Our Word is Our Weapon

Owen Barder has written what looks like an interesting note on the debate around attaching conditions to overseas aid. Broadly speaking, he’s against it. I haven’t read the full note yet, but I think he makes an excellent couple of points on aid effectiveness in the comments to his post:

if our aim is to ensure that we allocate aid to countries where it will do the most good, in terms of reducing poverty, then according to the same studies that find that aid is more effective in good policy environments, we would get huge benefits from allocating more of our aid to countries with low incomes and large numbers of poor people. The benefits - in terms of increasing the bang for our buck - of targeting the poorest countries far exceeds the benefits of trying to discriminate between good policy environments and poor policy environments. So if we are serious about increasing the poverty impact of our aid by improving its allocation, this is where we should start. Leaning towards good policy environments will help too, but the size of the benefits is an order of magnitude smaller.

Second, the statistical evidence for the benefits of targeting aid on good policy environments is not as strong as our intuitions would suggest. Some studies find a positive effect - the marginal aid dollar may be 30-50% more effective in the best policy environments compared to the worst - but many studies have failed to find any correlation at all; and the statistical relationship is fragile. And we should not fall into the trap of thinking that aid given to poor policy environments is not effective: all of the studies find that aid is effective even in poor policy environments (albeit more effective if policies are better).

I should probably wait until I read all of Owen’s note, but for now here’s my two cents: detailed policy conditionality is likely to be self-serving (from a donor point of view) and counter-productive, and requiring officials in poor countries to report in exhaustive detail on how every single penny was spent is a waste of resources. Donors should, though, enourage recipients to improve the processes by which they assess needs, allocate expenditure, monitor outcomes and make themselves accountable to their own people. And while untied aid in the form of direct budget support is usually the most effective kind, donors should not hesitate to suspend or withdraw such support (or channel the same resources through NGOs in the same country) if recipient governments engage in the kind of authoritarian abuses recently seen in Ethiopia.

I know I should spend more time doing serious analysis and less time jibing at free-marketeer think-tanks, but there are two reasons why I don’t: firstly it’s easy, and secondly they keep serving up such irresistable opportunities.

For example, here’s Paul Staines of the Globalisation Institute on corrupt think-tankers who produce ‘research’ to serve the interests of their corporate sponsors:

So how can I get into this game? Maybe I should develop a passionate interest in global warming. The London-based International Policy Network said it’s “a myth”. Ker-ching! It received $250,000 from Exxon for “climate change outreach”. IPN wonks are multi-taskers; they are software experts as well. Free open-source software is, they say, bad for economic growth. Ker-ching! Microsoft electronically transfers its support. Mr Bandow himself was at IPN’s launch of its Big Pharma-funded Campaign for Fighting Diseases. Coincidentally, pamphlet after pamphlet from IPN recommends policies that would further boost the gargantuan profits of Pfizer, the world’s biggest pharmaceutical corporation. Is this ethically suspect cash for policies? Nobody is getting fired at IPN.

It’s worth noting that two of the other platforms the multi-tasking IPN likes to promote are free trade and cutting back overseas aid. Presumably Paul thinks we should be just as sceptical of that ‘research’ too?

Anyway, he goes on:

John Blundell, the director-general of the respected Institute of Economic Affairs, despises these “wonk whores”. He says: “Global companies are buying up think-tanks left, right and centre. Large cheques come attached to particular policy recommendations and senior corporate types sit on committees ready to ‘candle-snuff’ dangerous ideas.”

Shocking stuff. But it raises a few questions:

• If John Blundell despises “wonk whores” like the IPN so much, why is he still one of their trustees? And isn’t this also slightly inconsistent coming from a director of the Atlas Foundation, itself a major recipient of funds from Exxon?
• Was Paul’s boss Alex Singleton a “wonk whore” when he used to work at the IPN?
• How much corporate sponsorship does the Globalisation Institute receive, and from who? They don’t volunteer the information, and for a group so concerned with think-tank transparency they’ve been pretty tardy making their annual returns to the Charity Commission.

Over at the Freedom Institute, which in another fine example of free-marketeer grandiloquence styles itself “Ireland’s Centre for Social, Economic and Political Studies”, Richard Waghorne has an interesting post about where the aid donated to the countries affected by last year’s tsunami came from. Basing his analysis on these figures from Foreign Policy, he says

Globally, as much aid was given privately as was given by the state.

Not true. This chart shows that the combination of aid from governments and international financial institutions (which comes from the states that constitute them, after all) was larger than that from private donors:
.

