Friday, December 21, 2007

Bucks, bowls, and NPV 

John Quiggin is right on this point: The oft-cited number that people put out about aid to Africa (something like $500 billion in 50 years) is meaningless because we don't have a present value calculation.
If every Australian receives, or pays, a dollar a week, the total amount is very close to a billion dollars a year. And if you have a cash flow of a billion dollars a year, and your interest rate is 5 per cent, the present value of that cash flow (the amount of extra wealth you would need to generate the flow) is twenty billion dollars.

It�s easy to stretch this gap even further. A dollar a week is about fourteen cents a day. And, if we looked at the US (about 300 million people), or the entire developed world (around a billion people, depending on your definition), the total would be that much larger. Fourteen cents a day for everyone in the developed world has a present value of one trillion dollars.

The fact that the same flow of money can be presented in such radically different ways, and that each of them is appropriate in certain contexts, is one reason public policy debates get confused.

But who knows how much is enough? The IMF says, according to this blog, that debt forgiveness to HIPCs (mostly in sub-Saharan Africa) of $32.8 billion is too slow. That's probably less than planned, but why is the higher number magical?

The trouble, as Bill Easterly points out, is that Africa is already growing, we just don't know if the aid had anything to do with it.
Why do aid organizations and their celebrity backers want to make African successes look like failures? One can only speculate, but it certainly helps aid agencies get more publicity and more money if problems seem greater than they are. As for the stars � well, could Africa be saving celebrity careers more than celebrities are saving Africa?

In truth, Africans are and will be escaping poverty the same way everybody else did: through the efforts of resourceful entrepreneurs, democratic reformers and ordinary citizens at home, not through PR extravaganzas of ill-informed outsiders.

The real Africa needs increased trade from the West more than it needs more aid handouts. A respected Ugandan journalist, Andrew Mwenda, made this point at a recent African conference despite the fact that the world's most famous celebrity activist � Bono � was attempting to shout him down. Mwenda was suffering from too much reality for Bono's taste: "What man or nation has ever become rich by holding out a begging bowl?" asked Mwenda.
It would be nice to have the present value number, but it's used to count the wrong things.

Wanna help them? Trade with them.