A Couple of Provocative Thoughts

Don't provoke him. You wouldn't like him when he's angry.

A few weeks ago, Nick Eubank wrote a piece about Somaliland in the Guardian’s Poverty Matters blog. Somaliland is an interesting one – it’s a state that is not officially recognized and therefore in receipt of less aid than would be expected (though it is incorrect to assert, as he does, that it receives no foreign aid), but is performing well above reasonable expectations. They have a pretty well-functioning democracy, biometric passports – like Lee, I still can’t get over this – and pretty good economic performance.

Eubank suggests that it’s the very lack of aid and subsequent development of tax structures that has led to Somaliland’s good performance, a view to which I have some sympathy. I’ve written in the past about why developing taxation systems is crucially important for all developing countries and why it tends to be difficult. If a side-effect of Somaliland’s lack of access to aid is being forced to be more representative and more developmental, could there possibly be a benefit to restricting rather than increasing aid volumes?

It’s a provocative idea, because it flies in the face of almost everything we’re led to believe about development and levels of development funding, but as a thought experiment, it’s worth considering. It would be likely to yield specific benefits:

  • Most obviously, it incentivizes the creation of a viable tax regime with the benefits of accountability, representation and responsiveness that issue from one
  • It also creates far more pressure to achieve concrete and valuable results than any system of performance assessment – strictly limited aid volumes makes failure far more costly
  • Ownership would take a big boost. The biggest boon to local ownership of the aid agenda would be the ability and necessity to refuse aid packages that are not wanted. If bad aid or aid out of line with the local development vision replaces good aid, the incentive to exercise ownership of the agenda and refuse the aid is that much higher
  • A limited volume of aid would mean that the limited management capacity of local institutions is not stretched over hundreds of projects and programmes (as is the case now), but focused on a few tightly prioritized programmes, with consequent benefits for implementation.

Offsetting these benefits is the obvious drawback that much of what needs to be done could not be financed with a strict aid ceiling. The value of the thought experiment is not to assess whether we should cap aid, but to see what benefits it would bring so we can work out how to generate these benefits without limiting aid volumes. The hardest two to incentivize without some resource constraint are the improved ownership (which really requires that local institutions to refuse aid far more than they actually do) and the management effects. Suggestions welcome.

Staying in the region, Chris Blattman also linked to a paper suggesting that Somalia was better off without a state. While the writer of the original paper seems to be a libertarian (and somehow the headline ‘Libertarian Dislikes Government’ isn’t all that shocking), it does make an interesting basic point: the correct counterfactual when we consider poorly governed or chaotic states is not a ‘good’ Government, but a ‘different’ one. This is something to bear in mind when we consider countries with corrupt, dictatorial or ineffectual Governments. Very often it’s not the specific leadership or political party that is at the root of bad governance or decline, but the structural characteristics of their rule: their relationship with the opposition, their relationships with the public, their ability to govern effectively and the options open to them. In very different contexts I’ve argued this for Malawi and Zimbabwe. In Malawi, the same leadership was fine in one political context and dictatorial in another. In Zimbabwe, the temptation to lay all blame at the feet of a very convenient (and abhorrent) villain blinds many to the complex roots of his crimes and Zimbabwe’s decline. The saddest thing is that this point is often neglected even by immensely powerful decision makers – the invasions of Afghanistan and Iraq both show marks of this error.

Going back to the original article, is there a case to be made for statelessness when the Government is predatory? The argument is strongest in the static view, comparing a bad state and statelessness. The more dynamic the view taken, where we consider how tyrannical or corrupt regimes can become effective ones, the less this view makes sense, though it’s also true that plenty of tyrannical regimes didn’t evolve but were overthrown. Again, the thought experiment of whether some developing countries would be better off stateless is most valuable in focusing our attention on the long term needs and real dynamics of state building – not just in terms of building institutions but understanding how bad or predatory institutions can evolve into good ones. It’s happened in many countries, and links back to the questions of accountability, representation and taxation discussed above.

Give it away, give it away, give it away now

Todd Moss at CGD writes about a potential solution for the natural resource curse: cash transfers.

Just as cash transfers are gaining recognition, there are also a bunch of countries facing the very real problem of what to do with newly-found oil wealth.  Ghana began pumping oil last month, Cambodia and Uganda will start this year, and the likes of Liberia, Sierra Leone, and Papua New Guinea may be next.  Given the problems so many countries have faced managing oil (Nigeria has earned some $400 billion from oil but its population has gotten poorer), so many of these new producers are fragile states, and the very limited ideas we have so far (sequester funds, promote transparency, cross your fingers) isn’t it perhaps time to try something fresh?

Why not just give the money to the people?  Why not ride the wave of cash transfers to break the resource curse?

Moss suggested something similar last year when Ghana discovered it had joined the oil club. He’s developed the idea a little further in a new working paper incorporating the growing  consensus over the efficacy of cash transfer progammes.

As I mentioned last year, the tricky bit is maintaining the social contract that exists between a government who depends on taxation and the citizens that demand services in exchange for a portion of their income. Handing point resources directly over to the population doesn’t immediately fix this problem unless the government can tax it back. Moss addresses this:

After giving cash to its citizens, the state would treat it like normal income and tax it accordingly—thus forcing the state to collect tax revenues and build tax administration, rather than simply bypassing the taxpayers by relying solely on rents. Although this initially sounds like an unnecessary step (why give something away that you are going to partly take back?), creating incentives for tax collection and administration is perhaps the most important potential benefit of this scheme (Devarajan, Le, and Raballand 2010).

Because the government must tax the oil revenue to recover some of it for public spending, the social contract is strengthened rather than broken by natural resource revenues. Governments will be forced to depend on the citizens for income, and consequently, citizens will have increased leverage and incentives to exert pressure on public policy.

There are still issues here (Ranil, in response, wrote an insightful post about tax systems). The biggest hurdle is the government’s willing to forgo all chances at rent-seeking, although this can be weighed against the obvious political benefits of handing out free cash. Countries with relative decent governance, like Ghana, may be able to clear these hurdles easily.

All of this leads to the same question I asked last year: if we think this would work with natural resources, why don’t we try this with aid?