Posted by Ignacio on
Tue, 28/11/2006
The Council on Foreign Relations has organized an on-line debate on Foreign Aid Effectiveness between William Easterly and Steven Radelet.
The debate, which will run until Friday, has already started.
Steven Radelet tries to find a middle ground and defends foreign aid successes and its impact, if moderate, on growth...
There is no question that too much aid has gone to plundering dictators like Jean-Bédel Bokassa [Central Africa Republic], Ferdinand Marcos, and Baby Doc Duvalier [Haiti], or otherwise wasted on bad ideas badly implemented. And average income in Africa is about the same as it was two generations ago. But that is just one part of the story.
Millions of lives have been saved through large-scale health interventions, many of them supported by aid programs. Routine immunizations save three million lives every year, small pox was eradicated, polio has been nearly eradicated, and there has been enormous progress in fighting river blindness, guinea worm, diarrheal diseases, and others. Life expectancy has gone up around the world.
On economic growth, despite popular misconceptions, the vast bulk of research over the last decade has found that while aid is not the most important ingredient in stimulating growth, overall it has had a modest positive impact.
... and William Easterly replies bashing top-down plans such as the PRSPs or the MDGs, by “experts” from the UN, IMF or the World Bank (where he spent 16 years as a Research Economist) and claims that the right response is to shift resources to bottom-up researchers and to increase accountability from aid agencies so that aid actually reaches the poor.
The right response is to demand accountability from aid agencies for whether aid money actually reaches the poor. The right response is to demand independent evaluation of aid agencies. The right response is to shift the paradigm and the money away from top-down plans by “experts” to bottom-up searchers—like Nobel Peace Prize winner and microcredit pioneer Mohammad Yunus—who keep experimenting until they find something that works for the poor on the ground. The right response is to get tough on foreign aid, not to eliminate it, but to see that more of the next $2.3 trillion does reach the poor.
Watch a video of a similar debate (including Easterly and Radelet).
You can also weigh in on the debate by emailing the editors at webmaster (at) cfr.org
Also at the CGD Blog
Posted by Ignacio on
Mon, 27/11/2006
The New York Times editorial last Saturday "Foreign Aid, Revised" warns against the increasingly apparent focus of US foreign aid on democracy promotion and terrorism fighting at the expense of antipoverty programs.
Promoting democracy and fighting terrorism are laudable goals. But such work needs to come on top of — not instead of — financing antipoverty programs, which save hundreds of thousands of lives and earn untold good will for the United States.
Posted by Ignacio on
Fri, 24/11/2006
We now enter the second part of our Fridays Academy series.
In upcoming weeks and, as always, using Raj Nallari and Breda Griffith's teaching notes, we will try to contribute to a deeper understanding of the areas that impact the lives of the poor. After describing the experience over the past several decades with development aid, which aims to place poor countries on a sustainable long-run growth path, we will turn to a discussion of external debt and how it became unsustainable in many low-income countries, crippling their growth potential and keeping millions in poverty. After that, we will examine areas that can hinder the movement of the poor out of poverty. These areas—education, health, labor markets and land —are core components of public policy that need to be addressed if poverty is to be addressed effectively. Many developing countries lack the capacity to mobilize resources—administrative and financial—to achieve the necessary progress to move the poor out of poverty, calling for the active involvement of the international community.
Next Friday we will start looking at Development Aid, Economic Growth and Poverty Reduction.
We would like to encourage all our readers to post comments or questions related to our Fridays Academys postings (or to any posting in this blog). An online discussion on these topics among participants from all around the world would certainly enrich this knowledge-sharing experience.
Posted by Ignacio on
Wed, 22/11/2006
Weijian Shan recently ignited a debate over the profitability of Chinese companies with his essay in the Far Eastern Economic Review “The World Bank’s China Delusion”, which had a reply in World Bank economists Bert Hofman and Louis Kuijs’ “Profits Drive China's Boom."
