Our Word is Our Weapon

Over at the ‘Globalization Institute’, Alex Singleton defends water privatisation:

If a campaign group argued that the UK’s industries and utilities ought to be under state ownership, no one would take them seriously. The empirical evidence of privatization in the UK is that it has been overwhelmingly successful. Telecoms, cars, gas, electricity and water et al have all improved as a result. The only contentious privatization was rail, yet even the Labour government - which originally opposed the privatization - remains committed to the principle of private rail operating companies, and has itself privatized the infrastructure of the London Underground metro system.

With state ownership firmly off the agenda in the UK, activists now try and argue for state ownership in developing countries. They pose as defenders of the poor, but their policies are profoundly anti-poor.

They argue for example that water is a human right, and that therefore the state should own each country’s water provision. Yet state ownership of water - which in the UK led to poor purity standards and little investment in infrastructure - is truly pernicious in poor countries. It means that access to piped, running water is often limited to relatively wealthy, politically-important groups, and the price of such water is set below cost, making it financially difficult to expand to a more universal service. From an egalitarian perspective, water privatization should be supported because it provides the incentive to expand and increase access to water, and depoliticizes the allocation of water. Ideological opposition to water privatization is not in the interests of the world’s poor.

The argument that since privatisation works in rich countries it must also work in poor countries is pretty weak. Firstly, the quality of government tends to be lower in poor countries, so state-owned utilities are more likely to be inefficient, which makes privatisation more attractive. But state regulators are likely to be less effective for the same reasons, which makes privatisation less likely to deliver maximum benefits. Secondly, corruption is more likely to be a factor in public sector inefficiency in poor countries. But again, corruption also makes it more likely that state firms will be sold off on the cheap to favoured bidders. Thirdly, the extreme poverty of many people in poor countries can make any price increases especially damaging in human terms.

The actual evidence on water privatisation is mixed. This paper finds considerable improvements in child mortality in areas of Argentina that privatised their water services in the 1990s. But this large-scale research in Latin America by the World Bank finds that while connection rates to piped water and sewerage improved in areas that privatised their services, it also improved in areas that didn’t, “suggesting that PSP [private sector provision] may not have been responsible for those improvements”. Lastly, the ‘bad apples’ in this briefing from the Center for Global Development, which is otherwise very positive about privatisation in Latin America, seem to mostly involve sell-offs of water utilities:

• “In the short-lived Cochabamba water concession in Bolivia, prices for poorer consumers went up at once by 43% on average, and doubled for a small segment of very poor consumers”.
• “In the Argentine province of Tucuman, popular protests and poor performance led to the cancellation, after two years, of a 30-year private concession for water provision”.
• “The Buenos Aires water and sewerage concession contract allowed the private operator to charge connection fees of between $1,100 and $1,500 (with payments spread over 24 months) in areas where the average monthly income was $245 per month”.

This new report (big pdf) from the World Development Movement has more examples, and argues against the British government’s practice of spending millions in ‘aid’ on consultants to promote privatisation in poor countries. In fact, it is presumably in response to this WDM report that Alex Singleton wrote his GI post.

A particularly interesting part of the WDM report criticises the fortunes in fees earned by consultancy firms contracted to drum up support for privatisation in poor countries. One firm which has done particularly well is Adam Smith International, a spin-off enterprise of our old friends the Adam Smith Institute. Coincidentally enough, as well as being ‘president’ of the Globalization Insitute Alex also finds time to write for the Adam Smith Institute: I’m sure he meant to mention this in his attack on anti-privatisation NGOs, but it must have simply slipped his mind.

In addition to mysterious memory lapses when it comes to revealing vested interests, Alex’s post for the Globalization Institute betrays all the hallmarks of an ASI blogpost: no link to the material being criticised so that people can actually get the other side of the argument, no factual evidence to back up your assertions, carefully phrased generalisations that sound more impressive than they actually are, and so on. One thing is different, though: the ASI blog is famed for deleting comments and trackbacks that express dissenting views, while the Globalization Institute saves time by not allowing any comments or trackbacks in the first place!

The WDM report differs from the Globalization Institute post in that it tries to actually back up its claims with evidence. You might think they’re over-critical of privatisation, but at least they’re willing to have a genuine debate. The same goes for groups like Oxfam and ChristianAid - you might not agree with their conclusions, but at least they show you how and why they reached them. In my experience, this is in sharp contrast to free-marketeers, many of whom are fond of criticising the ‘Left’ for ‘economic illiteracy’ and the like but who are much worse when it comes to providing any actual back-up for their beliefs.

In the example above, Alex simply asserts without reference to any actual evidence that “The empirical evidence of privatization in the UK is that it has been overwhelmingly successful” and that “state ownership of water is truly pernicious in poor countries”. Seemingly oblivious to the irony, he then signs off with “Ideological opposition to water privatization is not in the interests of the world’s poor”. As the research I mentioned earlier shows, water privatisation in poor countries is a complex matter which has gone badly wrong in some cases. The chances of a privatisation actually benefitting the poor are higher when the risks are clearly identified and carefully managed. State ownership is not a panacea, but then neither, obviously, is privatisation. Simply dismissing - out of sheer ideological fervour - any criticisms of any privatisation as ‘profoundly anti-poor’ is deeply hypocritical.

