American Enterprise Institute

April 25, 2006

[Edited transcript from audio tapes]

11:45 a.m.	Registration and Luncheon
Noon	Presenter:	William Easterly, New York University
	Panelists:	Robert Guest, The Economist
		Adam Lerrick, AEI
	Moderator:	Vance Serchuk, AEI
1:30 p.m.	Adjournment

Proceedings:

Vance Serchuk:  My name is Vance Serchuk.  I’m a research fellow here at the American Enterprise Institute where I coordinate our development policy programs.  It’s my pleasure to welcome all of you here this afternoon for a discussion on foreign aid, why it has failed, and how to fix it. 

The impetus of today’s event is the publication of an important, fascinating, and provocative new book by one of our panelists, The White Man’s Burden:  Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good by William Easterly.  At the risk of sounding like one of those people on TV, I should say that, for those of you who have not purchased a copy of the book, they are available in the lobby while supplies last, and you should all avail yourself of the opportunity to purchase a copy.

I was telling Bill earlier, I know that this is a particularly important book because just a few weeks ago, I was at a talk at a major university, and the subject was ostensibly combating corruption.  And the speaker, who had just an absolutely gold-plated resume, was speaking about how corruption in the developing world is obviously a very complex and very, very important problem for us to wrestle with.  And really the best solution is to have a big international summit with all of the interested parties, and the summit in turn would produce a global convention.  This convention then in turn would get implemented over five years or so – you could call it a five year plan, if you will, a big five year plan – and this would really be the best way to address the problem of corruption. 

And after he was done, he concluded by saying, but, you know, 45 minutes is not really that much time to get into these issues.  If you really want to understand it better, you need to read this new book by William Easterly, The White Man’s Burden.  And I told Bill, you really know that a book is important when people start quoting it, even though they clearly haven’t read it and don’t know anything about its ideas.

So thankfully, because all of you are here today, you won’t have that problem.  You get to hear from Bill himself what his ideas and arguments are.  The way that we’re going to structure this event is I will turn the microphone over to Bill in a second.  He will make his presentation, and then we have Adam Lerrick here to offer some remarks, and then we’ll just open it up to a broader discussion with question and answer from the floor.

You have copies of biographical statements in the packets that you should have picked up.  Let me, nonetheless, shamelessly promote our speakers just a little bit more.  William Easterly is Professor of Economics at New York University, joint with Africana Studies, and a co-director of the Development Research Institute there.  He’s also a non-resident fellow at the Center for Global Development, our friends down the street, and for 16 years was a research economist at the World Bank.  In addition to The White Man’s Burden, he’s the author of four other books, including the Elusive Quest for Growth, The Autonomous Adventures and Misadventures in the Tropics.

Adam Lerrick is a visiting scholar here at AEI.  He is also the Director of Carnegie Mellon University’s Public Policy School and the Friends of Allan H. Meltzer Professor of Economics at Carnegie Mellon.  He has been, since 2001, an advisor in international economic policy to the Joint Economic Committee of the US Congress.  I should also add that we were hoping to have an additional panelist here today, Robert Guest, of The Economist.  Unfortunately, Robert was not able to join us with, I think, a fairly legitimate excuse, the birth of his son on Sunday.  So he gets off the hook for that, but, nonetheless, it means that our two panelists will just have more of an opportunity to be expansive in their remarks. 

So with that, thank you, both of you, for coming here today, and thank you, all of you.  Let me turn it over to Bill.

William Easterly:  Thank you, and good afternoon.  It’s really a great pleasure and an honor to be here with you with this great audience and this wonderful discussant who I think so highly of, particularly because he’s going to be discussing my remarks.  Let me start off with the big question, which this book really was meant to answer, can the West save the rest, and then with the little question of how can I relentlessly promote a new book in the guise of giving a luncheon address.  And of course you know what book I’m going to promote.  I’m going to promote Jeff Sachs’ The End of Poverty.

I think this book is just – I think of it as 100 percent perfect, as an illustration of what not to do in economic development.  He offers the hope that our breath-taking opportunity is to spread the benefits of technology to the whole world, and that’s certainly the hope that many of us share and care about very deeply.  I’m a little less convinced by the details, but, in fairness to Jeff, I will say that it is endorsed by the world’s leading development economist, who of course is Bono, where he wrote the introduction to Jeff’s book and said it’s up to us.  And I think Jeff and Bono are suffering from something that we could call the “White Man’s Burden,” which also happens to be the title of the book that we’re talking about today.  And I thank the promotional efforts of AEI on my behalf.  I don’t want to be so overtly promotional myself just because the royalties go for medicines for my sick mother.

But this is a very serious issue that we’re dealing with.  We’re talking about two tragedies that affect the world’s poor, and the first tragedy Jeff has actually done a great job to dramatize and to call it to the world’s attention, which is just how many people there are around the world that are desperately suffering the lack of material income.  And this is crystallized in statistics like the fact that 30,000 children die every day basically from extreme poverty, from the causes associated with extreme poverty. 

One example of that is the 1.8 million child deaths last year from dehydration due to infant diseases that cause diarrhea like cholera and other diseases that cause rapid dehydration, where you could save a child’s life just by getting a 10-cent packet of oral rehydration salts to a child who’s getting dehydrated.  And yet, there are some people in the world that are so poor that they cannot afford 10-cent oral rehydration packets.

And that was the kind of tragedy that foreign aid has always set out to solve, which leads us to the second tragedy, which is, there already has been an effort that has lasted already 60 years, spent $2.3 trillion, and is still not getting 10-cent oral rehydration packets to 1.8 million babies last year who lost their lives for lack of an oral rehydration packet.  And that is really a tragedy.  Now, the current attempt to solve this tragedy is, I think, epitomized in the most extreme form by Jeff Sachs’ book.  It very much has the mentality of a top-down plan, which is just really, on the face of it – this is a little bit of a caricature, but this is the sort of facts that emerge when you look carefully at this plan. 

The United Nations Millennium Project came up with a plan, which they published in a 451-page book with 3,300 pages of technical annexes, and, if Adam is not nice to me, I’m going to force him to read all of this.  The plan proposes 449 separate interventions to meet what are called the United Nations Millennium Development Goals for the year 2015, which are all indicators of various degrees of tragedy and suffering of the world’s poor.

