Thursday, September 4, 2008

Wood proposes cap on aid to Africa

Adrian Wood, Professor of international development at the University of Oxford argues for cap on aid for development. He proposes aid equivalent to less than or equal to 50% of tax revenue because higher tax revenue forces African leaders to be accountable to its citizens rather than to donors. The real challenge would be how to coordinate donor agencies and their interests and determine how much aid a country should receive. Who would look at conflicting interests of donors in funding similar project, often leading to over funding in one sector and under-funding in other sectors that really matter to the citizens of the country. Whatever approach donors take, the feedback mechanism should be strong and leaders should be accountable to their citizens. Wood's proposal to cap aid in Africa might be a good place to start with!

...I therefore propose that donors collectively set an upper limit on the amount of aid they give to any developing country. This limit should be 50 per cent of the amount of tax revenue that the aid-receiving government raises from its own citizens, by non-coercive means and excluding revenue from oil and minerals.

This would keep the governments of non-mineral countries dependent for revenue mainly on their citizens, and thus give them incentives to pay attention mainly to what citizens want, not donors. It would also encourage governments to raise more taxes from their citizens, since every extra dollar of tax raised would attract a matching increase of 50 cents of aid.

Higher taxes would help because there is strong evidence that the tax relationship is vital for accountable government. “No taxation without representation,” said the early Americans, and the converse also applies. Budget legislation is central to the political process, forcing governments to justify their actions in open debate. At the micro level, tax collection obliges governments to be in direct contact with most of their citizens and companies.

...More challenging would be how to phase in this limit. About 30 countries with populations over 1m, of which more than 20 are in Africa, now get aid above this limit and in about half of them aid is more than 100 per cent of taxes. Instant cuts in aid or increases in taxes to get down to the limit of 50 per cent would be damaging, so implementation would need to be gradual, over a period of anything up to a decade. Much further ahead would be the issue of how to phase out the aid, as countries ceased to be poor.

Yet the idea is worth exploring. A lot of countries, including some in Africa, still get too little aid – well below my 50 per cent limit and below what they could put to good use – so part of the agenda should still be to increase aid. But the dangers to development of too much aid for too long are sufficiently serious that donors also need to think strategically about upper limits.

Reserve accumulation and development

Does international reserve accumulation aid development? Cruz and Walters argue that though reserve is used as a buffer against potential financial risks and speculative attacks, it is not optimal for development. Interesting paper here.

International reserves accumulation has been the preferred policy recently adopted by developing economies to achieve financial stability. The aim of this policy is to increase liquidity and thus reduce the risk of suffering a speculative attack. The main concern expressed in the literature has been related to its cost. Most of the studies conclude that the opportunity cost of international reserves accumulation is around 1% of GDP. However, these studies have not analysed whether this strategy is, or could be, more broadly supportive of development, an issue that must be of central interest for developing economies. The aim of this paper is to show that the stockpiling of international reserves is not optimal for developmental purposes and that there exist alternative policies that can be applied to achieve financial stability, policy autonomy and a better performance in terms of development.

Impact of discontinuity of aid in Swaziland

Here is an article about how large sum of emergency aid is given for a year and then withdrawn seeing decrease in severity of the cause for aid, leading to more chronic problems. This basically wipes out the gains made under the emergency aid. The money spent is a waste of resources.

Aid money aimed at sustainability is helpful but if it is cut off beforehand seeing initial improved results, then the problems might boomerang. For instance, if two-thirds of the Swaziland population depend on sustenance agriculture, then donors should make sure that along with seeds and fertilizers aid, the 35% of the population suffering from AIDS is taken care of just to keep workforce alive to work in farms!

What happens to a nation whose people depend on the largesse of international donor agencies for their existence, once support is withdrawn?

If forecasts for the small landlocked African nation of Swaziland are an indication, the granting of temporary relief may be followed by a new humanitarian emergency.

..."Why is money available for emergency relief, but not for making farming affordable? Why are there too few tractors? Where is the funding for a self-replenishing seed bank that farmers can draw from?" asked Connie Hlope, one of the few women agricultural field officers in the country. Her job is to advise farmers on planting schedules and tractor hire.

Is Malthus' prediction coming true (obviously, in the absence of technology)?

When Swaziland gained its independence 40 years ago, it routinely recorded food surpluses because a population one third smaller than it is today did not consume as much from available land.

"Three things happened in the intervening decades," noted Carl Dlamini, an agriculture field officer in the central Manzini Region. "The population grew but there wasn’t enough farmland, so new generations moved onto marginal land that could barely produce.

"Secondly, climate change brought droughts that made formerly good land only marginally productive and marginal land completely incapable of producing crops. For the last 15 years much of the eastern Lubombo region has been droughty.

"The third factor cutting into agriculture production has been AIDS."

The horror of AIDS on labor:

Less than 60 percent of Swaziland's arable land is under cultivation, partly due to AIDS decimating the agricultural work force. This year, input costs will be another important limit on agricultural production. Fertiliser costs are expected to be up 200 percent over last year come the height of the planting season in November.

Was Keynes wrong on leisure and work?

Here is a nice piece from the guardian. Elliott argues that Keynes' prediction that rising income would result in less working hours and more leisure has simply failed because he concentrated his analysis on the lifestyle of the elites, not that of those struggling to eak out a living. Keynes failed to take account of distribution of income.

...Back in 1930, Keynes predicted that the working week would be drastically cut, to perhaps 15 hours a week, with people choosing to have far more leisure as their material needs were satisfied. The world was then gripped by a dreadful slump but in the long run Keynes was sure mankind was solving its economic problems. Within a hundred years, Keynes predicted, living standards in "progressive countries" would be between four and eight times higher and this would leave people far more time to enjoy the good things in life.

...Keynes also got it spectacularly wrong. Rising living standards have not led to people deciding that they can satisfy their material desires through a much truncated working week. The number of hours worked in the United States has remained pretty much steady for decades, and is 30% higher than in Europe. Europeans tend to use up all their holiday entitlement; Americans, even though their vacations are shorter, do not.

...Keynes's big failure was to recognise that distribution matters. The economic problem will not be solved while a quarter of the world lives in abject poverty, nor while a good slice of those living in developed countries are not sharing in economic prosperity or feel they need to spend longer and longer on the treadmill just to make ends meet.