Saturday, June 11, 2005

And maybe we'll even talk euros again! 

The NARN will be at White Bear Lake Superstore today, 12-3pm for a live broadcast. Just before going to bed last night I checked the other NARN blogs (don't you love that little aggregator in the NARN flash site?) and found Captain Ed had announced the news of a new deal to relieve the debt of the poorest countries, mostly in Africa. This came after an agreement between the Blair government and the Bush administration earlier in the day. Ed thinks this is a good idea -- I wrote to say I did not and that we should debate this point. Here's why:

Bob Subrick at Stationary Bandit
cuts to the heart of the matter with a single question:
How does this change the incentives of public officials that led to the debt in the first place?
The answer of course is that it doesn't. This aid is akin to sending my kid to college with a credit card, having him max it out on pot and beer, and then paying it all off and telling him to use the card more wisely next time. If you do this, you usually find the card re-mexxed a few months later. But even that metaphor fails: It's more like giving your kid the money to pay the bill, only to find he's wasted that on the finer aspects of college dorm life. Former World Bank chief economist William Easterly explains:

The mythology of African debt is that huge amounts of money are being sucked out of the continent to go to international creditors. The truth is that much of Africa's debt has been fictional for a long time. When the debtors had difficulty coming up with the repayments, creditors gave new loans, postponed the repayment of old loans, or forgave the old loans altogether. The G7 has already spent 20 years giving ever more debt relief to Africa at each successive summit. Maybe the best argument for dropping the debt is just to end this charade, freeing up the time of people such as Geldof, G7 politicians and African leaders to concentrate on the real problems of African aid.

Debt relief itself shows that insufficient aid was not the problem in Africa. African governments could not repay zero-interest World Bank loans that required no repayment until 10 years after the loan was made and then had a 40-year repayment period. What does that say about the pay -off to the money lent in the first place? The International Monetary Fund and World Bank gave debt relief even to such long-standing "success stories" as Uganda. If a businessman could not generate enough profit to repay a loan with a 10-year grace period and 40-year maturity at zero interest, you wouldn't call that a successful business.

We know that aid is ineffective from the record of the $568bn (�313bn) already given in aid to sub-Saharan Africa. This aid was not successful in preventing decades of stagnation. Yet campaigners and politicians are jostling in the public square to call for ever more aid to Africa, from Geldof to Jeffrey Sachs to Tony Blair and Gordon Brown.
And now they seem to have persuaded George Bush to go along with this, which is silly because George Bush already has the right plan, in the form of Millennium Challenge Grants. To use another private market analogy, Millennium Challenge Grants require the U.S. do to more due diligence of the countries to whom they lend, and insists on accountability. Towards that end, the U.S. has a set of criteria in three main areas: good governance; investment in people; and economic freedom. To get the grants, which are as generous as those Easterly describes, you must fulfill a majority of the criteria in each of the six areas. (I've been working on a few papers to discuss these criteria, but I'll save those thoughts for later this month when the first one rolls towards completion.) Bush is still pushing those today, but so far only one country has qualified: Madagascar.

Why, you should ask? Because up to now countries in Africa have not created the institutions needed to provide good governance and economic freedom, and have not invested in public health or education. And the aid given to them has not worked. In short, Millennium Challenge Grants create an incentive for the poor countries of Africa to put good policies in place by making them a precondition for aid rather than something to be done after the aid arrives. Unfortunately from my view, Geldof and the other rocking wheezers have given the kleptocrats in Africa their junkie fix and delayed reform and the Bush Administration, for agreeing to this, needs to be held accountable, as Easterly concludes.
you could hold aid agencies accountable for results if the aid agenda was less utopian, just concentrating on specific tangible steps to help poor people. Researchers have found many programmes that reach the poor: subsidies to parents to keep children in school, free textbooks for school children, de-worming medicines, nutritional supplements, education on condoms and treatment for other sexually transmitted diseases to prevent Aids, indoor spraying to control malaria, fertiliser subsidies, vaccination, and water provision.

Aid agencies need independent evaluation of the effects on the poor of their programmes. What aid agencies do today is mostly self-evaluation. Aid agencies are only accountable if independent evaluators judge them. In short, three steps - individual responsibility of aid agencies, a less utopian agenda for aid and debt relief, and independent evaluation - are more likely to help the poor than even more utopian campaigning for more aid and debt relief.

To all of you who will be listening to Madonna and Coldplay at Live8, you deserve congratulations for your compassion for Africa's desperate poor. Direct your energies at the outrage of aid and debt relief dollars not reaching those same poor. Ask the aid agencies why those 12-cent medicines have still not reached children dying of malaria. Don't let aid agencies shun individual accountability and hide behind utopian agendas and self-evaluation. Once that outrage is fixed, let's go ahead and increase foreign aid.

But the money is spent now, without regard for these conditions.