There are actually 54 different goals.  They will tell you there are eight Millennium Development Goals, but when you actually read the fine print the eight are just the overall headings that capture many, many indicators.  So there are actually 54 separate numerical indicators that the Millennium Development Goals campaign is trying to reach, and this is supposed to be run by a mammoth bureaucracy headed by Kofi Annan coordinating the actions of the all the United Nations agencies, the UN country teams, the World Bank, the IMF, etc.

So as an economist, when you think about the incentives created by a plan like this, you get kind of worried because you have a number of features about the public choice incentives that are created for officials in this plan that are not good.  One is that they are collectively responsible for meeting the goals, so, if one of them doesn’t do well, they can always put the blame on the other actors that were supposed to meet the goals, the other agencies.  Second, they’re responsible for 54 different goals, so, if somebody doesn’t meet one goal, they can always say they were working on a different goal.  And third, the goals depend on other things besides what the eight agencies themselves do, and so they have a third excuse for not meeting the goals.  If they’re not met, it’s because of some third factor that caused them not to be met.

So when you really read the fine print on this, and I hate to be so ruthless in examining a document, so I put it in very shy print, in very, very small print, because I’m a very shy and retiring person who hates to provoke controversy.  So you can’t even read this, so I’ll have to read it to you.  You have this huge foreign aid apparatus which is now being implemented.  It’s much like the huge foreign aid plans of the past, and in this whole system, nobody is individually responsible for any one result.  That’s it.  That’s the bottom line.  This is why this plan will not work, and it’s why the previous aid plan did not work.  Nobody is individually responsible for any one result.

Then we have the World Bank IMF poverty reduction strategy paper, which are their own version of top-down plans to end poverty in poor countries.  They go through the motions of consulting the poor people by holding kind of like meetings to consult with poor people, and then they go back to Washington and get the plan that they had already written and issue it as the plan.  I’ve reproduced some of the language from these plans to make clear that they are indeed plans.  The language is pretty explicit.  I apologize for those of you who are sensitive to overtly bureaucratic language.  This is really explicit stuff for mature audiences only, so I won’t try to read this.  It actually is very cumbersome to read.  It really did not translate all that well from the original Russian.

So there’s a huge knowledge problem about planning that has been, speaking of Russian, familiar from the old debates about central planning, why plans don’t work, that the planner at the top can never have enough knowledge to make the plans work.  Poverty is not the result of anyone’s conscious actions, and prosperity is not the result of anyone’s conscious actions.  They’re both the results of a complex, spontaneous order of a lot of political, economic, social, cultural, technological actors, and there’s just no way to find a plan to fix the whole system so that you can end poverty. 

What has actually historically ended poverty, as we all know, has been the actions of myriads of individuals in a free society who do political reforms and economic entrepreneurs in firms who find solutions to customers’ problems.  Now, it’s a very simple message, but it’s incredibly difficult to communicate this message to people who see the intense poverty and want to fix it right away.  And they think, if we can just come up with this big plan, we’ll fix everything right away.

Well, in writing this book, one of the reactions I’ve gotten, and I’ve gotten this reaction for many years in my career, is that I’m kind of really hurting the cause of the poor by criticizing this approach to poverty, this planning approach to poverty.  And really, the aid debate really has a kind of strange debate about whether to have a debate at all, that, if you criticize aid, maybe you’ll give comfort to the people who don’t care about the world’s poor, and that will give them an excuse to just cut foreign aid and just not care.  So that’s one of the challenges we all face when we’re trying to intellectually engage these plans is that some people prefer just not to have the debate.

Here’s a quote that I found that I thought sounded like a lot of the criticisms I tend to get in my own work.  “While the work is in progress, any public expression of doubt or even fear that the plan will not be successful is an act of disloyalty and even a treachery because of its possible effects on the will and on the efforts of the rest of the staff.”  And I guess I have to plead guilty to that, that I am hurting morale by criticizing these plans.  This was a valid criticism when it was made, which was in Sidney and Beatrice Webb’s book on Soviet five-year plans in the 1930s.

So I think there is a much better alternative to the world’s poor than these plans, and my intellectual hero in kind of thinking about prosperity and poverty is really Friedrich Hayek.  He’s said things like, “Whatever kind of development will emerge,” talking about developing countries, “may sooner take appropriate forms if it’s allowed to grow, than if it is imposed from above.”  And then he has this kind of sweeping statement, which I think is very much true, that as economists we have this very difficult task to explain to men how little they really know about what they imagine they can design. 

I was early this morning talking to a journalist who was asking me my opinion on – there’s this very wealthy, prominent individual who wants to fix Rwanda, and he’s come up with a comprehensive plan to fix Rwanda.  And I was trying to explain to the journalist why I didn’t think that was going to work, but she had been to Rwanda with this very charismatic, influential individual and just really didn’t get it.  She couldn’t understand why these horrible problems of poverty that you see on the ground just can’t be fixed by someone who just comes up with a great plan like a successful, influential and rich person from the United States.  But that’s the sad reality that we face as economists, that our prosperity is not the result of a plan.  It’s the result of spontaneous order.

The main argument for big plans is that they are so appealing to journalists and to movie stars, to movie stars who endorse the cause.  So I kind of feel like the debate I’m involved in is kind of Friedrich Hayek versus Selma Hayek, and at this point I’m really, really losing the debate.  I can tell you, so far it’s economist, zero, celebrities, two.  Bono and Selma are way ahead.

So I tried very hard to come up with my own catchy acronym to try to explain to the skeptical on what was wrong with these plans, so I came up with this acronym CIAO.  So I’m open to feedback on this.  I worked hard on coming up with this acronym for you, and I’m kind of testing it on you, and then I’ll try it on journalists.  So it took some work. 

Initially, I only came up with the first three letters of the acronym, and I realized that would lead to some misunderstanding.  So the C stands for the lack of Customer feedback.  The plans have no mechanism, aid plans have no mechanism for feedback from the poor themselves and whether they’re getting what they want.  I is the lack of incentives.  A is the lack of accountability of those who are implementing the plan, that they’re not held accountable.  And O is the lack of omniscience, which is what I was talking about before.  That was kind of a stretch.  I kind of had to work hard on that O word.  I could have really stayed with CIA.  So actually, O is not very fixable.  We’re never going to have omniscience, but there is hope for progress on the C, I, and A.

