TCS Daily

My Kind of Economist

By Tim Worstall - January 30, 2006 12:00 AM

Even for someone as demonstrably weird as myself, it's rare that a speech at a development bank leads one to gales of laughter and a desire to leap onto a desk singing the praises of the man who gave it.

The man was the incomparable William Easterly. And the speech was "Planners vs. Searchers in Foreign Aid." One of my writing compadres over at the Adam Smith Institute blog called it "refreshing," which it indeed is. But I would go further, dropping our characteristic English understatement, and describe it rather as putting a boot into the rear of the current development aid orthodoxy.

He opens with this piece of fighting talk:

Seventeen years after the fall of the Berlin Wall, there is only one major area of the world in which central planning is still seen as a way to achieve prosperity -- countries that receive foreign aid. Behind the Aid Wall that divides poor countries from rich, the aid community is awash in plans, strategies, and frameworks to meet the very real needs of the world's poor. These exercises only make sense in a central planning mentality in which the answer to the tragedies of poverty is a large bureaucratic apparatus to dictate quantities of different development goods and services by administrative fiat. The planning mindset is in turn linked to previously discredited theories, such as that poverty is due to a "poverty trap," which can only be alleviated by a large inflow of aid from rich country to poor country governments to fill a "financing gap" for poor countries. The aid inflow is of course administered by this same planning apparatus.

He then goes on to eviscerate just about every commonly held belief about how aid should operate. Taking them in turn, he points to the four core beliefs of development economic planners:

1) That there is a financing gap; that more investment is needed (and that there is a direct relationship between the level of investment and growth); and if we sent that extra cash as aid, then it would become that extra investment... As Easterly points out, even the people writing the papers for the World Bank on the issue -- those papers that are being used to support the current jamboree of aid for Africa -- even they in their footnotes point out that the extra cash strategy is wanting, and that investment-growth correlation is false.

2) That there is a poverty trap; that prevents countries from developing seems unobjectionable. Places might simply be too poor to ever save enough to actually get going. Or, in an alternative formulation: all are so desperately searching for that scrap of food for today that they never have a chance to plan and build for the longer term. There are indeed some statistics that support this contention, but unfortunately they are not very convincing ones:

It doesn't help the poverty trap story that 11 out of the 28 poorest countries in 1985 had NOT been in the poorest fifth back in 1950. They had gotten into poverty by declining from above, rather than being stuck in it from below, while others escaped. If the identity of who is in the poverty trap keeps changing, it must not be much of a trap.

3) That aid should be of the government-to-government model; That is, that the wise and good of our society should be using the (forced) charity of the citizenry to aid the wise and good of another country, to in turn aid the poor of their country. Such might be fine if those wise and good were, in fact, wise and good rather than whatever group of scumbags that had managed to climb to the top of the dungheap. (The Professor is, of course, a little more diplomatic about it and probably doesn't share my view that the same is true of our own "wise and good"). But there is little evidence of benevolent, corruption-free dictators:

The search for the elusive "well governed low income countries" casts a broad net. The Millennium Project report lists 63 poor countries that are "potentially well governed," and thus potentially eligible for a massive increase in foreign aid. The list includes 5 out of the 7 countries singled out by Transparency International in October 2004 as the most corrupt in the world: Azerbaijan, Bangladesh, Chad, Nigeria, and Paraguay. The list of "potentially well-governed" countries also includes fifteen governments that Freedom House classifies as "not free." Such dictators as Paul Biya of Cameroon, Hun Sen of Cambodia, and Ilham Aliyev of Azerbaijan are on the list. President Aliyev of Azerbaijan scored a double as most autocratic and most corrupt since he was "elected" to succeed his autocratic father in 2003.

Wise and good, indeed.

4) That sending in aid is equivalent to actually achieving any of the desired development goals; It's extremely difficult to find evidence of success outside of the most limited (and specific) programs -- e.g. vaccinations. But in terms of general development aid? There are very few signs of success.

