Moving away from aid in development

Today, world leaders are meeting in the Ethiopian capital of Addis Ababa for the third Financing for Development summit. This builds upon the work of previous summits to produce a framework for the funding of development programmes and all that entails. It's an important discussion, not least of all because after decades of hurling cash at nations, growth in recipient nations has been sub par. Clemens et al. indicate that a 1% increase in aid in one year results in a 0.1-0.2% growth in real GDP per capita on average, which emerges in the following 5-10 years from the aid increase. Previous studies have conflicted in their findings of the impact of aid on growth - this paper reconciles the various views by controlling for confounding factors and considering just those factors that tend to have a short-term impact. Such a modest increase (combined with the fact that this is an average figure - many countries would not have benefited from aid at all) indicates that the effectiveness of aid is, from a charitable perspective, suspect. In subsequent posts on this subject, I’ll write on alternatives to aid.

Development aid is often confused with humanitarian aid - and this makes it look much more appealing than it really is. Few people would advocate not donating to emergency causes in other nations to help in the aftermath of a crisis; long-term development aid doesn't have this morally glossy hue. The main reason is simply just that the evidence doesn't show it to be very effective.

The economist Dambisa Moyo has written extensively on this subject in her book, Dead Aid (2010). She puts forward the argument that aid in Africa has served only to entrench aid dependency, and result in market-distorting inefficiencies. The consequence of this approach is one in which donor nations are off the hook but none of the promised benefits have accrued to the recipients. Moyo also indicates some evidence to show that nations that didn't receive aid have done better than those that have. Her research and argument goes further than many mainstream development economists (i.e. Paul Collier, who maintains that the right kind of aid can be helpful) - for Moyo, it's not just that aid has been ineffective, but that aid has entrenched the poverty it sought to cure Africa of.

This provides great context for Lucy Martin's paper on the impact of tax compared with aid. Martin finds from experiments in Uganda that citizens are 13% more willing to punish leaders for misusing tax revenue on average - but those with most experience of taxation are 30% more likely to punish government. The theory is simple: the loss of utility is higher when, not only do you lose earned income, but that income is not put to good use to produce social goods. The fact that in many countries, poor citizens do not pay tax results in less anger and frustration at poor governance. Aid as a substitute for tax revenue hence enables this process to continue and results in less frustration - and less clamour for better governance, without which the institutions that result in development cannot develop.

In 2006, William Easterly wrote:

The evidence is stark: $568 billion spent on aid to Africa, and yet the typical African country no richer today than 40 years ago. Dozens of “structural adjustment” loans (aid loans conditional on policy reforms) made to Africa, the former Soviet Union, and Latin America, only to see the failure of both policy reform and economic growth. The evidence suggests that aid results in less democratic and honest government, not more. Yet, unchastened by this experience, we still have such absurdities as the grandiose plans by Jeffrey Sachs and the United Nations to do 449 separate interventions to reach 54 separate goals by the year 2015 (the Millennium Development Goals), accompanied by urgent pleas to double aid money.

Nothing much has changed since his time of writing, except we have committed yet more resource to an aid programme which is at best ineffective and at worst harming the prospects of the world’s poorest. The insights of extensive research and leading economists should inform us to proceed carefully and to give more weight to those areas of development that might be more fruitful. Most importantly, when the evidence suggests we might be doing enormous harm to those least able to bear it, our governments should be proceeding with humility and caution rather than hiding behind their cheque books.

Yes, let's take BBC financing out of the political arena

We finally have what looks like a very sensible idea about the financing of the BBC:

Tony Hall, the director general of the BBC, has pledged to ensure that last week’s hasty deal with government to secure stable funding for the corporation will never happen again.

Writing for the Observer, Lord Hall, who has been forced to accept responsibility for the £750m cost of free licence fees for the over-75s, argues that key negotiations about the financial basis of the BBC must now be taken out of the political arena for good.

If one is to use the power of the state to take our money at gunpoint risk of a jail sentence for non-payment then it is right and just that the amount to be extorted and how be part of the political process. For that's what that process is: the series of decisions over who may use that power of the state and how.

So, it would appear that the head of the BBC now agrees that the BBC should no longer be tax funded, but should perhaps charge a subscription, carry advertising, whatever. For that's the only way that BBC funding can righteously or justly be divorced from the political process, by not using that process to gain said funding.

Sadly we're just kidding. What is being meant here is that the BBC should continue to use said state power to extort from us all but that none of those beastly politicians, the ones we elect to decide who may use that state power, should have anything to do with it. Just an open hand into our wallets.

