Our Word is Our Weapon

Dan Drezner’s post here wasn’t written in response to my one on trade and development, but it might as well have been. Reading Stiglitz and Charlton’s Fair Trade For All, he concludes:

The problem with this argument is the same as the problem with Stiglitz’s Globalization and Its Discontents and Sachs’ An End to Poverty — they recognize that markets in the developing world lack vital infrastructure, but fail to recognize that developing governments suffer from even greater institutional deficits. Expecting these governments to determine when their proteted sectors should become unprotected from a welfare economic perspective is wishful thinking — in large part because these governments will not want to give up the rents that they extract from trade protection.

[But states like Japan and South Korea pulled this off!–ed. That’s a matter of some debate, but accept the premise as given. The states that could pull this off have already done it. I ask my readers to identify states with well-developed institutional capabilities that have yet to hit the fast track of economic growth.]

I’m not sure what ‘well-developed institutional capabilities’ means here. Does it mean ‘transparent, democratic and free of corruption’? Because if so, it would be a bit of a stretch to apply it to South Korea. And I would suggest that there are reasonably well-governed countries in Africa, such as Ghana and Senegal, that are far from ‘the fast track of economic growth’. But if it simply means ‘effective at achieving developmental outcomes’, isn’t that a bit tautologous? After the fact, it is easy to identify succesful countries as having had well-developed institutional capabilities. But looking at institutions alone, would anyone have predicted the stunning success of South Korea and, more recently, China?

My view is that institutions are very important but are themselves in part dependent on expectations of future growth or stagnation as well as the socioeconomic heritage of the country in terms of poverty and inequality. Furthermore, to focus solely on institutions is to ignore the role of geography (a positive factor in South Korea, a hugely negative one in most of Sub-Saharan Africa), the external environment (South Korea being a long-term recipient of very high levels of US aid) and policy space.

I think institutions can benefit from the virtuous circle of pro-poor growth: determined efforts, funded by outside aid if necessary, to boost the incomes, capabilities and power of the poorest in the poor countries should not only reduce poverty but create the expectation of future development, with a consequent improvement in the institutional environment. Such a process would take time, but it may well be a pre-condition for the kind of succesfully interventionist trade policies we’ve seen in places like Korea and Japan.

Anyway, that’s just a theory. Comments welcome as always.

Here’s Madsen Pirie of the Adam Smith Institute:

Prof Bob Carter, a geologist at James Cook University, Queensland, engaged in paleoclimate research, writes a robustly skeptical piece in the Telegraph about the currently fashionable consensus on human induced global warming. He points out that the official temperature records of the Climate Research Unit at the University of East Anglia show that for the years 1998-2005 global average temperature did not increase.

Scott Burgess also parrots Carter’s ‘finding’ that “there’s been exactly zero global temperature rise since 1998″.

Gee, I wonder why the focus on 1998? Well, if you actually go to the website of the Climate Research Unit this is what you find:

The 1990s were the warmest decade in the series. The warmest year of the entire series has been 1998, with a temperature of 0.58°C above the 1961-90 mean. Nine of the ten warmest years in the series have now occurred in the past ten years (1995-2004) … Analyses of over 400 proxy climate series (from trees, corals, ice cores and historical records) show that the 1990s is the warmest decade of the millennium and the 20th century the warmest century. The warmest year of the millennium was 1998 …

So it appears Pirie and Burgess would have us believe that because the last couple of years were only slightly cooler than the warmest year of the millennium, anthropogenic global warming is a non-issue. Of course, it’s also possible that they’re not being deliberately misleading but instead are dim or incurious enough to be unaware of the real facts on the issue. Either way, the disconnection of these pseudo-scientific and self-appointed experts from the actual evidence is startling. In a fine example of either a remarkable brass neck or extreme self-delusion, Burgess even attacks the Guardian and Independent newspapers for not “providing multifacted information to their readers, who might then be able to distill a considered position on the matter”.

Hat-tip to Tim Lambert for the link.

I’ve been slowly brewing quite a long post exploring William Easterly’s arguments on poverty traps, but in the meantime it would be a shame if I didn’t highlight the recent flurry of discussion around the publication of his new book. Jonathan Dingle points to a ‘conversation’ hosted at Cato Unbound, in which Easterly leads off with a summary of his arguments on aid and development, with responses - all expressing varying degrees of scepticism - from Branko Milanovic, Steve Radelet and Deepak Lal.

I’ll concentrate on the responses here since they say most of what I would have about Easterly’s article. Briefly, Milanovic thinks Easterly’s book is “very misleading” and gives three main reasons:
(i) We shouldn’t be surprised that poverty persists after so much aid has been doled out, since “only a tiny fraction of it is given with the objective of poverty alleviation” (I said something similar here).
(ii) Easterly’s distinction between ’searchers’ and ‘planners’ is a false dichotomy: searchers need planners and vice versa, so the two roles should be complementary.
(iii) Easterly’s proposal for clear lines of accountability linking individual agencies to individual outcomes is wildly impractical given the complexity of development.