And of course, we know how this works in rich societies.  In rich societies, you have firms, markets, who want to meet your needs because you have money to pay for your needs being met.  So you create incentives, and the firms are accountable to you.  This is all Economics 101.  And then there’s Civics 101, which says your democratically-elected government is accountable to you.  If they don’t provide the public services you need, they have incentives to fix it or else they get voted out of office. 

So this is not to say that markets and democracy are an overnight panacea because they cannot be implemented overnight, and they’re not an immediate solution.  But they really are the homegrown source of prosperity everywhere prosperity has been achieved, and they could inspire a lot more of the western aid effort because, if we have some successful systems out there that do have customer feedback and incentives and accountability, that could be an inspiration to solve some of the problems of aid that we face today.

So the tragedy is that we rich people on what we could call our side of the aid wall that separates us from the poor - we’re the ones who give the aid, and the poor are the ones who receive the aid – the rich people, we’re so lucky that we have what we could call searchers as an alternative to planners who do have customer feedback, incentives, accountability.  Where on the other side of the aid wall, the poor are stuck with planners, and so the second tragedy continues. 

Now, why are planners more popular than searchers in foreign aid?  Well, I had some explanations for you, but they’re not really very convincing.  So I’ll tell you the other explanation, which is that we have a third celebrity involved here, Angelina Jolie, who is on the side of the planners.  And so far, my efforts to come up with a celebrity to be on the side that demands real accountability from aid agencies that’s just not as sexy a cause, and I haven’t been able to think of a celebrity that would meet the bill.  The closest I could come up with, and, again, I’ll just try this out on you, the closest I could come up with was Judge Judy.  You know, I think with her as a sex symbol, she – well, oh well.

So the only other thing that planners have against them is that this has not been working.  The aid plans were supposed to create economic growth, but this graph shows you the raw data, which is that the blue line is per capita growth in four groups of countries, and the red line is aid received in four groups of countries, from those that got the most aid to those that got the least aid.  And those that got the most aid had the lowest growth.  They’ve had 42 years of 20 percent of their income in aid, and they haven’t had any per capita economic growth.  Now, if you do the econometrics really carefully, you can take this from being a negative correlation to being a zero correlation if you control for possible reverse causality, but there’s no robust evidence that aid has any positive effect on growth.

And we also have the sorry experience of structural adjustment lending by the World Bank and IMF which were an attempt to kind of impose what seemed like good economics at the time, kind of free market ideas from the top down.  But actually, paradoxically the World Bank and IMF kind of tried to plan how you would have a market.  They kind of tried to introduce markets quickly overnight in poor countries that didn’t have the supporting institutions, and they didn’t know which things were most broken and which things you should fix first, and they weren’t very effective in enforcing the conditions for free market behavior. 

And so, the outcome of the whole thing was that structural adjustment lending did not result – the whole conditional aid loan that was what structural lending was – did not succeed in generating growth in Africa, did not succeed in generating growth in the former Soviet Union where it was called shock therapy.  Instead, the former Soviet Union went into one of the worst depressions of modern economic history when shock therapy was tried as an attempt to introduce free markets overnight from the top down.  It just doesn’t work.  You need institutions that prevent what actually happened, which was the looting of Russia by the oligarchs and the creation of criminal mafias because there was no rule of law.

Also, I should note again, I try every time I make a criticism to be fair and to give the other side their chance, so in fairness to the World Bank and the IMF they have had a response to the failure of structural adjustment lending, which is now widely agreed to have failed in Africa, Latin American, the former Soviet Union, and the Middle East.  But they have had a response.  They’ve agreed to change the name.  Structural adjustment loans will no longer be called structural adjustment loans.  They’ll now be called property reduction support credits.  So to those who say there’s no progress in foreign aid, shame on you.  Here, we’re making progress.

Let me skip over a few.  The reality is that, even during the structural adjustment era and even during the era in which we talk a lot about the importance of clean government and democratically accountable government, the reality is that aid coddles a lot of bad governments.  And that’s another one of the many reasons why aid plans don’t work is they’re always implemented through the governments in the poor country, which too often is not democratically accountable, is corrupt, or is autocratic.  There has been 10 years of rhetoric about corruption and democracy, but there is still today in the data – I can tell you, there’s still in the data no correlation between the amount of corruption and the amount of aid a country receives.  There’s no correlation between the amount of democracy a country has and the amount of aid it receives.  There’s no correlation between the amount of corruption and democracy and the amount of World Bank-IMF lending a country receives.

Now, the only way around this problem seems to be to try to lower your standards so that the governments that are actually bad governments from most points of view, you try to decide they are good government.  So the Sachs book and the UN talk a lot about good governments that are examples of good governance, and he talks about just giving budget support, which means just giving a check to governments that pass minimum standards of being a good government. 

One of his favorite government leaders is Prime Minister Meles Zenawi of Ethiopia, and this is really a sad case.  And here I have to get serious for a moment because this is – I got an email which was really heartbreaking from a woman who told me that her brother was in jail in Ethiopia under horrific conditions.  And he’s not an obscure figure.  He’s well known to the aid community because he’s an economist who himself used to work for the World Bank.  His crime was that he was democratically-elected mayor of Addis Ababa in the last elections and then was put in jail for protesting, and people protesting the elections that were mostly rigged except for a few victories for the opposition, like the mayoral race, unarmed student demonstrators who were protesting the elections were shot down in the streets by this guy who is the darling of the aid community.  This is not the way that aid is going to make progress, and even democratically-elected governments still have a long way to go in cleaning up corruption.

Like the democratically-elected government of Kenya, unfortunately the first generation of democratic politicians saw it as kind of their turn to get their turn feeding from government coffers, and they were courageously exposed by a Kenyan anti-corruption crusader named John Githongo, who is now in hiding in fear for his life in London. 

