Class Notes 12

Development: What do we do to promote it?

Development, as we saw in last class, takes place in all countries at all stages. But in international context, it most often refers to poor countries becoming richer/more advanced.

1. First, why do we want to promote it? Why are we talking about it in a class on global civilization?

Quote from �Arrested development: Making Foreign Aid a More Effective Tool� by J. Brian Atwood, M. Peter McPherson, and Andrew Natsios, Foreign Affairs, 87(6): 123-132. (abbreviated A.D. below):
�In March 2008, retired Marine Corps General Anthony Zinni and Navy Admiral Leighton Smith, representing a group of more than fifty retired flag and general officers, testified before the Senate Foreign Relations committee in support of a budget increase for the State Department and USAID. Zinni and Smith said, �We know that the �enemies� in the world today are actually conditions�poverty, infectious disease, political turmoil and corruption, environmental and energy challenges.�� A.D. p. 124.

�There are compelling security and macroeconomic arguments for foreign aid. As Paul Collier�s acclaimed book The Bottom Billion demonstrates, countries with high poverty rates descend into civil war far more often than more prosperous nations. These conflicts kill thousands and destroy the political and economic institutions of the states in which they occur, leaving the international community to pick up the enormous tab for rescue, relief and reconstruction. Likewise, development success is closely related to investment, trade, and finance policies; U.S. policy on these and developing-country policies on these matters are as important as the volume of foreign assistance. �within the U.S. government, decisions concerning international trade and finance are all too often made without any regard for reducing poverty or stimulating economic growth in poor countries.� A.D. P. 130.

2. Who promotes development?

3. Historical view:

Foreign lands: to be conquered (and get tribute paid from) or traded with

Foreign lands: to be colonized or traded with. Colonies either had many colonizers living there or few, leading to different institutions. (See Acemoglu, Johnson & Robinson, 2001, �The Colonial Origins of Comparative Development,� American Economic Review.)


"�Modern foreign aid efforts began with the Marshall Plan, which was justified as a national security measure, a humanitarian contribution, and an effort to build markets for U.S. exports. In the intervening years, the policy rationale for aid has not changed much�� A.D. p. 124.
Two significant events shaped thinking about development post-WWII:
  1. Europe needed to be reconstructed, and this could happen in a relatively straightforward way by rebuilding destroyed infrastructure.
  2. The Soviet Union was seen as a model to be emulated, since under Communism it seemed to have leaped from a mostly agricultural, feudal country to an industrialized country by dint of massive investment.
Both of these contexts led to belief that massive investment (a "big push") in capital goods & infrastructure would lead to a �take-off�. Attempts to apply this to poor countries did not work well. Many investments had negative real returns (but loans still had to be paid off).

next phase: Cold War: U.S./Soviet �foreign aid� often did more to prop up �friendly� governments than contribute to development.

Security aid represents by far the biggest category. � security aid tends to tie the United States to the status quo in an era of rapid change. For it works to cushion existing regimes, many of them corrupt and reactionary; when these fall, the U.S. is an object of hatred for the government that succeeds.� Page 74 from �Foreign Aid: Saved by the Bell?� by Joseph Kraft. Harper�s Magazine, February 1963. pp. 73-81.

1980s: Reagan/Thatcher/Chicago school--the problem with economies is that governments are too involved and distorting prices and markets all over the place. The answer is to liberalize (remove regulations and subsidies--give markets free rein), privatize (remove government ownership and control), and stabilize (get your macro balances in order). These policies were followed mostly by Latin America, and then in 1990s after fall of Communism by East Europe and the former Soviet republics, and to a lesser extent in Africa. Not much good came of it. Came to be known as the "Washington Consensus."

End of 1990s, early 2000s: Focus shifted from �Washington consensus� to institutions. Based in part on work about deep & lasting effect of property rights regimes, such as the Acemoglu, Johnson & Robinson 2001 article cited above about effects of colonization. Belief in importance of institutions led to conditionality: behave well to receive money. But this puts a lot of countries in a catch-22: don�t have good institutions, not eligible for aid, don�t develop good institutions.