FEER’s blog told the full story.
To vastly oversimplify the positions, the World Bankers believe that the corporate sector is making healthy returns on its investments, and this is fuelling the high savings rate and fast growth in investment. Therefore Beijing can afford to be sanguine about the investment level, although the central government could improve efficiency by forcing state-owned companies to pay dividends back into state coffers.
Mr. Shan argues that while profits may have been growing in recent years, they are not nearly as high as some official statistics would have one believe, and it is bank credit which is fuelling the investment boom. The implication is that a large proportion of savings is going into unproductive investments, which will eventually cause more problems in the already precarious banking system.
Thank you Yan Wang for the heads up.
Posted by Ignacio on
Tue, 21/11/2006
Tina Rosemberg wrote last week in the New York Times (paying, free trial available) about programs that are successful reducing poverty.
Here are eight particularly effective ones, in her words:
I. The Gold Standard: Universal Vaccination
Universal vaccination is cost-effective foreign aid at its best. It is so successful, so widely considered essential, that many people today do not realize that it began only 20 years ago.
II. Give Poor People an Ownership Stake
... Mr. De Soto, a Peruvian economist, realized that the world’s poor own trillions of dollars’ worth of assets. But their houses, plots of land and businesses lacked formal title – and so could not be used to do all the things that people in wealthy countries do to turn a little money into a lot of money.
III. Microcredit: The 62-Cent Solution
... Microcredit now reaches nearly 100 million clients in more than 100 countries. The World Bank has found that microcredit accounted for 40 percent of the entire reduction in moderate poverty in rural Bangladesh —and that it had an even bigger impact on extremely poor borrowers.
IV. Bribe the Poor
... He began a program to pay poor mothers to keep their children in school and take their kids to the health clinic. He compared the results to poverty figures in a group of similar villages without the program. It was a great success.
V. Link Up the Villages
... Roads allow farmers to market their products, and bring in fertilizer and seeds. They let rural residents take non-farming jobs in nearby towns. Sick people can get to the hospital in time. Roads make it easier for the government to bring in water and electricity. Children can get to school faster, which means more will go. ... In India, it would be the single most effective antipoverty program, the group concluded. Feeder roads would also be among the best ways to spend money in Africa and China.
VI. Target the Decision-Makers
... But educating girls is not necessarily good for parents – and they make the decisions. Most poor people in the world live in societies in which the girl marries into her husband’s family. Educating a daughter, these cultures say, is like watering a neighbor’s garden. Parents will send their girls to school only if the costs are very low.
VII. A Green Revolution for Africa
The Green Revolution is not yet over – productivity continues to increase, and even faster than in the early days. It has prevented famine and brought improvements in income, health and survival to hundreds of millions of people. But few of them are in sub-Saharan Africa. Africa’s farmers get less than half the amount of grain per acre that Asian farmers get. From 1980 to 2000, India’s agricultural yields rose 28 percent. Africa’s dropped by 7 percent.
VIII. Hold the Patient’s Hand
... Because of poor adherence, resistance has reached the point where some forms of TB are incurable ... The solution is a strategy invented in Tanzania in the 1970s and now in use all over the world, called DOTS, for Directly Observed Treatment, Short-course. ... Someone becomes a pill pal, with the job of watching the patient swallow the medicines. This can be a neighbor, a family member, or a community health worker. DOTS is now widespread – it covers about 60 percent of the world’s diagnosed TB cases. It greatly improves the chance of cure.
Posted by Ignacio on
Fri, 17/11/2006
Like every Friday, from Raj Nallari and Breda Griffith's lecture notes
Differences in input accumulation explain some, but not all, of the variation in rates of economic growth across countries. The unexplained part—differences in how productively inputs are used—is explained by institutional differences. The right institutions are needed to encourage appropriate policies both for the accumulation of inputs themselves (land, capital, and labor) and for developments that will improve productivity (new technologies, managerial processes, education), all of which affect growth.