And Jeff Sachs does talk about Kenya, the problem of corruption in Kenya in his book.  His solution is a little bit counterintuitive.  He suggests that the way to solve the corruption problem is to give more aid money to the government that is corrupt so that it can pay for computers to keep track of what is being stolen.  So forgive me for being cynical, but I really don’t see how it solves the problem when some politicians are stealing money the answer is to give them more money with which they can – how would it work exactly?  You use the new money to keep track of how much you’ve stolen from the old money?  And the next installment after that, you’ll keep track of what you stole from the previous installment?  What are their incentives of those receiving the money to audit themselves?  To say that more aid money is the answer to corruption seems a strange delusion to me, but I’m not always well educated in these arcane matters.

Now, on the positive side, we do have searchers on the ground that are finding solutions that are often courageously operating without much in the way of funding, with no government support, with no international agency support.  So here’s an example I know of personally, and there are lots and lots of examples like this in the book, The White Man’s Burden.  Did I mention that already?  I hate to be self-promotional.  I’m sorry.  There are lots of positive examples like this.  This book has received rave reviews from all the members of my immediate family.

So anyway, Patrick Awuah is someone I’ve met personally, and I’ve visited him three times in Ghana now.  He grew up in poverty under Ghana’s brutal military regimes, but he got his escape from a kind of aid that the aid community is not too fond of, but it actually works in this case.  He got a scholarship to go study in the US.  He got a degree at Swarthmore.  He got in on the ground floor at Microsoft and became a millionaire, and then, contrary to all the alarmist predictions of those who worry that the brain drain is going to destroy Africa and destroy all the poor countries. 

He was actually an example of brain circulation, he took his money and his expertise, and he went back to Ghana and started a new private university in Ghana as an alternative to the woeful aid-financed state university, the University of Ghana, which just is lacking all kinds of essential equipment and students are packed into classrooms like cattle and don’t learn anything.  He started a high quality private university called Ashesi University using his own money.  Fifty percent of the students are on scholarship from very poor families, and so this is a vehicle by which poor families, poor children, are lifting themselves – teenagers – are lifting themselves out of poverty by getting a high quality education on scholarship.  And then they’re going to be in hot demand by the private sector, and who knows what good things could happen if enough searchers on the ground find solutions like this.

The only sad part of this story is that Patrick Awuah was turned down by all the official aid agencies.  And again, this is not because he was not well known.  This is a famous success story.  This is very widely broadcast among lots of international media.  It’s well known to the aid agencies.  But he was turned down.  They said silly things like we have to show the maximum number of students reached per dollar that we give you, so you have to have a class size of 50:1, have a student to teacher ratio of 50:1.  He said no, that’s not how education works.  I want a student to teacher ratio of 20:1. 

They wanted it to be community-owned and the local leader to decide how the aid project would work.  So they wouldn’t tell him the answer right away.  When he said why did you reject my plan, they said, well, we didn’t like your plan, but go back and give us another one.  And it was only after several rounds that he finally lost his patience and told them why do you keep rejecting my plans?  And he found out that it was because of this absurd student-teacher ratio that would have totally contradicted what he was trying to do.

Then my second and final example of a successful searcher is Santiago Levy, a Mexican government official.  He started a program to make cash payments to parents in return for them keeping their children in school and taking them to health clinics for regular nutritional checkups.  And this has been a wonderful success as an aid program.  It has all the right incentives.  It gives the parents incentive.  Instead of having their children work in the fields, to have them in school, to take them for nutritional checkups.  It gives the children a much brighter future with an education and full nutritional intake that allows them to fully develop. 

This has been rigorously evaluated and tested, and it’s been shown to work.  And it’s been expanded now to cover all of Mexico, and it’s being expanded to other Latin American countries, and there are similar programs in India and Bangladesh that have been demonstrated to be effective.  So there are aid programs that work.  It’s just that somehow the aid agencies are not searching for them because they’re too busy writing these grandiose plans.

So here are my policy recommendations.  The first one is kind of difficult, so let me go over it in some detail.  When something doesn’t work, you should discontinue it.  It takes years of training as an economist to come to conclusions like this.  I hope you appreciate it.  Maybe I’m going too fast for some of you.  Let me go over it again.  When something doesn’t work, you should discontinue it.  And I think we’ve seen already in foreign aid a lot of things that have not worked and that a lot of progress can be made right away just by lopping off all the things that have not been working. 

So one thing that has not worked is structural adjustment lending, both for the reasons that Washington didn’t know what to do, how to fix another economy from the top down, and there was not effective enforcement of pre-market conditions.  So I think at this point you have to give up on structural adjustment lending and do something else.

The other thing that I hope I’ve tried to get across today is that the big plans do not work.  The big top down, grandiose plans do not work.  They don’t create the right incentives for any individual to take responsibility to do anything.  It’s not the way to make foreign aid work.  Poverty, I’m going to have to say something unpopular now, which is unlikely to attract any more celebrities.  Poverty is not fixable by outsiders.  It’s the spontaneous result of an unplanned spontaneous order of a dysfunctional society that doesn’t create economic opportunities for poor people.  It’s not fixable by outside experts. 

It doesn’t mean that we should abolish foreign aid.  It doesn’t imply either one of those things.  It means that the main hope for long run development for the escape from poverty – the main hope for the escape from poverty is from homegrown economic development from the efforts of homegrown searchers, political reformers, economic entrepreneurs, social entrepreneurs who find innovative programs like those in Mexico and Ghana.  These are the things that gradually work a little bit at a time to allow a society to work its way out of poverty.  It’s not the things that are fixed by outsiders.

And so, development is mainly up to – the salvation of Africa is up to Africans.  The salvation of the poor lies in the poor themselves.  While there’s been a lot of agonizing about whether to increase foreign aid by a few billion here or there, the citizens of India and China last year, operating in a relatively free market environment or at least much more free market than in the past, created $715 billion of new value for themselves.  $715 billion of new income for themselves they created by their own efforts.

However, there are some problems that are fixable by outsiders.  There are some things that could be done for the poor by outsiders.  There are non-governmental organizations that do good things.  There are things that official aid could do, could work much better.  First of all, we can free official aid from the grandiose objectives of trying to achieve overall economic development to just work on simpler problems.  If you can’t fix the complex problem, then break it down into simpler problems.  Find piecemeal solutions to problems of malaria, to problems of infant diarrhea, to problems of clean water, to problems of business regulation that stifles private enterprise.  These are all specific things that you can focus on.  And it’s going to take a lot of searching just to fix each one of those problems because you never know the answer in advance, and it may differ from one society to another.  But if aid agencies have the incentive, I think that there is a lot of hope that they can find the solution to those problems.