Waghorne continues,

In the US, the amount given privately was almost twice that of the amount delivered by the administration. This pattern is unique to the United States; the only other country with a significantly larger private than public contribution being the United Kingdom.

Again, not true. Private donations from the US were 82% higher than state aid (I’m using the amount allocated here rather than pledged, since that reflects what was actually delivered rather than simply promised - the gap between pledges and allocations is a significant but separate issue), but in Germany the figure was 93% ($664m to $345m).

Those who criticised the US at the time for the size of its public contribution (which was, incidentally, the largest) do Americans an injustice.

Well, the American government’s contribution was the largest in absolute terms, which is hardly surprising since America has the world’s biggest economy. As a proportion of national income, though, the US state contribution was by some way the lowest, at 0.007% ($814m out of a Gross National Income of $11.7 trillion). So those people who criticised the US government on these grounds were quite right to do so.

Waghorne concludes,

Whether the government has a right to tax money for the purpose of charitable donations is one question, but even for those inclined to say that it does have such a right (or perhaps even a duty) it remains most unclear that government taking responsibility for giving results in more money for charity than a purely private approach would generate.

Does it? Waghorne clearly wants governments to spend less taxpayers’ money on overseas aid to tsunami victims and the like, and if the data shows that private citizens and companies donate significantly more in countries where their governments donate less, he might have a case.

Unfortunately for him, the data shows exactly the opposite. The table below summarises (I’ve used the Foreign Policy aid data and figures for Gross National Income from this OECD spreadsheet).

As you can see, it looks like countries whose citizens and companies gave more aid as a proportion of national income also gave more in the form of state aid. So while the US is lowest in terms of state aid, it is second lowest, behind only Japan, in terms of private giving. Australian and Dutch citizens each donated more than three times as much as Americans as a proportion of national income.

The chart below depicts the same figures on a scatter-plot, and suggests that there is a relatively strong proportional association between levels of state and private aid (or at least there was in the case of the tsunami).

Let me just emphasise that I am not criticising the generosity of individuals and companies in America or anywhere else - anyone who donated some of their own money to such a cause deserves praise. But these figures do raise some interesting questions. Does the generosity or otherwise of governments simply reflect the preferences of their electorates? Or does government rhetoric and policy on aid influence those preferences? Either way, it seems clear that if you want to increase the total amount of aid going overseas (which I presume is what the Freedom Institute wants), slashing back official aid (which also seems to be what they want) is not the way to go about it.

I had been wondering if any of our free-marketeer friends would even acknowledge the bid-rigging scandal in the construction industry - which, if you’re not familiar with it, involves the Office of Fair Trading finding evidence that “bids for construction contracts worth £500m have been rigged … the scale of the anti-competitive practices could be much greater … more than a thousand contracts in just one region - the east Midlands - had been won this year because of unfair cartel practices”.

It seems I underestimated at least one of them - Eamonn Butler of the Adam Smith Institute, who has decided that this is simply more evidence of “naïve or incompetent” government, completely ignoring the substance of the story, which has got nothing to do with insurance requirements or changing specifications, and everything to do with contractor cartels colluding to keep prices up. With such flagrant abuse of market power, maybe it’s no coincidence that the UK has experienced the fastest rise in construction costs in Europe in recent years, up 40% in just three years (see page 67 of this big pdf of housing stats).

Of course, the problem for Butler and other fundamentalist free-marketeers is that they are ideologically committed to a worldview that has no room for such business practices. His writings suggest a belief that there is no such thing as an uncompetitive private market and that just about everything that goes wrong must be somehow the fault of government. Perhaps the Adam Smith Institute should remeber the words of Adam Smith himself, who supported genuinely free markets rather than the accumulation of corporate power:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

Alex Singleton of the Globalisation Institute modestly asks when I’m going to give him some damn credit for saying something sensible about DDT. I’m happy to give praise where it’s deserved, and Alex was quite right to point out the urban myth being peddled by Philip Stevens on the Adam Smith Institute blog. It’s a shame that when I tried to make exactly the same point on the ASI blog it was blocked - it appears that dissent is only permitted from approved channels.

Nonetheless, it’s nice to see Alex talking sense about DDT and malaria. But then I have to wonder what made him change his mind, when not too long ago he was foaming at the mouth on the very same ASI blog about how “If environmentists did not exist, malaria could be eliminated with DDT”. That, surely, is even more of a crazy urban myth than what Stevens was saying. What changed Alex’s mind? Did he, like, open a book on the subject or something?