Economic Growth and the Quality of Institutions
Source: World Bank
There is ample evidence that good governance causes higher income growth. Edison and others (2003) suggest that improving institutional quality by one standard deviation (roughly equivalent to the difference in institutional quality between Cameroon and the entire country sample) would increase average annual growth in income per head by 1.4 percentage points. Moreover, Rodrik and Subramanian (2003) find that the quality of institutions (measured by a composite that includes protection of property rights and rule of law) is the only significant determinant of income levels. The authors find that were Bolivia and Korea to have the same quality of institutions, Bolivia’s GDP per head would be close to $18,000 rather than its current level of $7,200.
So institutions clearly matter for economic growth and inequality. Indeed income differences in terms of GDP per head, the growth rate of GDP and growth volatility across countries appear to be closely correlated with indicators of institutional quality.
Furthermore, institutional quality and per capita income levels are closely correlated and move in the same direction across developing country regions as shown in exhibit below.
Income per capita and Aggregate Governance
Source: WEO, 2003
WEO (2003) estimates that the aggregate governance measure explains almost three quarters of the cross-country variation in income per head. The exhibit above shows the benefit to Sub-Saharan Africa (in particular) of improving institutional quality from (-0.49) at present to the average of developing Asia (-0.19) suggesting an 80 percent increase in its per capita income (from $800 to over $1,400).
Improving institutional quality also has positive effects on volatility and economic growth. The higher the quality of institutions (as measured by the aggregate governance measure), the lower the volatility of growth (WEO, 2003). The WEO (2003) uses a standard growth model – economic growth measured by the annual average growth rate of GDP per capita is regressed on initial levels of income and schooling – to capture the effects of institutions on cross-country growth differentials. Institutional quality is proxied by governance measures and financial development. Improving institutional quality by one standard deviation implies an increase in average annual growth in GDP of 1.4 percentage points.
What lies behind the strong correlation between economic growth and development and institutional quality? Clearly one would expect that strong economic performance induces institutional change. Countries with positive growth records are more likely to strengthen their financial and real markets by improving the underlying legal and regulatory frameworks. Thus institutions are endogenous to economic growth. Endogenity indicates reverse causality—that is, good institutions stimulate growth and growth encourages the development of good institutions. Turning to the possible exogenous factors that influence institutional quality the literature has concentrated on “the role played by geographical and historical influences on institutional formation” (WEO, 2003). The effect of these exogenous factors on institutional quality is not conclusive – the success of institutional quality is not a given based on a country’s geography and/or history – although causal linkages have been found. Geographical factors such as a country’s location and its resource endowments are determinants of economic growth. For example, and as noted in WEO (2003) improvements in agricultural productivity, health and external trade have positive impacts on economic performance. Institutions are considered a key intermediary between the geographic factors of latitude, distance from main markets, climatic conditions and resource endowments and economic performance. Islam and Montenegro (2002) demonstrate that “openness” (to trade) is positively associated with institutional quality. Their finding is confirmed by Rodrik and Subramanian (2003), who also find that globalization and international trade have a positive impact on institutional quality. The evolution of institutions and institutional quality has been linked in recent years to historical factors such as settlement and colonization. The literature suggests that where settlers settled in large numbers, institutional developments encouraged participative approaches to economic activity that favored innovation, growth and investment. On the other hand, where settlement was more confined and power rested within the hands of an elite, institutional developments revolved around maintaining that power, and hampering economic growth. Although the implications for GDP are not conclusive, some of the work in this area has considered the legal framework stemming from different colonial influences and suggests that the common law framework, compared with civil law, is more conducive to the development of good institutions.
Economic policies have important consequences for institutional quality and vice versa. The WEO (2003) highlights the positive effects of openness to trade, stronger competition and higher transparency on institutional quality. It notes the positive effect of the EU accession process for the improvement of institutions in central and eastern Europe. Furthermore, the success of policies in turn depends on the quality of institutions – policies aimed at improving human capital and trade openness are unlikely to be as effective if the underlying (political and other) institutions are weak.