But how will they have those incentives though?  How are they going to have the incentive to search for what works?  Well, here’s the second and last piece of the puzzle, that you have to have independent evaluation of aid agencies.  The shocking scandal of aid business, both NGOs and official aid agencies, are operating now in sort of the aid equivalent of Enron accounting where you do your own books, you do your own self-evaluation, and you make yourself look good, and you always claim that you’re succeeding, but in fact, as we’ve seen, you are not succeeding. 

But aid agencies continue to feel free from accountability because no one is doing an independent evaluation, an independent audit, an independent evaluation of piecemeal steps to solve problems on whether they are actually working.  And once there is a political demand from the rich country’s public to have this real independent evaluation, then I think aid agencies would be much more motivated to do more searching, do less planning, a lot less planning, and be willing to take individual responsibility for making things work.

So please, finally, have someone somewhere take responsibility – individual responsibility – for getting 10-cent oral rehydration packets to sick events to prevent them dying.  That’s the bottom line.  Now is it hopeless?  The aid establishment has lasted for so long and has resisted change for so long.  Is it hopeless?  Well, I’m an optimist.  I think that, if we keep screaming loud enough that this is unacceptable that $2.3 trillion be spent on the world’s most desperate people and they don’t see the money because it’s lost in ineffective plans and corrupt governments, I think we can gradually force change, just as we’ve gradually forced change politically in other areas in rich societies.

So I’ll close with an inspirational quote from Robert F. Kennedy on how all of us can do our part to call for more searching, for more evaluation, for more honest accounting so that the next $2.3 trillion does reach the world’s poor.  Robert F. Kennedy said, “Each of us can work to change a small portion of events, and in the total of all those acts will be written the history of this generation.  Each time a man stands up for an idea or acts to improve the lot of others, he sends for a tiny ripple of hope.  And crossing each other from a million different centers of energy and daring, those ripples build a current which can sweep down the mightiest walls of resistance.”  Let’s sweep down the aid wall.  Let’s change foreign aid. 

Vance Serchuk:  Thanks so much, Bill.  I think I’m extraordinarily sympathetic to the argument, although arguing against planning, while having such a perfectly presented PowerPoint show, makes me a little bit more skeptical.  I think that the World Bank has still done its damage. 

Adam Lerrick:  Well, I have a simple task here today.  I’m supposed to make Bill look like a moderate.  And it’s interesting, I testified before the Senate Foreign Relations Committee a few weeks ago along with Bill on sort of the effectiveness of aid and reform of the World Bank, and I received a promotion in the press.  For six years, I’ve always been called an outspoken critic of the Bank and the Fund, and I’ve suddenly been promoted to a scathing critic of the Bank and the Fund.  And I do not consider myself an enemy of the Bank.  I consider myself a member of the royal opposition.  The Bank has a valuable role to play, and aid does have a valuable role to play, but unfortunately it’s not the role it’s playing or has played.

Bill touched upon one of the key arguments, which when he raised Jeff Sachs’ book and his outlook.  The debate about aid has not changed in 30 years.  If you go back and read Peter Bauer’s books, it’s the same debate.  One side says all we need to do is just dust off our checkbooks, and if you throw enough money at the problem it’ll be solved.  And the other side is saying, well, it failed – Bill uses the number of $2.3 trillion – and the fact is we’ve spent over $2 trillion on aid, and there’s nothing to show for it, as Former Secretary of Treasury Paul O’Neill used to say. 

I think I’m less optimistic than Bill on one front, which is the concept of searchers versus planners.  There’s a third group in the aid process, which I call the seizers, the people that seize everything that they can possibly get their hands on, and that is the basic problem in Africa today.  And let’s be clear, the problem of development now is a problem of the African continent.  Most of the other regions of the world have achieved a substantial level of growth, outside of a few countries in South Asia and Southeast Asia and a few, such as Haiti, in the Western Hemisphere.  But the fact of the matter is the progress has been made in India, as Bill said, in China, which has been extraordinary.

But in Africa, we have a problem, and the problem is corruption.  Corruption is not a symptom of poverty.  It’s the root cause of poverty in Africa.  And if you do not try to deal with corruption – and I give great credit to the current World Bank President, Paul Wolfowitz, for trying to attack this issue – Africa is just going to continue to be poor because, no matter how many searchers you have in an economy, if there is a group of people that are literally just going to appropriate whatever resources are available, there’s going to be no progress. 

A very simple example, you could have a group of villagers that decide to grow roses, which is one of the great agricultural exports from Africa to Europe.  Well, they could set up a very nice irrigation system, they could plant their rosebushes, they could cut their roses, and they could load them into the truck.  But when they arrive at the airport to fly them to Europe, if there is someone that’s just going to say thank you very much and take their roses, it’s not going to succeed.  And that’s why my view is that you have to have a very basic minimal standard of living, of education, of welfare in this country to try to get rid of the corruption.

Because I remember having lunch with the head of USAID, Mr. Natsios, and he said what do you think we should be doing?  This was at the beginning of the Bush Administration.  I said, well, I think you should be moving toward a system of what we call performance-based grants where you literally take small projects and decide – one example, you could say vaccinating children against measles, which is the number one cause of death among children in Africa.  You would just say all right, rather than give a $20 million loan to the Ministry of Health and hope for the best, you would literally put up a contract for bid of people that would go and be paid - they could be NGOs, they could be private sector companies – to vaccinate children. 

And what you would say is, all right, for every child vaccinated with independent verification and audits we will pay you $5 per child.  10,000 children vaccinated this month, you get $50,000.  No children vaccinated, you get nothing.  And Mr. Natsios said, well, that’s not the business we’re in.  I said, well, we’re not in the business of providing water and health and education to poor people.  My answer to the question was, well, what business are you in?  He said we’re in the business of building democracies.  And my question was how do you propose to have a democracy if people do not have enough to eat, do not know how to read, do not have potable water, do not have a passable road system, and do not have the ability to function?  Because if they don’t, there is going to be no ability to have a viable democracy and, hence, have controls on the power of the elites that then have control of all resources and can continue to maintain power.