Which isn't, we have to say, quite how we think the system should be working. You can ask for our money and if we like what you're doing then you'll get some of it: as all private sector businesses have to do. And if you demand our money with the weight of politics behind you then you're going to have to put up with being controlled, or at least limited, by the politicians.

What you don't get to do is use the power without accepting the oversight. Not while there's still pitchforks and burning brands available to the citizenry you don't.

Perhaps this isn't really the Greek solution

The assembled professors of the Alma Mater have given us their collective wisdom on the Greek crisis:

The institutions have to agree to a relaxation of fiscal austerity, at least until Greece is on the recovery path. Austerity during a recession is the wrong policy as it deepens the recession. Continuation of the stringent austerity measures implemented by Greece is delaying recovery. More fiscal austerity could fail the creditors too, if recovery is so slow that the fiscal deficit increases. Public investment has collapsed completely and providing more funds for investment projects that can improve the infrastructure and create jobs should be given priority. Although some progress has been made, further structural improvements are necessary, including pensions and VAT, anti-corruption, tax compliance, and institutional reform of product and labour markets. It is important that the Greek government acknowledges that there is still a lot to be done and comes up with credible proposals. The Greek economy is not likely to recover as long as there is still significant uncertainty about the future and there is no credible path towards a situation in which the Greek debt is sustainable. It is essential to achieve an early agreement to get Greek debt levels to sustainable levels, even if it is to be conditional on progress elsewhere. Conditionality on structural improvements is a good way forward.

Well, yes, OK. Greece should do all of those supply side reforms, lower the relative wages and thus get the economy booming again. Or we could heed the wisdom of Milton Friedman in the quote there. Instead of having to have this internal devaluation, this heavy austerity needed to bring down sticky prices like wages, we could just have a change in one single price in the economy, the external value of the internal money. You know, a devaluation.

Amusingly, this is one of the times that Friedman agrees with Keynes, even with the New Keynesians of today: prices are sticky, notably downwards, and wages especially so. Thus an economic policy which depends upon pushing down wages is going to require a great deal of pain to work.

Better, by far, not to have had the euro in the first place.

Yes, your humble writer here is extremely biased on this subject. But also correct.

And so is the biter bit: serves them right

One of the more bizarre points of Osborne's budget is that renewable energy generation technologies will be subject to the Climate Change Levy. Given that the levy is meant to be one of the clumsy, kludgy, ways in which the UK begins to have a carbon tax this is pretty odd really. And as Guido points out, the boosters of renewables are having conniption fits:

Caroline Lucas: “We’ve seen yet another example of reckless short-term policy making that prioritises the profits of polluters over the public interest in a safe and habitable climate”

RenewableUK: “It’s another example of this government’s unfair, illogical and obsessive attacks on renewables”

Greenpeace: “This will make it more expensive for business to buy electricity from renewable power. He is man out of step with the times”

Friends of the Earth: “This is totally bizarre, making renewable electricity pay a carbon tax is completely counterproductive — like making apple juice pay an alcohol tax”

Friends of the Earth does have it right there: non-carbon energy generation shouldn't be paying a carbon tax, that's rather the point of it all.

Except, except, the nuclear industry has been subject to the Climate Change Levy all along. And there are no "no carbon" technologies at all, there's always some emissions, from cement for windmill footings, the energy to purify silicon, the rotting of vegetation at the bottom of a reservoir behind a dam. And nuclear has rather lower emissions than some of those forms of generation.

Which is where the biter is bit of course. They all were perfectly happy that the low carbon system, nuclear, that they didn't approve of had to pay the levy. Now that the hunger of a Chancellor for revenue is coming for them they don't really have a logical point to stand on.

Oh dear, boo hoo, eh?

Government to eliminate extremism by passing law against it

Being somewhat conventional, my parents brought me up with conventional views and being stuck in Norfolk, I have not got around to changing them.  I was therefore a little surprised to discover I am now an extremist. The Home Office considers that 1950s opinions are “extremist” in 2015. Obviously most of us want to make life difficult for terrorists but the briefing for the new Counter-Extremism Bill goes far beyond terrorism.  The Home Secretary says “we are determined to eliminate extremism in all its forms”.  One has to wonder what kind of home the Home Secretary is living in if she imagines a parliamentary piece of paper will cause all terrorists to throw down their weapons and speak peace.  And ensure the rest of us invariably use language that our neighbours, and the thought police, consider inoffensive.

