Archive for the 'Foreign Aid' Category

Paul Romer on charter cities in Prospect

Published on 2/28/2010 in Foreign Aid . 0 Comments Tags: , .

Forget aid—people in the poorest countries like Haiti need new cities with different rules. And developed countries should be the ones that build them

Paul Romer: this short article for Prospect explains his charter cities proposal for the general public:

(…) When disaster strikes—as in the recent Haiti earthquake—the prime minister is right. Even small amounts of aid can save many lives. The moral case for aid is compelling. But we must also remember that aid is just palliative care. It doesn’t treat the underlying problems. As leaders like Rwandan president Paul Kagame have noted, it can even make these problems worse if it saps the innovation, ambition, confidence, and aspiration that ultimately helps poor countries grow.

So, two days later, I opened my own TED talk with a different photo, one of African students doing their homework at night under streetlights. I hoped the image would provoke astonishment rather than guilt or pity—for how could it be that the 100-year-old technology for lighting homes was still not available for the students? I argued that the failure could be traced to weak or wrong rules. The right rules can harness self-interest and use it to reduce poverty. The wrong rules stifle this force or channel it in ways that harm society.

The deeper problem, widely recognised but seldom addressed, is how to free people from bad rules. I floated a provocative idea. Instead of focusing on poor nations and how to change their rules, we should focus on poor people and how they can move somewhere with better rules. One way to do this is with dozens, perhaps hundreds, of new “charter cities,” where developed countries frame the rules and hundreds of millions of poor families could become residents.

How would such a city work? Imagine that a government in a poor country set aside a piece of uninhabited land. It invites a developed country to enter into a new type of partnership, in which the developed country sets up and enforces rules specified in a charter. Citizens from the poorer country, and the rest of the world, would be free to live and work in the city that emerges. It could create economic opportunities and encourage foreign investment, and by using uninhabited land it would ensure everyone living there would have chosen to do so with full knowledge of the rules. Roughly 3bn people, mostly the working poor, will move to cities over the next few decades. To my mind the choice is not whether the world will urbanise, but where and under which rules. Instead of expanding the slums in existing urban centres, new charter cities could provide safe, low-income housing and jobs that the world will need to accommodate this shift. Even more important, these cities could give poor people a chance to choose the rules they want to live and work under.

To understand why rules are the way to harness self-interest, and why such new cities could work where old cities have not, look again at the example of electricity. We know from the developed world that it costs very little to light a home—on average, less than one US penny an hour for a 100-watt bulb. We also know that most poor people in Africa are not starving. They could afford some light. Africans do not lack electricity because they are too poor. Indeed, reliable power is so important for education, productivity and job creation that it would be more accurate to say that many in Africa are poor because they don’t have electricity. So why don’t they?

Why the right rules matter

Consider development the other way round. US customers have cheap electricity mostly because rules channel self-interest in the right way. Some protect investments made by utilities, others stop these companies abusing their monopoly power. With such rules, companies win; efficient providers make a profit. But customers win too; they get access to a vital resource at low cost. It’s the absence of these rules that explains why many Africans don’t have electricity at home. It might seem a simple insight, but it took economists a long time to understand it.

