The Road to Genocide

Rafe Champion asks, apropos of nothing in particular, whether ‘well-meaning socialists and big government interventionists learned anything from the failures of local policy and foreign aid to the poor states of the world?’ Of course, it’s  a rhetorical question, because – as any regular reader of  Rafe’s posts will know  – the answer is: obviously,  no.

This is why Rafe thinks that now is the right time to invoke the name of Peter Bauer (1915-2002), the British economist and development expert. He quotes from an obituary of Bauer  by ‘palaeo-conservative’ Paul Roberts, who takes the opportunity to reiterate the inherently monstrous character of development aid, in passages like this:

Foreign aid, Bauer noted, made control of the government a life-and-death matter, causing genocidal warfare between tribes. He did not spare his muddle-headed colleagues, who fervently believed they were doing good by socializing poor lands when any fool could see that not even England could afford socialism”¦ Bauer’s books on development economics are the only ones worth reading.

Notwithstanding the libertarian  conceit that  establishment icons  like Bauer are heroic dissenters, statements like this express perfectly the received wisdom on foreign aid in Tory and Republican circles for the last three decades. Reviewing Bauer’s 1981 polemic Equality, the Third World, and Economic Delusion, one of Bauer’s muddle-headed critics, Amartya Sen, put it like this

Bauer isn’t particularly isolated himself. His arguments develop and reinforce deep-seated conservative beliefs. Also, as it happens, both in Bauer’s own country¢â¬âBritain¢â¬âand that of his publisher¢â¬âthe United States¢â¬âthe governments in power share Bauer’s economic outlook, even though that outlook is rarely defended as fluently and cogently as Bauer defends it. Bauer is, in fact, an eloquent, original, and influential member of the powerful conservative tradition in political economy.

Sen praises Bauer, whose ‘political and economic analysis powerfully illuminates various aspects of international economic relations that are often ignored.’ He continues:

All this could have formed the basis of an undogmatic and balanced reappraisal of the relations between rich and poor countries. But despite several sensible suggestions for policy, such a reappraisal does not, alas, take place. I believe there are two reasons why it does not. First, Bauer is not content with throwing light on unexplored aspects of aid and international relations; he wants to draw his policy conclusions exclusively from these aspects, ignoring many of the other things that we do know. Many of the countries whose economic achievements Bauer praises (e.g., South Korea and Taiwan) have received a great deal of aid¢â¬âsome of them appearing at the top of the list of recipients, if aid is measured on a per capita basis. He also overlooks the fact that some of the countries with the fastest growth performances have policies involving deep government intervention in economic life.

The point is that you can tell innumerable stories of aid projects that failed, fostered corruption, or dashed the hopes of this or that community. But it doesn’t follow that aid in general, or on balance, is useless or harmful – any more than a hundred tales of police corruption and judicial  incompetence prove that the criminal justice system ‘doesn’t work’. The only way to tell, if any exists at all, is through statistical methods. And it happens that the past decade has produced a spate of these.

The  best known was  a series of papers by Burnside and Dollar, culminating in an article in the American Economic Review. The full  version is accessible on  the web only through databases like JSTOR, but un updated version of their work is described in a 2004 World Bank Working Paper that can be downloaded from this page.

In the authors’ words ‘the basic hypothesis that we want to explore is that the effect of aid depends on the same institutions and policies that affect growth directly’. Using panel data from 56 countries from 1970 to 1993, they estimated the effect on growth of aid expenditures and an index of institutional variables. In coutries that scored favourably on the index, the aid variable turned out to be highly significant. Two alternative hypotheses were also considered. They rejected the hypothesis that ‘aid has a positive effect on growth that is the same regardless of the quality of institutions and policies (that is, aid works the same in Mugabe’s Zimbabwe as inreformist Uganda)’. They could not entirely reject the hypothesis that ‘aid has no positive effect in any institutional environment: it is always money down the rat hole.’ But this is a long from saying they found any support for it.

They also investigated the interaction between aid and institutions, concluding that contrary to the view that aid undermines institutions, it strengthens them where they are on a sound footing in the first place.

