In the driest chapter of the book, Easterly discusses everyone’s favorite global money pot – the International Monetary Fund (IMF). It’s one of the Bretton Woods organizations (along with the World Bank and International Trade Organization), which makes it a multilateral aid donor — it receives contributions from member organizations and distributes funds to countries in need.
Which brings up the obvious question: which countries are “in need”? The first group is composed of those countries that need short-term “bailout” money – in the recent past, a few were South Korea, Thailand, and Mexico. More ambitiously, the IMF provides conditional loans to countries for large-scale projects; many, many countries have received this type of development loan (the next is likely Egypt). Often, the loan is a “standby arrangement,” which makes it “conditional on the government’s getting its finances in order so it can pay the loan back quickly.”
Easterly holds that the IMF does a better job with the former group than the latter: “on balance, the IMF has done useful short-term bailouts of poor countries experiencing financial crises, but it has done worse at promoting long-term development.” Which, conceptually, makes sense: the countries that are in financial crisis are probably slightly less likely to be “broken,” so a short-term injection of emergency cash could right them up and set them on their way. Not so much for the poorer, slightly-more-likely-to-be-corrupt countries.
The IMF also plays the heavy for many countries, “often [forcing] the government to do unpopular things, such as cut subsidies for bread or cooking oil.” The main reason is two-fold: 1) subsidies for basic goods are often politically popular but economically inefficient; and 2) this is one of many ways the recipient government cuts expenses as part of the standby agreement. As a consultant, I can empathize with the role of the heavy: it’s often (implicitly) a big reason clients hire us, so I’m used to it. Of course, citizens don’t like it when prices for basic goods double, so a certain amount of rioting often occurs (as it currently the case in Jordan – though that wasn’t part of IMF cost-cutting).
Depending on how you look at it, the IMF is either really bad at providing loans (and thus, conditions to reform) to countries that are likely to collapse, or in providing loans to poorer countries, it naturally just accepts some poor outcomes, but the correlation is there either way: “statistically, spending a lot of time under an IMF program is associated with a higher risk of state collapse.” Easterly appears to take the former position, and recommends not getting involved with countries that can’t take it. This seems to be sound advice, though also a tall order, to attempt to provide funds and reform conditions to poor countries without accepting some level of risk.
In a way, the IMF acts as an enabler to poor countries: when they can’t repay their first IMF loan, it’ll often provide another loan – even without adhering to the initial conditions by which the loan was granted. In other words, the IMF is like the parent that keeps paying the kid allowance even when he/she isn’t doing the chores. Poor coordination makes the situation worse, as Western governments and other agencies kick in more debt to pay off old debt; this spiral continues until all parties admit the obvious: the country won’t be able to repay the loans. This led to the creation of a new acronym: HIPC (Heavily Indebted Poor Countries), and in 1996 “the IMF and the World Bank, for the first time in their history, forgave part of their own loan.” Anyone who remembers the 2008 financial meltdown in America will recognize the issue with this: moral hazard – or, in plain human speak, “countries will stop repaying loans because they know they’ll just be forgiven anyway.”
Easterly’s solution is to look back to the 1944 Bretton Woods conference and true-up the mission of the IMF and World Bank: “The World Bank, which is an aid agency, should just give the poorest countries grants, not loans… The IMF, which is not supposed to be an aid agency, should get out of the business of loaning money to the poorest, least creditworthy countries altogether.” This doesn’t strike me as a solution that fixes the problem: treating all poor-country funding as essentially “pre-forgiven” (which is basically what the grant would be, right?) isn’t likely to fix the underlying issue: that the money isn’t being put to productive use.
Off-the-cuff, another solution might be to accept the underlying conditions (i.e., don’t bother with the pre-conditions), then provide grant money for specific infrastructure projects – roads, dams, etc. Money’s fungible – a dollar is a dollar is a dollar – but at least something would come of it. This seems to be what Easterly is getting at but doesn’t explicate.
In Easterly’s view, the IMF is sitting on a giant pile of money that it should be lending to emerging markets (not the too-likely-to-fail countries) and doling out on an emergency basis; its role should be a stabilizer, not a fixer. With its recent funding of the Eurozone bailout, it seems to be heading in that direction. If that’s the case, the question is what the IMF should do with all of the additional contributions: give to the World Bank for development work? Rebate back to member countries?