It’s no wonder free market capitalism gets a bad press - no matter how strong there case may be in reality, as long as free-marketeers continue to respond to detailed, exemplified arguments with glib attacks and uninformed generalisations, they’ll continue to lose these debates.

In the last post I discussed research which suggested that aid was more effective in countries with high-quality ‘institutions’. One measure of institutional quality found to have a significant impact on aid effectiveness was the ‘Freedom in the World’ index of political rights and civil liberties, published by Freedom House. In that post, I argued that

by this measure ‘institutional quality’ has increased strongly in developing countries and continues to, particularly in Africa. By this logic, state-to-state aid is now more effective than it was in the 1970s, 80s or 90s …

In this post I’ll focus on Africa in particular, since Africa is where most of the worst poverty is and where aid is seen as most needed. So how has Africa done on the ‘Freedom in the World’ index in recent decades? The chart below shows the trend between 1973 and 2003:

Sub-Saharan Africa certainly started from a low base: in 1973 barely a quarter of the countries rated were described as either ‘free’ or ‘partly free’. But in the 30 years since there has been a massive change - now there’s nearly five times as many ‘free’ countries, and two-thirds are either ‘free’ or ‘partly free’, broadly comparable with the rest of the world. Over 40% are still just ‘partly free’, but at current rates we should expect the picture to keep improving (a quick glance at this spreadsheet suggests that it’s mostly African countries who have improved their ratings in recent years).

Obviously there have been and still are glaring exceptions to this trend in Africa, and large parts of the continent still suffer from civil war and dictatorship. But it’s important not to let the likes of Bob Mugabe obscure what has been an impressive wave of democratisation. And it’s equally important not to let outdated notions of pervasive African despotism rule today’s development policy.

Here, for example, Niall Ferguson uses the past examples of many African countries but the current example of just one (Kenya, which he admits is an exceptionally bad case) to sneeringly dismiss aid to Africa as no better than handouts for tyrants. What this amounts to, though, is punishing the very Africans who have managed to escape dicatorship for the sins of their former oppressors. By the same logic, the Marshall Plan aid to Germany was wasted given that country’s troubling recent support for fascism. Anyone who made such an argument after the second world war, of course, would have been laughed out of the room. But somehow it’s okay to suggest that Africa is inescapably prone to corruption and violence - a sad cause, but a lost one.

Global Growth Org has a post up discussing some recent research by David Dollar and Victoria Levin of the World Bank, which examines the effect of overseas aid received, ‘institutional quality’ and geographical indicators on the success or failure rate of World Bank projects in a sample of countries during the 1990s.

GGO says:

The fact that in several different macro data-sets researchers have found that growth is correlated with the interaction of aid and a measure of institutional quality or economic policies confirms that aid targeted to low-income countries with corrupt institutions or protectionist policies is more likely to be wasted.

In fact Dollar and Levin don’t directly address the effect of either corruption or protectionism on aid effectiveness. They do look at a ‘rule of law’ index, which is related to but not identical to a measure of corruption. But they don’t look at trade policy at all - they mention in passing that the rule of law index is “correlated with economic policies such as macroeconomic stability and openness to trade”, but don’t go into detail. Just because A is correlated with B and B with C doesn’t mean A is correlated to C, though. So GGO’s statement about ‘protectionism’ seems to be mostly conjecture.

In terms of aid policy, the work provides additional support to the view that aid resources have the greatest impact on development when they are channeled to poor countries with sound institutions and free market policies.

Same again, really - the Dollar and Levin research does not look at economic policy so the comment about ‘free market policies’ is not supported by the analysis.

Dollar and Levin do find ‘institutional quality’ to be associated with greater aid effectiveness, and this is a significant point. They initially use two indicators of institutional quality - the ‘rule of law’ index and the data on civil and political rights published by the Freedom House. I can only find country trends for the Freedom House data (Excel sheet here), but they indicate that by this measure ‘institutional quality’ has increased strongly in developing countries and continues to, particularly in Africa (see next post for more detail on this). By this logic, state-to-state aid is now more effective than it was in the 1970s, 80s or 90s, which in turn suggests that aid levels should be raised. I’m glad to see that Global Growth Org is finally coming round to this point of view .

Finally, GGO says of the Dollar and Levin research that

It also suggests that increasing aid flows are subject to the law of diminishing returns. Something that the rock-star advocates of mega-billion aid programs should note.