Two groups of reseachers protested that the results were not robust, but were on the contrary sensitive to the inclusion and exclusion of a few countries and years. On one side William Easterly, author of The White Man’s Burden (and arguably Bauer’s successor as leading academic aid sceptic), reproduced the study with more countries and less clear-cut results. A non-technical version of Easterly’s critique  was published in  the Journal of Economic Perspectives (again available in full  only to  database subscribers). On the other, Hansen and Tarp (pdf alert)  found  that when some outlying is excluded, the  data  ‘aid works even in countries hampered by an unfavourable policy environment.’

Who was right? Burnside and Dollar was only the best known of perhaps several dozen econometric studies in the last ten years.  A survey of the literature by Addison et al.  (pdf alert) concludes:

When we review the literature we find that the overwhelming majority of recent empirical studies do conclude that aid increases economic growth, and below we cite more than 30 studies that find that growth would be lower in the absence of aid. There is also evidence that aid increases public expenditure, including expenditures that are pro-poor in orientation (for example primary education and basic health care). One can reasonably infer that on the basis of these findings, poverty would be higher in the absence of aid. Thus much of the criticism of aid is not supported by research, and we submit that it is research that should guide aid policy not anecdotal evidence.

The strength of the evidence that aid benefits countries with appropriate institutional arrangements (well-defined property rights, rule of law etc.) is reflected in a widespread bipartisan support for the UN’s Millennium Goals which, according to the Millennium Project, would require a doubling of official aid over the next ten years.

Even the Bush Administration has jumped onto this bandwagon by creating  a Millennium Challenge Account, which has helped to reinvigorate interest amongst conservatives in the design and evaluation of aid projects. Meanwhile, the Economist, not normally a cheerleader for soft-headed aid projects, has praised the Millennium Project and accepted, in however qualified terms, that progress is occurring in making aid efficient.

The Project’s director Jeffrey Sachs has become a champion of development aid*, highlighting successes such as the green revolution and reductions in infant mortality due to public health measures.

There is no doubt Peter Bauer’s insights have contributed to improvements in the targeting, design and evaluation of aid projects. But the World Bank and the various United Nations agencies have been responding to these kinds criticims for years, as a quick perusal of the Millennium Project’s Overview Report will confirm. It shows a wanton ignorance of all these development – in terms of data, theory and practice – to portray these institutions, and the governments who support them, as the  tools of  ‘well-meaning socialists and big government interventionists’; to imply that they are, even now  as we speak,  veering ever further off the path of wisdom, and in dire need a wake-up call.

I hope Bauer does not become the pin-up boy for a new wave of uninformed criticism of aid agencies and their efforts. The notion that aid is mostly (at best) a waste of money, far from being a long-suppressed truth, known only to a wise minority, is in fact a deeply entrenched belief, and one that needs putting to rest, not revitalising. As Severino and Charnoz  (pdf alert)  put it:

“Poor countries are still poor. Those countries that are helped are not able to grow economically. The few exceptions benefit only an elite. Aid has only ever had onedestination: the bottomless well of useless projects and misappropriation of funds.” Deeply rooted within public opinion indeed, practically the level of the collective unconscious this point of view is bandied about so often that it is nearly impossible to count the number of individuals that support it.

(They forgot to mention genocide.) As Sachs  himself argues, this is precisely the wrong time to spread cynicism and score ideological points about development aid. However, for those bent on doing so anyway, I guess it  remains true that ‘Bauer’s books on development economics are the only ones worth reading’. Well, almost the only ones. People who have already made up their minds on the issue can also safely add Easterly to their reading lists.

*John Quiggin’s review of Sachs’ book The End of Poverty takes up the issue of conditions under which aid is effective, and also the pervasiveness of pessimism.

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Cameron Riley
15 years ago

Another approach is to give aid directly to projects; Global Giving.

Scott Wickstein
Scott Wickstein(@scott-wickstein)
15 years ago

I looked at a different point about development, the use and abuse of crony capitalism.

Isn’t it also worth looking at how the host government looks at aid, and what they do with it? Wouldn’t that have a bigger impact on their societies, and the effectiveness of the aid, then anything else?

