Thursday, March 02, 2006

Does the Absorptive Capacity of Nations Matter? 

While looking through the Financial Times' letters to the editor section, I came across this gem from Italy-based development economist, Javier Pérez de Vega, which amply demonstrates why the proponents of development aid simply do not get it. His letter is a response to the Bhagwati op-ed I linked to in a previous post.
Bono's common sense and down-to-earth approach to development issues is well reflected in the foreword he wrote for Jeffrey Sachs' book The End of Poverty and in the many initiatives he has taken to ease the situation of the world's poor. The article, if he reads it, is unlikely to elicit more than a little smile on his part.

Africa's "absorptive capacity", or lack thereof, is one of the oldest arguments brandished by the enemies of all forms of international co-operation and development aid. One wonders what was the absorptive capacity of Europe after the second world war. Against a realistic assessment, the Marshall Plan would have never been launched and Europe would not be where it now is. I knew Prof Paul Rosenstein-Rodan well and can guarantee that he would not have supported Prof Bhagwati's misguided advice.
Well, first of all, Bono's introduction is the worst foreword I have ever read for any book, and that's saying something given the number of bad introductions there are in existence. As the Economist said in its review of the book,
And, frankly, it is difficult to forgive his invitation to Bono to write the introduction to the book. Describing his experience of campaigning with Mr Sachs, the Irish rock singer recalls, “I would enter the world of acronyms with a man who can make alphabet soup out of them. Soup you'd want to eat. Soup that would, if ingested properly, enable a lot more soup to be eaten by a lot more people.” Sorry, even if it sells more copies of this otherwise outstanding book, publishing such drivel cannot be right.
Yes, that's about right, but this is the more frivolous point. The more important point is vis-a-vis Mr De Vega's comment about post-war absorptive capacity. This is a pet theme in some parts of the development aid lobby; since the Marshall Plan worked, surely a similar initiative will work in Africa too. Well, let's look at the numbers first. If this idea were in fact true, Africa would have been well developed by now, given the trillion dollars that have been poured into the continent in the last 50 years (by way of comparison, the Marshall Plan consisted of $13 billion worth of assistance, or $130 billion, once you adjust for inflation). In fact, most of Africa is substantially worse off today than when aid first started to flow in. Instead, the money has been frittered away on such development projects as clearing the jungle in the middle of the Congo to build a new runway on which the Concorde could land to ferry Mobutu and his family to Disneyland and France. No prizes for guessing where the money to clear the forest, lease the Concorde etc came from.

So, what is the difference between post-war Europe and Africa which explains this discrepancy? Well, it links directly to the absorptive capacity issue. Japan, Germany etc were well functioning countries with solid institutions (legal system, education system, banking system etc) before they were visited by the horrors of the war. So, an infusion of capital could be put to use easily and efficiently to rebuild the institutions destroyed by war. It was simply a matter of getting trained teachers or bankers back to work, rather than training an entire cadre from scratch. By contrast, when the Belgians left the Congo, there were exactly 17 college graduates in a country the size of western Europe. To imagine that a country with 17 college graduates could absorb large infusions of aid (without any institutions in place) just because Germany and Japan (which were superpowers before the war) did so is bordering on the insane.

Yet, that's exactly the comparison Mr De Vega has drawn while calling for a Marshall Plan for Africa. Imagining economic growth and development without building institutions and absorptive capacity is to betray a fundamental ignorance of politics and economics. Bihar is not going to develop if you shoveled in large amounts of cash, unless Laloo's growing bank account is a proxy for SDP growth. Neither is Africa. Both places need large doses of political and economic reform before any sort of development takes place. The sooner we recalibrate the aid system to recognize this reality, the better off we'll all be, most of all the residents of the very places that the system was set up to help.