Well firstly, this leaves out Dollar and Levin’s qualification (page 10) that the evidence on diminishing returns was “weak”. Secondly, it’s widely accepted that there is some level - usually measured as aid as a percentage of GDP or government expenditure - at which aid to any country starts experiencing diminshing returns. The point is to find out what this level is. Dollar and Levin offer no help on this score, but this paper by Mick Foster has a handy summary:

Hansen and Tarp find that aid is subject to negative returns above about 25% of GDP, as do Hadjimichael et al, whereas Durbarry et al, and Lensink and White, find negative returns above around 40-50% of GDP. Clemens and Radelet estimate a turning point of around 34% of GDP, based on an analysis of 20 countries that are likely to qualify for access to the US Millennium Challenge Account based on an assessment of their policy and institutional effectiveness. Returns would be likely to become unacceptably low before the point when they turn negative.

Let’s assume that the lowest figure is correct - aid is subject to negative returns above 25% of GDP. How many countries receive aid above this level? According to Table 25 in this Excel file from the OECD, a grand total of ten (asssuming GNI=GDP). Even out of these, only five have populations of over 2 million.

So based on these figures, it looks like the vast majority of developing countries receive aid below the minimum level at which it has been found to produce diminishing or negative returns. Billions more could be given (or re-allocated) to low income countries with decent institutions before we need to start worrying about diminishing returns. A similar conclusion has been reached by the World Bank - something that critics of “rock-star advocates of mega-billion aid programs” should note.

Tim Worstall responds to my post, the one that pointed out the various factual errors in his original post on John Prescott and government housing plans. Tim didn’t bother to find out for himself whether Prescott had really ‘designated’ 400,000 homes for demolition (he hadn’t), whether local residents had voted against the scheme to demolish homes in Liverpool (they didn’t) or whether Boris Johnson was right to describe the South East Regional Authority (sic) as an unelected quango (he wasn’t). He just believed what the Telegraph told him, because the Telegraph was telling him what he wanted to hear (this is the secret of the Telegraph’s undeniable success, by the way - you’ll never go broke catering for the gullible end of the market).

Anyway. Apparently tired of pussy-footing around with the actual facts of the matter, Tim declares that the argument is really about whether democratically elected governments should have any planning policies at all:

I object to Government (whether local or national) planning such things, stating who may build or destruct when and where … No, freedom and liberty require that there are things, areas of life, decisions, not taken by the community at large, but by the individuals concerned, solely by the individuals concerned … No large scale redevelopment projects anywhere ever. Organic redevelopment, by individuals, at their own pace, driven by their own desires. That’s what actually makes an urban landscape that’s worth living in.

Firstly, I should point out that Tim thinks Edinburgh’s New Town is a great example of this kind of unplanned housing development driven by the demand of individuals and the supply of developers, without any interference from meddling planners. Yes, that Edinburgh New Town, described here as “probably the world’s best example of Georgian town planning and architecture” and by Wikipedia here as “a very fine example of Georgian town-planning and architecture”.

It’s no surprise that Edinburgh is probably the most liveable city in the UK, because a massive chunk of it was laid out in pretty much one go by talented designers working within a strong civic planning system. Planning’s not perfect, of course, and we can all point to examples where it’s gone terribly wrong. But we can also point to examples of places where there’s no planning system at all and people just ‘organically’ develop housing. I think they’re called ’shanty towns’ or in Latin America, ‘barrios’. Mexico City’s got a pretty big one if Tim’s looking for one to visit on a fact-finding mission.

As anyone who has given a moment’s serious thought to the issue knows, completely abolishing the planning system would be a disaster for housing, the environment and society in general (Tim’s erstwhile hero Boris Johnson certainly wouldn’t want it). Tim’s imagining things if he thinks people would want to live in a country with no planning system, or if he thinks developers would want to build houses in such a country. Or if he thinks insurers would want to insure them.

Which brings me onto the next point. Tim got started on this issue when he read this in the Telegraph:

Eighty-five thousand houses in the Thames Gateway need to be built with living spaces on the first floor because of the risk of flooding, the Association of British Insurers told John Prescott, the Deputy Prime Minister, yesterday. A report by the association said that a third of the housing developments in Mr Prescott’s proposed South-East growth areas were located in flood plains where the risk was “unacceptably high”. Jane Milne, the association’s head of household and property, said: “Unless there are radical changes to the way these developments are planned, my members will be reluctant to insure them. “If they can’t get insurance they can’t get mortgages so developers won’t be keen to build them either.”

Let’s see if I have this right: John Prescott wanted to build lots of houses in the South-East and rushed in without considering even the most basic facts? Sounds like fuckwit behaviour to me alright. Tim certainly thought so, as he felt the need to ‘google-bomb’ Prescott to the same effect.

But he didn’t feel the need to actually check whether what the Telegraph had told him was true. So let’s do it for him. The summary report from the Association of British Insurers is here. It makes for interesting reading, especially when compared to what the Telegraph said about it. Was the Telegraph right to say that “Eighty-five thousand houses in the Thames Gateway need to be built with living spaces on the first floor because of the risk of flooding”? No. Look at table 1.1 on page 9. It examines different policy options for reducing flood risk, including “reduced ground-floor living”, which it says is “Most suited to homes located in significant risk areas” (areas with a greater than 1.3% annual probability of a flood).