It’s also strange that when Alex repeated the criticism on his own site, he didn’t think to mention who he was refuting - maybe he didn’t want to embarass his old workmates at the International Policy Network. Philip Stevens’s post says he’s Director of the Campaign for Fighting Diseases, which seems to be some sort of astroturf organisation set up by the International Policy Network, which we have seen before talking rubbish about international aid.

Just so you know, the IPN is apparently a charity (object: “To promote the advancement of learning”), used to be called The International Institute for Economic Research, apparently receives most of its funding from corporate donations, and was in turn set up by the Atlas Economic Research Foundation, the mission of which, according to its former president John Blundell, is “to litter the world with free-market think-tanks” (and which has even published a helpful guide to starting your own free-market institute, though it warns against giving it a dumb name like “Freedom Institute”, which will come as a disappointment to these guys, who otherwise seem to have followed the recipe to the letter).

Blundell has done a pretty good littering job - as well as all this, he is also listed as a trustee for the IPN and the charity correspondent for the Foundation for Education in Economics, now known as, er, the Globalization Institute!

See, I bet you thought I was just rambling there. I have one last question, though (apart from, why would anyone need to download a 1.9mb picture of Alex when there are such good alternatives?) - how come the GI is now called the Globalisation Institute when there were such damn good reasons for spelling it with a z?

I’ve finally taken the plunge and changed my blogging software from Movable Type, which was fun for a while but atrophied badly, to Wordpress, which is great. So I’ll probably muck things up quite a bit over the next while, but bear with me …

A while ago I said here that “if I thought that there really would be serious compensation for the losers from international trade liberalisation, I’d be a lot less cautious about it … But the signs are not encouraging”. Now there seem to be moves afoot to create a largish fund (seeded with $400m with the aim of levering in billions more - it’s all a bit vague at the moment). This raises a few issues.

Firstly, this initiative represents an implicit acknowledgement that (a) the ‘adjustment costs’ of trade liberalisation are severe for some countries and have not been adequately mitigated in the past, and (b) simply dropping trade barriers will not automatically increase the trade shares of developing countries if they lack the infrastructural (eg transport) and administrative (eg improved customs arrangements) capabilities to take advantage of it. Advocates of ‘trade not aid’ might therefore want to consider whether their opposition to aid is not another case of free trade fundamentalists shooting themselvs in the foot.

Secondly, the plans are not well developed yet, but it’s still worth asking whether the amounts being considered are really enough, compared for example to UNCTAD’s call for a $15bn ‘aid for trade’ fund over three years.

Lastly, it would be short-sighted this fund were used to bribe developing countries into further liberalisation. Pressure for more ‘aid for trade’ has grown because developing countries have not yet benefitted from freer trade as much as anyone would like. Plenty of aid is needed to meet the adjustment costs of previous liberalisation and fund the export opportunities that already exist, and diverting it into buying more reform is potentially storing up more problems for the future.

Dani Rodrik, probably the most-cited academic on this blog and an excellent analyst of globalisation and development (see this and this, for example), will be speaking at the LSE here in London this Friday the 18th. The lecture will apparently “ask what kind of global rules best permit and foster economic development, and compare those with the ones that are enshrined in current economic arrangements”. If you’re in town at the time, check it out - I can’t think of a better way to start the weekend, but then I always have been a saddo.

Paul Staines of the Globalization Institute complains here that Christian Aid never “produce anything on say micro-finance and the creation of micro-entrepreneurs”. Is this a fair or even accurate criticism? No.

Long before the Globalization Institute or Global Growth Org burst onto the scene, Christian Aid were supporting partner organisations in Africa in setting up micro-finance schemes and publicising the results (here and here). Not only that, they almost literally wrote the book on the subject way back in 1998, with their “Microcredit - planning and appraisal guidelines” which were “intended to assist organisations working with Christian Aid to plan microcredit or microfinance schemes”.

But while Christian Aid know that microcredit can “make a significant contribution to the effort to tackle poverty”, they’re not so naive to think it’s a panacea. This useful analysis of the promise and limits of microcredit ends with the following caveats:

* Microcredit needs to be accompanied by other programmes or services which address the full range of the needs of the poor.

* The poor should not be expected to pay for their own development alone. The richer have a continuing duty to assist the poorer.

* The effort to promote and to raise funds for microcredit should not result in the diversion of resources from providing for the poor’s other needs.

* Any growth in commercial funding for microcredit should not be seen as an opportunity for a decrease in aid or social provision.