Now, one of the questions that comes up frequently and Jeff Sachs has raised this with me, he says, well, corruption is not unique to Africa.  And that’s true, and, if you go back and read the discussions about poverty and development in the 1960s, the great debate was not whether Africa was going to develop.  It was whether East Asia was going to develop.  No one was worried about Africa.  At the time, Africa’s standard of living was approximately three times that of East Asia, but 30 years later it’s reversed by a multiple of more than 10.  And this is a valid question.

And the answer I came up with was that corruption in Africa is much more intense, and the reason it’s intense is not because the leaders in Africa are stupid or more venal or more criminal.  It’s that they have shorter term time horizons.  In essence, if you are trying to seize as much as you can over your time horizon – let’s be fair, in Africa there have been 100 violent changes of regime in 30 countries in the last 35 years.  If every day you wake up as a leader of an African country and say this may be my last day, your optimal strategy is to grab as much as you can as fast as you can. 

Now, compare that to Indonesia or the Philippines.  Now, Mr. Suharto or Mr. Marcos might want to have the largest wealth accumulation they could possibly have, but, if they think they’re going to be in power for 30 or 40 years through their children and their grandchildren, they’re going to have a different pricing strategy and a different attempt to extract from the economy.  So instead of taking 90 percent of what’s available, they will only take 10 percent and leave enough for the economy to continue to grow so they’ll have 10 percent of a bigger pie next year and 10 percent of a much larger pie 10 years from now.  And I think that’s one of the key issues.

The problem with corruption is that now there’s a basic consensus in the aid community that you cannot send aid to corrupt countries.  There’s agreement, whether you go to the United Nations or you go the Millennium Challenge Corporation or even if you go to Carnegie Mellon University where I am, there’s an agreement that aid does not work if there’s corruption.  The problem is that, if you enforce those rules, there will be no place in Africa to send any aid monies. 

Now, confronted with that dilemma, the United Nations and Jeff Sachs have come up with a very interesting idea.  They’ve said, well – and if you look at their books they’ve published this.  Well really, what we need to do is adjust corruption for poverty, so we’re going to not measure countries based on their absolute level of corruption.  We’re going to base it on their relative level of corruption.  And since poor countries on average are more corrupt than rich countries, we’re just going to re-grade the countries against each other.  So if you take the Africa countries, of the countries with less than $2,000 per capita income, 36 out of the 42 countries of the world are all in Sub-Sahara Africa.  So if you only grade them against each other, magically 36 countries that all have abysmal marks based on World Bank governance indicators or Transparency International, magically a third of them are going to have good marks, a third are going to be average, and a third are going to be bad. 

Instantaneously, there’s now two-thirds of the country in Africa that qualify for open flow of aid, and, as Bill mentioned, the concept is just to give it to them as budget support.  We’re just going to write a check to the government.  I think that’s one of the basic problems.  Absolute levels of corruption matter.  It’s not the relative level of corruption compared to other poor countries.

One of the issues that Bill touched upon and we’ve been working on for quite some time is the idea of a performance audit of aid.  This is something that is wildly unpopular in the aid community.  When I first proposed it seven years ago to the World Bank, it was considered absolutely scandalous, and I’m going to give you an example of why things can be misleading.  The World Bank will publish a statement that will say “By independent evaluation 80 percent of World Bank projects completed in 2004 had satisfactory results.”  That sounds very nice.  We should applaud them if this is true.  The problem is the words don’t mean what you and I think they mean.  Independent evaluation means World Bank staff, and the reason they’re independent is that they don’t let the loan officer, when he’s on a tour of duty, evaluate the project that he was the loan officer on.  It’s another loan officer that gets to evaluate it. 

Secondly, projects completed in our minds means the school is built and there are children learning to read, there’s an electric plant and electricity is being delivered to the factories or the towns.  That’s not what it means.  In World Bank policy, that means the money has been disbursed.  It could be two or three years before there’s any results of what’s going on.  So these are just projections.

And further, the World Bank had three categories of evaluation, and one was called outcomes, satisfactory or unsatisfactory.  The second was sustainability, and for decades sustainability ratings were below 50 percent, whereas outcome were in the 70s to 80 percent.  I went to the OED, what was then the Operations Evaluation Department, and said, well, what is this grade sustainability.  They said, oh, don’t pay any attention to that.  And I said, well, what does it mean?  He said, oh, it’s not very important.  And I finally found the technical definition in the footnote. 

“Sustainability” was that the benefits of the project would exceed the costs of operations and maintenance and debt service.  And my question that I posed to them was, well, how can you have a project that’s satisfactory, and yet its benefits don’t exceed its costs?  And they said, well, you shouldn’t pay attention to sustainability.  But what was interesting is after the Meltzer Commission published these statistics, magically the sustainability rankings went from 48 percent to 70 percent in six months within the World Bank.

Now, following Bill’s comment about changing names, the OED, the Operations Evaluation Department, has just had its name changed.  It’s not called the Independent Evaluation Group, so I guess if you don’t want to do anything, you change the name, which is what they did.  I think I’d like to leave time for some questions, but I’d like to just mention a couple things.  When it was proposed to then World Bank President Jim Wolfensohn to have a performance audit of World Bank projects, he gave three reasons why it would be a terrible idea. 

The first reason was that the results would be so terrible that it would demoralize the institution, which my answer to Jim was, well, if the results would be so terrible, why do you want to save the institution?  But he then gave me a second reason. 

The second reason was more intriguing, which was, because you’re going to go evaluate projects where you actually have an operating history, a track record of results, you’re going to be looking at projects that were completed five, six years ago – completed in World Bank terms – that we disbursed the money five, six, seven years ago.  And we’ve cured all those problems, so it’s a waste of time to go back and look at them because we’ve solved all those problems, and the current projects don’t have those problems. 