According to the government’s plans, how many homes would be located in significant risk areas? Actually the Telegraph’s original piece has this information: 10,000 homes. Where did the Telegraph get the number of 85,000 which would “need to be built with living spaces on the first floor because of the risk of flooding”? That’s the total number of homes planned to be built within what is technically the Thames floodplain (note: there are already a lot of homes built on the Thames ‘floodplain’). Figure 6.1 here shows that the vast majority of these would be in low-risk areas, i.e. with an annual flood probability of less than 1%. The ABI say elsewhere that flood cover would be available as a “standard feature” for such areas.

Even the figure of 10,000 homes at ’significant risk’ will only come about, say the ABI, “without taking steps to manage the risk”. It recommends several such steps, such as reviewing Planning Policy Guidance (which the government is doing), and to carry out further research into current and required flood defences in the Thames Gateway (which the government is doing). The ABI press release that accompanied the report, in fact, featured a quote from the minister for housing Keith Hill welcoming the report and committing the government to “working with the ABI and the Environment Agency to ensure we get this right”.

So the Telegraph was talking nonsense (as usual) and Tim Worstall swallowed it whole without bothering to carry out even the most perfunctory fact-checking (as usual). In fact, you might say that he rushed in without considering even the most basic facts. Sound familiar? Is this yet another case of Tim Worstall trying to label someone else an ‘idiotarian’ or ‘fuckwit’ or similar and ending up looking like one himself? Y’know, I think it is.

What’s probably most amusing about Tim using the example of the ABI to highlight the evils of planning is that the ABI goes to great pains to emphasise just how vital good planning policy is to a ’sustainable’ housing supply. According to the ABI:

The Government’s plans for a step-change in housing supply are essential to the economic and social well-being of this country.

And

Our study shows that planning is the most cost-effective and sustainable solution, reducing annual flood losses in Ashford, the South Midlands, and the M11 Corridor to negligible levels, and halving the risk in Thames Gateway.

So there you have it. People who actually know anything about housing, planning, the environment and insurance all know that a planning system is vital. Tim Worstall knows nothing about any of these things but feels that his own libertarian fantasies and the nonsense spread by the Telegraph are good enough reason to dismiss the very idea of a planning system and go around calling people ‘fuckwits’.

I know that the right mix of gullibility, ignorance and spite is practically a requirement of the job if you want to write for Dreck Central Station - certainly no self-respecting and serious news organisation would pay for such rubbish. Maybe Tim could still get a gig at the Telegraph, though.

Good to see a card-carrying free-marketeer like Martin Wolf come out and say it so clearly:

Here are two propositions: first, the elimination of destitution, disease and deprivation is taking too long; second, additioanl assistance to the world’s poorest countries is easily affordable. The important question is whether that aid can be well used.

Some argue that aid merely allows bad governments to ignore the wishes of their populations and avoid necessary reforms. Others seem to believe that extra aid is sure to deliver improvements in desired outcomes. Neither of these extremes is right. Even in Africa much aid has delivered high rates of return, once one allows for adverse external shocks, conflict, the burden of disease and poor agro-climatic conditions [link]. But there are also many examples of great waste: Tanzania’s socialist experiment of the 1970s comes to mind. Mobutu Sese Seko’s Zaire is a far worse case …

On current trends, East Asia and the Pacific will eliminate extreme poverty by 2015 and hit most other targets. But in sub-Saharan Africa as a whole conditions are getting worse, or at best barely improving, in almost every salient area. Fortunately, there are success stories in sub-Saharan Africa. The World Bank lists Benin, Burkina Faso, Ethiopia, Madagascar, Mali, Mauritania, Mozambique, Tanzania and Uganda as countries with relatively good policies that are capable of absorbing substantially more aid [doc]. Mozambique has been receiving about one-quarter of gross domestic product in aid. Its real income per head also rose 4.3 percent a year between 1990 and 2001. Uganda, another heavily aided country, achieved growth of income per head of 3.6 percent over the same period. So how, then, are we to ensure that increases in aid are to be reasonably well used to achieve the improvements in human well-being that we seek? I offer five rules and two dilemmas.

Rule one: give tolerably governed countries the aid needed to achieve the internationally agreed goals. Anything short of that is hypocrisy. If a desperately poor country has a reasonable government and tolerable policies, it should receive the assistance it needs to implement agreed investments and programs.

Rule two: make open agreements that can be monitored. Detailed conditionality rarely works. That is today’s consensus. Governments cannot be forced to do what they do not wish to do. They will cheat. But they should do what they promise. So let them put down their promises in detail and then monitor them.