Posted by Ignacio on
Tue, 14/11/2006
Infrastructure, Investment, Innovation and Institutional Capacity, according to a new World Bank Study: Facing the Challenges of African Growth: Opportunities, Constraints, and Strategic Directions.
The four big “I”s, as the study calls them, are among the most critical areas demanding action if Africa is to make up for missing two decades of global growth or replicate the growth models that have lifted millions of people out of poverty in other regions of the developing world.
Read the press release in English, French, Portuguese.
Executive Summary in English, French, Portuguese.
Power Point Presentation
Full book
Posted by Yan on
Mon, 13/11/2006
While global cross border capital flows have risen to reach nearly $6 trillion in 2004, only a small fraction (about 10%) flows to developing countries. People cannot help but ask, Why doesn't capital flow from rich to poor countries? In a recent conference, Prof Enrique G. Mendoza and his co-authors seemed to have provided an answer. In their paper "Financial Integration, Financial Deepness and Global Imbalances", they argue that in the last decade, financial integration was a global phenomenon, but financial development was not. Capital market liberalization may lead to global imbalances when countries are vastly different (heterogeneous) in their levels of financial development.
Their model shows that first, countries with deeper financial markets have lower savings and accumulate net foreign liabilities. Conversely, countries with shallow financial markets may have higher savings (due to the lack of insurance, for example) but higher capital outflows (out of desire to seek more secure returns). Second, financial market differences also affect the composition of the international portfolio. Countries with deeper financial markets invest in high return assets. As a result, they may receive positive factor payments even if the net foreign asset (NFA) position is negative (e.g. the US). The authors conclude that this has some welfare implications to developing countries: Low income countries with low levels of financial development will be worse off in such an environment because their savings may bypass their domestic financial sector and flow to developed countries with highly sophisticated financial markets, at least in the short run. (Considering learning by doing, the long run effect may be different, in my view ).
Posted by Ignacio on
Fri, 10/11/2006
From Raj Nallari and Breda Griffith's lecture notes.
At least six dimensions of governance are referred to repeatedly in the literature. These are: (i) voice and accountability, (ii) political stability, (iii) government effectiveness, (iv) regulatory quality, (v) rule of law, and (vi) control of corruption (Kaufmann and Kraay 2002).
Income per capita and Voice and Accountability
(Log of GDP per capita on Y-axis; voice and accountability score on X axis)
Source: WEO, 2003
Measures of voice and accountability attempt to capture the strength of the voices of the various strata of a population, and how accountable the political regime is to the needs and wishes of its people. Exhibit above shows the link between income per head and voice and accountability. Included in this measure are various aspects of the political process, notably civil liberties, political rights, and media independence (because independent media monitor those in authority and hold them accountable for their actions). Voice and accountability is a cornerstone of the emerging literature on social accountability, which seeks to improve the responsiveness of government and other power holders to the needs of the governed—especially those whose voice is weak or obscured. Data on all of the aspects of voice and accountability discussed in this paragraph are collected by the World Bank to facilitate cross-country comparisons and changes over time and across countries.
Political stability, the second identified dimension of governance, captures a population’s perception of the stability of its government. The perceived likelihood that the incumbent government could be overthrown by violent or unconstitutional means compromises governance, as does uncertainty about the ability of a country’s citizens to peacefully elect and replace those in power. The interaction between political and economic institutions to produce stability determines capital accumulation, investment in new technologies, and thus economic growth and poverty reduction.
