Tuesday, August 11, 2009

Searchers or planners

What country has had the highest rate of per capita income growth since 1960?
What was the deadliest conflict since World War II? (Answers below)

In the last five decades, the West has spent $US2.3trillion in foreign aid (i.e. almost a fifth of the annual output of the US economy [p.4]). Money overwhelmingly handed out by governments and non-profit organisations. It has overwhelmingly been wasted (or even been counter-productive). In that time, hundreds of millions of people have been lifted out of poverty. They have been lifted out of poverty overwhelmingly by for-profit activity.

I have two objections to socialism. (1) Its tensions with human freedom. (2) That it doesn’t work. (Or, to be more precise, public ownership’s patent, enduring tendency towards declining productivity.) Even at the most basic level of eliminating poverty, capitalism works far better than socialism. And it does so for a simple reason. Socialism inherently becomes increasingly bad at creating and using capital. Capitalism produces capital, and produces it at an accelerating rate. The more capital per person, the wealthier folk are. Hence capitalism’s far greater success at lifting folk out of poverty.

Both socialism and capitalism have incentives. Capitalism just has generally much better ones because capitalism inherently incorporates accountability and feedback (are people buying? are we making a buck?), which socialism doesn’t.

These thoughts were prompted by reading The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good by William Easterly who also has a blog, Aid Watch.
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This is an informed work by an experienced former World Bank economist who has been to many poor places around the world and has deep experience of what doesn’t work in foreign aid and why. (I particularly liked his citing of a question from a couple of other commentators—if foreign aid was a country, what would the World Bank and IMF recommend for it [p.367]). It is a damming critique against the Planners (top down ideas of how things should be done) and eloquent support for the Searchers (bottom up searching for what works).

I liked the book immediately as it accords with my view of public policy as discovery process. As Hayek pointed out (Hayek, Burke and Popper are intellectual heroes for Easterley) markets operate as discovery processes. Easterly emphasises the central importance of feedback and accountability (p.15). The real question is what can foreign aid do for poor people (p11).

Eastlerly uses various studies to set out how things (don’t) work. There is no evidence foreign aid has any effect on economic growth. Starting poor has no effect on country’s growth prospects. There is no “poverty trap”. Bad government does have an effect (pp28ff). (BTW, Botswana is the country with the highest per capita growth since 1960 [p.28], a country in the world’s poorest region—sub-Saharan Africa.)

Easterly discusses the way folk choose which study to believe and then ignore later criticisms of said study. Easterly is telling a story of intentions that operate without serious interest in consequences, without testing of consequences. The book has some great chapter headings: You can’t plan a market. Planners and gansters. The rich have markets, the poor have bureaucrats. Easterly uses “snapshots”, vignettes to illustrate points.

Easterly admits he was a former believer in shock therapy (p.61) and structural adjustment (p.65). (I confess to having had sympathy for the former myself.) Shock therapy typically failed to get past, or change, the networks that had allowed firms to survive the inanities of The Plan in the first place. A point Easterley later applies more broadly (p.101).

Reading Easterley, I was struck yet again—especially in his discussion of growth of institutions, particularly of provision of law and courts—of the relevance of medieval experience, particularly the post-Empire experience. I can remember thinking that post-colonial Africa had some obvious similarities to post-Roman Europe 30 years ago. (How long did folk use crumbling Roman roads before equivalent quality roads were locally built? Well over a thousand years.)

Easterly is very much pro-democracy. Democracy is strongly positively correlated with delivery of government services after adjusting for per capita income (p.118). Easterly suggest that the negative influence of oil on democracy is major mechanism for the “resource curse” (p.126). He notes the utility of anti-Israel posturing for Arab elites (p.128).

How bad can foreign aid be? Pretty bad: there may be a “foreign aid curse”. One study found foreign aid was worse than oil in its anti-democratic effects (Pp 135ff). Easterly notes the tension between planning and democracy (p.145)—a very Hayekian point.

Eastery examines how the poor get aid, and aid bureaucrats, rather than the roads they need (p.166). This is because the poor have no voice in how aid operates (p.167). Easterly argues that a crucial question about how institutions work is whether incentives work for or against the able and well-intentioned: the invisibility of effort and outcomes by aid agencies at core of the problem (p.170). Emphasising how much aid is provided (or, rather, spent) measures inputs rather than outputs (p.182). Vague goals plus not being accountable to the poor gives little incentive for effective evaluation (p.193).

Alas, irresponsibility is congenial: it shields folk from having their ideas challenged. Reading Easterley’s damming analysis, it exactly parallels the failure of indigenous policy in Oz.

It is not all despair. Easterly does list some successful cases, based on his theme of supporting Searchers rather than Planners (pp173ff).

Easterly is very interested in the history of things: particularly the history of foreign aid, which seems to be an endless cycle of repeating the same errors. He assembles a series of 1949-70, 1971-1990 and 2001+ quotes saying exactly the same things (pp199-200) with no sign of any progress in effectiveness.

His prose is very clear, with a good turn of phrase and a willingness to be direct:
In UN documents, the jargon has no substantive content for anyone (p.202).
Easterly has a simple perspective: he is in favour of what works and against what doesn’t (no wonder I find him so congenial). Thus, he cites an example of clever marketing of soap by Unilever to poor Indians. There is no doubt that Unilever is profiting from the poor: who are suffering markedly less diarrhoea and other disease as a result (pp 208-9). But, for plenty of “concerned” folk in the West, Unilever’s profit is a much bigger issue (because it fits their status-strategy) than poor children having less sickness.