Deepak Lal is next, and if anything is even more doubtful than Easterly that aid can be made to work. He says that “aid is not only ineffective; it is actually counterproductive” but neglects to give any actual evidence for this statement, which brings us to Steve Radelet …

Jonathan thought I’d enjoy Radelet’s piece, and he was right. I think it’s a fairly devastating summary of the ways in which Easterly selectively ignores the evidence that would undermine his argument. It’s also an excellent one-stop shop for arguments refuting the anti-aid crowd, so I’m going to quote it at length here, adding links where appropriate.

I hate to interrupt a spirited debate with facts, but occasionally they are useful. Let’s start with the claim that the West has spent $2.3 trillion in five decades with precious little to show for it. $2.3 trillion! Wow! What a huge number! Except…it’s not.

Take a closer look: $2.3 billion over 50 years is $46 billion a year, a modest amount for any global capital flow. And only about half went to low income countries, with the rest to middle-income countries like Israel that didn’t need it. So we have around $26 billion a year for all the low income countries. This works out to be a rip-roaring $14 per person per year in low-income countries. Much of that goes to consultant reports or is tied to purchases in donor countries where it gets much less bang for the buck. As a result the recipients actually get far less than these figures indicate. So let’s cut the grandstanding. It ain’t much. In Easterly’s judgment, based on his opening vignette, because poverty still exists in Ethiopia after it has received all of $14 per person in aid per year (Ethiopia happened to receive exactly the average amount), “aid doesn’t work.” Please!

So aid amounts have been modest. Have they done any good? Certainly much was wasted on rapacious dictators like Joseph Mobutu, Ferdinand Marcos, and Baby Doc Duvalier (our allies, one and all: I’m shocked—SHOCKED!—to find they didn’t use the money to fight poverty!). Some aid went down the tubes with dumb ideas or even worse implementation. And average income in Africa is about the same as it was two generations ago. But that is only one side of the story. Korea until the early 1970s received more than three times as much aid per person than the average low-income country.

As I pointed out here.

Botswana is Africa’s great growth miracle, and since 1960 it has received 8 times—8 times!—more aid per person than the average low-income country (and still today receives more than the average low-income country).

More on aid to Botswana here.

More recently, large recipients like Mozambique and Uganda have nearly doubled their incomes since the early 1990s. In much maligned Egypt, since 1960 average real income has tripled, infant mortality has dropped from 189 to an astonishing 35 per thousand, and literacy rates have nearly doubled.

Easterly rightly despairs that millions still needlessly die of disease (despite our generous $14 of assistance), but he neglects to mention those that now live. A recent book documents how millions of lives have been saved in developing countries through large-scale health interventions in the last several decades. Routine immunizations save 3 million lives every year. Small pox was eradicated, and polio nearly so. And there has been enormous progress in fighting river blindness, guinea worm, diarrheal diseases, and others. Aid programs did not always discover these medicines and technologies (although in some cases they did, like oral rehydration therapy to fight diarrhea), but they were central to delivering them to the poor. Without these programs, millions of these people would be dead. Tell them that aid has been wasted, and that we all would be better off without it.

Here’s the book he’s talking about. Owen has a lot of the details. A thought: I haven’t read Easterly’s book yet, but if he really does ignore all those millions of lives saved, isn’t that just a bit of an insult to those people and the ones who helped them?

But what about economic growth? After all, everybody knows that the research shows that there is no relationship between aid and growth. Except…um, that’s not what it shows. I used to think it did, because that’s what all the pundits say. But then I did something radical: I read the research. And here is the dirty little secret: most of the published research over the past decade has shown a modest positive relationship between aid and growth—not in all countries, to be sure, but on average across countries over time.

I am not talking about the famous research by Craig Burnside and David Dollar that aid works if countries have good policies or institutions. Easterly and others have shown that these “conditional” results are fragile. I’m talking about the much less sexy yet solid research by people like Henrik Hansen, Finn Tarp, Robert Lensink, Howard White, and several others, much of it published in peer- reviewed journals. Never heard of these studies? You should read them—you’d be way ahead of most of the pundits! You may not agree with this research, but let’s stop misleading the world by telling them it doesn’t exist.

