corporation—an independent foreign-aid agency created by Congress in 2004—approved a new package of $277 million in aid for El Salvador, effectively sanctioning the antidemocratic methods of governance that Mr. Sánchez Cerén represents. U.S. Secretary of State John Kerry is chairman of the MCC board, which includes Treasury Secretary Jacob Lew, U.S. Trade Representative Michael Froman and Morton Halperin of George Soros's Open Society Foundations. To understand why so many Americans distrust Washington's foreign-policy agenda, look no further than this bizarre aid decision.

First some more background: Mr. Sánchez Cerén's onetime guerrilla group—the Farabundo Martí National Liberation Front—is El Salvador's ruling political party, and he is vice president under FMLN President Mauricio Funes.

The Funes-Sánchez Cerén government, in office since 2009, has made El Salvador decidedly poorer and less free. Its international reputation as a destination for capital has seriously deteriorated, and allegations of corruption are rife. The World Economic Forum, the World Bank and Transparency International have all noted the country's worsening investment climate.

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