I think Paul Romer understands economic growth better than just about anybody else on the planet.
(…) When I started graduate school in the late 1970s I was convinced economists underestimated the potential for new ideas to raise living standards. The body of work that grew out of my PhD thesis came to be called new growth theory, or post-neoclassical endogenous growth theory in Britain (when it was infamously taken up by new Labour in the mid-1990s). Initially I just wanted to understand how good ideas, like those which make cheap electric light possible, were discovered. But then another topic began to interest me: why didn’t ideas common in some parts of the world spread to others?
Put simply, some countries are better able to establish the type of rules that help good ideas spread, while others are trapped by bad rules that keep ideas out. The rules stopping cheap electricity, for instance, are not hard to identify. The threat of expropriation or political instability stops many western electricity companies moving into Africa. Those that do set up there can exploit their power as monopolists to charge excessive prices. Often they offer bribes to stop rules being enforced, or pay bribes themselves. Good rules would stop all this. So to unleash the potential of the marketplace, poor countries need to find a way to create good rules.
The challenge in setting up good rules lies in solving what economists call “commitment” problems. How can a developing country promise to keep the rules that govern investment fair? Nobel prize-winning economist Thomas Schelling illustrates this problem with the example of a kidnapper who decides he wants to free his victim. But the kidnapper worries that the victim, once released, will go to the authorities. The victim, eager to be free, promises not to—but there is no way for him to guarantee he will keep quiet. As a result, the kidnapper is compelled to kill the victim, even though both would be better off if a binding agreement could be made. Poor countries face similar problems: their leaders cannot make credible commitments to would-be investors.
(…) Other urban economists fear new cities will repeat the unimpressive history of government-planned ones like Brasília, or Dubai’s recent bust. But these are both extreme examples. The state was too intrusive in Brasília and almost non-existent in Dubai. Hong Kong is the middle ground, a state ruled by laws not men, but one that leaves competition and individual initiative to decide the details.
The experience in Hong Kong offers two further lessons. The first is the importance of giving people a choice about the rules that govern them. Hong Kong was sparsely populated when the British took over. Unlike other colonial systems, almost everyone chose to come and live under the new system. This gave the rules proposed by the British a degree of legitimacy they never had in India, where the rules were imposed on often unwilling subjects. This is why building new cities, rather than taking over existing ones, is so powerful.

(…) As billions of people urbanise in the coming decades, they can move to hundreds of new cities. The gains new cities can unleash are clear. Picture again the students studying under the streetlights. By themselves, political leaders in poor countries won’t provide cheap, reliable electricity any time soon. They can’t eliminate the political risk that holds back investment or ensure adequate regulatory controls. But working with a partner nation, they can establish a new city where millions of young people could pay pennies to be able to study at home. And as these cities seek out residents, the leaders and citizens in existing countries will face the most effective pressure for good governance—competition.
I can’t recommend the comments to the Prospect article. It seems that most do not bother to think about what they have read.

Why International Assistance Does Not Alleviate Poverty

Published on 2/27/2010 in Foreign Aid . 0 Comments Tags: , , .

From the Charter Cities blog:

In reviewing Dambisa Moyo’s Dead Aid in Foreign Affairs, Jagdish Bhagwati takes an interesting look at the history of development aid. He traces the changes in the way economists viewed aid as well as changes in the tactics used by aid advocates. He goes on to note that while many development debates are still aid-related, the most recent development success stories, such as those in India and China, have a very different relation to aid—almost none at all.

[From Jagdish Bhagwati on Development Aid]
Here’s a representative excerpt from Bhagwati:
(…) Moyo’s sense of outrage derives partly from her distress over how rock stars, such as Bono, have dominated the public discussion of aid and development in recent years, to the exclusion of Africans with experience and expertise. “Scarcely does one see Africa’s (elected) officials or those African policymakers charged with a country’s development portfolio offer an opinion on what should be done,” she writes, “or what might actually work to save the continent from its regression. . . . One disastrous consequence of this has been that honest, critical and serious dialogue and debate on the merits and demerits of aid have atrophied.” She also distances herself from academic proponents of aid, virtually disowning her former Harvard professor Jeffrey Sachs, whose technocratic advocacy of aid and moralistic denunciations of aid skeptics cut no ice with her. Instead, she dedicates her book to a prominent and prescient early critic of aid, the development economist Peter Bauer.

Moyo’s analysis begins with the frustrating fact that in economic terms, Africa has actually regressed, rather than progressed, since shedding colonial rule several decades ago. She notes that the special factors customarily cited to account for this tragic situation — geography, history, social cleavages, and civil wars — are not as compelling as they appear. Indeed, there are many places where these constraints have been overcome. Moyo is less convincing, however, when she tries to argue that aid itself has been the crucial factor holding Africa back, and she verges on deliberate provocation when she proposes terminating all aid within five years — a proposal that is both impractical (given existing long-term commitments) and unhelpful (since an abrupt withdrawal of aid would leave chaos in its wake).