A society like Malaysia, which seems to have a broad consensus that they want to develop, is bound to use aid better then a society like Indonesia, which seems to have no idea what long term goals they want.

derrida derider
derrida derider
15 years ago

If you want right-wing critics in development economics Deepak Lal was a far, far better one than Bauer – his analysis of dependista theories was devastating, and it was he who first pointed to the problems of rent appropriation by urban elites that import-replacement strategies create (it’s no coincidence he was Indian). But even he thought aid a necessary, though far from sufficient, thing for very poor countries.

Gaby
Gaby
15 years ago

Nice post, James.

Thanks for your efforts, not only as an “under-labourer in clearing the ground a little, and removing some of the rubbish that lies in the way to knowledge”, but also cutting a few gnarled trees spoiling the view.

John
John
15 years ago

Has anyone ever noticed that ALL the economically successful countries get most of their raw materials from somewhere else.

The initial prosperity of Europe was based on this and its continuing prosperity remains wedded to the same process.
Colonialism was the name of the game and it still is very much alive.
Of course we dont use that word anymore do we! Very politically incorrect!
Holland for instance imports over 90% of its supplies. Japan would probably be even worse. California is similar. Etc Etc Etc.
Extrapolating that: what if every country became “successful” via the same method?

Are there enough “elsewheres” to provide every country with 90% of its raw materials?

Of course this process of getting most of your raw materials from “elsewhere” inevitably means that most countries will inevitably be losers and the rich ones will continue to get richer as long as the system lasts.
Altogether it is a very tragic zero sum game.

Meanwhile global capitalism is rapidly grinding everything to rubble. Capitalism being in effect an extreme form of the war of all against all including the planetary eco-systems. See.

http://www.coteda.com/fundamentals/index.html

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
15 years ago

Great post James. I hope Rafe provides you with the considered response you’ve been craving.

While I’m very sympathetic to the view that you’re putting, (this isn’t some positioning statement – I agree with you on aid), I strongly disagree with the undertone that the view that aid is a waste is somehow something we must especially guard against spreading within the lazy minds of the populace. Large swathes of the populace will continue to believe strongly in aid – witness the live aid and live 8 pushes. And lots will be skeptical – and have a fair right to be skeptical given how many cockups and cover ups there have been.

Some on the right will continue on their lazy way using whatever comes to hand to say ‘I told you so’ going into their self referential worlds of distain for other views. But if we are to conduct the debate with slogans, I don’t think the hardness of heart in the right wing slogans are worse and more to be guarded against than the soft headedness of many of the left wing ones.

Whether one is a scientist or a progressive, one shouldn’t be afraid of the truth or even of a bit of exaggeration from one’s opponents. If some people argue it’s all money down the drain, and show a hundred projects to back up their view, that’s actually a useful corrective to what I think Easterly documents to devastating affect. I summarised his case here here as this – “that reporting by euphemism, priority setting by lowest common denominator and progress by forgetfulness are entrenched in the system.”

I recall a conversation I had with two prominent somewhat left of centre people for whom I have considerable respect and they said in a rather feckless way that it took the right to object to giving money to corrupt regimes. They thought that the left wouldn’t have done it – without the prodding of the right and they didn’t seem to think there was much wrong with that. I think there was.

And whatever your regressions say (unless they’re reasonably clear it’s OK), there’s a pretty good case for not giving aid to corrupt regimes, and being very circumspect about any aid in such countries not just because the chances of it doing good are heavily diminished, but because it threatens to discredit aid itself.

And I think that pro-aid attempts to hush up horror stories of aid are ultimately counterproductive. I well remember coming across Easterly and Sachs’ spat which I’ve already refered to, and it struck me the more I thought about it that Easterly got far the better of the argument because he was able to show how little Sachs referred to the literature on past failures in order to learn from them. Sachs reply as I recall was surprisingly ad hominem.

Anyway, thanks for the terrific post.

Rafe?

Patrick
Patrick
15 years ago

What N Gruen sensibly raises is that the theme of Farrell’s post is rather bleakly right-wing – economic growth is all, never mind the socio-political claptrap! I guess we can stop tearing our hair out about those IR laws then ;)

NB: As far as I can see Sachs’ main problem is ‘ego error’. He seems to believe that he is smart enough to avoid the errors of the past and the errors not yet known. Whilst that is a tempting prospect for all of us at one time or another, there is a reason why political systems (to take an example) designed around fallibility and not infallibility seem much more durable than those designed the other way around.

