As Bush pledges more money for Africa, and Live8 will soon attempt to rally more support for throwing money at Africa's problems, it helps to remember that this is not a new approach to an old problem. In fact, it is the same approach to the same problem.
First, look at countries that didn't take the easy way out, and what happened. In today's (Thursday) WSJ, Richard Brookhiser noted that the United States's first Treasury Secretary, Alexander Hamilton, set the economy right not by repudiating debts as many in the US wanted, but by paying them (see the WSJ ). Hamilton also had to overcome congressional resistance to rewarding speculators who had bought up debt. But Hamilton knew that if the United States started picking and choosing among its creditors, its credit would go back into the outhouse. Penalizing speculators, or repudiating debts, merely would have delayed the adoption of good governance necessary for growth.
According to the Financial Times the IMF has released two extensive research papers that suggest aid flows to poor countries have not led to higher growth rates, the main driver of poverty reduction.
Easterly made small changes to the dataset period, its breadth, definitions of "aid", "policies", and "growth" (the main variables in Burnside and Dollar), all rendered the results insignificant. The very conspicuous conclusion was not robust to minor respecification--the aid showed no effect on growth under a variety of measures of good governance.
One example of a particular failure was Zambia. Notes Easterly,
"If Zambia had converted all the aid it received since 1960 to investment
and all of that investment to growth, it would have had a per capita GDP of about $20,000 by the early 1990s. Instead, Zambia’s per capita GDP in the early 1990s was lower than it had been in 1960, hovering under $500."
Adam Smith noted that "what is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom." This he applied to trade, but surely it holds for credit policy too. Think about your financially troubled friends and relatives. It is usually the case that the last thing they need is more money or pity, but rather bourgeois virtues that create prosperity.
First, look at countries that didn't take the easy way out, and what happened. In today's (Thursday) WSJ, Richard Brookhiser noted that the United States's first Treasury Secretary, Alexander Hamilton, set the economy right not by repudiating debts as many in the US wanted, but by paying them (see the WSJ ). Hamilton also had to overcome congressional resistance to rewarding speculators who had bought up debt. But Hamilton knew that if the United States started picking and choosing among its creditors, its credit would go back into the outhouse. Penalizing speculators, or repudiating debts, merely would have delayed the adoption of good governance necessary for growth.
According to the Financial Times the IMF has released two extensive research papers that suggest aid flows to poor countries have not led to higher growth rates, the main driver of poverty reduction.
The research, which took into account duration, type of donor and governance record of recipient, found aid did not boost growth.That World Bank study was critiqued pretty well by William Easterly in the Summer 2003 Journal of Economic Perspectives (see pdf here), where Easterly noted that the World Bank study offered the cautious conclusion (see Burnside and Dollar (2000) American Economic Review) that development aid can help when countries have good governance. This seemingly commonsensical result was quickly and widely adopted as gospel by policymakers such as Wolfensohn and Bush, and media such as The New Yorker and The Economist.
This conflicts with the findings of an influential World Bank study five years ago that found aid boosted growth in countries with good policy environments.
Easterly made small changes to the dataset period, its breadth, definitions of "aid", "policies", and "growth" (the main variables in Burnside and Dollar), all rendered the results insignificant. The very conspicuous conclusion was not robust to minor respecification--the aid showed no effect on growth under a variety of measures of good governance.
One example of a particular failure was Zambia. Notes Easterly,
"If Zambia had converted all the aid it received since 1960 to investment
and all of that investment to growth, it would have had a per capita GDP of about $20,000 by the early 1990s. Instead, Zambia’s per capita GDP in the early 1990s was lower than it had been in 1960, hovering under $500."
Adam Smith noted that "what is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom." This he applied to trade, but surely it holds for credit policy too. Think about your financially troubled friends and relatives. It is usually the case that the last thing they need is more money or pity, but rather bourgeois virtues that create prosperity.
HedgeFundGuy - am 2005-06-30 23:57 - Rubrik: economics
Ostracised meinte am 1. Jul, 09:57:
Thanks for the link to the FT article, although I think you could have quoted other parts of the IMF statements in that article, for example these two paragraphs: “The bad news is that even if delivered with the best intentions and used carefully by recipient governments, there are side effects like adverse effects on competitiveness, which can offset aid’s beneficial effect on growth,” the fund said. “The good news is that by paying careful attention to macroeconomic management and issues like absorptive capacity, perhaps aid may have a better chance of success. “
The IMF makes a distinction between aid that is given to promote growth and humanitarian aid, for example, after natural disasters, saying that the two should not be confused. “Humanitarian aid to save lives is right regardless of the macro effects. But when the aid is focusing on growth, you need to take into account the macro effects,” Mr Rajan said.
HedgeFundGuy antwortete am 1. Jul, 15:05:
The focus on the "Dutch Disease"--the effect of aid on exchange rates and then exports--is I think second-order relative to the main incentive problems created by giving money to governments. A government flush with cash has no incentive to do the things that increase growth because these things create highly concentrated losers in the short run who complain--who needs that? I think the IMF is still trying to avoid seeming to blame the victim, by pointing to this crazy technical effect caused by aid, as opposed to the simpler story that aiding corrupt dictators provides them less incentive to change.
But I'm a great admirer of Ragu Rajan.
pauln meinte am 1. Jul, 20:13:
At well-endowed and research-heavy universities like Harvard, it would be only a minor drain on resources to waive tuition for all incoming undergraduates, and doing so would certainly increase the quality of students they get. However, these universities feel that unless students pay for their education, they won't value it properly, and they therefore underperform.