* The benefits of ownership of microcredit institutions by the poor themselves and of wider organisation should be recognised.

* If the North is to support microcredit in the South, there must also be changes in Northern policy to produce a fair and favourable macroeconomic context in which microenterprise can flourish.

Sensible stuff, I think, and typical of Christian Aid’s healthy scepticism (borne out of experience) towards whizzy policy ideas.

Over at Stumbling & Mumbling, Chris reports an eye-catching bit of new research that claims to demonstrate that “life satisfaction decreases with higher government spending”. And it does, if you believe that the countries with the lowest government spending (as share of GDP) in the world are (lowest first) Japan, Spain, South Korea, Norway (yes, Norway) and Finland, and that France has a smaller government than the USA (see Table A1 on page 35 for the full breakdown). If you think that’s a load of nonsense, then this paper is a load of nonsense. I’m not blaming Chris or these other bloggers for taking respected researchers on their word (we all do that, all the time), but I would like to know whether they think the bizarre data on government size weakens the results at all.

Sorting the data also reveals that the countries with the ’smallest’ government seem overwhelmingly to be rich and those with the ‘biggest’ seem overwhelmingly to be poor. So maybe what this paper is telling us is “people in rich countries tend to be happier”. And in fact that’s precisely what this table from one of the researchers behind the World Values Survey (from which the life satisfaction data was drawn) shows. Unfortunately, that’s a far less blogworthy result than “Big government makes people unhappy”.

Commentes have pointed out that I was a bit misguided myself in my original post, so I’ve updated with some paragraphs at the end

“You can’t always get what you want
You can’t always get what you want
You can’t always get what you want
But if you try sometimes you might find
You get what you need”

Alex Singleton’s latest post on free trade at the Globalization Institute is both misinformed and misguided.

Let’s get misinformed out of the way first. Clearly inspired by his pals at The Business, Alex informs us that “Developing countries that open themselves to globalisation grow faster”. This is actually a rather ambiguous claim, probably deliberately so - does ‘open themselves’ mean trade liberalisation (a policy choice), or does it refer to growth in trade (not only or even mostly a policy choice)?

Anyway, his evidence for the claim is apparently “A study by Jeffrey Sachs and Andrew Warner of 117 countries in the between 1970 and 1989 [which] showed that open developing countries had an annual growth rate of 4.5 percent, compared with 0.7 per cent in closed developing countries”.

Problem is, as I said here recently, it’s been known for some time that the Sachs-Warner study is seriously flawed in that it doesn’t so much measure whether countries had open trade policies or not as whether countries were in Sub-Saharan Africa or not. So all it really tells us is that countries in Sub-Saharan Africa tended to grow more slowly, which we already knew. I think Alex needs to get his crack team of researchers working on some better evidence in support of his case.

Now for misguided. As we all know, the Doha ‘Development Round’ of trade talks is seriously stalled. The main reason seems to be the demands of the EU in particular that developing countries open their markets in exchange for the EU cutting their obscene export subsidies and prohibitive barriers to agricultural trade. The Financial Times reported on Wednesday that “Mr Mandelson, who is under strong pressure from France and its allies not to give more ground in agriculture, insisted yesterday that it was up to countries such as Brazil and India to show their hands on industrial goods and services as an “incentive” for Brussels to go further”.

What this means is that it is the demands of the rich countries that developing countries must cut their trade barriers even more that is holding up liberalisation in the sectors that probably matter most in terms of poverty reduction.

It’s ironic, really - if the EU and the other rich countries had listened to the ‘trade Justice’ movement and dropped these demands, then we would now be much closer to the real reform of the disgraceful farm policies that we all say we want. Instead, they took precisely the line that the Globalization Institute supports - trying to bully poor countries into opening their markets - and that’s why the trade talks are going nowhere. In short, the free trade fundamentalists are shooting themselves in the foot.

Alex points out - correctly - that the two main political parties in the UK support pressuring poor countries into liberalising (the Labour government have talked about dropping such demands, but in practice haven’t have yet to do so), and thus support the approach that has grounded the trade talks. I don’t think this will last, though - for example, over 200 MPs have signed the Trade Justice Movement’s Early Day Motion calling for a change in tack, support that will probably only grow given the recent breakdown.

People are slowly coming round to the realisation that trying to impose liberalisation on everyone else as a condition of our reform only slows that reform down. I hope this message eventually gets through to the Globalization Institute too - I’m sure the trade justice movement would love to have their support.