Here is how the research stacks up. One small set of studies, mostly unpublished, which Easterly loves to cite, finds no relationship, but is based on two important erroneous assumptions: (1) aid has a fixed proportional impact on growth, so that the first dollar and the hundred-millionth dollar of aid must have the same impact on growth, and (2) all aid affects growth equally, whether it is spent on emergency food for refugees, consultant reports, or building roads. A second, larger but less publicized set of studies relaxes the first restriction, and allows aid to have diminishing returns on growth (remember that from your first economics class?). A few newer studies relax the second restriction, allowing different kinds of aid to have different impacts on growth. Almost all of these studies find a modest, positive, statistically significant relationship, and they have held up well to scrutiny. Surprise! But don’t bother to tell the journalists—modest good news doesn’t sell.

In a recent study I conducted with Michael Clemens and Rikhil Bhavani, we found that aid actually aimed at growth (about half of all aid) had a positive and significant impact with diminishing returns, with an estimated average rate of return of around 13%. Our results have been tested, re-tested, tortured, and banged on by many observers, but they have held. A recent and well-publicized study by Ragu Rajan and Arvind Subramanian purported to find no aid-growth relationship, but almost all of their results were based on the two false assumptions above. In the few cases where they allowed for diminishing returns, the results were always positive, and where they both allowed for diminishing returns and examined the subset of aid actually aimed at growth, they found positive and significant result, confirming our results.

So where does this leave us? First, the rich countries have given very modest amounts of aid. Second, aid has achieved very modest results in many places, strong results in a few, and failure in others. Third, aid is no panacea – trade policies, institutions, decent governance and the rule of law, private entrepreneurship, and investments in health and education are the mainstays for growth. But aid can help and has helped on the margin in very poor countries, at least in some circumstances. Fourth — and here is where I agree with Easterly—aid programs are not nearly as effective as they could be, much is wasted, and we can and must do better. How do we do that?

First, I strongly agree with everything Easterly says about feedback and accountability. We need clear, measurable goals, and aid programs should be constantly assessed against those goals by independent monitors. Second, we should separate our politically-motivated aid from aid aimed at development. If we want to give aid to Israel, Pakistan, Jordan, and Colombia to achieve other foreign policy goals, fine. But as Milanovic argues, let’s not pretend those funds are aimed for development, nor judge their success that way. Third, let’s get away from one size fits all, and deliver aid differently in different countries. In democracies with better governance, provide most of the aid to the government. But in corrupt dictatorships, give less, make shorter commitments, keep it on a tighter leash, and give most (if not all) through NGOs and faith-based groups on the ground to deliver basic services. But most of all, let’s get away from the broad-brush ideological sound bites on both sides that only fog the real issues, and find ways to deal with difficult problems with practical, hard-headed solutions.

This is all perfectly sensible stuff, and should be required reading for anyone inclined to pontificate on the evils of overseas aid without addressing the real evidence. Such as, oh I don’t know, The Globalisation Institute, Fredrik Erixon, Allister Heath and the Cato Institute to name a few.

Whenever the guys over at the Globalisation Institute need an example of the inevitable catastrophe that awaits any country tempted to dabble in trade protection, they often turn to the example of India’s car industry. In December, Brian Mickelthwaite said the sector demonstrated

the futility of trying to build an internationally competitive industry behind high tariff barriers. Actually, as the Chennai car industry illustrates, if you want an internationally competitive industry, getting rid of the tariff barriers is where you start.

A week later, Alex Singleton pointed to an article on A World Connected, which compared the mediocrity of Hindustan Motors with the success of Japan’s Toyota and declared

While Toyota has competed on the global market, Hindustan Motors spent much of its corporate history sheltered from competition.

These are at best half-truths. Yes, India’s car industry was pretty poor for quite a while, but the idea that Toyota thrived in an environment of free and open trade is complete bollocks. Toyota “has competed on the global market” in part because it was protected from competition for so long. Over to you, Ha-Joon Chang:

When the first Japanese attempt to export passenger cars to the United States market spectacularly failed in the late 1950s (Toyota’s sub-compact car, Toyopet), the debate on the future of the Japanese automobile industry flared up again, with free-market economists arguing that this is what happens when a country, whose biggest export item is silk, tries to defy the law of comparative advantage and export things like automobiles. They argued that the automobile industry should be liberalized by lowering tariff barriers and removing government subsidies.

Luckily for Japan (and for the rest of the world, which has eventually benefited from better cars), the MITI prevailed again and the Japanese Government continued with its support for the industry. Until as late as 1962, Japan’s nominal tariff rate on automobile imports was 35.9 per cent. It was not only the highest among the developed countries – the corresponding figures were 23.1 per cent in the United Kingdom, 19.5 per cent in the European Community, 14.7 per cent in Sweden and 6.8 per cent in the United States – but also the highest for any Japanese industry, at about double the national average (18 per cent). The automobile industry was excluded from the liberalization package for FDI in 1969, hardly surprising when the total output of the Japanese automobile industry was still less than half that of General Motors. In addition to tariffs and restrictions on FDI, a host of other measures were used in order to promote the industry throughout the 1960s and the 1970s – direct subsidies, accelerated depreciation, import quotas, and “rationalization” through government-mediated mergers and acquisitions.