Notwithstanding the work of Collier and others (2001), our knowledge remains limited about the institutions and mechanisms that contribute to conflict prevention, conflict recurrence, and economic recovery. Once conflicts end, there is likely to be insecurity at the household level, as at the macroeconomic level. Conflict usually leaves behind armed civilian populations that are prone to violence (Somalia, Sudan). At the macro level, whether the conflict has been resolved by military victory (Ethiopia, Uganda), or through a negotiated settlement (Cambodia, Mozambique), there are significant risks that the government may not survive for long.
Government effectiveness, as a measure of governance, refers to the inputs that government need if it is to produce and implement sound policies and deliver public goods. In effect, it reflects the credibility of a government. An effective government is free of the pitfalls of the predatory state (rent-seeking, corruption, theft, conflict, and the risk of expropriation). The competence and independence of the civil service and the government’s commitment to the development and implementation of sound policies are keys to effectiveness.
Income per capita and Regulatory Burden
(Log of GDP per capita on Y-axis; regulatory burden score on X axis)
Source: WEO, 2003
Regulatory quality refers to the quality of the policies developed and implemented by government. Indexes of regulatory quality reflect how friendly government policies are to growth. Policies that promote red tape, excessive regulation, price controls, and inadequate supervision of the financial sector make for poor governance and are growth-retarding, i.e. regulatory burden as captured in exhibit above.
Extent of the Rule of Law, by Region, 2002 and 1996
Percentile rank of region among all countries of world
Source: D. Kaufmann, A. Kraay and M. Mastruzzi 2003
The rule of law indicator measures the extent to which economic and social interactions are governed by duly constituted, clearly articulated, and reliably enforced laws and regulations. Institutions that protect property rights (both from criminals and the predatory power of the state) and the enforcement of contracts promote the rule of law and allow economic activity to flourish. Democratic institutions, including an independent, well trained judiciary and a well codified legal system, promote freedom, scrutiny, and debate, which in turn reinforces the effectiveness (credibility) of government.
In many developing countries, the rule of law is spotty, ineffective, or absent altogether. In such countries, private institutions and customs, for corporate governance, long-term relationships, dispute resolution, and information dissemination, have proliferated in place of formal public institutions. Even in countries with strong formal institutions, including legal systems, customary mechanisms may continue to function alongside the formal ones. For example, in modern countries, disputes are typically resolved through arbitration and other methods, with the courts left as a last resort.
Control of Corruption, by Region, 2002
Percentile rank of region among all countries of world
Source: D. Kaufmann, A. Kraay and M. Mastruzzi 2003
Measures of corruption have generated the most attention in the literature on governance and investment climate (World Bank 2005b). Transparency International (TI), a nongovernmental organization that has fought corruption since its inception in 1993, has become the key source for data and information on the level of corruption in developed and developing countries alike. TI defines corruption as the “misuse of entrusted power for private gain,” whether “according to rule” or “against the rule.” So-called facilitation payments, whereby a bribe is paid to receive something that the receiver of the bribe is required to do by law, constitute the former. A bribe paid to obtain services that the bribe receiver is prohibited from providing is an example of the latter.
Next week: Institutions and Economic Growth
Posted by Ignacio on
Thu, 09/11/2006
Posted by Ignacio on
Wed, 08/11/2006
Jeffrey Sachs replied to some of the questions asked by the audience at Daniel Altman’s excellent Managing Globalization Blog.
Among many topics, he discusses MDGs, Population Growth, Microfinance, Corruption, Environment, and Aid. The first comment regards Multilateral Development Institutions.
Having adopted the Millennium Development Goals (MDGs), with specific targets and timetables by the year 2015, the development institutions like the International Monetary Fund and World Bank should be gearing their work around the practical success of achieving these Goals. Unfortunately, these institutions do not yet take the Goals as operational guidelines, and therefore do not put enough emphasis on the practical steps needed to achieve the MDGs. Dozens of countries, notably in Africa, are still off track from meeting the MDGs, but the international agencies (and the rich countries that guide them) have not yet stepped up their practical help sufficiently to get these countries back on track. They are still dramatically under-funding policies as urgent as the control of AIDS, tuberculosis and malaria.