Following comments from readers Jonathan and Paul, I’m happy to correct my post and clarify that the Globalization does support unilateral liberalisation without pressure being put on poor countries to reciprocate through the WTO. A couple of questions then arise:

(2) If the answer to question (1) is no and the GI really does support developing countries having the liberty to decide their own policies, then would someone like to explain what the pragmatic differences are between this position and that of the trade justice movement? In another recent GI post, Paul complained that Christian Aid seeks to “impose an outdated, failed economic model on the developing world”. The problem with this argument is that even if they did want to impose their wishes on developing countries, in pragmatic terms neither Christian Aid nor anyone else has any power to force any country to raise trade barriers. They know that countries can be pressured or even forced to lower their trade barriers by others, and that kind of pressure, bribery and coercion is what they campaign against. So does ‘trade justice’ ultimately mean the same thing for both the Globalization Institute and the TJM - ‘unilateral liberalisation in the rich world and policy space for developing countries’? Or have I just misunderstood again?

A couple of months ago I criticised Tim Worstall’s attack on the World Food Programme’s response to widespread under-nourishment and starvation Niger, in which he accused them of “making the problem worse” by (a) providing aid in the form of food supplies, and (b) providing this aid too late so that it would arrive at the same time as the October harvest, which would push down prices and make local farmers even worse off, some of them fatally so.

As I said at the time, Tim was misinformed, in that he didn’t seem to realise that the WFP had already started food distributions in August. But I said that “if that process does go too far and we do get mass starvation of farmers as a result of too much free food aid, the WFP deserve all the criticism Tim can throw at them”.

So, did anything like this happen? As far as it’s possible to tell, no. There have been no reports of farmers made destitute by plummeting prices - in fact, as this update of the 10th of November from the United Nations Office for the Coordination of Humanitarian Affairs says, “while cereal prices have come down, they remain higher than at the same time last year and higher than the five-year average” (my italics).

So Tim’s “Textbook case of how bureaucracy kills” appears to be nothing of the sort. But this should not be that surprising. As I reported back in September, the WFP were acutely aware of the need to avoid distorting markets with food aid, and as the crisis developed they worked closely with the Nigerien government to keep a close eye on price developments throughout the country. Tim seemed to conceive of the World Food Programme as an “international bureaucrat running the system” from far away with no regard to the situation on the ground. The reality was completely different - WFP bureaucrats were in Niger, intimately connected to the situation on the ground, working with government, local groups and NGOs, and saving lives by the thousand.

I think there’s an obvious but important lesson here. The criticism of centrally planned economic systems - that the bureaucrat in the centre cannot access and process enough information to allocate resources correctly - is a valid one, but much less so when applied to mixed economies. The same market that shares and synchronises information for the benefit of consumers and producers also informs the decisions of planners and bureaucrats in mixed economies.

Another conclusion to be drawn, I think, is that in some cases emergency food aid can be A Very Good Thing. While it is always preferable to boost people’s capabilities and purchasing power in order to prevent starvation in the first place, if and when that starvation kicks in a quick distribution of food can save lives without distorting the market too much. The key word there is ‘quick’ - food aid that has to be transported thousands of miles because of cosy deals with farmers in donor countries definitely does not count.

The last point is this: surely nobody, even those who read or write for TechCentralStation, can deny that the UN’s World Food Programme saved lives in Niger by distribution food to tens of thousands of dangerously malnourished people? I don’t expect Tim or TCS to ever actively celebrate the existence of UN, but wouldn’t it be nice if they actually acknowledged the life-saving work of the WFP and other ‘bureaucrats’ in Niger or even, at the very least, acquired a basic understanding of the situation before working themselves up into patently mis-informed rages about “the weasels who rule us”?

In a recent post I said “the reciprocal nature of WTO negotiations means the ‘Quad’ are able to demand ‘concessions’ from everyone else in return for reducing their manifestly unjust trade barriers and export subsidies”.

Kamal Nath, trade minister of India, makes the same point but puts it much, much better in this interview in the Independent:

“I welcome Peter Mandelson’s proposal to say he will reduce by so much but then he says ‘I want my pound of flesh’,” Mr Nath said. He compared Mr Mandelson to a politician seeking a knighthood simply for obeying a traffic light. “He is looking to be rewarded and rewarded for behaving as one should.

Today’s edition of The Business features a lengthy rant against the Trade Justice Movement. The piece is unsigned, but judging by the intemperate language and shaky grasp of the facts, I suspect it’s our old friend Allister Heath at work again (see here for discussion of his previous article slating Make Poverty History).