Joshua Gans
Joshua Gans(@joshua-gans)
15 years ago

Thanks for all the comments, especially to DD for reminding me about Deepak Lal (the critique of Dependency theory in Magical Mind Magical Body is very powerful.

The rest is mostly directed to Nicholas.

Re. ‘my’ econometrics, I’m not sure if looked at any of the surveys, but yes the message seems overwhelming. The paper by Addison et al. that I listed is good, but there’s another one by Mark McGillivray in the context of the Millenium Development Goals. After surveying dozens of recent panel studies, he concludes

Aid now appears to work in the sense that per capita economic growth would have been lower in its absence, according to the findings of this research. This is the clear, unambiguous finding of practically all empirical studies conducted over the last seven or eight years, one that marks a remarkable turnaround in the literature on aid effectiveness, which for decades provided rather inconclusive, often contradictory findings…The overall message from the empirical literature is thus reasonably clear: to the extent that growth is good for poverty reduction,it can reasonably be inferred that poverty would be higher in the absence of aid flows.

Against this

Easterly et al (2003) and Jensen and Paldham (2003) are the only papers, to the author’s knowledge, which do not support the hypothesis that aid and growth are positively associated. Note, though, that the former study was concerned with critiquing Burnside and Dollar’s econometric analysis, and not with the effects of aid per se.

On the topic of Easterly, since I quoted Sen on Bauer, I might as well quote Sen on The White Man’s Burden, since the message is very similar. From the begining:

…the empirical picture of the actual effects of international aid (which, incidentally, does not come only from white men, since Japan is a major participant in the effort) is far more complex than Easterly’s shotgun summary suggests.

And from the end:

There is much of merit in Easterly’s perceptive vision about initiatives, incentives, and communication. We should be grateful to Easterly for the wealth of material he has presented, thereby enriching the development literature. We may have less reason to celebrate — or even to accept — the diagnosis of idiocy and obduracy he gives to those whom he calls “planners.”

It’s important to stress that, although some of he studies point to aid working irrespective of the institutional framework, no one is saying that the latter should be overlooked, and indeed the point of much of the work is to identify the kinds of instutions that give projects the best chance. My message was intended to be, yes they have listened, but also, thank goodness, they haven’t been deterred. If it was ‘the right’ who forced ‘the left’ to target countries with better institutions,and develop better systems to measure and monitor projects, so be it. Thank God for the dialectic.

Finally, I’m not having any of this stuff about how aid only works ‘at the village level’ or with the ‘direct involvement of the beneficiaries’. Yes of course decentralisation is often appropriate for all the usual reasons. It’s terrific to install a pipe to carry water to this or that village, but that doesn’t mean no projects should be developed at the national level. I have no idea, for example, how you administer a nation-wide immunisation program or an overhaul of the teacher educatiuon curriculum ‘at the village level.’

Rafe
15 years ago

Thanks to James for providing some solid argument for the debate. However the argument is not as solid as it appears due to the inherently unsatisfactory nature of econometic analsis using panel data and regression analysis. It is likely that the major function of this kind of analysis is to provide employment for econometricians, not to illuminate the causes and effects in the world.

Having been there and done some of that I can attest that doing regression analysis is just about as much fun as you can have with your clothes on, but still the problem is to work out what it all really means.

Anyone who has practiced this kind of analysis knows that the interpretation of the results is plagued by correlation between variables (collinearity) that renders the value of the coefficients highly conjectural. http://seamonkey.ed.asu.edu/~alex/computer/sas/collinear_VIF.html

That is on top of the other problems regarding quality of data and measurement of institutional variables by various proxies (for the level of corruption, for example).

This week I am on leave, trying to make progress with a paper for a refereed academic journal so I can’t afford to be distracted into a major blogging war. Nor do I want to cop out of this important debate, so I will aim to get back later in the day with a more lengthy reply.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
15 years ago

Yes James, I wasn’t saying they were your regressions literally. A figure of speech.

Andrew Leigh
15 years ago

James, terrific post. You might also have mentioned Helen Hughes, whose work on the Pacific generally takes the form a) these countries got a lot of aid, b) they’re poor, c) aid must’ve made them poor.

