Tirole's Nobel Lecture

Jean Tirole's 2014 Nobel Economics Prize lecture is masterful: clear; concise; simple, but not simplistic. He starts at 3:45:

Good African

The inspirational story of how Andrew Rugasira and his partners built the Good African Coffee company in Uganda.

Alternative Finance

The BBC's Evan Davis recently interviewed the co-founders of three technology-based services that are disrupting conventional banking and financial services: M-Pesa (mobile money), Zopa (peer-to-peer lending for individuals) and MartketInvoice (auction-based online marketplace for unpaid business invoices).

Noblest Nobel

My favourite Nobel prize this year was in the category of economics. It was awarded, in part, for empirical work on market design by Alvin E. Roth, an engineer turned economist (fittingly enough).

Bond, Zambian Bond

Zambia sold its first ever dollar-denominated bond to international investors last week. It was a stunning debut.

Chinese traders in Africa

The Brenthurst Foundation has recently published a fascinating study of Chinese traders in five African countries.

Poor Economics

In Poor Economics (2011), Abhijit Banerjee and Esther Duflo claim to have discovered a radical new way to fight global poverty. Given the magnitude of the problem and the dismal failure of many previous "solutions", this is a significant claim. But does it have any merit?


Well, Banerjee and Duflo's fundamental idea of using randomised field trials to test various public policy alternatives is good...as far as it goes. Unfortunately, it doesn't go very far. It basically looks at lots of small-scale public policy problems and questions and investigates them rigorously, from the scientific perspective. Which is fine. I can't argue with good science. The trouble is this: Is this small-scale, bottom-up, micro-level approach really THE answer to global poverty? I don't think so. All the existing evidence from all the countries that have ever "developed" indicates that the answer must involve large-scale, top-down, macro-level policy solutions. Micro-level solutions are little more than palliatives.

Banerjee and Duflo neatly (and self-servingly) portray all existing thinking on economic development as falling into two opposing camps, pro-aid and anti-aid, and then claim that there is currently no definitive evidence to prove or disprove either of these camps. A rather convenient characterisation. Naturally, their work on randomised evaluations provides the brave new third way. Evidence-based, of course.

I understand their argument about a lack of evidence. The only problem is it happens to be factually and historically incorrect. Consider the case of Germany, East and West. Or Korea, North and South. Or even Zambia, pre-1991 and post-1991. These cases (and numerous others) provide ample controlled evidence of what really works and doesn't work in economic development.

But perhaps what's most disturbing about Banerjee and Duflo's work are its implicitly (and no doubt unintentional) racist assumptions. How come other countries (from the West, East and increasingly the global South) have been able to develop without the interventions of external do-gooders like Banerjee and Duflo? Why does the world suddenly need a different formula without which the countries of Africa and other underdeveloped parts of the world will be doomed to perpetual poverty?

Poor economics indeed.

J. M. Keynes vs. F. A. Hayek

Round 1:



Round 2:

All the T in China

(The titular "T" stands for Truth.)

In 1941, Henry Luce famously defined the 20th Century as the American Century. Seventy years later, few would argue with him. Recently, some have defined the 21st Century as the Chinese Century. Of course, a final, definitive verdict on this second pronouncement can only be passed a century from now, after all the evidence has come in and been thoroughly and thoughtfully examined. What is already clear, however, is the emergence, or perhaps more accurately, the arrival, of China as a 21st Century global power. Consequently, understanding China is vital for anyone who's interested in issues of global significance.

But where to start, and how to proceed? In the past, and indirectly. So I'm reading The Man Who Loved China, Simon Winchester's elegantly written biography of Joseph Needham (CH, FRS, FBA), author of the monumental and multi-volume Science and Civilisation in China. Needham was a remarkable character (to say the least), whose life spanned almost the entire 20th Century (1900-1995). The various distinctions he achieved as a scientist, historian, professor, author, linguist and administrator, were more than sufficient to populate multiple distinguished careers, let alone one. He was, and remains, the preeminent authority in the field of sinology, a position he is unlikely to relinquish any time soon, so formidable and foundational is his scholarship in that domain. Winchester focuses on the sinological aspects of Needham's work and career and thereby casts new light on China's history and its place in the modern world.