Whoever the author is, it’s ironic that they describe the Trade Justice campaign as “propped up by so many basic economic fallacies and selective statistics that its misleading nature can only be wilful”, because you could say the same about their article. Actually, that’s a bit unfair on TJM- whereas its members tend to back up their arguments with a variety of statistics and other evidence, Heath or whoever wrote the article in The Business is mainly content to fling mud (describing the TJM as ‘Marxists’ and their platform as “in effect, a petition to kill Africans”), and relies on very little hard fact.

The single economic study referred to is a ten-year old paper by Sachs and Warner entitled “Economic Reform and the Process of Global Integration”, which The Business claims “showed growth averaging 4.5% in deregulating countries and 0.7% in protectionist ones”. It is unfortunate that the author of the article couldn’t find any better evidence, because the Sachs-Warner paper simply doesn’t cut the mustard. A later paper by Rodriguez and Rodrik demonstrated that the rather novel measure of economic ‘openness’ used by Sachs and Warner didn’t really measure trade policy at all and was more likely to be simply picking up whether or not a country was located in Sub-Saharan Africa, rendering the conclusions drawn about whether or not it is good to be ‘open’ of little or no value. Rodriguez and Rodrik conclude, politely, that the Sachs-Warner index “yields an upwardly-biased estimate of the effects of trade restrictions proper”.

And that’s what the sum total of the hard evidence offered by The Business amounts to. The rest should be familiar - for example, there’s the old chesnut of claiming that Hong Kong proves that free trade is the road to riches, when in fact Hong Kong is interesting because it is such an outstanding exception to the general experience, which is that today’s well-off countries lowered their trade barriers well after embarking onto sustained high growth. At least we are not treated to another nomination of China as a free trade success story.

What strikes me is that nowhere is there any acknowledgement that the experience of trade liberalisation might be any different in poor countries to the experience in rich countries. But there are perfectly valid reasons why it might be, for example:
(a) Income from trade taxes often accounts for up to 30% of government revenues in very poor countries, revenues which almost never recover following liberalisation and which thus have to be replaced using taxes on labour or consumption, which are more likely to fall on poorer households;
(b) Poor countries tend to specialise more in a few key products - suddenly exposing these industries to competition could have a much greater proportional impact on employment than we see in the far more diversified rich countries;
(c) It’s no fun losing your job in the UK or another rich country, but it is very rarely life-threatening because we have relatively lucrative safety nets, quality education and re-training facilities, and usually relatively tight labour markets. In many poor countries, none of these apply, so losing your job can be catastrophic;
(d) Finally, selective protection can allow firms to build up their competitiveness rather than simply being immediately flattened by globally dominant companies. Getting over this first hurdle can allow them to develop an advantage in higher value-added niches not accessible from the word go.

None of these are laws to be written in stone and followed in every case. But they illustrate how selective and reasonably applied trade protection can be pro-poor and pro-growth, as indeed it has been in the past for many of today’s rich countries. The Trade Justice Movement simply demands that governments in developing countries be allowed the freedom to make these decisions for themselves based on their own circumstances, rather than being ‘crowbarred’* open either directly by the rich countries or indirectly through the WTO or through their proxies in the IMF and World Bank.

It’s interesting that the article in The Business ends with a similar call: rich countries “should simply make a unilateral declaration to scrap their tariffs without condition on the goods and services of developing nations” and then try to win the battle of ideas for free trade. I’d love to see that happen too, but if this article represents a first salvo in that battle, I don’t fancy their chances.

*I’m referring here to the viewpoint articulated by then-US Trade Representative Carla Hills, who in her Senate confirmation hearings spoke of prying open other countries� markets with a crowbar if necessary “so that our private sector can take advantage of them”

It’s good to see that the Center for Global Development has a new blog up covering general development issues, in addition to their two pre-existing blogs on Vaccines for Development and Monitoring the Millennium Challenge Account. To get the discussion going they asked for views on the fate of the Doha round of trade talks, and I gave this comment, which sums up my thinking on the subject at the moment. If you want to weigh in, feel free to do so either here or at the CGD blog.

“I’ve recently been wondering whether [the Doha Round] will really make that much difference in terms of development and poverty reduction. The latest World Bank estimates of gains from a likely Doha round are not actually that huge, and seem to accrue mostly to high-income countries and a handful of non-LDC developing countries. Preference erosion for African countries is a real worry - Lesotho has already lost a lot of market share in textiles with the expiry of the Multifibre Agreement. The reciprocal nature of WTO negotiations means the ‘Quad’ are able to demand ‘concessions’ from everyone else in return for reducing their manifestly unjust trade barriers and export subsidies. And so I wonder whether the poorest will really benefit that much from Doha.