�like telling them that the only way to develop is to become developed.� Rodrik, p. 13. �Goodbye Washington Consensus, Hello Washington Confusion?�, January 2006.
The Washington Consensus became "augmented" with a list of other must-haves: (from Rodrik, above)

4. Millennium Development Project (big push) & Jeff Sachs vs. "policy choice" approach, Dani Rodrik

Since 2000 and the start of the U.N. Millennium Development Project run by Jeff Sachs, there has been another (augmented) version of �big push�.

�The key to escaping the poverty trap is to raise the economy�s capital stock to the point where the downward spiral ends and self-sustaining economic growth takes over. This requires a big push of basic investments between now and 2015 in public administration, human capital (nutrition, health, education), and key infrastructure (roads, electricity, ports, water and sanitation, accessible land for affordable housing, environmental management).� Page 19, Investing in Development: A Practical Plan to Achieve the Millennium Development Goals--Overview, Millennium Project Report to the UN Secretary-General.

The 8 goals and 18 targets that make up the Millennium Development Goals (MDGs) are very worthy goals. Why are they important? Intrinsically, for good of people. Instrumentally, as capital inputs raising people�s productivity. Instrumentally also as reduction of probability of violent conflict/criminal activity.

Here is the theory underlying the MDGs:

�When suitably empowered with human capital, infrastructure, and core human rights in a market-based economy, women and men can secure productive and decent employment through personal initiative.� page 13
Otherwise, individuals and countries find themselves in a poverty trap (recall our discussion of poverty traps from Lesson 3).
�In such circumstances, globalization can have significant adverse effects--including brain drain, environmental degradation, biodiversity loss, capital flight, and terms-of-trade declines--rather than bring benefits through increased foreign direct investment inflows and technological advances.� page 13

Critiques of the MDG approach:
1. The list of things that governments have to do is very long, and not always realistic. The MD report itself says, �Achieving the Goals requires that all these areas of governance be properly addressed.� page 16.

2. Although the target areas of the MDGs are indeed worthy, "fixing" these problem areas may be too simple.

�The narrower, more focused programs are politically appealing because they appear to have a direct, measurable impact on identifiable individuals. But such a concentration on the short-term delivery of goods and services comes at the expense of building sustainable institutions that promote long-term development.� A.D. P. 127.

3. Rodrik critique of MDG project is that they are so sure of how to do it. But then if so many countries are failing to do it, isn't that proof that it is not so straightforward?

Alternate view: we don't know what to do with certainty.

�Dozens of studies on foreign aid show that aid programs rarely succeed when they are not customized to the poor countries they are designed to help and built on local ownership.� A.D. p. 126

�The central message of this volume,� Gobind Nankani, the World Bank vice-president who oversaw the effort, writes in the preface of the book, �is that there is no unique universal set of rules�. [W]e need to get away from formulae and the search for elusive �best practices��.� (p. xiii), World Bank Report 2005, Economic Growth in the 1990s: Learning from a Decade of Reform.

The lessons in the World Bank report, as summarized by Rodrik, are:

