2014 Gates Annual Letter: Myths About Foreign Aid

Converging on a massive breakthrough for humanity

If you are reading SeekerBlog chances are you have already read the 2014 annual letter. If not I hope you will go there now. You will learn that 2014 foreign aid is not your father’s foreign aid. Especially not the way the Gates Foundation does data-driven aid. Bill and Melinda Gates are designing and building a new road for the traditional aid agencies. More and more, those agencies are following the Foundation’s lead.

The above graphic comes from a new Lancet paper. In the chapter on the Aid Dependence myth, Bill writes:

The bottom line: Health aid is a phenomenal investment. When I look at how many fewer children are dying than 30 years ago, and how many people are living longer and healthier lives, I get quite optimistic about the future. The foundation worked with a group of eminent economists and global health experts to look at what’s possible in the years ahead. As they wrote last month in the medical journal The Lancet, with the right investments and changes in policies, by 2035, every country will have child-mortality rates that are as low as the rate in America or the U.K. in 1980.

In the chapter on the Aid Breeds Dependency myth, Bill writes (emphasis mine):

Second, the “aid breeds dependency” argument misses all the countries that have graduated from being aid recipients, and focuses only on the most difficult remaining cases. Here is a quick list of former major recipients that have grown so much that they receive hardly any aid today: Botswana, Morocco, Brazil, Mexico, Chile, Costa Rica, Peru, Thailand, Mauritius, Singapore, and Malaysia. South Korea received enormous amounts of aid after the Korean War, and is now a net donor. China is also a net aid donor and funds a lot of science to help developing countries. India receives 0.09 percent of its GDP in aid, down from 1 percent in 1991

Conclusion:

If you read the news every day, it’s easy to get the impression that the world is getting worse. There is nothing inherently wrong with focusing on bad news, of course—as long as you get it in context. Melinda and I are disgusted by the fact that more than six million children died last year. But we are motivated by the fact that this number is the lowest ever recorded. We want to make sure it keeps going down.

We hope you will help get the word out on all these myths. Help your friends put the bad news in context. Tell political leaders that you care about saving lives and that you support foreign aid. If you’re looking to donate a few dollars, you should know that organizations working in health and development offer a phenomenal return on your money. The next time you’re in an online forum and someone claims that saving children causes overpopulation, you can explain the facts. You can help bring about a new global belief that every life has equal value.

In the rich world it’s easy to lose perspective on how much progress is being achieved. Good news is not “news” for the media that most people consume. It’s also easy to stop learning. I’m thinking of the way aid was managed during the Cold War, where the focus was buying political concessions or alignments of nations. In many cases this kind of aid was paid to the nominal government, enabling the leaders to fund their Swiss bank accounts and to pay off their cronies. In particular, when a big proportion of the nation’s income was aid the leaders did not have to fund themselves through taxation. Hence these leaders did not need to listen to their population. I sincerely hope that epoch of foreign aid is behind us.

Summary – the three myths:

  1. Poor countries are doomed to stay poor
  2. Foreign aid is a big waste (including corruption, aid dependence)
  3. Saving lives leads to overpopulation

Why Africa Is Poor and What Africans Can Do about It

Cato recently held a book launch for South African development expert Greg Mills (you can pre-order at Amazon). This is a very smart book by a man who has spent his professional life in the thick of the problem (bad governments making bad policy choices).

Economic growth does not require a secret formula. While countries from Asia to Latin America have emerged from poverty, Africa has failed to realize its potential in the 50 years since independence. Greg Mills, the former director of the South African Institute of International Affairs and one of South Africa’s most respected commentators, confronts the myths surrounding African development. He shows that African poverty was not caused by poor infrastructure, lack of market access or insufficient financial resources. Instead, the main reason Africans are poor is because their leaders have made bad policy choices. Please join us to hear why a growing number of African opinion makers and ordinary citizens believe that to emerge from poverty, Africa must embrace a far greater degree of political and economic freedom.

I recommend the podcast of the event (download MP3). Excellent comments by Marian L. Tupy, a policy analyst with the Center for Global Liberty and Prosperity.

One of my favorite development economists wrote the lead blurb

“Poverty is now optional” is Greg Mills’ invigorating message’, Paul Collier, Oxford University, Author of The Bottom Billion and The Plundered Planet

African poverty has been optional for fifty years — just keep in mind that the African elites do just fine under the status quo. And so do the NGOs, who effectively get a commission cut of the western aid budgets (as does the consulting industry housed around the DC beltway).