The third one was that it would be a waste of money.  And so, we went out and actually asked private sector firms what they would charge to go do a performance audit of, let’s say, a third of the projects, the projects in the poorest countries over a three-year time period.  And three bids came back.  One was approximately $6 million, one was $4 million, and then there was one at $1.5 million.  And I called up the president of the firm that put in the $1.5 million bid, and said, you know, this is really quite low to go evaluate a few hundred projects.  And he said, well, you have to understand we know the World Bank extremely well, we know these countries extremely well, because we run many of the services of the governments in these countries.  Our expectation is that on half the projects we will come, and there will be literally nothing.  We’ll arrive, there’ll be no road, there’ll be no school, there’ll be no plans, there’ll be no records of anything.  So really we’re charging $3 million to review the projects that we’ll actually have to do something on because the first set of audits will go very quickly.

So that’s one of the things that I think is absolutely essential because, until you have admission of failure, there is no hope for reform of these institutions and to the aid process.  But really, there is a much more fundamental flaw in the development aid arena, which is the donors are far more desperate to give than the recipients are to receive.  Once you accept that premise, aid is doomed to failure because, when there’s a contest of will, the recipients are just going to say we’re just not going to do what you want, and this has been repeated over and over again. 

Kenya is a perfect example.  For many years, Kenya had a terrible corruption problem, and after pleading with the Kenyan government, the World Bank and the IMF would throw up their hands and say you’re just so terrible we’re packing up and going home.  And the Kenyans said okay because they knew within six months the World Bank and the IMF would be back pleading with them, please take our money and do these few little things.  And the Kenyans said okay, and of course they’d never do anything.  And this is the basic problem.  You cannot have a system, when you talk about incentives, if we’re more desperate to give than they are to receive, they’re never going to give in, and they’re never going to do the things that we want them to do.  And part of this is that, no matter how horrific the poverty in these countries seem to the West and to us, in the eyes of the elites of these countries the poor are just part of the landscape.  They’ve been there their entire lives.  They expect them to be there for the foreseeable future, so it does not bother them in the same way that it bothers us.

We’ve talked about official aid, but this is not unique to official sectors.  A good example was the Gates Foundation.  Bill Gates, very successful, intelligent man.  I know the solution to aid and development.  All right, we’re going to come in, and we’re going to do basically what we call performance-based grants, and the best example that came out was Kenya again.  He, in essence, donated – the Gates Foundation – donated the vaccines to the Kenyan government, and the idea was they could come in and do performance audits, spot checks to see what had actually been accomplished. 

The Kenyan government says fine.  The first, at the completion of the first year, the Gates Foundation comes in, goes to Nairobi, meets with the Ministry of Health, is shown all these wonderful statistics of how everything’s been so wonderful.  They then say, all right, we’re going out into the bush or we’re going to go see the clinics.  They go to the clinics, they find there’s no evidence of anything.  They come to the clinic and say how many children have you vaccinated.  We don’t know.  Did you vaccinate anyone?  Oh yes, we vaccinated some people.  Well, what about these forms that you were supposed to fill out at the end of each week sort of giving the number of vaccines?  Oh, we used them to wash the windows.

And so, they went back to Nairobi and said, look, there’s no evidence that you did anything valuable with what we provided, so next year we’re going to want to see some evidence.  And the Kenyan government reaction was, well, if you insist on that, we don’t want the money.  It’s too much trouble.  But the reaction of the Gates Foundation was interesting.  They said, well, the greatest failure of a foundation is not distributing the money.  Therefore, we’re going to give credit to – we saw there were some posters on the health clinic walls about health practices, so we’ll give them credit for that. 

We know there were some vaccinations that were made, so we’ll give them credit for that.  And so, we’ll fund it another year.  So what does the Kenyan government learn?  That if they just say no, they will get the money, and you cannot have a system that functions that way.  And it goes further.  USAID had a program a number of years ago they asked me to try to advise them on how to improve, and I said what’s the problem with the program?  They said the money gets stuck.  And I said, well, what do you mean, the money gets stuck?  They said, well – I said is it in some bank account somewhere?  They said no, no, no, we agree on the programs, Congress sends us the money, we send the money to the Central Bank, and the money goes, but we never see the progress. 

I said that’s not stuck, that’s stolen, that’s misappropriated, that’s wasted, but it’s not stuck.  And so I said, well, how many years has this been going on for?  They said six.  And so I said, well, why don’t you stop sending the money?  And the head of the program said because, if I do, they’ll fire me and get someone who will send the money.  And that’s the basic problem, the pressure to give is extraordinary, but, until we cure the fundamental flaw and impose some disciplined incentives, aid will not work.  Thank you. 

Vince Serchuk:  Thanks, Adam.  Let’s see how well we’ve stirred up the hornets nest and take some questions.  What I’d ask is, if you have a question, please raise your hand.  I’ll call on you, and then just please remember the three AEI rules.  First, wait for the microphone; second, identify yourself and the institution that you’re connected with; and third, please try to form your statement in the form of a question so that we can at least give our people a chance to respond.  All right, standard Murphy’s Law, the first question is all the way in the corner, so right back there.

Rick Grouden:  I’m Rick Grouden with Action Aid International, and we also have a critique of the Breton Woods Institution, but maybe from a different angle or for different reasons.  But, Mr. Easterly, we have been looking a lot at your research on the inflation growth relationship.  It’s very interesting work.  We also share your concerns that perhaps the disinflation policy from the IMF loans to PRGS, the old EFAFs, were somewhat too contractionary maybe, the disinflation policies driving inflation down into the low single digits.  I know you’ve expressed in the past you felt that that was a bit unnecessary or perhaps excessive. 

I’m wondering how much do you think that that type of contractionary disinflation policy that’s characterized the last 20 years has played a role in the much lower growth rates we’ve seen in the last 20, 25 years?  Do you think that those two are correlated at all?  And if so, why do you think the US Treasury continues to approve these PRGS loans on a regular basis?  And my other question is why isn’t AEI and other more conservative groups out there also critiquing the continuation of structural adjustment? 

And then just lastly, really quickly, on the Progressa thing in Mexico, I know it started with the creative initiative of an individual, spontaneous creation, but, as you said, it has gone national.  And I’m wondering, how do you feel about public administrators and public planners in the Mexican government administering that with tax dollars?  Are you concerned about that? 

