Aid Thoughts

Digesting the difficult decisions of development

Archive for category Political Economy

The migrant’s dilemma

Aug 23

Posted by Matt in Development, Political Economy, Research | 3 Comments

Where would people end up if there were no barriers to movement?

The folks at Gallup, who recently produced some interesting figures on the large number of people from developing countries who  would like to permanently emigrate, have followed up with new data on where people would like to move to.

Using their survey data to predict the proportion of the population who would move if all barriers were dropped, they constructed net migration indices, basically showing the increase/decrease in adult population which would result if everyone got their wish. For example, below we have the top gainers (in percentage terms):

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Keeping it in the Family

Aug 7

Posted by Ranil Dissanayake in Development, Economics, History, Political Economy | No Comments

Michael Corleone condemns his brother to death.

'Never take sides with anyone against the Family again. Ever.'

One of the enduring questions of historical debate is why Western Europe and North America so outperformed the rest of the world economically in the 1800s. Though some (notably Andre Gunder Frank) have argued that the ‘advance of the West’ was really an illusion created by the decline of the rest, it is generally agreed that Western Europe and America had or developed a number of advantages that took their growth forward and retarded the growth of other regions – sometimes through luck, sometimes through natural endowment and often through a combination of the two.

One aspect of these advantages has interested me recently: financial services and the organization of business. It’s now widely accepted that better financial services was part of the reason why Western European companies in particular prospered in this period. The Dutch pioneered the Joint Stock Company to mitigate the risks of long mercantile voyages, and the Dutch East India Company was an early example of the separation of ownership and management. In Britain and then in the rest of Western Europe, regional banks came to prominence and provided the means by which firms could raise capital for expansion. This was generally accompanied by a changing of the structure of firm.

Businesses had till this point been, by-and-large, enterprises that were run by families. The emergence of new forms of financing and capital made it easier to raise money and also made it easier to share risk, as the legal code governing how liability should be assigned to the ownership of a firm changed as different forms of financing became available and different types of company evolved to take advantage of financing which enabled them to exploit risky opportunities overseas.

At the time the East India Company was demonstrating the sheer size that could be achieved through the use of these new firm structures and through exploitation of financing (as well as war-like methods that were part of the ‘trading’ world at the time), almost all the successful Chinese companies were still keeping resources within the family. They were unable to access credit and unwilling to experiment with the new firm structures that expanded ownership and dispersed fiduciary risk to individual owners. Many historians now argue that the innovations in financing allowed the West to expand faster, while the changes in the structure of the firm and the accompanying legal code gave their private enterprises a massive advantage in expansion into new markets.

What I find particularly interesting about this is that the family-ownership pattern has persisted in much of Asia and Africa right to the present day, despite the massive expansion in financial services available. I’m not just talking about the small stalls and dukas which are run by families but major businesses, particularly in India, which are often owned by a patriarchal character, with senior posts in management distributed to sons, sons-in-law and other favoured family members. In South Asia and Africa family networks and even more broadly, ethnic or similar networks remain incredibly important for business. Go almost anywhere where there is an Asian business community – more often than not, you’ll find that there is a network of family run firms, and where they have links to each other, it’s common that they are from the same region or area.

Why has this structure of the firm persisted so long, despite legal and financial advances that should be encouraging larger, less risk-averse firms? The standard answer is ‘trust’. When family or strong ethnic ties bind the decision-makers in an enterprise, the argument goes, it is easier to persuade owners to part with new capital for the expansion of the firm, there are less likely to be financial disputes, theft, and liability can be enforced as it falls within a small circle – no shirking of responsibility is possible. Yet this doesn’t convince entirely. As the infrastructure surrounding firms improves, these issues are less and less binding. Financial institutions now provide far more opportunities for those with collateral, while insurance, commercial courts and dispute resolution all mitigate the risks that using family trust as a basis for commercial enterprises is supposed to leaven.

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Best laid plans

Aug 3

Posted by Matt in Aid, Development, Political Economy | 15 Comments

No one else could possibly think of the same thing

There is a wonderful moment in the 1979 film “Life of Brian,” where the People’s Front of Judea, an anti-Roman revolutionary group, embarks on a mission to kidnap the wife of Pontius Pilate to force him to make political concessions. As they sneak through the palace, the group bumps into the Campaign for a Free Galilee, another separatist movement which is also planning to capture Pilate’s wife. The two groups argue over who gets to do this and end up killing each other before Pilate’s guards even get a chance to intervene. You can watch the scene here (fast-forward to 5:00).