I was a bit disappointed that Rafe didn’t bother to engage. Saying that these guys should be aware of measurement error and the problems inherent in separating correlation from causation is a bit like telling the rest of us that we should always remember to turn on our computers before browsing the Net.

Gaby
Gaby
15 years ago

Heteroscedasticity Rafe! Is that your argument? That James is unaware of the problems of multicollinearity among dependent variables. Well I’m surprised and autocorrelated!

Gaby
Gaby
15 years ago

Heteroscedasticity Rafe! Is that your argument? That James is unaware of the problems of multicollinearity among dependent variables. Well I’m surprised and autocorrelated!

Joshua Gans
Joshua Gans(@joshua-gans)
15 years ago

Gaby, your last two errors are serially correlated, and your whole attitude reeks of endogeneity bias.

Russell
Russell
15 years ago

Time for an anecdote ? Can you talk so generally of aid ? Here’s an article about one type of aid:
http://www.ausaid.gov.au/publications/focus/focuspdfs/may06/focus_may06_31.pdf
which is something similar to what I did many years ago in Indonesia – a very corrupt country, but so what ? Anything wrong with this project ?

derrida derider
derrida derider
15 years ago

James – perhaps you meant to link to this for a readable overview of Lal.

Steve Edney
15 years ago

Its disappointing that Rafe hasn’t made any substantive argument in response other than doubting the reliability of statistical methods.

Rafe
15 years ago

Steve, as I said before, I have got other things to do this week (like watching the State of Origin) and I want to provide a good response with a wide perspective so I am not going to be rushed. It does appear that the Lal paper linked by derrida has anticipated many of the points that I was planning to make, so in fact James was refuted before he even posted. The ejaculations of his supporters may be premature.

Dont miss the postscript of Lal’s paper, he has a complimentary mention of some work by Pichford which he described as “the Australian response” to various policy issues.

trackback
15 years ago

Does foreign aid work?

Doles foreign aid boost economic growth? The research has produced divergent and confusing assessments. James Farrell has a very clear summary of the literature over on the Club Troppo blog in his post The Road to

Rafe
15 years ago

Still collecting material to reply to James. I don’t know why dd thinks that Lal is so much better than Bauer, they are out of the same stable and Lal is saying the same things.

This is part of a plan for a book.
http://www.econ.ucla.edu/Lal/others/Proposal%20for%20poverty%20book.pdf

“Finally, the book will outline the reasons why numerous aid agencies including the World Bank and non-governmental organizations (NGOs) are still promoting the false impression (given the evidence) that despite the substantial economic growth that has taken place in the Third World since the 1980’s there has been no reduction in Third World poverty. Hence what is needed is even more foreign aid. It will be argued that ‘third world poverty’ has now become an industry by which many middle class professionals make a living. It will be shown that foreign aid has not succeeded in its aims of alleviating poverty. By providing predatory governments the means to maintain their dirigiste policies that damage the economic prospects of the poor, and with the dismal failure of ‘conditional’ aid in changing state behaviour, aid is no longer merely a palliative but harmful. It is time the whole ‘poverty’ enterprise is shut down by pensioning off the Lords of Poverty. The reluctant globalizers may then decide to integrate with the world economy which can – as the example of numerous countries in the Third World, amongst whom India and China are notable- lead to rapid intensive growth and the elimination of mass structural poverty within the life time of a generation.
Using historical data and evidence from around the third World, the book will thus deal with a number of continuing myths concerning world poverty. These include:
1. Globalization has increased rather than reduced world poverty
2. The West grew rich at the expense of the Rest
3. Economic growth does not ‘trickle down’ so direct measures like the Western welfare state are needed to tackle world poverty.
4. Without massive foreign aid the problems of the world’s poor will not be solved.”

James should direct his criticism at Lal, anyway, I will refer his piece to some people who are professionally engaged in the field in case he has made some point that is not covered in the existing literature.

