What’s the effect of aid flows on people “on the ground”*?

I’ve re-delved into the twister world of thesis research and have decided to use this blog as a way to jot down my thoughts…without arrows and with minimal use of numerical orderings (although I read a great article somewhere about an efficient professor who writes all of his email correspondence with numerical ordering and no complete sentences unless absolutely necessary…which I will link as soon I as find it).

Three interesting reads: Aid Chain by Tina Wallace, Lisa Bornstein, and Jennifer Chapmant; “Teach a Man to Fish” by Susan Watkins and Ann Swidler; and More Than Good Intentions by Dean Karlan and Jake Appel

Aid Chain is a relatively short book on the process by which Ugandan and South African NGOs get funding from the UK, the rise and influence of “rational management” and “logframes” on development, and the resulting prioritization and time management problems NGOs face as they need to fill out more and more paperwork, in specific ways, and requiring actions that are at best, reinforce an oversimplified picture of development to donors and at worst, keep time, resources, and attention away from the true clients, the Ugandans and South Africans and their communities that are meant to be helped by the NGO programs.

Positive Feedback: The book provides a very clear story of what’s happening to aid flows by giving a great summary of the history of aid flows. It elucidates very clear linkages between the grant process, what has led to the current grant process from critical theory, economic, and managerial points of view, and what are the wide ranging effects of the current grant process. Most important chapters: 1, 2,3, 4, 6

The authors also clearly give credit where it’s due — telling, even as they’re not able to show (for reasons discussed below) the many years of work and many people heavily involved in the project.

Negative Feedback:  The authors, partially because of interviewee confidentiality constraints, rarely provide specific examples of the negative effects of the current papery, jargony, log-frame filled grant process (a description I’ve summed up from their book, which does not present the process quite so elegantly) and use often vague though effectively scathing critiques.  The book could ultimately be made stronger in its country context chapters on Uganda and South Africa if it could better describe its anonymous NGOs beyond small, medium, and large. Perhaps the fault is partially on the funding and time constraints for which the authors apologize  at the beginning of the book.  Nevertheless, it could have presented specific stories as examples that development workers and donors could recognize. Although the author does make use of the couple of organizations by name, it seems that the authors more successfully showcased their own opinions and agendas on the NGO’s issues than they did the problems of the grant process and aid flows.  For example, using an example of a HIV/AIDS NGO, the authors complain that donors forced condom usage on a village where condom usage clashed with cultural and religious traditions in conservative Uganda. Whether or not that’s true, the example instead of compelling readers, who are of the development workers and donor stock, might quickly the judge the book by their opinions on this contentious issue rather than the important and less controversial meat of the book. Examples speak, fortunately or unfortunately.

A book that uses examples well and is more appreciated by development bloggers than Kristof’s Half the Sky is More than Good Intentions. As Chris Blattman recommends, I will buy it for my mom (or at least lend her my university copy) so that she will finally know what I starting to do with my life. Reads as quickly and compellingly as Kristof’s Half the Sky with a fair bit of evidence for the good programs it highlights. I enjoyed it for the short humorous anecdotes of conversations with the authors’ friends in Africa such as on p 34-35 on Ghanaian women’s addresses (answer: directions by way of landmarks) as well as the conversation (can’t find the page number now) on how many people does a interviewed man live with –different depending on the question you ask him. The book does a wonderful job of showing different logics that are common to individuals from developing countries in a pragmatic and non Western/Eastern or Northern/Southern or Racial way (or any of the other common “excuses”/”explanations”).  And what I think will be especially appreciated by my co-blogger are the explanations of ways to test whether development interventions are working and how, introduction to behavioral economics, and the fun experiment on testing for “trust”. I think the book could have been published differently by having the harder evidence provided as an addendum at the end of each chapter.  The authors could have explained a bit further why some experiments adequately controlled for differences but I guess the book really is geared for the average educated but non research interested Joe (and perhaps I need to get cracking on the appendix).

Finally, Teach a Man to Fish is one of the most interesting, comprehensive and coherent articles I’ve read. (I’m even more psyched that I get to work with the authors this summer). It, like the other two pieces above, encapsulates a lot of the experiences I’ve had interning in South Africa and Tanzania and the authors present their argument in a easily and accessibly logical way. At the same time it manages to achieve a lot of things at once: spin and less radical/mono-disciplinary usage of Foucault, Ferguson and critical theory; makes the policy solution very obvious and provides a space for donors to come to the conclusion because argument stays away from labeling donors evil, neo- colonialist, etc and instead concentrates on side effects and labels them side effects; and it also neatly folds in issues like evidence-based projects, social stratum dynamics, the necessary and realistic uses of patron-clientelism and real (not judged negative) perpetuation of patron clientelism. I’m not really doing the article justice but I do recommend a read.