Rule three: use markets. One of the most innovative and effective approaches to delivery is “social marketing” - the use of market mechanisms to deliver subsidized goods, such as condoms, water treatment systems, anti-malaria bed nets. Population Services International, the leading organization in this field, has had remarkable successes. In Malawi, for example, the proportion of children under five covered by nets jumped from 8 percent in 2000 to 55 percent in 2004. In Tanzania, nets have been sold, with similar success, through subsidized commercial channels.

Rule four: make aid predictable, untied and, provided the recipient’s commitments are met, sustained. If countries are to engage in long-term spending, they need to know the aid will be there. The only qualification is the need to provide cushions against short-term economic instability, particularly shocks to the terms of trade.

Rule five: remember policy. Many campaigners view trade liberalization, privatization and budgetary discipline as anathema. They are wrong. It is more important, not less important, for the poorest countries to avoid the waste inherent in high and variable protection against imports, inefficient state monopolies and macroeconomic instability. It is particularly silly to combine greatly increased aid with higher protection against imports, since additional aid must mean a bigger trade deficit.

This, then, is the approach to be taken with reasonably well-governed countries that can absorb more aid, Wolf argues. This leaves two dilemmas. One is that the quickest way to reduce poverty is to shift aid towards India and Bangladesh from other low-income countries. These countries receive low levels of aid per head, but have enormous numbers of people in poverty and reasonable administrative capacity. A better solution is to transfer aid from over-aided middle-income countries that need it far less.

The bigger dilemma is what to do about fragile or failing states. These are, by definition, the places where money is most likely to be ill-used. They are also, by definition, the places where the concentration of desperately poor people is set to rise over time. This is a huge challenge, to which we have few good answers, but it must not divert attention from what we can do: help those already prepared to help themselves. With luck, examples of success will themselves turn at least some of the failing states around.

What we must do is our best. We can not justify doing less. The aim is to eliminate the extremes of poverty and despair that continue to disfigure our world. Additional aid is certainly not the answer on its own. But it has to be part of the answer. Let us resolve to give aid, properly directed and monitored, a chance. Few can question the ends. We must will the means.

(Emphasis added)

The one quibble I would raise is on his fifth rule, ‘remember policy’. ‘Budgetary discipline’ is a much-abused term, and carried to extremes discipline becomes sadism (or masochism). Trade liberalisation has not been shown to be a generally positive policy for poor countries. As for privatisation, I think it is often the best solution, given a properly carried out process and adequate monitoring, both of which are perhaps even less likely in poor countries than in rich ones. But every country and every industry and service are different, and a blanket endorsement of privatisation is unhelpful.

Poor countries have been industrialising fast but don’t seem to be reaping the expected benefits. Or at least that’s how I read this:

“The increase in the share of developing countries as a group in world exports of manufactures has not been accompanied by concomitant increase in their share in world manufacturing value added”.

That’s according to UNCTAD economist Jorg Mayer, as described by Third World Network. Full paper here. I believe a similar result was also discussed at length by Arrighi, Silver and Brewer here.

Chart from Globalization Reloaded, by Kozul-Wright and Rayment for UNCTAD:

Or to put it another way, in every region except China, growth was lower and more volatile in 1980-2000 than it was in 1960-1980. An important caveat, though: it’s based on a sample of twenty-nine developing countries, albeit a sample that I would say accounts for well over half of developing world GDP.

A development strategy based on agricultural commodity exports is likely to be impoverishing in the current agricultural policy environment in which policymakers in many countries have mercantilist and protectionist reflexes that, when aggregated, compromise world trade in agricultural and food products. The emergence of competitive producers in developing countries does not lead to a rationalization of production among noncompetitive producers as it would in a liberalized market. Instead, noncompetitive producers remain in business, buffered by extensive protection and support.

This piercing insight was brought to you by the World Bank. Full report, ‘Global Agricultural Trade and Developing Countries’, is available in massive pdf form here.

Just to follow up on yesterday’s post on cotton subsidies, here’s the IATP with a factsheet estimating the degree to which various agricultural commodities are ‘dumped’ on world markets at below production cost.

Full report here.

President Bush’s latest budget proposal may well be “the most squalid manipulation of budgets ever seen”, but as well as an increase in overseas aid it contains one more element with potentially significant implications for development - a cut in agricultural subsidies.

Okay, it’s not a big cut - the proposal is to cap total subsidies at a mere $250,000 per farm, and big farmers have found a way around similar limits before - but it’s a start.