Moyo’s indictment of aid, however, is serious business, going beyond Africa to draw on cross-sectional studies and anecdotes from across the globe. Before buying her indictment, however, it is necessary to explore why the hopes of donors have so often been dashed.

(…) although aid was predicated on increased domestic savings, in practice it led to reduced domestic savings. Many aid recipients were smart enough to realize that once wealthy nations had made a commitment to support them, shortfalls in their domestic efforts would be compensated by increased, not diminished, aid flows. Besides, as Moyo notes, the World Bank — which provided much of the multilateral aid flows — faced a moral hazard: unlike the International Monetary Fund, which lends on a temporary basis and has a “good year” when it lends nothing, the World Bank was then judged by how much money it disbursed, not by how well that money was spent — and the recipients knew this.
After countries such as China and India changed course and adopted liberal (or, if you prefer, “neoliberal”) reforms in the last decades of the century, their growth rates soared and half a billion people managed to move above the poverty line — without question, the greatest and quickest progress in fighting poverty in history.
Neither China nor India, Moyo points out, owed their progress to aid inflows at all. True, India had used aid well, but for decades its growth was inhibited by bad policies, and it was only when aid had become negligible and its economic policies improved in the early 1990s that its economy boomed. The same goes for China.

More insights on what’s wrong with Haiti and how it can be fixed

Published on 1/29/2010 in Foreign Aid . 0 Comments Tags: .

Typically insightful analysis by Tokyo Tom. This post links Tom’s 19 Jan post on Haiti. Together you will find a library of digital support for your research.

What needs to be done? Simply, an end to corrupt rule and heavy taxes and regulatory burdens, central planning and intrusive foreign aid “development” schemes (that feed local elites and foreign contractors), and free and open trade with foreign nations.

By “simply” I think Tom highlights the clarity of the biggest inhibitors. The degree of difficulty of achieving those changes is staggering. That is why Paul Romer is campaigning for Charter Cities.

Somali pirates launch stock market

Published on 12/3/2009 in Foreign Aid . 0 Comments Tags: .

Now that Tyler Cowen has linked the story it seems obvious this would happen:

Somali pirates are raising money through a local equity offering:

In Somalia’s main pirate lair of Haradheere, the sea gangs have set up a cooperative to fund their hijackings offshore, a sort of stock exchange meets criminal syndicate.

Here is one internal account:

“Four months ago, during the monsoon rains, we decided to set up this stock exchange. We started with 15 ‘maritime companies’ and now we are hosting 72. Ten of them have so far been successful at hijacking,” Mohammed said.

“The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials … we’ve made piracy a community activity.”

For the pointers I thank Pin-Quan Ng and Eric Crampton.

What Makes a Nation Rich?

Published on 11/22/2009 in Economics , Foreign Aid and Foreign Policy . 0 Comments Tags: , , .

Say you’re a world leader and you want your country’s economy to prosper. According to this Clark Medal winner from MIT, there’s a simple solution: start with free elections.

CLICK HERE FOR A MAP OF HOW GOVERNMENTS AFFECT THE WEALTH OF NATIONS >>

That is a bad headline I think – free elections may not work unless the institutions are right — especially the rule of law and private property rights. Here’s MIT economist Daron Acemoglu:

(…) The question social scientists have unsuccessfully wrestled with for centuries is, Why? But the question they should have been asking is, How? Because inequality is not predetermined. Nations are not like children — they are not born rich or poor. Their governments make them that way.

(…) yet while Sachs and Diamond offer good insight into certain aspects of poverty, they share something in common with Montesquieu and others who followed: They ignore incentives. People need incentives to invest and prosper; they need to know that if they work hard, they can make money and actually keep that money. And the key to ensuring those incentives is sound institutions — the rule of law and security and a governing system that offers opportunities to achieve and innovate. That’s what determines the haves from the have-nots — not geography or weather or technology or disease or ethnicity.

Put simply: Fix incentives and you will fix poverty. And if you wish to fix institutions, you have to fix governments.