Monty Python’s comical vision of a fracture resistance, comprising dozens of similarly-named groups with redundant objectives, is strikingly familiar in the world of aid. While the NGO community suffers from these problems the most, it is official donor fragmentation and duplication which is particularly disheartening as its relative size (a few dozen approaching 100 donors versus hundreds of international NGOs) means coordination and communication ought to be easier.

It is in this muddled context that USAID, has just announced its own “plan” for achieving the 2015 targets for the Millennium Development Goals, soon to be followed by USAID’s overall strategy for development assistance, all ahead of next month’s UN summit on the MDGs.

Let’s simplify things for a minute: Imagine a world where the US was the only donor. In this context, an individual strategy seems quite sensible – the solo donor just needs to decide on what its objective function is (i.e poverty reduction, growth, reaching the MDGs) and allocate aid flows accordingly to best achieve those objectives.

Now let’s move to a world where there are two donors and make the rather strict assumption that they have the same objective (perhaps achieving the MDGs). If each of those donors continues to operate as if they are in a vacuum, without knowledge of or concern over each other’s movements, they will both tend to spend money on the same programmes in the same places. This results in “donor darlings,” countries and programmes that have too many donors and probably receive too much aid money.

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Workers

Aug 2

Posted by Ranil Dissanayake in Development, History, Political Economy | 5 Comments

Emilio and Charlie knew something about work...

In a recent post I argued that development work paid too little attention to the prospects of unionism as a method of protecting the poor and mitigating inequality in a rapidly growing economy. I mentioned that there have been a number of successful union movements historically that have served this specific purpose. In the comments, Lee (of Roving Bandit fame) made the very valid point that a unionism movement may actually harm some of the poor if it blocks out ‘Outsiders’ to the movement and prevents them from accessing the benefits of organization. These outsiders are, of course, likely to be the unemployed seeking work.

This is of course possible. But a union can function in a number of ways. The most common in the developed world is as a set of insiders seeking to protect their material conditions by collectively bargaining with employers and preventing outsiders from undercutting their position. This is the kind of unionism, relying as it does on an insider-outsider distinction and the coercive ability of the union to exclude outsiders from even entering the realms of discourse, which Lee worries about.

In the developing world, a different kind of unionism can be seen. In many cases the politically loaded term ‘Union’ may not even be the best descriptor for what is observed. We could rather call them ‘workers cooperatives’. Their aims are different: not only to create a better division of an industries surplus between capitalists and labour, but to protect basic rights which are poorly understood and poorly protected. This kind of unionism isn’t as widely required among the workers in the developed west because the state takes this role for all citizens through legislation on health and safety and so on (the obvious exception being for illegal migrant labour, who are denied access to the state’s protection or are operating under the radar and hence opt not to appeal to it).

What these unions or cooperatives exist for has less to do with bargaining and more to do with ensuring that legal frameworks are provided and that workers understand what their rights are vis-à-vis employers. One relatively well known historical example concerned migrant labour which entered South Africa for mining work. Many workers were under the misapprehension that their presence in South Africa was illegal and therefore accepted conditions well below the statutory minimum until a movement built up to ensure that all workers were aware of their statutory status.

Alongside this kind of unionism is another kind – the representation of a ‘captured’ population. The classic case here is of plantation labour descendent from migrants: these are workers who have historically formed a labour pool that is almost bonded, even after being freed. Bonded plantation labour of slave plantations were established across the globe: Zanzibar’s economy was in large part built on slave plantations, and Sri Lanka’s on bonded plantation labour. The case of Sri Lanka is particularly illuminating. Though the plantations were captured labour and virtually bonded through the lack of education and social mobility imposed on them, a number of union movements emerged, including the Ceylon Worker’s Congress. Under its original leadership, the CWC made enormous gains for all plantation workers – improved education, housing, healthcare and wages without apparently operating any penalizing system to punish either those who defected from the union or those who were members of other unions. Similar success stories are apparent in Southern India in particular.

Both of these models could be profitably applied to the African context. Such is the excess of unemployed (more accurately, underemployed) in Africa, that individuals are deeply reluctant to assert their rights to employers. Employers also use strategies to minimize the risk of this, particularly in rural areas, where employers often employ a calculated strategy of using day-workers, changing the individuals picked up regularly. Often, they target female heads of household, who are even less likely agitate, given their precarious financial situation. These areas need movements to educate individuals about their rights and the laws, but also need organizations to represent their voice collectively and therefore reduce the risk associated with individual agitation.

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The Power of Equality

Jul 19

Posted by Ranil Dissanayake in Africa, Development, Political Economy | 6 Comments

Before they turned to cookie cutter stadium rock, RHCP cared about the Power of Equality.