As an example of just how much damage these subsidies can do to producers in poor countries, here’s an excerpt from UNCTAD’s Economic Development in Africa: Trade Performance and Commodity Dependence:

There has been a significant decline in real cotton prices, accompanied by high volatility, with current prices half those of 1960 price levels. Real cotton prices averaged $2.31 and $1.34 per kilogram during the 1960s and 1990s respectively. The decline in cotton prices was sharpest in 1985, when the United States changed its support policies from stockholding to price support …

Domestic support to cotton production has averaged $3 billion and $0.6 billion respectively in the United States and the EU since the 1999–2000 cotton season. In the United States, cotton subsidies amounted to $3.9 billion in 2001–2002, which was double
the 1992 level and $1 billion more than the value of United States cotton at world market prices …

The richest 10 per cent of cotton farmers receive more than 73 per cent of cotton subsidies, according to the United States Department of Agriculture, with as much as 25 per cent of subsidies going to the richest 1 per cent …

In Benin, cotton contributes about 7 per cent to GDP. According to a recent study, a 40 per cent reduction in farm gate cotton
prices between December 2000 and May 2002 led to a 7 per cent reduction in rural per capita income in the short run, and is projected to be reduced by 5–6 per cent in the long run. United States cotton subsidies over the same period have cost Benin, Burkina Faso and Mali 1–2 per cent of GDP and 8–12 per cent of earnings, thereby exacerbating balance of payments and domestic fiscal pressures …

Subsidies to United States cotton farmers are more than three times the entire USAID budget for Africa. In 2001, United States aid to Mali amounted to $37.7 million compared to foreign exchange losses of $43 million due in part to United States cotton subsidies; Benin lost $33 million, double its level of aid provision in the same year.

Via Adam Smithee, here’s an interesting Slate article criticising Hernando de Soto’s simple but appealing little idea of bringing ‘dead capital’ to life by giving property rights to Third World slum dwellers.

John Gravois writes:

Mindful of the fact that “the single most important source of funds for new businesses in the United States is a mortgage on the entrepreneur’s house,” de Soto’s plan is, quite simply, to make homeowners out of the world’s poor squatters. Neighborhood by neighborhood, slum by slum, he wants to formalize the vast extralegal world by dotting it with individual property titles. Once that’s done, he promises, the poor will have access to credit, loans, and investment, as their dead assets are transformed�voil�!�into live capital.

De Soto is right to point out the importance of legally sorting out who owns what in the Third World. Secure property rights probably are indeed, as he puts it, the “hidden architecture” of modern economies�or something like that, anyway … But he has botched the details, especially by pushing one solution�individual property titles�for all different kinds of poor people in all different kinds of poor places. From the field, the verdicts are rolling in: In some corners of the world, the land-titling programs inspired by de Soto’s work are proving merely ineffective. In other places, they are showing themselves to be downright harmful to the poor people they set out to help.

First, the merely useless:

In various parts of the Third World, newly legalized squatters on the outskirts of cities are discovering that a property title supplies little of the benefit de Soto projects. Government studies out of de Soto’s native Peru suggest that titles don’t actually increase access to credit much after all. Out of the 200,313 Lima households awarded land titles in 1998 and 1999, only about 24 percent had gotten any kind of financing by 2002�and in that group, financing from private banks was almost nil. In other words, the only capital infusion�which was itself modest�was coming from the state.

Reports from Turkey, Mexico, South Africa, and Colombia suggest similar trends. “In Bogota’s self-help settlements,” writes Alan Gilbert, a London professor of geography who has done extensive research on land issues in Colombia and other parts of Latin America, “property titles seem to have brought neither a healthy housing market nor a regular supply of formal credit.”

This is probably because banks realize they don’t stand to gain much from repossessing shanties in rotten locations. Faced with a massive surge in legalized but tenuous properties owned by poor people, banks have simply adjusted their criteria for lending, and in some cases care more about stable employment than a land title. Not only that, but the actual real estate markets in many of these shantytowns on urban outskirts are stagnant, which puts a serious damper on any potential gains on capital�live or dead.

“You cannot accumulate capital if there is no market in which to trade your asset,” Gilbert writes.

Now for the downright harmful:

In places where real estate markets are buoyant, titles turn out to be quite a hot commodity. Too hot, in fact. In June of 2002, for example, the World Bank kicked off a several-year project to distribute over a million titles throughout Cambodia. In Phnom Penh, the capital, untitled land near the city center has been selling for about $20 to $30 per square meter over the past few years. Titled properties nearby have been selling for around 10 times that much. For a poor squatter in the middle of the capital city, the promise of a title would seem to be a road to riches. In practice, it’s more like a sign taped to his back that says, “Kick me.”

In the nine months or so leading up to the project kickoff, a devastating series of slum fires and forced evictions purged 23,000 squatters from tracts of untitled land in the heart of Phnom Penh. These squatters were then plopped onto dusty relocation sites several miles outside of the city, where there were no jobs and where the price of commuting to and from central Phnom Penh (about $2 per day) surpassed whatever daily wage they had been earning in town before the fires. Meanwhile, the burned-out inner city land passed immediately to some of the wealthiest property developers in the country …

Since then, a similar pattern has continued elsewhere in the city, says Alain Durand-Lasserve, a land-management expert who has worked in Cambodia during the last couple of years. Investors have been buying squatter-occupied state land from various government officials in Phnom Penh, who pocket the money, thus looting the land both from the state and from the poor. In other cases in Phnom Penh�and also in Manila, in the Philippines�speculators or middle-income groups went out before titling programs took effect and bought land at slightly better than informal prices directly from the squatters, who happily sold off for a bit of cash. Then the investors just waited for the titling program�and the attendant leap in value and legal security�to come their way.