“Foreign aid donors spent two billion dollars in Tanzania during the past twenty years building roads. The road network did not improve. Roads deteriorated faster than donors built new ones, due to lack of maintenance…The poor need roads; the aid bureaucracy fails to deliver them. We should be tough on a bureaucracy that fails to turn aid money into critical services for the poor.”
The block-quote above is a nice summation of the issue this chapter explores – why do aid bureaucracies fail, and what can be done to improve them? Reasons for aid agency failures are legion, but boil down to three overarching explanations: misdirected incentives, a dearth of accountability, and poor feedback mechanisms.
First up: incentives. We’re back to the classic “principal-agent” problem where “the principal is the rich country politicians and not the real customers, the poor in poor countries” – so aid agencies are incented to appease the rich country politicians rather than the poor aid recipients. If a rich country politician is persuaded that aid funding is a smart use of resources (a big if, admittedly), he/she needs to show that to constituents somehow, and it’s easier to do when appealing to the vision of Saving Poor People From Poverty than incrementally improving the lives of those same people. This causes aid agencies to overpromise on vague, utopian goals, which diverts resources away from small, tangible, ostensibly doable things. If the incentives are in the wrong place, it’s easier for aid bureaucracies to fail their recipients.
Additionally, if no single agency is accountable for the success or failure of a program, it’s hard to say which is successful and which is not, aid agencies can claim successes as their own and explain away failures as the fault of a different agency – no one is accountable. This may lead aid agency workers to slack off; as Easterly puts it, “When nobody can tell whether aid agency efforts make a difference, the aid agency managers have only weak incentives to exert effort.” This strikes me as a little pessimistic, but the general idea makes sense – without accountability, projects that aren’t successful can continue to be funded, which is a waste of resources; better to allocate resources towards projects and NGOs that are proven successes.
A corollary to the issue of accountability is that of feedback – if an agency doesn’t directly hear how it’s doing, it’s difficult to iterate and improve. Easterly argues this is missing from current aid agency efforts, partly because of the first two issues above.
Which begs the question – what can be done to mitigate these issues? Easterly argues that we should look to “have aid agencies specialize more in solving particular problems in particular countries, rather than having each agency responsible for everything.” This is a perfectly legitimate, reasonable thing to do – but the obvious question is: how? Who decides what each organization is going to specialize in, and where? My notebook is full of scribbles of potential models; I don’t think it’s an impossible thing – just really, really difficult to operationalize and coordinate. It would also require a mind-shift on the parts of the World Bank, USAID, DFID, etc. One potential model may point towards an increased role for “expert NGOs” to receive funding from the aid organizations for specific, measurable projects. Another area where I need to do more research.
The next section highlights the successes of aid; in a sentence: “Despite the zero-growth payoff to aid in Africa, there has been a fall in infant mortality and a rise in secondary enrollment in that most aid-intensive continent.” Easterly surmises that it may be easier for health interventions to be successful because the outcomes are clear – populations either get better or they don’t – which can help align incentives and is direct feedback. This points the way towards Easterly’s main contention – utopian goals of economic development and Ending Poverty may be non-starters, but there are discrete, narrow, piecemeal things that aid can do; therefore, we should do those.
In a sentence that really surprised me when I read it, Easterly takes it one step further: “Here is one way to make aid work better: aid donors should just bite the bullet and permanently fund road maintenance, textbooks, drugs for clinics, and other operating costs of development projects.” This sounds pretty gargantuan, but actually isn’t much different than the models for Teach for America, AmeriCorps, the Peace Corps, etc. – permanent injections of resources (in this case, funding from the government for short-term deployments of human capital) to improve on-the-ground efforts while institutions improve achingly slowly. Unfortunately, it also isn’t a sexy model – donors would love to eradicate AIDS in Tanzania more than ensuring roads are properly maintained there. It seems that aid agencies may need to focus on marketing these long-term efforts more effectively.
Another inefficient mechanism preferred by donors is the funneling of aid to purchases from their own country’s exporters (e.g., American-made insecticide-impregnated bed nets) – known as “tied aid.” This “lowers its value to the recipient because it restricts choice on what products can be purchased and from whom,” and can distort local markets. Tied aid seems like a pretty significant issue – one that rich countries should be much better at explaining to their constituents. I need to learn more about this.