But even if that’s the case, there are other reasons to hope that the Doha round does conclude with significant liberalisation by the rich countries. Firstly there’s the cost to their citizens as consumers and tax-payers of the current arrangements. And there’s the prospect of a collapsed Doha round leading to yet more bilateral and regional trade deals in which the imbalances of power are even greater.

Last point: I always find it strange that analysis and discussion of trade focuses on the role of countries and governments, when it is firms who trade. I recently read some research suggesting that most of the gains from the African Growth and Opportunity Act went not to exporting African firms but to US firms due to their rather oligopsonistic market power. Recognising that this kind of analysis is often very difficult, shouldn’t there be a greater focus on the distribution of the gains from trade not just between countries but between the different actors and classes within them?”

Johan Norberg, citing this World Bank study, writes:

total world income gain from free merchandise trade would be $287 billion - four times the total amount of foreign aid given every year

Johan is quoting the World Bank study accurately (leaving aside for a moment whether the findings are correct), but the comparison is misleading.

A detailed breakdown of the distribution of that $287 billion is given in Table 3 of the PDF. There we see that Sub-Saharan Africa would apparently benefit from global free trade to the tune of $4.8 billion - but this is many times less than the aid it receives. By far the biggest share of the gains would, according to the World Bank analysts, go to high-income countries. As always, distribution matters.

Recently I was musing on the fact that there were probably lots of people in rich countries who would like to lend small amounts of money to businesses in poor countries, and lots of businesses in poor countries who would like them to too. If only there was some way of connecting one to the other!

Fortunately somebody was way ahead of me. They’re called Kiva, and they let people loan money in increments of $25 to businesses in Africa that need a few hundred dollars to, say, buy a truck or some new equipment. You get your money back, but without interest, so you could call it charitable lending. There’s always the chance that the business won’t work out and you don’t get anything back, in which case it’s just charity, but Kiva’s viability rests on that not happening very much. I’ve just lent 50 bucks to Lweny Gichandi Fish, so we’ll see how that goes.

Phil Hunt and Market Wire have more on Kiva. In a nice example of the blogosphere impacting positively on the real world, Phil’s post seems to have indirectly inspired this diary entry on DailyKos, which in turn inspired Kos readers to bombard Kiva with business.

As the Doha talks continue to go nowhere, it is perhaps time to ask whether anybody should be either that surprised or that disappointed.

First let’s look at the benefits we can expect from the most likely Doha scenario. According to the latest estimates from Kym Anderson and other World Bank researchers, the benefits of their most likely ‘hypothetical’ Doha scenario amount to an extra $96 billion or so on top of world GDP in 2015, an increase of a whopping 0.23% above the baseline figure. Anderson et al also suggest that the lion’s share of the gains would go to rich countries, leaving low and middle-income countries with an extra $16bn, or 0.16% above the baseline. To put that in concrete terms, they estimate that this trade round would reduce the percentage of people living on less than $1 a day in Sub-Saharan Africa from 38.4% to, er, between 38.1% and 38.3%.

It’s hard to know how seriously to take these results. They use the same kind of CGE calculations I’ve criticised before, and as Frank Ackerman says here, they are based almost entirely on the impacts on consumers of trade policy changes, mostly leaving the producer side out of it. Perhaps a more realistic assessment would begin by looking at how much developing countries have benefitted from trade liberalisation in the past. The answer seems to be “not very much”, with this recent paper from Emma Samman of the UNDP only the latest to support this view.

So if the gains for most developing countries are not particularly alluring, we shouldn’t be that surprised if they’re resisting pressure to open up their markets unless the rich countries make some very significant concessions in terms of agriculture, which so far they’re pretty reluctant to do.

Does this reveal an inherent problem with the reciprocal nature of WTO negotiations? The usual theory is that wringing concessions from our trading partners sweetens the pill of our liberalisation, but there are two possible counter-arguments:

• The effects of liberalisation are more likely to be harmful for poor countries (as previously discussed on this blog here; see also this recent paper from DeJong and Ripoll) so why should they take part in reciprocal liberalisation? True, the cuts being suggested are not exactly reciprocal, but developing countries are already very open in historical terms (as Yilmaz Aky�z argues here).
• Secondly, perhaps reciprocity actually slows down liberalisation which would otherwise happen unilaterally.