How do we know that institutions are so central to the wealth and poverty of nations? Start in Nogales, a city cut in half by the Mexican-American border fence. There is no difference in geography between the two halves of Nogales. The weather is the same. The winds are the same, as are the soils. The types of diseases prevalent in the area given its geography and climate are the same, as is the ethnic, cultural, and linguistic background of the residents. By logic, both sides of the city should be identical economically.

And yet they are far from the same.

On one side of the border fence, in Santa Cruz County, Arizona, the median household income is $30,000. A few feet away, it’s $10,000. On one side, most of the teenagers are in public high school, and the majority of the adults are high school graduates. On the other side, few of the residents have gone to high school, let alone college. Those in Arizona enjoy relatively good health and Medicare for those over sixty-five, not to mention an efficient road network, electricity, telephone service, and a dependable sewage and public-health system. None of those things are a given across the border. There, the roads are bad, the infant-mortality rate high, electricity and phone service expensive and spotty.

The key difference is that those on the north side of the border enjoy law and order and dependable government services — they can go about their daily activities and jobs without fear for their life or safety or property rights. On the other side, the inhabitants have institutions that perpetuate crime, graft, and insecurity.

Nogales may be the most obvious example, but it’s far from the only one. Take Singapore, a once-impoverished tropical island that became the richest nation in Asia after British colonialists enshrined property rights and encouraged trade. Or China, where decades of stagnation and famine were reversed only after Deng Xiaoping began introducing private-property rights in agriculture, and later in industry. Or Botswana, whose economy has flourished over the past forty years while the rest of Africa has withered, thanks to strong tribal institutions and farsighted nation building by its early elected leaders.

Now look at the economic and political failures. You can begin in Sierra Leone, where a lack of functioning institutions and an overabundance of diamonds have fueled decades of civil war and strife and corruption that continue unchecked today. Or take communist North Korea, a geographical, ethnic, and cultural mirror of its capitalist neighbor to the south, yet ten times poorer. Or Egypt, cradle of one of the world’s great civilizations yet stagnant economically ever since its colonization by the Ottomans and then the Europeans, only made worse by its post-independence governments, which have restricted all economic activities and markets. In fact, the theory can be used to shed light on the patterns of inequality for much of the world.

If we know why nations are poor, the resulting question is what can we do to help them. Our ability to impose institutions from the outside is limited, as the recent U. S. experiences in Afghanistan and Iraq demonstrate. But we are not helpless, and in many instances, there is a lot to be done. Even the most repressed citizens of the world will stand up to tyrants when given the opportunity. We saw this recently in Iran and a few years ago in Ukraine during the Orange Revolution.

Please continue reading…

When Sarkozy Spoke Truth to Obama

Published on 9/27/2009 in Foreign Aid . 0 Comments Tags: , , .

Claudia Rosett, as usual, did a great job contrasting Obama’s rhetoric with Sarkozy’s call for action:

The setting was the special, summit-level Security Council meeting Thursday morning, chaired by Obama, in which the official topics were nuclear nonproliferation and disarmament for the entire world — but with no focus on any specific country. The meeting was advertised by the White House as “historic,” if for no other reason than that no U.S. President has ever before stooped to chair the often feckless and at times just plain sleazy UN Security Council — where the 15 members currently include Vietnam and Libya. For this particular occasion, Libya’s foreign minister attended (thus sparing the Council the risk of a replay of Qaddadi’s 96 minute performance the previous day on the General Assembly stage). The rest of the table was filled with presidents and prime ministers.

They began with Obama’s pre-packaged deal of unanimously adopting a “historic” resolution, which Obama said “enshrines our shared commitment to the goal of a world without nuclear weapons,” etc, etc. etc (All very nice, but what does this have to do with the real world?). Secretary-General Ban Ki-Moon kicked off the ensuing round of official self-congratulatory huffing and puffing (”…a historic moment…a fresh start towards a new future”). The canned diplo-speak continued, as each member spoke in turn – Costa Rica, Croatia, Russia, Spain, Austria, Vietnam, Uganda, China … and then it was the turn of the French president, Nicolas Sarkozy. Here’s his wakeup call, in the UN’s translation from the French (boldface mine):

“We are here to guarantee peace. We are right to talk about the future. But the present comes before the future, and the present includes two major nuclear crises. The peoples of the entire world are listening to what we are saying, including our promises, commitments and speeches. But we live in the real world, not in a virtual one.