Basic argument: HIV/AIDS  programs and the goal of sustainable projects by way of local participatory self-reliant groups have failed to create the desired direct effects of sustained local groups that provide HIV/AIDS services because donors, in light of the international ideology of sustainability, pay for training and minimal materials in hopes that groups will rely on their own resources. The indirect effect are societal effects – for the lower classes, the authors show that the development industry and programs have been inserted into already existing expectations that things come and go like the weather. For the middle “interstitial elites”, training has provided language that reinforces their elitism and helps to justify their salary-lessness as they act as volunteers for the projects; training also provides the elites with networks that provide access to patrons. The ebb and flow, competition for NGO salaried positions reinforces the importance of patrons.  The authors even bring in an important and overlooked factor – the overstretched and fragmented work life of the urban elites as elites do not only their jobs, but also often are in charge of meeting with donors, showing off projects, etc making it increasingly difficult to do even one job well.

*”On the Ground” referring to Blood and Milk’s article on calling development areas “the field”, or “on the ground” etc. Good Article, sets up a fun challenge of alternative ways to present working in Malawi this summer.

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Of Smoke and Ice

Tyler Cowen links to an article about Iceland’s plans to ban the sale of cigarettes. This sounds like really bad public policy. Don’t get me wrong, the negative effect on other people from inhaling cigarette smoke is a very good example of a failure of the Coase theorem: the high transaction costs of bargaining with every smoker you meet to pay him not do so while you are around, prevent an efficient outcome from being realized. However, the right way to respond to a negative externality is by taxation or regulation, not by making something illegal.

On the one hand, think about long hair. How would you feel about the government deciding that looking at long hair is unbearable for those whom the wearer meets every day and the thicket on our heads might also lead to infections. Would it be justified to outlaw long hair? Of course not. While public spaces might be legitimately protected from shaggy youngsters, banning hair salons from supporting such hairdos would obviously be unjustified. Similarly, every smoker has the right to keep smoking while only endangering their own health. After all, who are we to judge whether or not this is a tradeoff they are willing to make? As long as no one else is harmed and they have all the relevant information available,  let the smokers smoke, just like we should let the lovers love and the females work – the dark history of discouraging “indecent” behaviors to the detriment of the individuals involved should give us pause.

On the other hand, the negative fallout from this policy might dwarf any potential benefit. Historical examples like the Prohibition or the ongoing war on drugs have shown that enforcement of sales bans can be very costly and creates black markets that fund other sorts of crime. At the same time, compensatory addictive behaviors might proliferate in smoking’s stead, because the wicked will find always find a way to wallow.

While policymakers might like to envision a world of puritan fitness fanatics who follow parliamentary debates, go to art museums and take bike rides (with a helmet!) when they want to relax, in reality most people like to take a break once in a while from decent sobriety and sink into the sultry arms of their primal humanity: Whether it is chocolate, love, wine or smoking – all the best things in life might kill you eventually but that will be nothing compared to the cruel suffering inflicted by a much more lethal poison: unadulterated, policy-compliant boredom.

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Gold for Glory

Arnold Kling ponders one of my favorite mysteries of public opinion:

The standard intuition is that going to work for a profitable company means that you are not serving people, only the profits of the company. On the other hand, working for a non-profit means serving the community…I think that profit-seeking enterprises serve the community, also. In fact, they do it in a way that is more sustainable and more accountable. It is more sustainable, in that the value of what they produce is greater than the cost of the resources (including labor) that they use. Otherwise, they would not make a profit. However, a non-profit can very well use more resources than the value of what it produces. A profit-seeking enterprise is more accountable, in that a profit-seeking business must satisfy consumers or else go out of business…Is my perspective valid? If so, why is the conventional intuition so pervasive?

The answer, I think, is based on our idea of why people act a certain way. True altruism, defined as a renunciation of the self and a devotion to maximizing the welfare of others (broadly defined), is very rare. Even though we call people who do social work for little money “altruistic”, we acknowledge at the same time that they have a strong desire to do this kind of work, that they receive a lot of immaterial compensation in terms of respect, a positive life narrative and “feeling good”, and that the common good they provide is not very large at the policy-relevant margin – in other words, that they are neither renouncing their  happiness nor are they maximizing others’ welfare.