So maybe both the Trade Justice and Free Trade brigades should be hoping for a high-profile collapse of the Doha round that puts significant pressure on the rich countries to liberalise unilaterally or at least part-reciprocally (eg the EU and US each agreeing to lower their barriers if the other does so without requiring increased market access from low-income countries).

Observing the progress of the Doha ‘Development Round’ of trade negotiations at the World Trade Organisation has become as frustrating as it is boring. Progress, where there has been any, has been achingly slow, particularly in the most important sector, agriculture, largely due to the intransigence of the big players (the US, the EU and Japan). As Peter Gallagher points out, the latest proposals from the US and EU are much less impressive than they may seem at first glance, and still Japan has rejected them as “unacceptable”.

What’s behind this intransigence? The political clout of protected farmers in these rich countries obviously plays a very big part. But this paper from Nuno Lim�o and Marcelo Olarreaga suggests another, perhaps more surprising factor: the preferential market access that some rich countries grant to some of the poorest (many in Africa).

These trade preferences are generally in the form of an exemption from the ‘Most-Favoured Nation’ (MFN) tariff which the importing country imposes on imports from WTO members, so they offer less and less advantage to the recipient (exporting) country as MFN tariffs fall. So if the rich countries suddenly decide to slash their trade barriers (I know it’s unlikely, but bear with me here), the poor countries who currently benefit from trade preferences could lose out.

This prospect has attracted considerable attention recently, and it’s not too far-fetched to imagine these concerns eroding support for liberalisation in rich countries, or being exploited by those who oppose such liberalisation anyway. And countries that might suffer major losses from preference erosion, even if they are small in number and size, can theoretically veto any agreement in the ostensibly consensual WTO. It’s worth noting here that trade preferences do appear to have helped recipient countries, though not as much as they could have in the absence of various non-tariff barriers (sanitary standards and the like).

Limao and Olarreaga (L&O) suggest another way in which preferential trade arrangements might be holding up multilateral liberalisation: the countries providing the preferences may want to maintain them as they can be used as a side payment for cooperation on other issues - for example the US uses trade preferences “to extract concessions in terms of enforcing labor, environmental standards” from exporting countries.

It looks like a classic case of a policy failing because its benefits, though they may be significant, are more widely spread than the costs, which are large enough for even a small number of actors to fiercely resist. Is there a way to ensure remove this obstacle to multilateral liberalisation without eroding the benefits enjoyed by the recipient countries?. L&O have a proposal: allow for a preferential import subsidy that maintains the preference margin unchanged relative to the initial MFN tariff. They argue that if the subsidy is paid to the purchaser at customs the costs and benefits to importer and exporter are basically no different from the situation under a tariff-based trade preference. As this subsidy is unrelated to the level of the MFN tariff the preference no longer poses an obstacle to lowering or eliminating that tariff, so that means no excuse for not concluding a decent Doha round.

All of which sounds great, but to my mind it begs another question: are the current trade preferences (and the proposed equivalent import subsidies) enough? Perhaps not, given that African exports are often uncompetitive in large part not because of inefficiency but because of transport costs and poor infrastructure (see this paper by Lim�o and Anthony Venables). Import subsidies, unlike trade preferences not inherently limited in size by MFN tariffs, could in principle be adjusted higher for some regions to account for differing transport costs, putting Africa in particular back on more of a level playing field with the rest of the world.

As this chart from the World Bank shows, perhaps the most interesting thing about the record of poverty reduction in China is how relatively slow it has been in recent years, despite consistently high economic growth.

The main reason seems to be that the very poor are not benefitting from growth, which is instead lifting the incomes of the better off and pushing up inequality. As the World Bank’s Martin Ravallion says, if inequality had stayed static rural areas there would be only around a quarter the current number of Chinese living in poverty.

So it’s no surprise that the Communist Party is vowing “to spread the benefits of economic growth more fairly among all levels of Chinese society” with its new five year plan. One thorny question is what to do about migration between rural and urban areas, which is currently quite restricted. Open it up and you might get more peasants leaving their farms for better prospects in and around the cities, but you might also get a much larger and more unmanageable mass of urban poor, which I imagine the dictatorship would want to avoid.

That World Bank article also serves the useful purpose of hammering home once again the fact that China’s poverty reduction is not a free trade success story, contrary to what many seem to believe. Ravallion puts it bluntly: there is “No clear evidence that greater external trade openness brought rapid gains to the poor”. Indeed, about half of the poverty reduction occurred in the early 1980s, when China was very protectionist.