We say that we must reduce. President Obama himself has said that he dreams of a world without nuclear weapons. Before our very eyes, two countries are doing exactly the opposite at this very moment. Since 2005, Iran has violated five Security Council Resolutions. [Ed note: Sarkozy then listed international proposals for dialogue with Iran attempted in 2005, 2006, 2007, 2008, 2009.] I support America’s extended hand. But what have these proposals for dialogue produced for the international community? Nothing but more enriched uranium and more centrifuges. And last but not least, it has resulted in a statement by Iranian leaders calling for wiping off the map a Member of the United Nations. What are we to do? What conclusion are we to draw? At a certain moment hard facts will force us to take decisions.

… Secondly, there is North Korea — and there it is even more striking. It has violated every Security Council decision since 1993. It pays absolutely no attention to what the international community says. Even more, it continues ballistic missile testing. How can we accept that? What conclusions should we draw? …”

You can read President Sarkozy’s entire statement here (in all its Defcon 1 relevance to the disclosures Friday of another Iranian uranium enrichment plant hidden on a military base near Qom) – click on this link to Security Council meetings for 2009, then click on the link for “Meeting Record” of Sept 24th and scroll to page 12.

UPDATE: the full text English translation is here. The closing paragraph:

….So, ladies and gentlemen, my dear colleagues, this is what I believe, in full support of what was decided in the resolution and in full support of President Obama’s initiative. What I believe is that by having the courage to strengthen sanctions, together, against countries that violate Security Council resolutions, we will give credibility to our commitment to a world whose future holds fewer nuclear weapons and perhaps, one day, no nuclear weapons./.


Obama worries China

Published on 9/23/2009 in China and Foreign Aid . 0 Comments Tags: .

David Goldman, aka “Spengler” on Obama’s foreign policy

From conversations with friends and acquaintances in Hong Kong, the damage the Obama administration has done to American interests in the Far East may be far worse than meets the eye. The Bush administration, whatever its other failings, achieved something that no previous US administration had done, namely to reassure China that the United States was committed to preserving its territorial integrity, among other things by defusing the Taiwan issue.

<snip>

Relations with Islam occupy the top spot on Obama’s international agenda, and Obama announced this policy in Turkey, the supposed showcase for moderate Islam– except that this “moderate Islam” wants to destabilize China, which is not a smart thing to do. The Chinese are trying to understand why America is going out of its way to placate a bunch of losers and sacrificing key relationships in order to do so.

Add to this the very well publicized lack of confidence in an economic policy which keep shoving American debt down the throat of the world market, and I would say China is very worried indeed.

[From Obama worries China]

And in his recent post on Gold and American Power

But the Obama administration is so destructive of American influence that the world has to own gold as a hedge against the collapse of America’s international position. I own a bit myself, not as an investment but as an insurance policy.

Everyone Should Be Responsible…(except the aid agencies)

Published on 1/27/2009 in Foreign Aid . 0 Comments

This is a big deal: Bill Easterly has a new blog on foreign aid. Here is his first post:

Today, I foist a new blog called Aid Watch on the blogosphere. The objective is to be brutally honest when aid is not helping the poor, but also praising it when it is.

Alas, there is far to go. Take World Bank President Robert Zoellick’s oped (A Stimulus Package for the World) in last Friday’s New York Times and another one in today’s Financial Times (It is Time to Herald the Age of Responsibility).

The more you promise, the more you are telling us you don’t expect to be accountable for promises

In the NYT, President Zoellick requests an additional $6 billion from the US in foreign aid, which will “speed up global recovery, help the world’s poor and bolster [America’s] foreign policy influence…facilitate fast and flexible aid delivery…create jobs while building a foundation for productivity and growth…increase demand for American-made equipment…[and] limit the depth and length of the international downturn, prevent the contagion of social unrest and help save a generation from a new poverty trap.”

