Zoo Station

The more I think of Bono's and Jeff Sachs' Africa aid initiative, the more I find myself in disagreement with it. I probably still believe in the role of humanitarian aid, especially in emergencies and to fight global pandemics. Economic development aid, however, is a serious no-no for me, not just because it has a long history of being wasted and keeping the corrupt elites in power, but also because of the market distortionary effect of aid. You can always depend on some variant of Gresham's Law (bad money chasing good money out) kick in with development aid. Anyways, that's me, but here's Jagdish Bhagwati's slightly different take on the issue in a gentle letter he addresses to Bono in the Financial Times.

The key problem in much of Africa is what has long been called the “absorptive capacity” problem: will aid be used productively or will it be wasted? This issue was understood by the pioneering development economists Paul Rosenstein-Rodan and Gunnar Myrdal. The former famously estimated aid requirements in the 1960s by reference to this notion. He calculated how much investment was required to help accelerate the growth rate of an aid recipient, based on an assessment of that country’s ability to manage such growth. Foreign aid would then be given to finance the investment, provided that the recipient made a matching effort to increase domestic savings as well.

But many economists became sceptical. They argued, with substantial empirical evidence, that when aid was provided, the recipients were likely to reduce, rather than increase, their own savings efforts. This was an early recognition of the “aid curse” that afflicts some aid recipients. Uncritical proponents of aid deny this effect even as they talk of the “oil curse”; as if largesse from the windfall of oil earnings is somehow more corrupting than largesse that comes from aid donors.
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Absorptive capacity is far less of a problem if increased aid for Africa is spent outside the country. Spending can be increased in the rich countries to develop vaccines and cures for diseases that severely afflict Africa, such as Aids and malaria. Research on cures for diseases such as yellow fever and sleeping sickness should be well financed. Since much of Africa suffers from huge skills shortages for virtually every developmental problem, education and training of African students in western universities could be vastly increased. They will mostly stay abroad. But then the west should develop and pay handsomely for programmes where they can contribute in other ways, such as short-term visits to train others, for instance. Until these shortages ease years from now (as they did in the 1990s in India; the “brain drain” was a big issue there in the 1950s) as more nationals are trained and find return attractive, surely we could send out more of our own. I have advocated programmes such as a Grey Peace Corps that would find our aged and retired doctors, engineers and other professionals jobs in Botswana, Zambia and other African nations.
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How, then, are we to translate the enthusiastic altruism that you have generated, dear Bono, into larger, sustained flows of aid? Surely the answer is to go after personal, rather than governmental, flows. Personal spending on aid typically runs into softer budget constraints. With all the charitable spending I do, I could always forego a dinner at Maxim’s and eat at McDonald’s instead, pledging another $100 to the Geldof-Bono aid fund. So, if you take seriously the estimated audience for Live8 concerts at 2bn, halve it for those who were there for a lark or are impoverished themselves, and halve it again for those who attended the concerts twice, you would have half a billion who could sign up for an average pledge of $50 a head as a supplement to their normal giving, yielding a net sum of $25bn outright. The money would be worth almost twice that amount in actual aid, since they would be grants whereas most aid consists of loans that must be repaid.

This would mean abandoning some of your current allies. But you can do nothing less if your efforts are to yield results. In a recent interview, you said that you expected your music would endure forever but poverty would have ended in a hundred years. I wish you good luck on your music. But not even a hundred years would suffice to end poverty if you fail to correct your course.

This is one of the most thoughtful pieces I have seen on the subject of development aid in the recent past, so try and read the whole thing if you can. Regular readers know I disagree with Bhagwati on more than one issue (especially on emigration taxation), but I have to second everything he says here. I am also struck by Bhagwati's call to Bono to rethink his allies. Does that simply one Columbia University professor has had it with the development prescriptions of another CU professor? :)