It turns out that titling is more useful to elite and middle-income groups who can afford to bother with financial leverage, risk, and real estate markets. For very poor squatters in the inner city�who care most about day-to-day survival, direct access to livelihood, and keeping costs down�titles make comparatively little sense. These poorer groups either fall prey to eviction or they sell out, assuming they’ll find some other affordable pocket of informality that they can settle into. The problem is, with titling programs on the march, such informal pockets are disappearing fast. So, the poor sell cheap or are evicted, then can’t find a decent new place to settle, losing the crucial geographic advantage they once had in the labor market.

What to do? Here’s one idea: Geoffrey Payne, a British urban planning consultant with years of experience working on land-tenure issues in Cambodia and elsewhere, recommends temporarily insulating slums from the commercial land market by granting informal neighborhoods groups land rights for some period of time. During that period, he says, the neighborhood can be upgraded and basic services brought in, allowing land values to inch up toward parity with the surrounding real estate market. Then, after a number of years, the neighborhood gets a full, group land title, which can then be subdivided into individual titles if people are willing to take on the costs. By taking these incremental steps, he says, you shelter the poor from the shock of a titling gold rush.

Creating valuable property rights in a context of serious market failure can go badly wrong - Russian privatisation, anyone? - and slum land titling is no different. If it’s not valuable, banks might not take it as collateral on a loan. If it is valuable, someone with better information and more power will try to trick or force you into giving it up. As AdamSmithee notes, land titling “may be one of those things (perhaps like globalization?) that is usually somewhat helpful once it has happened, but frequently very, very nasty to go through”. I would add that any reform - such as creating a valueless asset - that doesn’t address the fundamental lack of power (political and economic) of slum dwellers is unlikely to help them much.

Commenters here point out that there’s more to de Soto’s ideas than simply creating property rights out of nothing and leaving it at that - the legal and institutional framework has to be right for the process to work. Fair enough - but improving institutions and reforming bureaucracies is lenthy and mundane work, and deliberately or not de Soto has allowed his idea to seem like a quick, easy and cheap fix.

De Soto’s popularity with the Davos elite and simple-minded free-marketeers alike suggests that he’s been co-opted into the “Anything But Aid” ‘movement’. If it’s not property rights, it’s reducing business regulations or micro-credit - each of these has repeatedly been singled out as the way to eliminate poverty and underdevelopment. Actually, each one has something to contribute to poverty reduction (some more than others) given the right conditions, but many of their advocates don’t seem that interested in the particulars of the subject: the main point seems to be to justify a dismissal of the idea that overseas aid could possibly promote development. That’s a shame, because aid - again, given certain not too onerous conditions - can make a big difference.

One argument you frequently hear in support of inequality is that it’s a price worth paying for ’social mobility’; the theory is that the greater inequality typically produced by the more ‘free-market’ varieties of capitalism reflects the disparate rewards of more open competition in which your position in society is determined by merit and achievement rather than inheritance. The rise in incomes at the top end represent entrepreneurs working their way up from the bottom through talent and hard work, that kind of thing.

The problem is that the evidence doesn’t support this theory. In fact, social mobility seems to be lower in countries with higher inequality. The two charts below compare social mobility with two measures of inequality for the six rich countries for which full data is available. The source is chapter 7 of the Economic Policy Institute’s ‘State of Working America 2004-05′, available here. The yellow bars represent the association between fathers’ and sons’ income in each country, a decent measure of social mobility.

It’s plausible that inequality is more the cause than the effect of the level of social mobility: in a very unequal society, the rich would be better placed to protect their positions and the poor may be unable to acquire a decent education. This idea seems to be supported by the fall in social mobility that accompanied the rise in inequality in America over the last few decades.

Madsen Pirie of the Adam Smith Institute outlines some steps to reducing global poverty which I would agree are necessary but which I would disagree are sufficient:

The Adam Smith Institute has long advocated debt relief, coupled with measures to prevent new unproductive debt being incurred. We have supported humanitarian aid on projects to fight AIDS, conquer malaria and provide clean water. But the biggest help will be to open our markets and to stop subsidizing our industries in competition.

He goes on to say that “it isn’t about sharing our wealth with them, but about helping them to create their own”. This has almost achieved cliche status among free-marketeers, but to me it’s a false opposition, since I think the evidence supports the idea that sharing some of ‘our’ wealth with them is one very important way of helping them create their own.

Boris Johnson, Tory goofball, gets all worked up today in the Telegraph:

We all knew Labour was a government of barbarians. We knew they cared nothing about history. But are they so spiritually impoverished that they are prepared to insult the Beatles?