Joshua Gans
Joshua Gans(@joshua-gans)
15 years ago

Rafe

I am not a proponent of dependency theory, an opponent of globalisation, or a supporter of protectionsim (although there is there is a prima facie case that protection of infant industries worked in South Korea and Taiwan). Basically, I agree to the tenets of the Washington Consensus. So most of the above is misdirected if you think it contradicts anything I’ve argued. It wasn’t termed a consensus for nothing, and the fact that it is a consensus, makes your groan of ‘have they learned nothing?’ plain comical. On the other hand, there is nothing in the WC that stipulates against foreign aid to countries with appropriate institutional frameworks, or against the involvement of the governments of those countries. If you are really interested in the empirics of poverty, they are easy to find in the latest Human Development Report. There is also a chapter there on the benefits of trade, if you are interested in the state of ‘big government interventionist’ thinking on poverty, trade, and aid. The emphasis on poverty, by the way, refelects a general recognition of the role of human capital in development, and the obstacles to benefiting from gliobalisation without it. The very poor don’t make it to school, and that provides a very strong motive for both accelerated (i.e. interventionist) poverty allevation policies and public investment in education.

But I doubt you’ll look at the HDR. Rather, you’ll go on trawling the right-wing websites for some quotable quotes chockablock with verbal fireworks directed against straw socialists. In the meantime you might be lucky and more commenters will step forward with books that ‘refuted me before I even posted’. Good luck, by the way, with the critique of the econometrics – you’re outsourcing that one if I understand right. My prediction is that you will opt for attacking the motrives of World Bank researches (‘aid industry’ is a nice term from the Paddy McGuinness lexicon you could use). Before doing so, though, see Sen’s critique of ‘indirect arguments’ in the review of Bauer (the one on your website).

Rafe
15 years ago

James, are you seriously suggesting that the Washington consensus does not owe a great deal to the lessons learned from Peter Bauer about the factors that prevent aid from having the desired effect?

Do you also acknowledge that it took decades of wasted effort for those lessons to be learned? Bearing in mind that he was at work in the 1940s. Where would you place the date of the Washington consensus?

Rafe
15 years ago

As to the Human Development Report, there is no shortage of data on the empirics of poverty, but the point is to formulate effective policies to improve things. What value is added to the debate by this dishonest bollocks from the report?
“What is it that impels the powerful and vocal lobby to press for greater equality?”

Rafe
15 years ago

Peter Boettke is back from the Bauer memorial conference in London with a report on the proceedings.
http://austrianeconomists.typepad.com/weblog/2006/05/back_to_bauer_a.html

My reply to James has bogged down in a large footnote on the disastrous impact of the Cold War on the aid program to the developing nations. Essentially the leadership had us over barrell so it was next to impossible to exert any control over the way the aid was used.

Robert Nanders
15 years ago

I don’t think it’s fair to characterize foreign aid as inherently helpful, harmful, or indifferent. It’s clear that aid can be misused, that it can be well used, and anything in between. If you’re seeking utility from it, you might get some, even quite a lot – but what’s not so clear to me is the risk involved in the investment.

I much favor private investment and donation in contrast to forced aid and compulsory giving – this tends to not only be paternalistic, but helps to plant resentment between the transacting populations.

An aside, how much comparison work has been done looking at the parallels between foreign aid and domestic aid programs, like those designed to help urban poor?

Geoff R
15 years ago

It all depends on how you define ‘rural’: if it means outside capital cities and mining areas Labor has won such seats. But if you exclude provincial city electorates from the ‘rural’ category then Labor has won very few rural seats anywhere since fairly early in the 20th century. Farmers were alienated from Labor long ago. Farmers have always been a small minority of the electorate even in ‘rural’ seats. My research suggests that in NSW in the early 1930s outside of Sydney and the mining areas manual workers still outnumbered farmers about 2 to 1. It is wrong to call Mt Isa a safe Labor seat, if the sitting Labor member retired in a bad year for Labor it could be lost.

Geoff R
15 years ago

posted to the wrong site obviously

Geoff R
15 years ago

There is a tendency in the humanities/social sciences to do the following: 1) propose an argument that is not inherently implausible; 2) cherrypick the historical evidence to support it. ‘Declinist’ literature of the left and right provides many examples, or Marxists and Austrians.

Tony Harris
Tony Harris(@tony-harris)
14 years ago

The critical comment on cross-country regressions at #9 is fleshed out in some detail in a paper by Dani Rodrik “Why we learn nothing from regressing economic growth on policies”. Thanks to Nicholas Gruen for the reference.

http://ksghome.harvard.edu/~drodrik/policy%20regressions.pdf