I recently wrote a piece for Change.Org about something I’ve been thinking about a lot since I got back from South Africa: the disappearance of equity and redistribution from the vocabulary of development work. Up till about twenty years ago or so, it was a common practice in development work to talk about ‘social and economic equalization’ as an aim in its own right. This normally took the form of deciding on a manner in which redistribution of wealth could be made: through taxation and selective expenditure, through active redistribution of resources, such as land, through subsidization and so on. Over time, this approach was removed completely from the discourse. Structural Adjustment was one reason for this, as it tightened purse-strings and regulated taxation structure. It began to seen as counterproductive, discouraging private sector enterprise. There were many reasons for this decline, many of them sound.

However, the concept of redressing imbalances in society didn’t disappear from development discourse. It simply mutated to a new kind of approach, described as ‘pro-poor’ expenditure. The idea behind pro-poor expenditure is essentially that Governments and donors should focus on development activities that aim most directly at the poorest sections of the population. This is less controversial than redistribution though taxation, subsidization or resource transfer, since it simply means that the portfolio of development projects is weighted in a different way.

This approach is based on a very different set of assumptions about the economy than a redistributive policy mix. By focusing expenditures on activities that are most directly related to the poor, the implicit assumption is that economic development and the improvement in the lot of the poor is best served by spending on activities directly relating to them, and allowing the industrial and commercial agriculture sectors to work on their own, unaided or with much less aid. This is new: prior development policy looked more at the prospects for developing a modern economy, one which generates wealth rapidly, in the mould of most currently developed nations, and then seeking to protect the poor from the worst inequities and exploitation that such an economic system can generate.

This is a fundamental change, one that deserves far more thought than has been given to it. Spending more directly on the poor has an obvious intuitive appeal: you’re not relying on any opaque feedback mechanisms to see support translate into gains for the poor, as you would under the historically far more common approach of pushing for overall economic strength and then redistributing through taxation. The idea is that if you spend directly on the poor, if the project is worthwhile, you will see a gain in their standards of living.

Yet, there’s a big unanswered question about this approach: what is the long-term effect of such expenditure? Does it generate a fast-growing economy which creates jobs internally? Or does it create a sort of smaller-scale, class-based aid dependency, something like the morphine drip Matt suggests aid might function as?

I suspect the latter is much more likely than the former. In the last few years, I’ve had the chance to examine the donor portfolios in a number of countries, and have seen first hand how they use their influence to put pro-poor expenditure at the centre of local budgeting processes as well. Yet, the suspicion lingers that these approaches are not sustainable, and not generating further gains: though we’ve spent the last fifteen or twenty years supporting small scale agriculture in Malawi, for example, there is little sign that these small farms are becoming bigger farms, or even moving systematically away from food insecurity in the long-term. What’s more there’s no counter-example we can give: no example of a currently developed country or even a high-flying semi-developed or middle-income country that has followed the pro-poor route.

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More on Romer’s Great Folly

Jun 14

Posted by Ranil Dissanayake in Development, Economics, Governance, History, Political Economy | 7 Comments

"You too can have this city, if you just purchase a simple, easily applied set of rules. Retails at $49.99"

Reader Adam alerted me to a piece in The Atlantic on Charter Cities. Long-time readers will know I’m profoundly critical of Paul Romer’s ahistorical, acultural thinking on the idea, which reveals a basic lack of understanding about how cities, migration and laws actually arise and work.

The article is full of badly reasoned logic, too. It says that Romer has been criticized for his Charter Cities idea, but then defends him by saying that he came up with New Growth Theory. So what? Clever people have stupid ideas sometimes, and people who are expert in one field might turn out to be ordinary or worse in another.

A lot else in the piece, some of which comes direct from the mouth of Romer worries me. Here are a few quotes, the first of which Adam pointed out in his e-mail:

“In a sense, Britain inadvertently, through its actions in Hong Kong, did more to reduce world poverty than all the aid programs that we’ve undertaken in the last century,” Romer observes drily.

This is the closest that Romer comes out advocating colonialism outright. Never mind that my earlier criticism pointed out some of the hundreds of holes in his story about how Hong Kong came to be so successful, Romer is decided: Britain made Hong Kong successful by importing new rules. The fact that Hong Kong’s legal code took something close to half a century to evolve, and a further 20 years to be enforced correctly, is completely ignored. I know – my family are all lawyers, and some have been key players in the evolution of that legal code and witnesses to the creation of a police force and institutional structure to enforce it.