Will you still need me, will you still feed me, when I’m 64? sang the twentysomething Beatles; and look what happens when Ringo Starr attains that age. How does the Labour Government propose to show its respect to him and his band, which must surely rank among Britain’s greatest cultural contributions to the 20th century?

It is destroying his house. It is a fine terrace house in the city of Liverpool, a city that has no equal as a centre of culture. The birthplace of Ringo - the man whose voice immortally informs the world that he can get by with a little help from his friends - is a place of pilgrimage. It is a lodestar for tourists across the world, and deservedly so.

And how is Ringo’s first home treated by his friends in the Labour Party? In an act of urban desecration unseen since the days of the Luftwaffe, it has been designated by John Prescott as one of the 400,000 houses to be destroyed…

It is a policy that defies logic. It is not as though Labour believes we have too many houses in this country. On the contrary, this same Prescott recently announced that, as a nation, we were so short of houses that it would be necessary, over the next 20 years, to construct another 640,000 in the South-East, with 200,000 going on greenfield sites. The policy is philistine, expensive and environmentally disastrous…

But there is one thing worse than the illogicality and the brutality of this policy; and that is its complete refusal to take account of local wishes. In both cases - the harrowing of the North, the concreting of the South - Prescott is using his new anti-democratic regional satrapies to force his will on the local population. The people of Oxfordshire have been told they must accept the plonking of about 2,500 new houses every year, with 40 per cent of them going on greenfield sites. These quotas have been set by the South-Eastern Regional Authority, based in Guildford.

With all respect to Guildford, a fine town, we in South Oxfordshire feel no sense of fiefdom or fealty towards its regional quangocrats. We do not understand how they came to have this authority over our elected politicians; and we do not understand how we may remove them from office, since they seem to have simply appeared, by Prescottian prestidigitation. The fact that they take ever more decisions, of ever greater political importance, is a source of increasing friction and despair.

I know we’re not meant to take Boris seriously, but this “Prescott wants to destroy 400,000 homes” meme has been spread around with some enthusiasm by right-wing hacks and bloggers recently, so it’s time it was debunked.

Firstly, though, let’s deal with the important matter of Ringo Starr’s house. Now, the thing is, it’s not actually his house. He was born there, but he moved away at the age of four and spent most of his childhood in a house in Admiral Grove. Boris says it’s a ‘fine’ house, but to this untrained eye it doesn’t look all that great:

What’s more, the local residents seem to agree, as they’ve voted overwhelmingly in favour of the regeneration scheme which may see the house demolished. Is this what Boris means by Prescott’s “complete refusal to take account of local wishes”?

That’s not the only bit of bollocks from Boris. For example, there’s that bit about Prescott having “designated”, Luftwaffe-style, 400,000 houses to be destroyed. It comes from this Telegraph article, which actually only says that “Up to 400,000 homes are to be demolished across the north of England”. Ah, “up to”, the hack’s friend. On closer inspection the figure looks even more shaky: it comes from this report from the Northern Way, a consortium of three regional development agencies in the North of England. On p. 53 it says:

The need to increase the rate of stock replacement is already recognised in the three Regional Housing Strategies but does not feature prominently in planning guidance. At present, we do not know how many homes are ‘at risk’. The Centre for Urban and Regional Studies (CURS) estimates that around 1,500,000 homes are at risk and perhaps up to 400,000 should be replaced. Others suggest that fewer are at risk and fewer still need to be cleared. Based on current rates, over the next ten years some 167,000 homes will be cleared. This is well below the rate required.

And that’s it, really. No decision has actually been taken, except that the current rate of demolition of homes is too low. Given that these areas face serious blight due to widespread housing abandonment, this does not seem such a crazy idea. Demolishing some houses, refurbishing others and building new ones actually strikes me as a pretty good framework for regenerating seriously deprived areas, and that’s exactly what the Northern Way is proposing. And they’re consulting local residents, not over-riding their wishes.

There’s more. That “South-Eastern Regional Authority” he mentions? He means the South-Eastern Regional Assembly, but ‘Authority’ sounds so much more authoritarian, don’t you think? (Predictably, Boris later labels the whole thing “Stalinist”). As for the Assembly having authority over elected local politicians, this is rather undermined by the fact that it is mostly comprised of, er, elected local politicians: two-thirds of the Assembly’s members are local councillors.

Boris’s article is notable for its attempt to disguise NIMBYist conservatism as market-friendly liberalism. Stalinist planners are “forcing” the demolition of hundreds of thousands of houses in the North while “concreting” over the South. All complete rubbish - the extra homes being built in the South will take up tiny amounts of ‘greenfield’ land (much of which is neither green nor fields) and is direly needed by hundreds of thousands of would-be homeowners, key workers and homeless families. Meanwhile in the North everyone suffers from the abandonment of entire streets to vacancy, crime and deprivation. It’s ironic that Boris excoriates the Government for listening to the loudest, clearest market signals imaginable and still manages to call him “Stalinist”.