Tying up the loose ends, Easterly ends this chapter by discussing the mechanisms that may allow aid agencies to better monitor and evaluate programs; he favors independent evaluation of programs and independent research divisions, with aid agencies putting funds into escrow accounts for both. It’s pretty shocking to think this isn’t already happening, and I’m hoping that in the time since this book was published this has happened.
I have more to research about approaches that emphasize NGO competition and specialization – this strikes me as a gap in current funding models. Where’s the Kickstarter & Kiva for foreign aid? Is it Kiva?
This is a fascinating chapter that investigates the role a bad government plays in a country’s quest for prosperity. Easterly contends that “We don’t do the poor any favors by tenderly respecting the sensitivities of bad rulers who oppress their own people,” but also that “imposing democracy from the outside doesn’t [work].” The unanswered question, then, is: what can we do (if anything)?
Democracy sounds better in theory that it works in practice – something that any 7th grade civics student knows. Theoretically, a democracy should lead to better government (who would keep a bad government around when they could just be voted out?), perfectly-distributed public goods (via feedback from the masses), and positive change when the voices are vociferous enough about it.
In practice? E. None of the Above.
To begin with the obvious: a democracy isn’t a democracy unless everyone has a voice – including the minority (for a counterexample, see America, 1787-1920; arguably, 1787-1964); this rarely happens, and as Easterly notes, is “far from hypothetical in poor-country democracies, which are often polarized along ethnic and class lines and where the winners sometimes abuse the losers.” Terrifyingly, “democracy… does not lower the probability of the most extreme violation of minority rights of all: state-sponsored mass killings (even genocide) of political or ethnic victims.” If the social norms of democracy aren’t in place, then the institution of democracy isn’t really democracy, and likely doesn’t work.
The introduction of democracy tends to be bad for the incumbent rich/powerful – the majority could redistribute their wealth or otherwise enact policies that strip them of their power. As a result, countries transitioning to democracy have a Goldilocks problem: they need to structure their democracy just right so that it protects the rich just enough to mollify them while not going overboard (which may cause the lower classes to revolt and could be inherently undemocratic). Throw in oil reserves, a highly agrarian society, a highly unequal society, or a high incidence of agriculture and it’s even more difficult to establish democracy – rent-seeking, violence, and inequality are not great pre-conditions for a society in which everyone has an equal voice.
Even if democracy – and the social norms accompanying it – accepted, the collective voice of a people can often be swayed by the lesser angels of our nature – “politicians could appeal to voters’ gut instincts of hatred, fear, nationalism, or racism to win elections,” which is decidedly less than ideal. In fact, we see a lot of the negatives of democracy in the United States of America; in the “Land of the Free” it isn’t unusual to see jingoistic paens to a halcyon, white-washed past that never existed; politicians stoking racist fears of a black president; or voting “irregularities.”
Back on the topic of bad governments. Research indicates that “bad government does indeed cause poverty,” which then puts wealthier countries in a bind; as Easterly notes, “It would be good to get aid from the rich of rich countries to the poor of poor countries, but what we see happening is that aid shifts money from being spent by the best governments in the world to being spent by the worst.” This, in turn, leads to the “aid curse” – money funneled towards the government goes to political insiders, who use it to entrench.
The question Easterly poses seems to be something like, “Given all of this information, why do Western countries/aid organizations give money to bad governments?” As in other examples throughout the book though, I feel that’s the wrong question to ask; a better one may be, “Given all of this information, what can the Western countries/aid organizations do to get funding to the worst-off people that should be helped?” In what ways can these organizations bypass these bad actors?
I think it’s fair to say that the United States and other Western Countries don’t have a sterling record of propping up the right leaders (see: Nicaragua, Afghanistan, most of Africa, most of Central America, etc.), so that probably isn’t the best place to start; it appears Easterly would agree with this sentiment: “the principle is nonintervention. Don’t reward bad governments by working with them, but don’t try to boss them around or overthrow them either.” Bad governments are bad; it’s probably best to stay away from them.
One plausible response is to simply bypass bad governments and ditch the thought that aid money can go towards helping bad governments improve – again, something Easterly seems to agree with. If the goal in funding is to improve/save lives, then it should be possible to do so without kowtowing to the government or other bad actors. Bring it right to the source.