The more actions you list, the less you are serious about each action

Right after saying “priorities” for actions in poor countries (NYT), President Zoellick manages to touch on agriculture, health, education, nutrition, infrastructure, banking systems, small-and-medium-enterprise development, microcredit, global warming, and private sector development. Mr. Zoellick (FT) also wishes for international action on the Millennium Development Goals, the Doha trade round, the Copenhagen climate change agreement, humanitarian food supplies, energy conservation, and more G20 meetings to agree on fiscal expansion and reopening credit market agreements.

It’s not about aid money to reach objectives, aid money IS the objective

NYT: “The United States could begin by pledging some $6 billion…0.7 percent of its stimulus package.” FT: “How we respond to the crisis…will set the course.” The “first step” is to give more aid.

President Zoellick does mention briefly the critical issue in both the NYT and FT: some “safeguards to ensure that the money is well spent,” which don’t currently exist. In the FT, he makes the inspirational call for an “Age of Responsibility,” but the Responsibility seems to apply only to rich donors, there is nothing about holding the World Bank responsible.

If you are not accountable for promises, if you try to do everything and focus on nothing, and if you obsess about aid money raised rather than results achieved, haven’t you already told us that the money will not be “well spent”?

Why Bill Gates Hates My Book

Published on 2/9/2008 in Economics and Foreign Aid . 0 Comments

NYU economist William Easterly is one of the true experts on the history of foreign aid [see my earlier posts on Easterly's research, such as "Foreign aid vs. growth: Robert Lucas and William Easterly"

This newspaper reported recently that Bill Gates hates my ideas. I have no hurt feelings, at least nothing that months of intensive psychotherapy can't cure. Mr. Gates, after all, has allied himself with the foreign aid establishment. This establishment is notoriously sensitive to criticism from people like me, who find no evidence that the aid industry's grand schemes are actually lifting anyone out of poverty.

Mr. Gates has now put forward his own scheme -- "creative capitalism" -- in a speech at the recent World Economic Forum in Davos. He argues that today's capitalism does not benefit the poor. For Mr. Gates, regular capitalism works "only on behalf of those who can pay." While entrepreneurs fall all over themselves trying to meet the needs of the rich, "the financial incentive to serve [the poor is] zero.” As a result, basic needs such as food and medicine go unmet.

Mr. Gates seems to believe that the solution is to persuade for-profit companies to meet the poor’s needs by boosting the “recognition” of corporate philanthropy. But the dossier of historical evidence to suggest this would work is as thin as Kate Moss on a diet. First of all, the recognition motive has proven to be awfully weak compared to the profit motive. Otherwise we would have had a lot more than the $5.1 billion of annual American corporate philanthropy to the Third World (as of 2005, which has the most recent reliable figures). That was four one-hundredths of 1% of the $12.4 trillion of U.S. production for the free market. Is it really the poor’s only hope that the Gap will donate a few pennies per sexy T-shirt for AIDS treatment in Africa?

Profit-motivated capitalism, on the other hand, has done wonders for poor workers. Self-interested capitalist factory owners buy machines that increase production, and thus profits. Capitalists search for technological breakthroughs that make it possible to get more output for the same amount of input. Working with more machinery and better technology, workers produce more output per hour. In a competitive labor market, the demand for these more productive workers increases, driving up their wages. The steady increase in wages for unskilled labor lifts the workers out of poverty.

The number of poor people who can’t afford food for their children is a lot smaller than it used to be — thanks to capitalism. Capitalism didn’t create malnutrition, it reduced it. The globalization of capitalism from 1950 to the present has increased annual average income in the world to $7,000 from $2,000. Contrary to popular legend, poor countries grew at about the same rate as the rich ones. This growth gave us the greatest mass exit from poverty in world history.

The parts of the world that are still poor are suffering from too little capitalism. Foreign direct investment in Africa today, although rising, amounts to only 1% of global flows. That’s because the environment for private business in Africa is still hostile. There are some industry and country success stories in Africa, but not enough.