What is normal for Norfolk might be considered extreme in Brighton and vice versa. Luckily for Mrs May, UK mental health care is so underfunded, the white coats are unlikely to call.

The ludicrous fantasy of the objective is only worrying insofar as it reflects the mental state of our leaders.  The far greater concern is the scope being given to the police, Ofsted inspectors and all our other guardians to penalise us for a word out of place.

The Home Office spinmeisters will reassure us that the key words are “extreme” and “hatred”.  Norfolk turnips can relax, we will be told, because we are not extreme in the meaning of the Bill, nor do we hate anyone.  But of course that is not true.  We hate terrorists and especially those who kill our neighbours on Tunisian beaches.  We will have to reform.  If we go on hating them, the coppers will be calling.  This is the new policing: if you catch someone burgling your home, as someone did recently in Newmarket, and hold him down until the police arrive, you are the one prosecuted, not the burglar.  Now one will be prosecuted for the hatred as well as common assault.

Much of this is political cant.  Theresa May said (ibid) “As the party of one nation, we will govern as one nation, and bring our country together. That means actively promoting certain values. Freedom of speech. Freedom of worship. Democracy. The rule of law. Equal rights regardless of race, gender or sexuality.” This is nonsense because if we really only had just one set of values our culture could not develop, and no one could say anything beyond the established creed.  Catholics would not be able to argue for marriage being heterosexual.  The whole point of a civilised society is being able to promote one’s point of view in whatever way one wishes.

Yes, there should be some limits to that but not many.  Overstating one’s position is counter-productive and that by itself brings moderation.

The truth of the matter is that the Home Office wants to draw the Counter-Extremism Bill as widely as possible to make prosecutions, however incompetent, stick.  It should be cut back to the Counter-Terrorism Bill and properly thought through.

An alternative for Greece

Three years ago I led an ASI team to compete for the Wolfson prize on leaving the Euro in an orderly manner. We got “close but no cigar”, hearing informally that we made it into the top dozen out of over 600 entries. The current position is more chaotic than anything imagined at the time of the competition, with several overlapping institutional problems.

• The Greeks need relief and devaluation. Neither is possible under the Eurosystem which they also say they want. They are going to have to choose. Meanwhile, it is unrealistic to expect Tsipras or any Greek government to reverse 170 years of political dysfunction and collect income taxes from tomorrow morning. They can, however, place asset sales with an outside body and (more or less) collect VAT.
• The Eurogroup (to simplify divergent inclinations) wants to keep the Euro immaculate, that is free of defection or conspicuous violations of its own rules, where they’re fast running out of wiggle room. Policy-makers also fear that further concessions will inflame populism in the other PIIGS, especially Spain where Podemos is leading the pack into the autumn elections. All in all, these objectives contradict each other, leaving the Eurogroup rudderless.
• The ECB and other official European creditors fear a “haircut” (reduction) on the “principal” (headline sum borrowed). This couldn’t be airbrushed off their balance sheets - unlike grace periods, reduced “coupons” (interest payments), extended payment periods and so on. This makes it hard for creditors to take a lead.
• For much of the Greek crisis, the IMF has given the impression of dancing to the ECB’s tune. At long last, it now seems to be manning up – none too soon, as it has risked its standing in the face of future defaults in “sovereigns” (state issued debt). It still needs to establish clear policy distance from the Bank, which should be taken to have relinquished its standing as an official creditor by “enabling” (as they say in AA) a defaulter.

This adds up to a catastrophic failure of leadership. Thus the following proposal, an exchange instrument which enables the IMF to take back the lead it should never have relinquished, grants Greece relief, and spares the creditors the worst by giving them a share in recovery.

1. First, the IMF must reinforce its recent shows of independence, seeing off the ECB’s claim of pari passu priority as an official creditor. It must insist that the Bank joins with other creditors in a 50% plus haircut on the nominal value of its holdings of Greek debt or “old paper”. The Greeks themselves have spoken of 30%, following the Fund last week. This is unlikely to be enough for medium-term sustainability. There may also be some malarkey as between private and official creditors. The pain for official balance sheets is less than the nominal haircut as they bought much of their holdings at market discounts; it will be also abated by (4).
2. Old paper is to be swapped for an exchange instrument or “new paper” with a nominal value reflecting the haircut. This is to be denominated in hard currency, unregistered and negotiable at par for tax payments to the Greek Government. This makes for a liquid secondary market and sets a floor for the value.
3. New paper is to be undefeased (guaranteed by a third party); but is part-collateralised by (and part-redeemed by the proceeds of) early sales of Greek publicly owned assets under the control of a body answering to creditors. No guarantor is available for defeasement, with the US Treasury uninvolved and the ECB compromised. The asset sales would be the €51bn identified in 2010, of which less than €5bn has been realised; and would underwrite between one quarter and one third of the new paper.
4. The coupon is to vary with increases in (and defrayed by a first call upon) VAT receipts above a threshold. This follows the precedent of the Paris Club (ie, for private holders of defaulted sovereigns); guarantees the coupon and offers upside to those taking the new paper.

