A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Tuesday, February 9, 2010

Transcript: 354 Aid doesn't work, Why?

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Today we begin with Bill Easterly at a recent conference on aid to developing countries.  Then we move into a nasty, but entertaining set-to between noted economist Jeffrey Sachs and economist Damibisa Moyo.  And we end with our thoughts, including the observation that agrarian economies have been decimated along with the phenomenon that today's agricultural products are now produced industrially and depend on heavy use of fossil fuels.

Opening with Easterly.  From a recent Brookings conference on aid, entitled What Works in Aid:  Thinking Big and Thinking Small.  The specific questions and schemes were not so interesting as the premise.

The premise is that aid doesn't work.  Here we have Bill Easterly describing why macroeconomists can't find the determinants of growth.  He begins by quoting microeconomist 
Abhijit Banerjee (Massachusetts Institute of Technology)


Now a question from the audience for Easterly, call it a bonus question, because it is probably the best thing on the podcast today.


John Sewell of the Woodrow Wilson Center

Now moving smartly into the disagreement between Jeffrey Sachs and Dambisa Moyo

from a Huffington Post post by Dambisa Moyo
Ahead of the publication of my book Dead Aid, an author friend of mine cautioned me about responding to opponents who found it necessary to color their criticism with personal attacks. This, he argued, is a tried and tested way of side-stepping the issues and providing a smoke screen when faced with a valid argument.

Jeffrey Sachs's latest posting is just the latest example of using this tactic to obfuscate the facts and avoid addressing the fundamental issues regarding aid's manifest failure to deliver on its promise of generating growth and alleviating poverty in Africa.

And though I am responding here in order to refute his arguments, as a fellow economist, I intend to rely on logic and evidence to make my argument and show Mr. Sachs the professional courtesy that he has failed to show to me.

So, thinking of Jeff Sachs as a gentle kind of guy, I looked up his post.  Indeed, it was personal and, well, it begins

The debate about foreign aid has become farcical. The big opponents of aid today are Dambisa Moyo, an African-born economist who reportedly received scholarships so that she could go to Harvard and Oxford but sees nothing wrong with denying $10 in aid to an African child for an anti-malaria bed net. Her colleague in opposing aid, Bill Easterly, received large-scale government support from the National Science Foundation for his own graduate training.

I certainly don't begrudge any of them the help that they got. Far from it. I believe in this kind of help. And I'd find Moyo's views cruel and mistaken even she did not get the scholarships that have been reported (Easterly mentioned his receipt of NSF support in the same book in which he denounces aid). I begrudge them trying to pull up the ladder for those still left behind. Before peddling their simplistic concoction of free markets and self-help, they and we should think about the realities of life, in which all of us need help at some time or other and in countless ways, and even more importantly we should think about the life-and-death consequences for impoverished people who are denied that help.

Returning to Dambisa Moyo's piece
Development is not that hard. We now have over 300 years of evidence of what works (and what doesn't) in increasing growth, alleviating poverty and suffering. For example, we know that countries that finance development and create jobs through trade and encouraging foreign (and domestic) investment thrive.

We also know that there is no country -- anywhere in the world -- that has meaningfully reduced poverty and spurred significant and sustainable levels of economic growth by relying on aid. If anything, history has shown us that by encouraging corruption, creating dependency, fueling inflation, creating debt burdens and disenfranchising Africans (to name a few), an aid-based strategy hurts more that it helps.

It is true that interventions such as the Marshall plan in Europe and the Green Revolution in India played vital roles in economic (re)construction. However, the key and (often ignored) difference between such aid interventions and those plaguing Africa today is that the former were short, sharp and finite, whereas the latter are open-ended commitments with no end in sight. The problem with an open-ended system is, of course, that African governments have no incentive to look for other, better, ways of financing their development.

Mr Sachs knows this; how do I know? He taught me while I was studying at Harvard, during which he propounded the view that the path to long-term development would only be achieved through private sector involvement and free market solutions.
Taking immediate issue here, the Marshall Plan's success was not so much that it was short, sharp and finite, but that it empowered the people of the receiving nations, who developed, managed and implemented the projects financed by the aid.  Had the same been done in Iraq, we have argued, the result would have been a stable society.  

Another issue is ignoring the resource curse, which contradicts the statement that "countries that finance development and create jobs through trade and encouraging foreign (and domestic) investment thrive."

George Soros has said the pathology of the so-called resource curse, the phenomenon that countries rich in resources commonly have extremely poor populations and extremely repressive governments, arises from the agency problem.  Briefly, the taking of bribes by the representatives of the population from these exploitative companies.  Parenthetically, we have that problem in spades in the developed countries, particularly the United States, where agents in government and banking have played for their own account rather than that of the people they are supposed to be serving.

Unfortunately, Ms. Dambisi Moyo's solution is private financing.  Or as she says, the agreed-upon base of "private sector involvement and free market solutions."  Perhaps via her former employers at Goldman Sachs.  External aid in short, sharp and finite chunks, sound a lot like a loan.

Leaving these questions entirely up in the air and suggesting your own investigation ought to include Dani Rodrick, D-A-N-I  ....

Our premise at demand side is that developing nations have been impoverished by their connection with the power structures of the developed world.  First through colonialism, but continuing through the political struggles that armed these nations to the teeth and created the context for strongman rule.  In connection and in concert, really, come the Western corporations, primarily the resource extraction companies and the plantation agriculture companies.

From this angle Aid becomes a framing exercise.  "Look at all we are doing for these people and yet their own political failings are keeping them from thriving."  One thinks of the charity of Tolstoy, who excoriated the grand charity balls whose attendees spent ten times the amount they donated to the poor to clothe and regale themselves at events of self-congratulation, no doubt saying to each other.  "All this effort and sacrifice on our part, and the poor will always be unable to take advantage of their opportunities."

Contrast, for a mental exercise, a farmer in Keyna working a day's labor in the field for an hour's pay to a Chinese factory worker making plastic toys to put in Cheerios boxes which is only three minutes pay for a bus driver in Oakland carrying commuters to work and a second and a half to the CEO of the company that extracts minerals from Kenya.  The exercise should suggest that, as John Kenneth Galbraith suggested, money flows not to value, but to power.

Contrast again the desperate need to wean ourselves from fossil fuels, the great need of agrarian societies to be built from the bottom up, and the actual production of agriculture deriving to a massive extent from fossil-fuel based industrial agriculture.

Perhaps that is more food for thought than clear coverage, but ...

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