“Anything that involves land can be manipulated by people who want to rise up against a leader,” [Romer] began. “You have to find a place where there’s a strong enough leader with enough legitimacy to do this knowing that he’s going to get attacked. It narrows the options quite a bit. But we shouldn’t give up without trying a few more places.” In short, a disappointment with one client is no excuse for failing to pitch other ones. Any entrepreneur knows that.

So, in other words, the only kind of places where a Charter City might actually work are where the Government is strong, has a legitimate leader, and able to resist opposition. Sounds like the kind of Government that least needs a foreign power to come in and govern a city for them.

When you listen carefully, you realize that much of what Romer is saying should not be controversial. A few development economists argue that geography is destiny, but most share Romer’s conviction that decent rules are paramount.

Another worrying statement. The problem is not that economists think that rules are important. The problem is that they are not independent entities. They do not exist in a vacuum, apart from the culture, history, geography, and so on they relate to. Romer’s approach is wrong not because he thinks rules are important or that countries should invite rich Governments to enforce them, but because Romer thinks he already knows the rules, and that they can be imported anywhere. That’s not how it works. In a recent post I pointed out how different rich countries are from each other. That’s partly because their rules, evolved over hundreds of years in some cases, are specific to each of their own contexts. Romer doesn’t see this. He just sees the rules of today, and imagines that they can be peeled off a society and pulled over a new one, like a one size fits all t-shirt.

Finally, one of the old clichés:

But when African teenagers do their homework under streetlights, isn’t Romer right to think the unthinkable?

Romer is right to think outside of accepted conventions, of course. But when his ideas are so misshapen, so at odds with the reality of the world, no amount of poverty in the world justifies their continued advancement.

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The missing question

Apr 23

Posted by Matt in Aid, Development, Political Economy | 2 Comments

Last night Sky News hosted the second UK Prime Minister’s debate, this time with an intended focus on “global issues.” The pre-selected questions presented by the audience to Brown, Cameron and Clegg covered Britain’s participation in the EU, security policy, immigration, climate change, the Pope’s impending visit, and the economy.

I was a little irritated that there wasn’t a question about aid or their general views on international development. This might be the moderator’s fault for selecting questions that leaned more towards domestic issues (for example immigration policy had already been discussed in the previous debate).

But maybe the real reason is less palatable – maybe there weren’t very many questions on development in the first place? Maybe Sky – and the candidates – prefer questions that offer them the largest possible gains in terms of votes.

Development/aid bloggers, advocates and practitioners are frequently concerned with making aid organisations accountable to the taxpayers, but we’ve little evidence that the electorate considers development policy a critical issue. These questions are demand-driven to a certain extent, and I wouldn’t be surprised if the average Briton doesn’t read the Tory green paper before considering their choice of party. There was an equivalent dearth of development discussion in the 2008 US presidential election – not a single question during the debates and little mention on the campaign trail. This doesn’t mean that voters don’t care about how public money is spent overseas, but that it takes a firm backseat to a large range of domestic and international issues.

The real question we need to be asking ourselves: if we do live in a world where development is on the electoral backburner, how does this affect the way we frame the aid effectiveness and accountability debate. Do we turn inward and try and create more ‘awareness,’ or do we turn outward and try and make aid more accountable to those that receive it? Are these two goals mutually exclusive?

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We should be Scared, but not of what we’re Scared of

Apr 15

Posted by Ranil Dissanayake in Aid, Development, Economics, Governance, Political Economy | 13 Comments

Be scared of him, not the Governator.

You should be afraid, just not of what you were afraid of at first...

Amidst the brouhaha over the Lancet article on aid fungibility, there’s one underlying question that seems not to have been addressed explicitly: what is the basis on which we expect funding (aid and domestic resources) to be allocated? I work in this field, and this basic problem has only been addressed with any quality in one place.

The comment on this topic is of sharply variable quality. Most of the voices critical of this evident of ‘fungibility’ deserve to be dismissed out of hand. Many suggest that by reducing own-funding to health the Governments concerned are committing a grave sin, based on absolutely no evidence on what the marginal return of the money moved was in the health sector compared to other sectors. These are single issue activists who lack the will or capacity to think more broadly than their specialism, and as Owen Barder has said, we should scorn them. Two contributions raise specific issues about resource allocation that we should explore further.