This proposal enables the IMF to resume its proper role after sovereign defaults, that is leading the workouts. It also gives Greece and its people the breathing space they need and helps out the country’s creditors with a share in the improvement in Greece’s economy.

If you want to know why rule by the Great and the Good doesn't work

Consider this from Simon Jenkins as an example of why rule by the Great and the Good doesn't work.

But such is the political arthritis now afflicting Europe’s “technocratic” rulers that they ignored the fact. They concentrate on their one concern: somehow extending Greece’s repayments so German, French and British banks could have even larger loans underpinned. It is bankers, not Greeks, who are being “bailed out”. They want Greek taxpayers to go on paying interest even if the principal is as beyond reach as a tsarist bond.

No Sir Simon, just no.

Of Greece's some €320 billion in debt a couple of percentage points is owed to foreign banks. That's actually what the problem here is: there's no bankers that anyone can go and steal the money from.

The debts are owed to: the IMF, which in effect means the governments of the countries that own the IMF. The ECB, which means the countries that own it (ie, the eurozone governments). The EFSF, which is guaranteed by the eurozone governments. Then there's bilateral loans from ...yes....the eurozone governments.

The Greek banks do own Greek Treasuries, both bonds and bills: and these are all pledged to the ECB as collateral for the cash they need to remain open. This is actually what the problem is in the negotiations. If there were any rapacious capitalists holding any appreciable amount of the debt then they would be haircut without anyone caring in the slightest. That near all of the money is owed to taxpayers of other countries is the problem.

This would have been a valid criticism of the 2010 to 2012 actions, where the banks' debt holdings were largely unloaded onto those taxpayer guarantees. But it's simply incorrect to claim that banks have anything beyond the most minimal exposure today. Whatever this is this isn't a crisis about protecting bankers.

And that, of course, is why that rule by the Great and the Good, by the wise Solons, by a technocracy, doesn't in fact work. For the obvious reason that all too many of them haven't a clue about whatever it is that they're supposed to be managing or making public policy upon.

This is not to say that they're all idiots, of course it isn't, but rule by the ill informed isn't a great step forwards now is it?

Apparently the euro is a neoliberal plot: who knew?

The blame game for the Greek disaster is in full voice over on the left. Apparently it's really all the fault of the neoliberals. Yes, that's us, the people who argue for less government intervention, markets work and so on, we're responsible for the idiocy that a supra-national bureaucracy has erected. Here's Georgie Monbiot as one of the cheerleaders for this argument:

The Maastricht treaty, establishing the European Union and the euro, was built on a lethal delusion: a belief that the ECB could provide the only common economic governance that monetary union required. It arose from an extreme version of market fundamentalism: if inflation were kept low, its authors imagined, the magic of the markets would resolve all other social and economic problems, making politics redundant. Those sober, suited, serious people, who now pronounce themselves the only adults in the room, turn out to be demented utopian fantasists, votaries of a fanatical economic cult.

So let's look at what a real market fundamentalist, Milton Friedman, said about it all:

The drive for the Euro has been motivated by politics not economics. The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for a federal United States of Europe. I believe that adoption of the Euro would have the opposite effect. It would exacerbate political tensions by converting divergent shocks that could have been readily accommodated by exchange rate changes into divisive political issues. Political unity can pave the way for monetary unity. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity.

Friedman was of course far too polite to put it this way, but that's clearly a claim that the idiot politicians are about to impose something that won't work, either economically or politically, and something thus that market fundamentalists (or as we like to style ourselves, liberals) simply should not be supporting.

George's basic problem here, as with that gathering chorus over on the left, is that they've got confused. They're against neoliberalism, they know that. And they're against the implosion of the Greek economy. At least one of those is a sensible thing to be against. But because they're against both they insist that one is a facet of the other. When in this case, neoliberalism, market fundamentalism, has been saying all along (and some of us have been shouting this for two decades now) that the euro as constructed simply will not work. Because it doesn't contain enough market, because it's a political construct built without reference to sensible economics.