What Easterly really wants is for people to understand that, in the same way top-down planning didn't make the Soviet block rich, it isn't going to make the poor countries rich. Development is a series of very small steps, all of which must be subjected to both responsibility criteria (accountability) and to information feedback mechanisms. Two things that simply don't exist in any such system of top-down planning. The very idea of a vaulting leap via capital infusion -- or of even the possibility that anyone from the outside could "solve poverty" is sorely mistaken. As for the specific methods of the development status quo, Easterly offers just one example of its backwardness:

For their part, the IMF and World Bank are fervent advocates of free markets for prosperity, not statist strategizing - but some unlucky countries are so poor that they face the requirement to do statist strategizing anyway. This is in the form of what is called a Poverty Reduction Strategy Paper (PRSP). The preparation of the PRSP requires planning that would overwhelm the most sophisticated government bureaucracy anywhere, much less the under-skilled and under-paid government workers in the poorest countries:

"The sector ministries prepare medium-term strategic plans that set out the sector's key objectives, together with their associated outcomes, outputs, and expenditure forecasts (within the limits agreed upon by the Cabinet). These plans should consider the costs of both ongoing and new programs. Ideally, spending should be presented by program and spending category with financing needs for salaries, operations and maintenance, and investment clearly distinguished."

If they have any time left after all this planning (not to mention time left after their meeting with the hundreds of donor missions that arrive every year to check up on the plan), they can also come up with a plan for those same donors, namely:

"[A]n external assistance strategy in the context of the PRSP process that explicitly identifies the priority sectors and programs for donor financing... More detailed external assistance strategies can then be developed for key areas through sectoral working groups in which representatives of major donors and line agencies participate...Agreeing on financing priorities for individual donors within the framework of a global external assistance strategy, rather than through bilateral agreements..."

At least the PRSP requirement is relaxed for failed states; it is instead limited to such peaceful, politically stable, abundantly-staffed, well-governed poor countries like Cambodia, Democratic Republic of the Congo, and Sierra Leone.

By the way, Easterly isn't calling for an end to development aid -- not at all. He simply wants to do away with the assumptions underlying the current process. He wants an abandonment of the top-down approach and a move to small scale projects -- working directly with those affected, with regular feedback as to whether something is working... and please, above all, not the way Jeffrey Sachs is advocating it be done (or Bono, Tony Blair, or any of the other international glitterati).

Actually, he's pretty scathing about Jeffrey Sachs throughout. Whenever he's looking for a paradigm of absurdity in the received view, it's Jeffery Sachs who is quoted. But I think that's a feature not a bug.

(Note: I would just like to make the ritual point that I am in favor of efforts to make development aid work. Why? Partly that sense of moral duty I have to my 6 billion fellow humans. But a great deal more has to do with the fact that their getting richer will make us richer, and our children richer still. All I insist upon is that whatever it is that we do actually works.)

But clear and concise views on what should be done about development don't produce the laughter and cheering noted above. No, rather it was where he gave the speech. Easterly castigates the entire structure and organization of the development bureaucracy. The World Bank, the IMF, well-meaning yet muddled do-gooders like Bono and Sachs, just about anyone and everyone who sits in an office and talks about such things. And where does he do this? At the Asian Development Bank -- a part of that very same development infrastructure.

Here's Easterly in conclusion:

Is it time yet to end the impunity of foreign aid, in which aid agents are not held accountable for whether the scarce aid dollars reach the poor? What a tragedy, that aid agencies have spent $2.3 trillion over the last 5 decades and yet there is still so much preventable human suffering that they failed to prevent. Could the Aid Wall, behind which the poor must put up with Planners while on the other side the rich prosper with Searchers, finally come down? The Planners have had five decades to deliver results in foreign aid and have not done so. It is past time in foreign aid to take power away from Planners and give Searchers a chance.

Truly I declare Professor Easterly to be a mensch. Worth cheering on don't you think? William Easterly -- my kind of economist.

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