Rather, when we see people do non-profit work we implicitly consider the difference between their wage and their opportunity cost and impute that the gap must be made up by non-monetary compensation. As the cognitive ability to derive non-monetary pleasure from mere institutional and societal interactions is essential for the functioning of mechanisms of social discipline and coordination, working “for” the community is  a strong signal of subordination to informal sources of authority. Such signals of loyalty are encouraged (just like supporting the military, waving the flag, singing the anthem etc. ) because they screen for deviants and resolve cognitive uncertainties about group delineations. Non-profit work signals all these things and that’s why we like it.

PS: Further support wanted? Women in the 50s worked for no money whatsoever as the homemaker, but we rarely laud their community service, so it seems that the public aspect of non-profit work matters. Moreover, we find the signal of non-profit work only commendable, if a salaried alternative exists. Think about the unappreciated non-profit work that begging street musicians do, as opposed to the highly-respected efforts of renowned singers who give charity concerts. It’s clearly also not simply about not making a profit. We clearly don’t respect bankrupt company-owners for having resisted the pull of profit. Again, we clearly regard the choice of not making a profit important, because it clarifies the differential between the non-profit compensation and the relevant outside options. That is, we would like to see the exact going rate at which one may exchange gold for glory.

Update: This post by Fabio Rojas made me  realize that I neglected the role of government in my thinking. Government is the ultimate non-profit historically, providing services to the poor and vulnerable by redistributing part of the national income. Perhaps encouraging non-profits has the same purpose of basically redistributing income to those in need. Why not leave it to the government? The reasons might be cognitive – the tax system does not feel like we are handing money to the poor, as it is too indirect. Or, we have caught on to the fact that redistribution through taxes and transfers is quite wasteful and cumbersome and that non-profits will be more efficient and responsive to local needs. In that sense, the relevant margin of comparison for efficiency might not be for-profit vs. non-profit business, but federal government vs. non-profit business. While in the former comparison the non-profits lose in many ways, in the latter non-profits might well come out ahead. Thus, non-profits might be a grassroots attempt to decentralize governmental redistribution. However, while this explains why non-profits exist, the widespread dislike of profitable activities seems to require further explanation.

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Monetary Ramblings – Part 2 (Seignorage in practice)

Last week, the NPR had an article on the golden, rarely used, 1-Dollar coins. Apparently, various government institutions decided that using metal coins would be less wasteful than the still-dominant 1-Dollar bill, because they don’t have to be replaced as often. However, most people prefer to hold the bills instead of the coins and so there have been difficulties to get the latter into circulation. The result are piles of idle coins without any use. However, as minting is controlled by Congress, that seems no reason to stop making more of them.

The process  of how the decision to manufacture these metal pieces was made illustrates the common logrolling in Congress:

…Congress decided that a new series of dollar coins should be minted to engage the public. These coins would bear the likeness of every former president…It was easier for the bill’s sponsor, then-Rep. Mike Castle (R-DE), to move the presidential coin bill forward if it didn’t displace other dollar coins honoring Sacagawea, the teenage Native American guide to Lewis and Clark…The mint would be required to make a quota of Sacagawea coins. Currently, the law says 20 percent of dollar coins made must have Sacagawea on them.

So the coins are just stored in vaults and never see the light of day, but Congress took care to ensure that the useless pile of presidential-faces metal had a politically correct quota of minority-honoring metal added to it.

At least some of the coins have made it into circulation though, earning seigniorage income for the federal reserve:

Some 2.4 billion dollar coins have been minted since the start of the program in 2007, costing taxpayers about $720 million. The government has made about $680 million in profit by selling some 1.4 billion dollar coins to the public since the program began.

Note, that this formulation is misleading. The government could always make about 1.4 billion dollars of seignorage profit by simply buying various assets and crediting peoples’  bank accounts in return with newly “minted” digital money at almost no cost. As explained in my previous post, long-term financial stability that is the limiting factor on this. Thus, the opportunity cost of spending $ 720 million  to make metal coins and earning $ 1.4 billion by issuing them, is issuing the same amount of money at almost no production cost. The “$ 680 million in profit” are thus actually an economic loss of $ 720 million.

So why might the government still try and get out the golden coins? The article suggest that the Government Accountability Office pretended that seigniorage profits are benefits from making the coins –  but that can’t be true, because the government can have those  profits by issuing money in other forms as well. Consequently, the Fed set the record straight:

When this profit, known as seigniorage, is factored out, switching to the dollar coin would actually cost taxpayers money over three decades, according to a Federal Reserve analysis of the GAO’s figures. The cost works out to $3.4 billion.

There you go. The Government Accountability Office did not understand that seigniorage is a normal part of monetary policy and pretended that making golden coins somehow creates value in a way different from the tax on money holdings that normal seigniorage (issuing of money) represents.