Good job Cato! Now, if we can just inject some sanity into the NGOs and OECD aid agencies. The billowing aid continues to insulate the African leaders from the consequences of their policies (and of course insulates them from their own populations).

On aid, I was pleased to hear Greg Mills respond to questions, with, paraphrasing:

Obama said his Africa policy was to “double the aid”. In fact that is a clear signal that there is no Africa policy. An effective, Africa policy is far more nuanced and complex than “double the aid”. What is the point of aid if you do not have tools for measuring the effectiveness of that aid?

While we are at it, let’s measure the effective of NGOs! I would be perfectly happy to have the organization that I run measured. Also, measure the effectiveness of consultants.

(…) The average age of African leaders is 75. The average age of Africans is 25. The numbers for Europe are about 55, 45. I am stupified by how passive African electorates are. How long would Robert Mugabe have lasted in Serbia?

Greg Mills emphasized that Africa’s demographics are a powerful positive force for economic development. Africa is rapidly becoming urbanized; by 2020 fifty cities of over one million population. (I think Africa today is about 40% urban). One clear benefit of the urban trend is it incentivizes agricultural productivity. The subsistence lifestyle so dear to the NGOs is finally going to be swept away. My guess is that the dreaded GMO crops will finally be grown seriously in Africa.

And in about the same time frame, one-quarter of the world population of “young people” under age 25 will be in Africa. They expect what they can see in the developed world – the affordable electricity, the communications, the computers, the autos. An African policy will be focused on ensuring those wants are satisfied rapidly by economic growth (jobs). If those expectations are not met…

Why big dams and big ag are good for the poor

(…) The United States, Western Europe, Japan, all countries in developed parts of the world that have significant hydro potential, have used more than 80 percent of that potential. In Africa, they’ve used 3 percent.

So you have countries like Norway and Switzerland and others that have developed 90 percent of their hydro potential, then sitting on the boards of their aid agencies and the World Bank and they say to Ethiopia, “We don’t like dams. We don’t like hydropower. You can’t have it. We won’t support it.” This is done in the name of environmental concern and it’s deeply, deeply resented by these countries.

(…) In my view, there’s a deep problem with the aid business. You read the UN Millenium Development Goals and in my view they put the social cart before the economic horse. They are all about social outcomes, but nothing on the economy that’s produced those outcomes, so infrastructure doesn’t figure, agriculture doesn’t figure. These global solutions are driven by rich countries and rock stars and just sort of run from fashion to fashion.

Marc Gunther interviews Harvard development expert John Briscoe.

(…) John, who was trained as a civil and environmental engineer, has worked as an engineer in the water agencies of South Africa and Mozambique; as an epidemiologist at the Cholera Research Laboratory in Bangladesh; as a professor of water resources at the University of North Carolina; and, for the past 20 years in a variety of policy and operational positions in the World Bank. Most recently he has served as the Bank’s Senior Water Advisor and the Country Director for Brazil. John is now a professor of environmental engineering at Harvard.

This is a terrific interview — I learned several things about water resources. Unfortunately, the rich country “environmentalists” don’t like dams, or GMO. Here’s an excerpt on Brazil and the 2008 food crisis:

(…)

JB: Yes. I think the energy, water, and food—this is a bad metaphor–but they are three sides of the same coin. You can hardly deal with one without the others. They all are interrelated.

Here there’s an extremely worrying situation. Look back to the 1960s and the success of the Green Revolution. People were saying that poor countries like Bangladesh could never feed their people. We now have India, Bangladesh, all these places, essentially, self sufficient in food production. We had in the 1960s and 1970s a yield growth of 3 to 4 percent a year. This was just incredible and had huge positive impacts. Even today, food prices are less than half than what they were in 1960 in real terms. So, this has been, in my view, one of the greatest achievements of science, contributing to the well-being of billions of people.

MG: But those gains are petering out, correct?

JB: Essentially, yes. Because the scientific ingredients of the Green Revolution have largely run their course, we now have yield improvements of half a percent and one percent, with large growing populations. and markets are becoming very, very thin. When there is some disturbance, the market tips and we food crises as in 2008.