Posted by Ignacio on
Mon, 06/11/2006
In a new working paper, our own Nihal Bayraktar and Yan Wang look at the links between banking sector openness and economic growth.
Banking sector openness may directly affect growth by improving the access to financial services and indirectly by improving the efficiency of financial intermediaries, both of which reduce the cost of financing, and in turn, stimulate capital accumulation and economic growth. The objective of the paper is to empirically reinvestigate these direct and indirect links, using a more advanced econometric technique (GMM dynamic panel estimators). An illustrative model is presented to link financial market development with investment. The empirical results confirm the presence of direct and indirect links, and thus provide support for countries planning to open their banking sector for international competition.
Read the full text.
Posted by Ignacio on
Fri, 03/11/2006
Fridays Academy postings are based on Raj Nallari and Breda Griffith's teaching notes.
Measures of Institutional Quality
In the literature of economics, political economy, and political science, the concept of institutional quality has been translated into attempts to measure property rights and governance. Ways of improving governance have been explored and developed in depth by the World Bank in recent years. The main instrument being used is the country diagnostic study, which tabulates the results of in-depth, country-specific surveys of thousands of public-service users, firms, and public officials to gather specific information about institutional vulnerabilities in the country. The surveys gather information on various dimensions of governance, chief among them corruption in its various forms. Country diagnostic studies for Colombia, Honduras, and Peru, for example, focus on four distinct dimensions of corruption—the frequency of bribery in obtaining services, in public procurement, in the budget process, and in shaping the formation of the policy, legal, and regulatory framework. The latter dimension, also known as “state capture,” has occupied a central place in studies of governance in former Soviet countries in particular.
Property Rights
By property rights we mean the protections accorded to private property in a society. Security of property rights is obviously a critical element of economic development. Without it, investment and trading incentives will be severely curtailed, while rent-seeking activities would flourish. De Soto (2000) has shown that within countries enforcement of property rights varies across income and social groups, with the least security for the least privileged. He also has documented the ensuing, adverse consequences of poor enforcement on incomes and incentives to invest. Secure property rights have been achieved through a variety of arrangements. China’s institutional arrangements differ greatly from those of India, for example. Yet in both countries, investors and entrepreneurs may be relatively secure about obtaining a return if they do their work well; that security creates a favorable backdrop for market activities and growth. Similarly, financial systems in the United States and European Union have different institutional foundations, but both perform at comparable levels of efficiency. In Soeharto’s Indonesia, by contrast, the enforcement of property rights depended on closeness to the ruling elite, with adverse consequences for investment and growth.
Income per capita and property rights
(Log of GDP per capita on Y-axis; property rights score on X axis)
Enforcement of property rights in land policies, for example, will depend on the benefits of enforcement relative to its costs, a ratio that depends in turn on the extent to which other landowners enforce their property rights. In an extractive economy, for example, if all landowners enforce their property rights, alternatives for labor decline, and so do their wages. As a result, rents on land increase. But if most landowners do not enforce their property rights, it is uneconomical for one of them to do so. In such circumstances, alternatives for labor, and hence their wages, will be higher, because workers can exploit land where property rights are not enforced. It is only when this coordination problem is resolved that economic incentives become sufficient for enforcement of property rights (Stiglitz and Hoff 2000).
Posted by Ignacio on
Wed, 01/11/2006
In 2005 migrant workers from Latin America and the Caribbean (LAC) sent a total of $48.3 billion back to their home countries. In 2004, remittances represented about 70 percent of foreign direct investment (FDI) in LAC and were 500 percent larger than Official Development Assistance to the region.
Despite the importance of remittances for Latin America and the Caribbean, a new World Bank study finds that their impact on the region has in some cases been overestimated.
Read the press release.
Download the full report.
Executive summary in English, Spanish, Portuguese.
Related: Some remittances theory, from our Fridays Academy series.
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