HT to Russ Roberts

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Fair is foul, and foul is fair

I’ve been reading Jagdish Bhagwati’s excellent take-down of  “fair trade” advocates’ alleged desire to raise labor and environmental standards in developing countries. I will restate the argument made by “fair trade” policy (also known as protectionism) proponents and then my summary and elaboration of Bhagwati’s response:

1. Environmental standards should be equalized (preferrably at a high level) across the world. Otherwise countries with strict standards are in “unfair” competition with low-standard countries.

  • Countries differ in local preference for the environment, economic situation, geography and climate. This requires environmental legislation to be adapted to these local conditions in order to optimally reflect the tradeoff that people are willing to make. Imposing high-standard countries’ preferences would make developing countries worse off by limiting their flexibility.
  • high environmental standards are the expression of a policy preference for pollutants to be more expensive. If a country taxes alcohol and alcohol then becomes more expensive that is exactly why the policy was introduced. Similarly, making the output of polluting industries less attractive/more expensive is the purpose of environmental legislation, as less output is what saves the environment. Complaining that these industries are “unfairly” disadvantaged by the high environmental standards (their goods are more expensive/their output is lower) is just saying that the policy did what it was meant to do.
  • This argument confuses absolute with comparative advantage in international trade. If all developed countries were better at producing everything in absolute terms than developing countries, the pattern of production would be that developed countries produce in their strongest sector compared to other developed-country industries, while developing country production concentrates in the strongest sector relative to other developing-country production. Thus, the margin of competition at which the shift in production will occur in response to a change in environmental standards is between developing countries. In other words, if there are giants and dwarves, the giants will specialize in picking cherries and the dwarves in picking mushrooms. If the giants complain that they are picking cherries barefoot while the dwarves “unfairly” wear shoes while mushroom-picking and push through rules that everyone has to be barefoot, what happens? The mushroom-picking will still not be done by the giants, but it shifts to the dwarves with the least sensitive feet. Thus, developed-country industries will not necessarily profit from a change in environmental legislation in developing countries.

2. A race to the bottom might develop in which countries underbid each other in ever-more destructive environmental practices.

  • while theoretically possible, there is no empirical evidence of this happening. Empirically, companies are not strongly attracted to places with weak environmental standards (see Africa). It seems to me that, anecdotally, the move has been in the opposite direction towards more and stronger environmental regulation globally. China is coming around to consider the environment as important to balanced growth; the former Warshaw Pact/Soviet states have moved from deliberate complete neglect of the environment during socialist times to more sensible policies after the transition to democracy…

3. Trade with countries lacking  adequate “labor rights” should be suspended. It is immoral to exploit/trade with countries/companies that do not guarantee “good” working conditions. Granting labor rights should be a condition of WTO membership, ie violation could be punished with trade sanctions.

  • All the arguments above about efficiency and the lack of empirical evidence for a race to the bottom apply
  • The world is a diverse place without universal agreement on what constitutes “acceptable” labor conditions. An interesting question is, what would happen if the world decided that having minors work in unpaid internships, limiting union representation and refusing to give immigrants rights and legal protection is a failure to guarantee “labor rights”, resulting in  a complete global boycott of many American industries. Would we simply accept that as deserved punishment for American immorality or try and cite specific local circumstances that make American labor standards excusable? Developing countries should have the same leeway in defining their labor norms as developed countries do.
  • Instances of almost universally condemned labor treatment, e.g. slavery, are rare and mainly in economic environments that are unlikely to be reached by international policy agreements
  • Unsurprisingly from a political economy perspective, the list of potential “labor rights” to be enshrined in global agreements is dominated by the things that protectionist rich-world industries  have and what developing countries are lacking, while issues like migrant workers’ rights are conspicuously lacking
  • It is not obvious that official government policy is the right tool to use, even if the goal was desirable. NGOs could help without government force. After all “if your ideas are good, they should spread without coercion”

International spillover effects and coordination on bigger issues like climate change often require legitimacy for international organizations in order to be meaningfully addressed. Only if petty domestic concerns of developed countries and misguided ideological crusades of the sort often exemplified by the international “fair trade” movement cease to threaten developing countries’ sovereignty will these organizations be able to gain support and legitimacy. Just like no country will like to actually disarm when the UN Conference on Disarmament is headed by North Korea [sic], it will be hard to coordinate CO2 emission controls as long as developing countries are continually threatened with sweeping and self-serving environmental rules by developed country advocates.