By the 1970s, the Japanese automobile industry became so successful that a host of VERs [Voluntary Export Restraints] was imposed by other developed countries.

Chang tells a similar story about the history of Korea’s Hyundai - from initially shoddy products to global competitiveness, a transformation he puts down to “a combination of massive government protection and subsidies, combined with the firm’s dedication to investment and innovation”.

Obviously these policies did not work everywhere - but just as obviously, and contrary to the GI’s claims, they have worked somewhere. And while India’s car industry was in the doldrums for years behind high tariffs, Mickelthwaite’s article reveals that things are picking up again. The question is, would India have even a sub-par car industry to revive if it hadn’t protected it during infancy? For that matter, can anyone point to a succesful auto manufacturing industry that hasn’t benefited from significant government intervention (in the form of tariffs and/or subsidies) in its early years?

But even the relative failure of trade protection in some countries requires some explanation. Chang lists five key ways to increase the chance of success with infant industry protection, summarised below (he goes into each in more detail in the text):

1. The choice of “target” infant industries should be realistic.
2. Infant industry protection needs to be combined with an export strategy.
3. The government should be willing and able to discipline the recipients of the rents that it creates.
4. The bureaucracy that implements the infant industry programme should be competent and relatively politically insulated, although
5. Embedded autonomy is key: a government needs to have close ties with societal actors, including the private sector firms (“embeddedness”) but, also has to have its own will and power (”autonomy”)

Looks like we’re back to institutional environment again. Also, it seems to me that all of these things would become more difficult or complicated the greater the degree of inequality and social-political strife in a country.

So, these seem to be reasons why the same policies would be less likely to bear fruit in, say, many African countries (and that’s leaving aside any problems of geography). That would be a depressing conclusion - the poorest countries too poor to benefit much from free trade, too screwed up to benefit from protection. In fact, the level of corruption in African government, while perhaps not excessive for such poor countries, may just be the best argument there is for liberalising their trade regimes - certainly it doesn’t seem to have boosted their growth much.

Can we be happy to leave it at that, though? If getting into high-tech manufacturing is the real road to riches, and some initial protection (and other intervention) is required to establish a niche in those sectors, do we simply accept that many African countries will never be that rich or do we try and work out ways to help them (or stop obstructing them) develop the institutions (as well as the education systems, research expertise and infrastructure) required?

In “Trade Liberalization and Poverty Reduction in Sub-Saharan Africa“, Marian Tupy says

[Sub-Saharan Africa] continues to be one of the most protectionist regions in the world … Whereas average applied tariffs in high-income OECD countries fell from 23.7 percent to 3.9 percent between 1983 and 2003 (a reduction of 84 percent), average applied tariffs in SSA fell only from 22.1 percent to 17.7 percent (a reduction of 20 percent).

His source is this table from the World Bank. Scanning it, something struck me as odd: why did Tupy take 1983 as his base year, when there were only three Sub Saharan African countries reporting figures for that year, compared to nine in 1981 (the first year available)? There seems to be no good reason … but wait! If you take the average of those nine in 1981 you get an average applied tariff rate of 32.2%, much higher than the 22.1% in 1983 - and that means a much bigger reduction in trade protection to 2003. I make it about a 47% reduction, which seems to be in line with the world average.

That conclusion, of course, would blow a hole in Tupy’s argument. So it looks like he just ignored it and plumped for the more unrepresentative figures (3 countries standing in for a whole world region, remember) that did lend some credence to his case. Good to see standards are as high as ever at the Cato Institute.

Update: Jonathan Dingle points out another fanciful finding from Tupy: one of his figures “makes it appear that Sub-Saharan Africa’s trade regime was the most liberal in the world in 1983″.

This is not encouraging:

Volatility of Development Aid: From the Frying Pan Into the Fire? The positive impact of foreign aid is limited by the erratic behavior of aid flows. The introduction in 1999 of various initiatives anchored in Poverty Reduction Strategy Papers (PRSPs) which were aimed at strengthening coordination among donors, improving the design of financial support programs, and improving domestic records of policy implementation should have led to an improvement in the time series properties of aid flows. We find no evidence of any fundamental changes in the way aid has been delivered in the past five years. If anything, aid volatility has worsened somewhat and the information value of long-term lending commitments has declined. We take these results to mean that the main causes of the volatility and unpredictability of aid, and the broader issue of macroeconomic instability in low-income countries, have not been addressed in a systematic manner by the donor community.