Not surprisingly, Owen’s is one of them, and his is the only contribution I would class as unreservedly useful, indeed excellent. He makes the most important point that we must hold in mind: the Lancet article actually does not address fungibility of aid. Aid would be fungible if the exact aid dollars that were earmarked for health could be used for education, transport or even private jets. What the Lancet article shows is that aid money in a sector can free up resources that the Government was always able to spend anywhere it wanted in a new area. That money was already fungible – it has simply been moved from one place to another in response to non-fungible funds. This is of crucial importance to this debate, because it means we can dismiss the question of fungibility altogether. What we are really talking about is resource allocation procedures governing the always-fungible Government resources.

Laura Freschi at Aid Watch makes the other contribution we should pay attention to, though I’m not uncritical of it. She says that donors use project support and earmarked funding to try and ‘force’ recipient Governments to use their resources ‘well’ by which she means ‘as the donors think they should’. This assumes that Governments will not change their own fungible resource allocation after the introduction of new, non-fungible resources by donors, so all aid money is purely additional to the sector it appears in. She says that if it doesn’t do this, then the argument for using earmarked funds disappears. This contribution is important, because it now introduces into the discussion the intentions of donor resource allocation and structure decisions, though I argue below this is an incomplete understanding of how it actually works.

So, how should resources for development be allocated, and how does the reality depart from this norm? Ideally, our resource allocation procedure would be entirely rational. Imagine a world in which no distinction is made between aid and local funds, and all money is fungible, the resource allocation procedure of Government should be straightforward. Looking at all the funds the Government has, it allocates a certain amount to core running costs (salaries, electricity bills and such) and then distributes the balance based on an analysis of the key constraints to the development of the country. If they have problems in health, education, infrastructure and private sector development, the rational resource allocation procedure would then address the constraining factors in each area. Given resources are scarce, we allocate them by looking at where the marginal benefit of each dollar is highest. If after we’ve spent $20 in health, we find that the marginal benefit in education is higher, we switch our attention there, and so on.

What we don’t do is just pour money in one sector until all the problems it faces disappear: doing this is counterintuitive, since after a point, each dollar would have a bigger impact in a different sector.

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Veil of ignorance

Apr 6

Posted by Matt in Political Economy | 4 Comments

Alanna makes her case against banning the veil in France. She uses an argument I’ve often heard (and am sympathetic towards):

Making the face veil illegal takes that stigma to the ultimate level. Women who wear the veil by choice will take it off, true. But women who are trapped in oppressive patriarchal structures won’t get to remove their veils and go out in the world. They’ll be kept from going out at all by the same men who force them into the veil in the first place.

It seems to me that there is little evidence/data on:

  1. What percentage of women choose the veil freely (as an unconstrained choice).
  2. How crucial the veil is for public engagement in communities where women are forced to wear a veil (i.e. what does the elasticity of demand for public involvement really look like for these families).

Narrowing the debate to one over the welfare of veiled women, these are things we really need to know. There are assertions on both sides, but no data to suggest what aggregate welfare effects an intervention like banning the veil might have (sorry, randomistas, Tibout choice [i.e. freedom of movement] prevents us from testing this one with a RCT).

Looking beyond the war of cultures, we should be treating the proposed ban the same way we treat any rights-based intervention: with caution, as well as much emotionless analysis as possible.

If readers know of any relevant empirical studies, please post  them.

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Be more confrontational

Apr 6

Posted by Matt in Aid, Development, Political Economy | 5 Comments

In an interview with Guenica Magazine last year, Michela Wrong suggests another way for donors to enforce accountability:

Africa is in pretty dire straits at the moment. In Kenya, there’s a severe drought, and because of all the violence that exploded after the last elections, the economy is really suffering. If you cut all aid to Kenya, people are going to die. So I don’t think that’s a solution. But I will say that aid donors have to look very closely at what they do. If you have a government whose ministers are setting out to steal the equivalent amount of money that they receive in aid, then you have to wonder why western donors are continuing with that relationship. I don’t think the answer is to cut them off, but the answer lies very much in doing what Edward Clay, the British high commissioner of the day, was doing. Which is to be very confrontational, to humiliate these people in public, to call them to account, to deny them visas. The aid relationship needs to be less automatic, less lazy, less complacent, and much more abrasive. And if the Kenyan government of the day doesn’t like it, then they can find their money elsewhere.

Wrong is right in recognizing that it’s difficult for donors to make credible threats. Pulling out sometimes carries with it an immediate humanitarian cost (although some would argue this is justifiable in the longer run). Her suggestion that we call people out is interesting. Is there room here to enforce domestic accountability (rather than just accountability to the donors?). Perhaps, when pointing out crooked public figures, donors should emphasize that the politicians are stealing money that the electorate are entitled to.

Hat tip to the Roving Bandit for the link.