The Wealth of Nations

Hot off the press (or more accurately, the screen, in this brave new pixelated world of ours): A report by the Royal Society on the scientific wealth of nations. It documents the continued dominance of the world's scientific superpowers like the United States, the United Kingdom and Japan, and the rapid emergence of new scientific powers like China, Singapore and Brazil. In 2007, Sub-Saharan African countries spent an average of just 0.5% of their GDP on research and development. The corresponding 2007 statistics for China, Singapore and Brazil were 1.44%, 2.61% and 1.4%. And rising...

Myths and Menace

From Standpoint magazine: Eminently good sense by Nigel Lawson.

Nobel Predictions

And the winner will be...

How many economists does it take to change a light bulb?

Either one or fifty-five, depending.

Old wine in old wineskins

In the IEA 19th Annual Hayek Memorial Lecture, Prof. Gary Becker proposes a radical solution to the problem of immigration: sell visas to the highest bidders.

However, this "solution" is not really as radical as it sounds: it already exists in a variety of forms, legal and otherwise. For example, many countries have special fast-track visas for investors or high-net-worth individuals--a legal option. On the illegal side, many trafficking syndicates charge huge fees to move their clients across borders, fees that can be collected in a variety of permutations: cash, kind, in advance, in arrears, and so forth.

For Prof. Becker's idea to really work, nation states must completely secure their borders, something even the mightiest nations on earth seem incapable of doing.

Tis the season to be financy

...Fa la la la la, la la la la.



Dr. Doom, a. k. a. Nouriel Roubini, s. b. k. a. (should be known as) Dr. Realist, has just published a new book, co-authored by Stephen Mihm, entitled (wait for it) Crisis Economics. There's an excerpt on The New York Times website. The Good Doctor also hangs out on facebook and twitter.

She comes to bury Aid, not to praise it: "Dead Aid" by Dambisa Moyo

Review: Dead Aid: Why Aid is Not Working and How There is Another Way for Africa. By Dambisa Moyo. Penguin, 2009. Pages: xx + 188.

Aid.

The word looks and sounds innocuous enough. Its basic meaning is simple too: “v. & n. help.” according to one pocket dictionary.

But there’s another side to aid apart from humanitarian assistance and charity, an altogether more pernicious side. This kind of aid involves the transfer of money from governments in developed countries to governments in developing countries for the ostensible purpose of fostering economic development. It is, in the memorable words of the eminent development economist Peter Bauer, “a process by which the poor in rich countries subsidise the rich in poor countries.”

Aid has become big business. Over the past 50 years, African countries have received over US$1 trillion in aid. Every year billions more are poured into the aid industry in Africa. The industry employs many thousands of people inside and outside the continent. The World Bank, for instance, one of the largest conduits of aid, has over 10,000 employees, although ironically only 30% of them are based in developing countries; the rest are in Washington, DC and similar places. Many of the aid workers that are in developing countries are expatriates and are handsomely paid for their work. I have seen many an expatriate aid worker in Lusaka’s top shopping malls lavishly spending their hard-earned hardship allowances—this in one of Africa’s safest and most stable countries. The aid industry also employs many of the brightest and best educated citizens of African countries, precisely those whose talents and skills are most needed and would be most productive in government and the private sector.

Yes, aid has become very big business indeed, but with very little to show for it in the way of positive results. In fact, as Dead Aid, Dr. Dambisa Moyo’s new book on aid and African development, shows, systematic aid is not only ineffective, it is harmful. It encourages corruption; it stifles the private sector; it weakens public accountability; it foments conflict and rivalry; it produces negative economic effects (such as reduced savings and investment and increased inflation); and it inculcates a culture of dependency in its recipients. Dr. Moyo sets out to show how aid is at the very root of Africa’s problems, how it must be removed, and how it can be replaced with better alternatives.

Dr. Moyo certainly has the credentials to match her aims. She was born and raised in Zambia. In 1990, her chemistry studies at the University of Zambia in Lusaka were disrupted by political unrest and she left to study in the United States. She earned a bachelors degree in chemistry and an MBA in finance from the American University in Washington, DC. From 1993 to 1995, she worked at the World Bank and was a co-author of its annual World Development Report. She then went on to earn a masters in public policy from Harvard KSG and a doctorate in development economics from Oxford CSAE. From 2001 to 2008, she worked at Goldman Sachs. She sits on the boards of several non-profit organisations and was recently nominated to the board of Lundin Petroleum, a global oil and gas exploration and production company. It is an impressive mix of experience and expertise: academic and professional; public sector and private sector; developing world and developed world.