The bias of international “labor rights” proposals against developing country morals and practice reminds me of Slavoj Zizek’s idea that human rights have been defined in a way that dehumanizes the countries of the developing world while basically defining humanity as whatever it is that us wealthy people already have. Note that this idea seems very much in keeping with the UN’s recent push to make internet access a human right. After all, if we don’t keep moving the goalpost, there might come a time when the “huddled masses” actually gain entrance to the noble club of “humanity” and then no sovereign borders will be there to help us keep them in their disadvantaged place.

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The bleak future of moral computer games…

…is described in this comic. Except that it is reality.

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Monetary Ramblings – Part 1 (Seignorage)

Conspiracies about money abound: there are crackpot theories about the international dominance of the dollar, the Chinese hoarding of Treasuries, the rate of inflation, or the gold standard that repeatedly make their way into the opinion sections of respectable magazines and newspapers. I think part of the explanation for the almost theological obsession of the public with all things related to money is, on the one hand, the association with deep philosophical concepts like value, time, authority and its omnipresence in human interactions, on the other hand, the fact that the monetary system is quite difficult to understand, which leaves much room for speculation.

I am no exception and so I constantly struggle to understand what it is exactly, that money does and how it can be influenced by policymakers. It seems that, where it comes to money even the simplest question are never silly and oftentimes have very complicated answers. As an illustration, consider the question “What is money?”. The answers can range from coins and note, to the entirety of assets like checking accounts, liquid stocks, jewels etc. that are available as stores of value and means of exchange. Consequently, any statement about monetary policy needs to contend with this complexity by clearly stating its definitions. Faillure to do so is often the reason for the seeming disconnect in public debates about the topic. Personally, I find that simple analogies help me to think through the chain of effects of a particular intervention. For personal reference and perhaps also as food for thought for the reader, I will try and think through some policy-relevant issues related to money in the next posts.

One question I have been wrestling with, is whether the central bank can help the government pay for its debt. Given that it can print an infinite amount of money to pay for all its obligations, it is trivially true that the central bank could pay for all the debt outstanding in the short run, at the non-trivial cost of destroying the US economy by hyperinflation. However, in the more meaningful sense of whether it can make sustainable profits without destroying the economy, and how large these profits can be and who has the offsetting loss, the question becomes more difficult to answer.

The profit that the central bank derives from being the monopoly producer of money in its area of operation is called seignorage. In order to find out how much that privilege is worth, there is two different ways we can measure this: the loss to citizens and the gain to the central bank. For the former, we can measure the opportunity cost of money. Remember that the central bank increases the money supply by buying interest-paying assets (bonds, stocks etc.) using a  zero interest asset (money) as payment.  Thus, citizens lose out on the interest and just get a bunch of green papers in return, which makes their loss equal the interest rate of whatever asset they would like to hold instead of zero interest money. This is obviously quite vague, as the best alternative to holding money is not the same for everyone and will actually change as monetary policy changes, which makes this is a hard measure to use in practice.

The gain to the central bank is easier to measure because it is not dispersed among many citizens: to the first approximation, in the short run its benefit from increasing the money supply is whatever it can buy with that money, that is, the real value of one dollar. In a way, it can print a dollar, go into a store and buy something. As the central bank does not really produce any real stuff, when it goes into the store and buys something real with the printed money, someone else must become poorer to make up for the fact that the central bank just got something for (green papery) nothing. This cost is in fact shared by all citizens, as the additional dollar introduced by the central bank increased the ratio of money to stuff in the economy, thereby making all the other money in circulation slightly less valuable. In effect, the increase in money supply is a tax on people who hold money.

In the long run however, this tax, like all taxes (as depicted in the Laffer curve), has a maximum level of revenue it can raise. The limitation to printing more and more money and buying more and more stuff with it is that if the amount of money created greatly exceeds the natural increase that is necessary to grease the wheels of an expanding economy, there will be inflation, which is just a different way of restating the fact that money loses value, if there is too much of the latter and not enough things to buy. This inflation (like all taxes) distorts the economic process by leading to frequent changes in pricing,  sub-optimal adjustment of relative price ratios and a tax on trying to accumulate wealth, which discourages effort. Thus, if inflation gets too high, the economy stops to function well, shrinks, and the money printed by the central bank will buy less real stuff, even as they print more money. Thus, if the central bank overdoes the seignorage trick, it will kill the golden goose. It’s as if you have a pub and you secretly dilute your beer with water. Initially, it is a gain for the pub owner (central bank) at the cost of the drinkers, but if you overdo it, people will stop coming to your pub all together and so, even if you would dilute the beer more and more to increase your profit, you would actually end up with less and less income, as business dries up.

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