But damn the consequences, full speed ahead with my ideas is not a monopoly of any group. Easterly is not a fan of the performance of the IMF or the World Bank. The discussion of IMF intervention and state collapse is very direct (pp218ff):
Isn’t there any society with an illness so advanced that the IMF will decline to prescribe its irrelevant medicine?
Easterly manages to smuggle in explaining a fair bit of useful economics. His take on the infamous Kitty Genovese case (cries for help ignored by 38 New York citizens) is that it is a classic instance of why collective action fails—everyone has much lowered incentive to do anything since there are so many other folk who could (p.345).

His grim analysis of the AIDS crisis (pp242ff) shows how it epitomises everything that is wrong with the foreign aid industry.

Easterly is not a fan of armed intervention either. He adduces considerable evidence against “the old colonial rulers did it better” arguments.
There were enough Europeans with power to mess up the pre-colonial arrangements (which were far from the blank slate that Europeans presumed), but not enough to create anything resembling beneficent institutions. Destruction is always easier than construction.
A point Burke made centuries ago about the British in India:
a few obscure young men, who have obtained, by ways which they could not comprehend, a power of which they saw neither the purpose nor the limits, tossed about, subverted, and tore to pieces … the most ancient and most revered institutions of ages and nations. (Both p.273).
Checks and balances that had evolved locally were swept away by colonially-convenient autocratising. Easterly cites evidence that the never-colonised have, on average, done better economically than the colonised (p.284), that countries with straight line borders (i.e. drawn without reference to local realities) do worse economically (pp293-4) and that countries that have borders that divide ethnic groups do worse democratically (p.292). He is particularly pointed in his analysis the disaster of the Indian partition (i.e. the creation of Pakistan). He cites a leader of Muslim migrants to Pakistan about what a mistake the separation of India was (p.300).

Easterly’s discussion of the problems of colonialism is very intelligent, precisely because he does not see it as The Worst Thing Ever or as Only Done By Evil People For Evil Reasons. Nor does he harbour illusions how local rulers can’t be worse. (The Congolese Civil War is the deadliest conflict since WWII [p.289]. Never heard of it? No Americans, Israelis or other Westerners be victims, participants or to blame.)

By the time you have got to this point in White Man's Burden, you can see why he argues that failure and incompetence was the most likely outcome of the Iraq occupation. Though I think his comment that Armies are inherently Planners and do not have Searchers (p.312) is too glib. A lot of special forces are precisely trained to be Searchers.

There is certainly not much evidence that various armed interventions have worked (pp 326ff).

Also, his comment that contemporary China
combines lack of property rights with free markets (p.354)
is too legalistic. What China has is economic property rights without legal protections. The point is precisely that people have been given use of land, money, labour, etc as individuals or firms—which is what (economic) property rights are. What the lack of legal protection will mean, is something yet to be revealed.

As for what can be done?, Easterly argues aid should concentrate on the myriad of small, local, doable things and forget about governments and structures which it patently cannot do anything useful about (pp 365ff). We should try lots of small things, and see if they work. Part of the basic principles he suggests (p.382). Though there is certainly plenty of useful nuggets of policy advice—such as study which found that bank disclosure rules had a positive effect, powerful bank supervisor-regulators did not (p.375). But there is a lot of evidence that official discretions are not a good way to regulate markets.

I have long been a sceptic about foreign aid, having early on been impressed by the argument of Peter Bauer (now thoroughly vindicated). My examination of indigenous policy in Oz has deeply reinforced my scepticism.

But it is very hard to have an intelligent debate on foreign aid (or indigenous policy for that matter). For too many folk, it is a matter of Look at me, I’m Virtuous, I Support More foreign aid. Look at him, he is Wicked, because he Doubts the Value of foreign aid. Truth is hardly likely when the “correct” answer is pre-determined. As Easterly points out, the problem is precisely that the poor are powerless, and the powerless are easy to project our preconceptions on to.

So the failures mount: in all sorts of forms. White Man’s Burden is a very humbling book. But one anyone at all interested in the wider world should read. For the ill-informed, heedless incompetence of the Iraq post-invasion occupation is of a piece with the ill-informed, heedless incompetence that created Iraq in the first place
(The young officer [T.E. Lawrence] had informed his Colonial Secretary [Winston Churchill, as it happened] that the sprawling territory that would one day be called Iraq was in fact three distinct entities with natural capitals in Basra, Mosul, and Baghdad. It was the estimate of Lawrence of Arabia that the three Ottoman provinces could be held together only at the point of a gun. That estimate proved to be durable. Even Saddam's long tenure offered no evidence to the contrary.)
And White Man’s Burden eloquently explains how deep, pervasive and entrenched such failures are and why.

3 comments:

  1. I like your comparison of capitalism and socialism. I have often said the same thing: that capitalism has done more than any other economic system to lift people out of poverty.

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  2. Thank you. As Thomas Sowell says, the problem with socialism is it sounds good, particularly as intentions. It is in effects that it fails.

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  3. I recently came across your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


    Margaret

    http://grantfoundation.net

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