I don’t have the answers, and definitely need to do more research to come up with a better way to phrase the question, but it strikes me that Western power can be used to help develop the infrastructure to support improving government accountability (using mobile phones and the internet to coordinate the communication of bad government behavior); “hot-spotting” problem areas (from a health or education standpoint, say) where an intervention is most needed; or simply by directly funding local NGOs (if a bad government won’t let them in, perhaps). Those aren’t permanent solutions, but they may help bridge the gap between a better future and a poor present.
This chapter explains the contention that “free markets work, but free-market reforms often don’t;” that a free market is much more than the thing itself, as much an indicator as an end. It also highlights the limitations of the market: “Nor are markets of much help to those who are now very poor – after all, the poor have no money to motivate any market Searchers to meet their needs.” The theme that weaves its way through the chapter is that institutions, markets, and social norms take time to develop – and that a failure to recognize this leads to disastrous consequences.
First, Easterly takes the World Bank’s (and, subsequently, the International Monetary Fund’s) “Structural Adjustment Programs (SAPs)” – essentially, pro-free-market pre-conditions before a loan would be given — to task for failing to appreciate the notion of scale: “either large-scale or small-scale partial reforms could backfire, but it is much easier to correct the small mistakes than the large mistakes.” Based on the research I’ve done, there isn’t a big contingent of supporters who will resolutely defend SAPs on their merits; as Easterly notes, they’re intuitively appealing – “partial reform would not work unless all of the complementary reforms happened quickly and simultaneously — but ineffective and harmful in practice.
A short discussion of cheating follows, with Easterly explaining the various types that can wreak havoc on a market; the Lemon problem (the prospect of poor product pushes down prices, which reduces the incentive sellers have to offer a quality product) and hold-up problem (a supplier may price-gouge when the purchaser needs the product the most) figure prominently. He then brings up multiple possible solutions to these problems: social trust (outside of the family), artificially-created trust (via credit rating agencies and warranties), courts, and reputation-based dealing (via age-groups and extended business relationships). As he notes, the issue with institution-based solutions is that “a poor country cannot use these solutions as much as a rich one” due to lack of scale and infrastructure. Ditto for courts – they’re “more corruptible – the richer or stronger party will pay bribes or intimidate the judge into seeing things their way.”
The most interesting part of this section has to do with another potential stave to cheating: ethnic specialization, where one ethic group establishes a long-term hold on an industry. In the pro column: specialization, the norm of trust (if you buy a fish from a Luo in Kenya, you trust it to be high quality), and innovation sharing. In the con column: the exclusion of the Other, breeding resentment among ethnic groups (see: anti-semitism in Europe), and decreased social mobility. On net, it seems like the con column outweighs the pro column.
Something that was drilled into my head in Economics 101 comes up next: property rights. In class, we were taught how important property rights are to savings, investment, and growth; as Easterly writes, “property rights are an incentive to accumulate assets over time and across generations, which is often necessary to have the productive capacity to meet consumer needs.” If only it were that simple! As it turns out, when societies don’t have formal institutions to create property rights, they create them informally, often leading to messy, confusing – but crucially, agreed upon – rights to land. Try to bring in “traditional” property rights, and a government often creates more problems than it solves: “By imposing land titling on such complex social customs, ‘private property rights’ may actually increase the insecurity of land tenure rather than decrease it.” See: SAPs.
Here’s the thing: change takes time, and the more we forget that, the more trouble we can cause. My own country went to war with itself 150 years ago, and there are still stark differences between the two geographical sides today; in the past, a family could literally squat on a parcel of land and it was theirs – boom, done; our so-called representative democracy was neither 100 years ago (arguably 50 years ago, actually). When we expect Afghanistan or Iraq to “modernize” in a decade, we’re teeing up failure; when we expect Uganda or Kenya to be corruption-free in a decade, we forget Teapot Dome, Tamany Hall, and myriad other scandals in American history.
At the same time, though, I think it’s fair and plausible to contend that intervening in the right way could help speed up the institution/norm-building. What might that look like? The significant increase in the use of technology in many countries in Africa opens the door for instant feedback mechanisms regarding the validity of a product (in Nigeria, this is happening through the use of cell phones and scratch-off labels on medication, with some success), which may replace a relationship-based norm with institution-based trust. Western know-how and funding could go towards establishing scalable credit-rating agencies, and there may be a role in helping to create corruption/cheating-monitoring organizations (like IPaidABribe in Kenya). In short: it seems like there are plenty of ways for the West to help establish the underlying institutions and prerequisites to allow markets to naturally develop in developing countries.