Atanu Dey On India's Development

Weekend Readings: Ideas and Aid

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Here’s a collection of links for the weekend of May 30th.

First, a piece from this blog itself — When Smart People Have Stupid Ideas:

The fact is that one does not have to be stupid to not have considered every conceivable idea. Ideas are informational goods. I can on my own come up with only some ideas. And if we all pool our ideas, we each can have a lot of ideas most of which we did not originate. It is the collective idea-generating power of human society that makes us so powerful, either to create wealth or to wreak havoc. To the collective, no idea is unknown. But to an individual, most of the ideas are unknown. That is a very powerful distinction that we ignore at our own peril.

I think that is a good post even if I say so myself. Do take a look at it. Next, a clear example of smart people differing on an important matter: all things considered, is international aid good or is it bad?

Ladies and gentlemen, on the left of the ring, wearing a bleeding-heart insignia is economist Jeff Sachs with his book “An End to Poverty”. On the right side we have a tag team of William Easterly with “The White Man’s Burden”, and Dambisa Moyo with her book “Dead Aid: Why Aid is Not Working and How there is a Better Way for Africa.”

In Aid Ironies on Huffington Post, Jeff Sachs throws the first punch on May 24th:

The debate about foreign aid has become farcical. The big opponents of aid today are Dambisa Moyo, an African-born economist who reportedly received scholarships so that she could go to Harvard and Oxford but sees nothing wrong with denying $10 in aid to an African child for an anti-malaria bed net. Her colleague in opposing aid, Bill Easterly, received large-scale government support from the National Science Foundation for his own graduate training.

. . . I begrudge them trying to pull up the ladder for those still left behind. Before peddling their simplistic concoction of free markets and self-help, they and we should think about the realities of life, in which all of us need help at some time or other and in countless ways, and even more importantly we should think about the life-and-death consequences for impoverished people who are denied that help.

William Easterly counters it with “Sachs Ironies: Why Critics are Better for Foreign Aid than Apologists” on May 25th:

Jeffrey Sachs, the world’s leading apologist and fund-raiser for the aid establishment, has responded here with a ferocious personal attack on Moyo and myself, “Aid Ironies.”
. .
Sachs suffers from the same acute shortage of truthiness as did the Bush/Cheney administration, all of whom have contributed to the current climate of fear and intimidation in foreign aid. Any aid critic is immediately denounced as a heartless baby-killer, which protects the establishment from the accountability so badly needed to see aid reach the poor.

. . . Instead of Sachs’ attempt to shout down critics with slanders and falsehoods, let’s have a climate of open debate in which we learn from past mistakes, the guilty suffer, the good are rewarded, and we can hope that aid does start to reach the poor.

And then Dambisa Moyo writes on May 26th, “Aid Ironies: A Response to Jeffrey Sachs.”

Development is not that hard. We now have over 300 years of evidence of what works (and what doesn’t) in increasing growth, alleviating poverty and suffering. For example, we know that countries that finance development and create jobs through trade and encouraging foreign (and domestic) investment thrive.

We also know that there is no country — anywhere in the world — that has meaningfully reduced poverty and spurred significant and sustainable levels of economic growth by relying on aid. If anything, history has shown us that by encouraging corruption, creating dependency, fueling inflation, creating debt burdens and disenfranchising Africans (to name a few), an aid-based strategy hurts more that it helps.

It is true that interventions such as the Marshall plan in Europe and the Green Revolution in India played vital roles in economic (re)construction. However, the key and (often ignored) difference between such aid interventions and those plaguing Africa today is that the former were short, sharp and finite, whereas the latter are open-ended commitments with no end in sight. The problem with an open-ended system is, of course, that African governments have no incentive to look for other, better, ways of financing their development.

Mr Sachs knows this; how do I know? He taught me while I was studying at Harvard, during which he propounded the view that the path to long-term development would only be achieved through private sector involvement and free market solutions.

Perhaps what I had not gleaned at that time was that Mr. Sachs’ development approach was made for countries such as Russia, Poland and Bolivia, whereas the aid-dependency approach, with no accompanying job creation, was reserved for Africa.

Well they stop short of fisticuffs but it is both entertaining and instructive.

And talking of instructive, I recommend Easterly’s excellent blog Aid Watch. See, for instance, this post on “Why so scared of “free markets”?” which ends with:

Q. But hasn’t the current crisis discredited “free markets”?

The history of markets is one of periodic crises (especially financial crises) and recoveries, including major episodes of creative destruction, but with steady positive long run growth despite severe fluctuations around the trend. The huge fallibility of human actors makes the case for markets stronger, not weaker. The market itself triggers the corrective actions by both public and private actors when these actors do stupid things, like give too many mortgages to people who were not creditworthy and then try to cover it up with fancy securitization. The collapse of financial markets was a severe wake up call to change this stupid behavior; creative destruction is wiping out firms that made huge mistakes (despite some well-publicized cases of individual CEOs getting bonuses despite their stupid actions). New firms or restructured firms will not make the same mistakes (even if they find new mistakes to cause some new crisis). Since we recovered from all the previous crises of capitalism, it seems likely we will recover from this one. A knee-jerk rejection of markets (especially in poor countries) will likely postpone rather than accelerate the recovery, which made the anti-market arguments of the Collier/UNIDO report particularly ill-timed.

Finally, a maxim that Easterly quotes, “Take take your work seriously and yourself lightly.” Have a good weekend.