And we're right of course. Far from neoliberalism being the cause here it's the cure.

We need to get this right about what the Millennium Development Goals have achieved

It's absolutely and gloriously true that these recent decades have seen the largest reduction in absolute poverty in the history of our species. But we need to work out why this is so, so that we can go and do more of that lovely stuff that reduces absolute poverty. And this isn't the answer:

The millennium development goals (MDGs) have driven “the most successful anti-poverty movement in history” and brought more than a billion people out of extreme penury, but their achievements have been mixed and the world remains deeply riven by inequality, the UN’s final report on the goals has concluded.

This is not true. This is to confuse correlation with causality. The MDGs have been around for a time, yes, and they correlate with some of that reduction in poverty. But the actual decline in poverty, the one of those MGD's that was achieved ahead of target, has not been driven by the MDGs. In fact, far from varied chuntering on at the UN being responsible for the reduction in poverty it's been the ignoring of said chuntering that has.

The two things that have led to this vast, and highly welcome, reduction in poverty are the economic development of China and the Washington Consensus. Both, really, being governments getting out of the way and allowing the natural propensity to truck and barter to assert itself. We can in fact prove this in two ways.

The first being that the reduction in poverty hasn't been happening where the UN has been dipping its greasy mitts, it's been in those places that have been taking part in globalisation. Secondly, the reduction in poverty started before, predates, even the consideration of those MDGs let alone their adoption and anyone doing anything directly about them.

This matters because of course, given the success they are crowing about here, they want to make another set of goals. And the correct goal should be to do more of what worked last time, not whatever comes about as a result of the chuntering of the bureaucrats.

What did work last time is that the rich world finally started buying things made by poor people in poor countries. Thus we should do more of this: more globalisation in short. And given that the bureaucrats, the UN, and their targets had almost nothing to do with it all the best thing we should set them as targets is that they should shut up, go home, and let the rest of us get on with making our fellow humans richer.

As we have been and as we'll all continue to do as long as no one interferes.

Five reasons to hate Sunday trading laws

1. They’re inconsistent and arbitrary. If you’re a waiter, factory worker, nurse, construction worker, taxi driver, bus driver, security guard, journalist or even a retail worker at a small shop you can and often do work at any time on Sundays. The places that have to close at 6pm are ‘big’ shops. Bizarrely, ‘big’ is defined as being 281 square metres or bigger. That doesn’t make much sense and any argument that retail workers are ‘protected’ by Sunday trading laws would also imply that all those other workers are being exploited.
2. Life isn’t nine-to-five, Monday-to-Friday, any more. Not that it ever was, really. Sunday trading laws inconvenience people who haven’t had time to buy their groceries during the rest of the week, and force them to rely on expensive local shops instead of cheaper supermarkets with more choice. For example, I like to do my shopping at my local Lidl. If I spend Sunday afternoon in the park with my friends instead of doing my shopping, and I need to buy something for that evening's dinner, I have to pay twice the price for a smaller range of inferior products at the Tesco Express down the road instead. That’s annoying. If I had a family to feed, it would be expensive.
3. The high street – and probably even small shops – will be better off. When Sunday trading laws were suspended during the Olympics, sales outside of London increased by 6.2%. They only increased by 2.8% inside London, probably because people were warned off the crowds. That’s good for smaller retailers too – no self-respecting retailer wants to exist just because her competitors are banned from trading, and more people out shopping means more customers to go round for everyone. They don't seem to have suffered during the Olympics suspension. If you’re worried about online retailers destroying the high street, this is one way to level the playing field.
4. Workers will have more hours available. It’s easy to talk about ‘protecting’ workers by stopping them from working on Sundays. But what about the ones that want to work then? Employers often end up having to pay workers more to work on Sundays – if you don’t think Sundays are sacred and want to earn a little more cash, the end of Sunday trading restrictions is good news for you. (Back when I was a teenage McDonald’s crew member, Sunday hours were a godsend.)
5. Lots of people actually like shopping. It’s very common to enjoy trips to the high street or the shopping centre with some friends. If you are interested in food, big grocery stores like Waitrose, Asda and Whole Foods can be interesting places to explore. Browsing clothes shops and buying new things can be really fun. I’ve seen lots of people sneer at this on Twitter, and no doubt it’s terribly gauche, but government shouldn’t be in the business of forcing snobs’ tastes on the rest of us. Some of us actually like consumerism.