In the first part of the book (“The World of Aid”), Dr. Moyo makes the case for the ineffectiveness and counter-productiveness of aid. As she readily admits, this case has been made before, first by Peter Bauer (to whom the book is dedicated) and later by others such William Easterly. But the unique perspective and deep passion that she brings to the task makes this perhaps the most compelling case yet. It fell, as it were, to Prof. Bauer and Prof. Easterly to pronounce aid dead, and to Dr. Moyo to deliver a brutally honest funeral oration and see to the burial of the corpse.

In the second and final part of the book (“A World without Aid”), Dr. Moyo proposes a number of market-based funding alternatives to replace aid: international private bonds; financing from China and other emerging economic powers; trade and foreign direct investment (FDI); and microfinancing, international remittances and local savings.

Now that aid is dead and buried, are we potentially on the cusp of a new era of sustainable African development based on the funding alternatives suggested by Dr. Moyo? Are the Dead Aid proposals the final answer to Africa’s perennial problems?

It has been said that to the man (or woman) with a hammer in his (or her) hand, every problem looks like a nail. Therefore, perhaps it’s not surprising that as an economist Dr. Moyo tends to see Africa’s problems and solutions in purely economic terms. If it were true that Africa’s problems were wholly or chiefly attributable to its dependence on aid, then we would certainly be on the verge of a metamorphosis. Sadly, the issue of aid, important though it is, is really only a serious symptom or set of symptoms (i.e., a syndrome); it is not the underlying disease. Or to use a military analogy, aid is a major battle (but still only at the tactical level) and not the war (at the strategic level).

The fundamental problem in Africa is not with the way African governments are funded (as the book asserts). The fundamental problem is with the way African governments are run, that is to say with the nature of government itself. For the most part, African governments act as masters, not as servants (their only legitimate role). There has been much talk about The African Renaissance (the “rebirth” of traditional African identity and culture presumably), but nothing about what’s really required: The African Enlightenment (the creation, adoption [regardless of historical or cultural origin], cultivation and implementation of good ideas and ideals). And so, the approach of the contemporary African government looks (and feels) remarkably like that of the traditional African chief. Government, legitimate government, should be a means, not an end. People should be ends, not means. This order is exactly reversed in many African countries. Not only is government the end, it is literally God, complete with all the divine attributes: omnipresence, omniscience and omnipotence.

Dr. Moyo argues strongly in favour of economic freedom but, regrettably, downplays the importance of other freedoms like political freedom. In one startling passage, she argues that democratic systems of government may be bad for economic development:

The uncomfortable truth is that far from being a prerequisite for economic growth, democracy can hamper development as democratic regimes find it difficult to push through economically beneficial legislation amid rival parties and jockeying interests. In a perfect world, what poor countries at the lowest rungs of economic development need is not a multi-party democracy, but in fact a decisive benevolent dictator to push through the reforms required to get the economy moving (unfortunately, too often countries end up with more dictator and less benevolence). The Western mindset erroneously equates a political system of multi-party democracy with high-quality institutions (for example, effective rule of law, respected property rights and an independent judiciary, etc.). But the two are not synonymous.

This is a mistake. Ultimately, economic freedom, political freedom, and any other freedom, are only particular aspects of freedom itself. In the final analysis, freedom is one indivisible whole. As one of the journals of the Scottish Enlightenment put it:

Be assured that freedom of trade, freedom of thought, freedom of speech, and freedom of action, are but modifications of one great fundamental truth, and that all must be maintained or all risked: they stand or fall together.
-The Edinburgh Review, Vol. LXXVII, No. CLV, February 1843, p. 224.

To her credit, Dr. Moyo acknowledges the importance of democratic institutions (such as the rule of law, private property rights, and an independent judiciary) for economic development. However, she fails to adequately emphasise that ultimately such institutions must be the embodiment of democratic principles (ideas and ideals centred on individuals), and cannot, perforce, be the embodiment of certain personalities (not matter how decisive or benevolently dictatorial).