  1. More important to focus on dynamics of economic growth than on static resource allocation inefficiencies. �market or government failures that affect accumulation or productivity change are much more costly [in terms of negative impact on economic activity], and hence are more deserving of policy attention, than distortions that simply affect static resource allocation.�
  2. The standard principles can be achieved by many different policies, not just one.
  3. Different contexts require different solutions to problems. �This explains why countries that are growing--the report cites Bangladesh, Botswana, Chile, China, Egypt, India, Lao PDR, Mauritius, Sri Lanka, Tunisia, and Vietnam--have such diverse policy configurations, and why attempts to copy successful policy reforms in another country often end up in failure.�
  4. Too much emphasis on rules over discretion (because governments were bad). You just have to work on making government decision-making (discretion) better.
  5. Better to focus on binding constraints rather than take a laundry-list approach (which infeasible, impractical, and ineffective). �In most cases, countries can deal with constraints sequentially, a few at a time� (p. 16).
To figure out which policies to pursue, Rodrik recommends:
  1. Diagnose
  2. Policy design (don�t always go for theoretical first-best, because the second-best but realistic solution is probably better)
  3. Maintain institutional reform so growth doesn�t fizzle out
    1. Encourage productive dynamism (diversification--remember from Lesson 11)
    2. Create resiliency to external shocks through conflict management (contrast of S. Korea and Indonesia post Asian financial crisis)
      1. strengthening the rule of law,
      2. solidifying (or putting in place) democratic institutions,
      3. establishing participatory mechanisms, and
      4. erecting social safety nets
Main idea: take a careful look at what is actually hindering progress and figure out ways to address hurdles.
This applies at both macro level and micro level. For example, perhaps the reason that farmers are not using fertilizer has to do with a little bit of inconsistency in their planning, so giving them a small "nudge" to help them commit to getting it may make a significant difference, as much as large and distortionary subsidies for fertilizer. See "Nudging Farmers to Use Fertilizer: Evidence from Kenya." Esther Duflo, Michael Kremer, and Jonathan Robinson, January 17, 2009.

Note that in both Sachs and Rodrik recommendations, effective civil society/political participation is paramount. This is one of Sen�s 5 freedoms.

5. David Ellerman Development Do's and Don'ts
From Helping People Help Themselves, 2006.

In line with Sen's idea of development as freedom/autonomy, here is a short list of how development ought to be promoted. If you are the helper and the developing person/country is the Doer, then:

  1. First Do: Start from where the Doers are
  2. Second Do: See the problem through the Doers� eyes
  3. First Don�t: Don�t try to impose change on Doers
  4. Second Don�t: Don�t give help as benevolence
  5. Third Do: Respect autonomy of the Doers
Best example of this �indirect approach� to development assistance I have come across is the book by Robert Klitgaard, Tropical Gangsters: One Man�s Experience with Development and Decadence in Deepest Africa. Basic Books, 1991.

The examples that you came up with in class include:

  1. First Do: when teaching a girlfriend to ski, don't tell her that to ski, all you need to do is... ski. Start with the very basics.
  2. Second Do: paving roads. "ideal" may be to use steam shovels, but from poor country's point of view, that may be too expensive, and they have unemployment as a big issue too, so from their point of view it would make more sense to use local labor doing a less than ideal job with rocks and other local materials .
  3. First Don't: this group looked at two situations where there is very little autonomy and a lot of putting up with what other decide: fish and children. When a child is adopted into a family, they may be told to change their behavior from one day to the next, which would be pretty difficult. It would be better to work gradually and from the child's own motivations. The fish can't do much on its own, but at least a fish owner can change the water in the fish tank gradually instead of all at once.
  4. Second don't: If someone is interested in eating healthier, don't just tell them which foods to eat, help them get the information and knowledge they need to make their own choices. [If the person didn't feel like improving nutrition, you would be in the situation above, where you'd need to be careful about not forcing change on the person.]
  5. Third Do: the example was of a kid running a lemonade stand, where maybe the lemonade wasn't very tasty and the stand was a little shabby. You could help the kid by telling them you'd like to buy more lemonade, but only if it tasted better, and suggesting ways the kid could experiment with water and sugar and run taste-tests to make better-tasting lemonade. This would respect the kid's autonomy as having had the initiative to set up the stand, and would help him or her continue to shape the enterprise.

Take-home point: there have been a lot of ideas about how to do development, and there still is not agreement about the best way, probably because there is no one "best way". Approaches that respect autonomy and build on what good is already there will probably work better than approaches that override or undermine autonomy.