Let me give an example: I lived in Brazil for the last three years. Brazil has had an amazingly positive experience. The value of agricultural output in Brazil today is three times what is was 35 years ago and Brazil is an agricultural superpower, one of the biggest producers of bio-fuels, of soy beans, meat, fruits, etc.

It turns out that of that 300 percent increase in production, 90 percent is attributable to productivity increases. Only 10 percent of that increase is accounted for by increases in input of land, labor, and capital. Most it comes from being much smarter. This is because Brazil over this period – even through hyper-inflation, through economic crises — never stopped investing massively in agricultural research. So they have today, without anybody being a close second, a research establishment on tropical agriculture that is by far the best in the world. They’ve seen enormous returns on investment in agricultural research.

Strikingly, look at that same period and see what the development agencies, including the World Bank, did in agriculture. In 1975, about 20 percent of development assistance went to agriculture because it was, in my view, correctly perceived that agriculture was one of the bedrocks on which countries developed. By 2008, agriculture had slipped from 20 percent to around 3 percent of official development assistance.

Why? Like all things, it’s complex. One contributor was that there was a lot of opposition to modern agriculture from green groups, environmental groups and others who don’t like irrigation and large scale agriculture, just as there was opposition to large-scale infrastructure. There was also a sense that the private sector would take care of this. The private sector, of course, does do quite a bit with agricultural research, but there is an enormous role for the public sector as well.

So, we get to 2008 and I was actually in Brazil when the food crisis struck. The International Assessment of Agricultural Knowledge, Science and Technology for Development — a twenty million dollar project done by the World Bank and 17 other partners – then came out telling us why the Brazilian approach (heavily scientific, large scale, and technologically sophisticated) was the wrong way to go and that the right way was small, beautiful and organic. And the Minister of Agriculture of Brazil quite rightly tore me to pieces and said, “This is bizarre….”

(…) Fortunately, I think what is very good in the international scene is the rise of the middle income countries, like China, India and Brazil. They are much closer to the issues of poverty, much more pragmatic, much less ideological and bring much more common sense to the discussion.

Bizarre indeed. Thanks Marc — an important interview for everyone to read.

Louise Fresco on feeding the whole world

Dr. Fresco’s TED Talk is one of the most important we’ve seen in the past year. Important, because she explains, in very engaging way, the principles of a sound agriculture policy for Africa. She has resigned her FAO post, and is now on the faculty of the University of Amsterdam.

Her credibility is enhanced by her years of hands-dirty experience in Africa. The experience and science combine to make it very clear how misguided is the “romantic greens” policy of encouraging small subsistence farming. She sees modern technology and mechanization as central to feeding the developing world. I’ll speculate that she also understands that urbanization is also key.

I recommend her Univ. of Amsterdam paper “Biomass, food & sustainability: Is there a dilemma?.

North Korea after Kim Jong Il

Have you given any serious thought to that question? I have not. Evidently neither has the US or South Korea. Read on at Banyan’s notebook:

(…) Even without invading others as Japan did, the North Korean regime will crumble, perhaps soon after the immortal Mr Kim’s number is up or possibly even before: reports of popular protests sparked by a hugely ill-judged currency confiscation may be a harbinger. Thoughts ought to be turning to North Korea after Mr Kim.

Yet as Sung-Yoon Lee points out in Foreign Policy here (the picture desk has a sense of humour), precious little thinking about it has been done by the United States or North Korea’s neighbours. At best, contingency plans exist for dealing with the short-term emergency generated by a collapse of power in Pyongyang. Even Chinese policymakers accept that American special forces might, or even should, move in rapidly to secure nuclear, biological and chemical stockpiles from rogue groups within the military. Chinese troops, in turn, would probably move across North Korea’s northern land borders to enforce the peace there. The Japanese navy would bring in supplies to the coast and pick up refugees in leaky boats. A massive humanitarian effort, led by the South Korean military, would get under way.

(…)

We Don't Know How To Solve Global Poverty And That's A Good Thing.

Bill Easterly is an always worthwhile source on economic growth and development economics. This (sometimes funny) lecture at London School of Economics (LSE) is not to be missed.

This lecture argues that occasions when development economists were more certain about ‘the solution to global poverty’ have often led to harmful consequences for the world’s poor in the long-run. Sceptical criticism is a creative force that redirects attention and effort away from centrally-directed expert solutions towards effective decentralised problem-solving.

Download the podcast (MP3).

Paul Romer on charter cities in Prospect

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

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

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

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.