Fortunately, the absolute necessity of good governance is beginning to be recognised in Africa. For instance, the Mo Ibrahim Foundation, founded by the eponymous Sudanese-born telecoms billionaire and philanthropist, focuses on building good governance in Africa through its annual Mo Ibrahim Prize for Achievement in African Leadership and Ibrahim Index of African Governance.

Dr. Moyo’s gung ho attitude towards Chinese economic expansion (or imperialism, according to some commentators) in Africa is somewhat misplaced. Clearly much of Africa’s economic partnership with China has come at the expense of democratic principles, human rights and good governance. Furthermore, whilst the Chinese government consistently proclaims its policies of not interfering with and not imposing conditions on its African partners, its actions belie its words. For example, in the run-up to the 2006 Zambian presidential elections, the Chinese government publicly threatened to sever all ties with Zambia if the electorate chose the opposition presidential candidate instead of the more pro-Chinese incumbent. More recently, in March 2009, the Dalai Lama was denied a visa to attend a FIFA/Nobel Foundation conference in Johannesburg. This came after the Chinese government “appealed” to the South African government not to allow the Dalai Lama into South Africa, warning that doing so would “harm” bilateral relations. So much for no interference and no conditions.

As a polemical work of literature, Dead Aid is very well written, in clear, supple prose with the occasional burst of linguistic flair.

In writing this book, Dr. Moyo set herself three ambitious goals: first, to write a book that tackles not one but two major themes (the case against aid and workable alternatives to aid); second, to write a book that is both scholarly and popular; and third, to write a book that addresses multiple audiences at that same time (In her own words: “Africans and African policymakers...[and]...those in the West and broader international community who truly wish to see Africa progress.”).

The first goal is a success: Dr. Moyo makes a well-argued and powerful case against aid and for alternative development financing alternatives. (Readers interested in learning more about the wider debate in development economics, especially central planning versus free markets, should consult the works of Peter Bauer, particularly his detailed critiques of state-led development approaches and his monumental and meticulous studies on indigenous entrepreneurship in West Africa and South East Asia.)

Dr. Moyo’s second accomplishment is to have written a book that is scholarly and yet popular. The end notes and extensive bibliography should prove useful to researchers in development economics and other disciplines. And the easy, accessible style should help almost anyone to become acquainted with the real issues around aid. The importance of effectively presenting these issues to the general public should not be underestimated, more so in these times when aid has become, in Dr. Moyo’s phrase, a “cultural commodity”. The proponents of aid now include all kinds of celebrities who are extremely adept at packaging their message for public consumption (e.g. the “Make Poverty History” campaign). Dr. Moyo’s book should do a lot to present the other side of the argument.

The third and final goal was the most herculean of all: to write a single book that speaks effectively to Africans, African policy makers, Westerners and the “broader international community”. Here, Dr. Moyo has not been entirely successful, but not for want of ambition or effort. The advice and prescriptions she offers to Africans and African policy makers, in particular, may be dangerously misleading in various ways. Nevertheless, the valiant pursuit of such a lofty goal should not be lightly dismissed for, as Browning reminds us, “a man's reach should exceed his grasp - or what's a heaven for?”

The book has two notable weaknesses, one, an error of commission, and the other, an error of omission. The first is the erroneous claim that aid is the fundamental cause of Africa’s problems. And the second is the lack of emphasis put on good government.

But this is a small price to pay for such a stimulating and readable book.

She comes to bury Aid, not to praise it

Dambisa Moyo is the author of an important new book entitled "Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa". The book's foreword is by Niall Ferguson. Yes, that Niall Ferguson.

The book is important because it tackles, head on, one of the most enduring myths in economic history: that aid, or more specifically what Dr. Moyo (D. Phil., Economics, University of Oxford) calls "systematic aid", i.e. regular transfers of money from governments in developed countries to governments in developing countries for the purpose of fostering economic development, actually works. She contends that aid is not merely ineffective, but hugely detrimental to development in Africa.

Dr. Moyo proposes that aid be completely discontinued in five years time. The long dead should be finally buried, as it were.