Mr. Gates also announced his foundation is starting “a partnership that gives African farmers access to the premium coffee market, with the goal of doubling their income from their coffee crops.” This is fine as a modest endeavor to help a few Rwandan and Kenyan coffee farmers, but it’s hardly going to remake capitalism. The main obstacles to exports in poor countries are domestic ones like corruption and political strife, not lack of interest from rich-country buyers for premium coffee.

Moreover, how do philanthropists choose just which product is going to be the growth engine of a country? Much research suggests that “picking winners” through government industrial policy hasn’t worked. Winners are too unpredictable to be discovered by government bureaucrats, much less by outside philanthropists. Why did Egypt capture 94% of Italy’s import market for bathroom ceramics? Why did India, an economy with scarce skilled labor, become a giant in skill-intensive IT and outsourcing? Why did Kenya capture 39% of the European market in cut flowers? Why did tiny Lesotho become a major textile exporter to the U.S.? Why did the Philippines take over 72% of the world market in electronic integrated circuits? Because for-profit capitalists embarked on a decentralized search for success.

Sure, let those who have become rich under capitalism try to do good things for those who are still poor, as Mr. Gates has admirably chosen to do. But a New-Age blend of market incentives and feel-good recognition will not end poverty. History has shown that profit-motivated capitalism is still the best hope for the poor.

Mr. Easterly, professor of economics at New York University and visiting fellow at Brookings, is the author of “The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good” (Penguin, 2006).

Australia: Howard loses to Rudd – 2

Published on 11/26/2007 in Foreign Aid . 0 Comments

Australia’s new prime minister, Kevin Rudd, outlined his vision for his country in an article he wrote last year for a local political magazine, the Monthly. Riffing off Dietrich Bonhoeffer, a 20th century German pastor and theologian, the bookish former bureaucrat decried what he called “rampant individualism.” John Howard’s conservative government, Mr. Rudd argued, had gone too far by liberalizing labor markets and sacrificing “family time” at “the altar of market utility.” Australia needs a new kind of socialism, he said, one that keeps the economy running but simultaneously emphasizes “equity, community and sustainability” and gives “power to the powerless.”

Mr. Rudd’s pitch came at just the right time. Mr. Howard was entering his 11th year as prime minister. The economy was humming along like it hadn’t in a generation, boasting full employment, manageable inflation and 16 years of economic expansion. Why not try something new, Mr. Rudd’s “Kevin ‘07″ campaign asked. “It’s time for a change,” the slogan went.

On Saturday, voters agreed. Mr. Rudd and his Labor Party surged to victory in one of the largest swings against an incumbent government since World War II, winning at least 83 seats in the 150-seat lower house of Parliament. Now the big question is what Mr. Rudd will do with his mandate. The answer lies, in large part, with how much power the prime minister can wield within his own party.

Mr. Rudd is a relative political lightweight compared to his deputy, Julia Gillard, who earned her stripes in the rough and tumble trade union movement. Mr. Rudd, who is 50, is not a career politician. He was elected to Parliament in 1998, joined the front bench in 2001 and was named party leader last November. The Labor Party is underpinned by trade union money and influence, and Mr. Rudd’s brand of socialism is too far right for many. It’s a risky balancing act. If Ms. Gillard’s hard-line socialism prevails, Australia could see trade unions gain power as the global economy is slowing — in other words, just as Australia, the world’s 15th-largest economy, should be liberalizing, not restricting, its domestic markets.

Fortunately, Mr. Rudd is also hemmed in by his campaign promises, particularly on economic policy. In a bid to “reclaim the middle ground” and make Labor electable, Mr. Rudd effectively copied the Howard government’s program of fiscal responsibility, lower taxes and support for free trade. When Mr. Howard announced a 34 billion Australian dollars (US $30 billion) tax-cut plan, Mr. Rudd rolled out a strikingly similar A$31 billion program. Dubbing himself an “economic conservative,” he persuaded voters he’d be a safe pair of hands. If he strays too far toward redistributionist policies, he risks losing public support rapidly.

If trade unions do take control of Australian policy I don’t think a Labor government will last long. <more>

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