William Easterly:  So I think the sad truth on IMF programs is that the research certainly does not support the conclusion that IMF programs have a positive effect on growth.  We can rule that out pretty convincingly.  There are some pretty convincing papers that they actually have a negative effect on growth, but we don’t really know much about the mechanisms.  One of the criticisms of a big plan like a big structure adjustment program is that, when it does go wrong, because it was doing so many things at once, you don’t know which was the thing that caused it to go wrong, which was the thing to blame, which of course is why it’s of little use as a kind of learning mechanism, a searching mechanism, for searching for what does work. 

The main effect of structure adjustment lending seems to be that it leads to yet another round of the evasion of responsibility by anyone involved for the economic outcomes.  The IMF will blame the government and the recipient countries for not doing enough of what it wanted.  The government in the recipient country will blame the IMF.  They’ll tap into national sentiment and blame the IMF, and that will disturb the whole political equilibrium, which is, I think, one of the sadder unintended consequences of – I think IMF has actually had a perverse effect in Latin America in that it’s allowed populace politicians to exploit it as a kind of uniphobic scapegoat for a lot of things that have gone wrong recently in places like Bolivia and Ecuador and Peru and other places.  Not so much Peru.  Peru has had good economic growth, but Bolivia and Ecuador, IMF has very much been a scapegoat for politicians.  So it’s hard to see how it’s having a positive effect on either the political or economic equilibrium.

On the question of Progressa being administered by administrators, yeah, I think of course there is an element of kind of planning with a small “p” in a lot of successful activities, and that once you identify something that is working, as you scale it up you need to do certain – you need to sort of schedule in advance what actions are going to be taken by whom and so on.  So every individual plans their own life.  I have plans for what I’m doing tonight. 

But the problem with planning is to try to draw the false analogy between how an individual or a firm or a government agency implementing a program can plan a specific program and whether you can plan the end of poverty in a whole society.  So of course you can do small-scale planning on a specific thing that you’ve already found to work.  It is not at all feasible to do planning at the scale of a society how to end poverty.

Nellie: I’m with the House International Relations Committee and responsible for foreign assistance and also the Millennium Challenge account, and I was waiting for a brief mention perhaps of this account.  I’d be interested in our panelists thoughts on this issue.  It seems to try and marry up some of the best of the ideas that you put forth, conditionality, political corruption, and economics, although based on rather low medians. 

As you say, the bar is lower because it’s the median amongst lowest and medium low-income countries.  Accountability, programs are supposed to halt if countries don’t continue to meet their goals year by year, their criteria.  Local entrepreneurship, well, to the degree that the governments consult with civil society and local entrepreneurs and to the degree that their input is then incorporated into the choice of intervention, it does seem to be focused not on fixing the entire economy or totally eradicating poverty, but in improving economic growth and poverty reduction through specifically agreed – mutually agreed between the donor, the governments and the poor, and the business and civil society folks.  So coming out of this mix, I’m interested to see what your prognosis might be.  Things are just starting to be implemented now in the field.

William Easterly:  I think the MCC was a step forward and that it did try to sort of cross off the list the most corrupt autocratic governments, which that’s progress.  That is at least getting rid of the most extremely corrupt, most extremely autocratic governments, and not giving them aid.  I’ve been a little disappointed when reading the MCC materials that they still seem to be thinking in terms of like a government strategy to eradicate poverty and trying to do too many things at once and that it does still seem to be pretty top down.  I wish they would think a little bit more like just searching for specific interventions that are proven to work that they can back and then will be subject not to – I don’t think the accountability that they have in mind actually works that will, which is you set up sort of national indicators of progress, which unfortunately depend on lots of other things besides what the MCC and the government is doing. 

That’s not very effective accountability.  Accountability really has to be someone taking responsibility for a specific task that is marginally subject to their control where they can effect the outcome, and then they’re judged on the basis of what they accomplish.  And I don’t think the MCC has totally gotten that yet.

 Adam Lerrick:  Well, first, I would like to just mention on the PRGS for – though AEI does not have an institutional position on the PRGS, the Meltzer Commission came out seven years opposing the PRGS.  I will just tell you why the PRGS continues to exist besides the fact that large institutions like to expand their power.  The recipients like it.  The recipients like it for two reasons.  The first reason is they want more money, and they can get more money if there’s another institution that will give it to them.  And the second is that the rationale for the PRGS is that the World Bank is so ineffective in its macroeconomic programs and its general programs, that the IMF is viewed as being somewhat more effective, and, therefore, it’s helpful.

On the MCC, I have to – in the interest of full disclosure, I have to say I worked very closely on the establishment of the Millennium Challenge account originally and now the Millennium Challenge Corporation.  The concept is a great concept.  The problem has been the implementation, and I would say there are three reasons for the problems in implementation, all of them political, not economic.  The first is that – and it comes back to the pressure to disburse money.  Very simply, the whole concept of performance-based aid is, if you don’t perform, you don’t get money.  Well, there is a problem.  What’s going to happen if no one performs?  If no one performs, you’re not going to be disbursing any money, and, therefore, everyone is going to say you’re a failure. 

And that’s one of the problems with the incentive in the entire process.  People that work at aid institutions are no different than anyone else.  They want to be promoted.  They want to have successful careers.  They want their children to go to school.

 They want to have a happy life.  Well, if you have the wrong incentives, if you reward them for doing the wrong things and punish them for doing the right things, you cannot expect to have a happy outcome.

And if you look at the Millennium Challenge Corporation the first year, what was the great criticism of the Millennium Challenge Corporation its first year?  It wasn’t, oh, they’re not evaluating projects well.  It wasn’t that they’re not looking at countries.  It’s not that they haven’t applied what they’re doing.  It’s they haven’t pushed the money out the door, and this criticism came from two groups.  It came first from the recipient countries, which all came and complained and said, well, you’re just too tough.  We have other people.  You have competitors out in the market.  We don’t have to do this.  To get money, we don’t have to jump through the hoops you’re making us jump through.  And when there’s competition, everyone goes to the lowest cost supplier. 

Secondly, the pressure came from the US Congress.  The US Congress came forward and said, look, this little program of yours – I don’t know the numbers.  We have Chuck Sethas who I’m sure can recite them by heart, but I think in the first year the total disbursements were less than $20 million.  The President goes to Congress and says we’re going to be disbursing close to $5 billion a year eventually.  Which understand that under the Millennium Challenge accounts or corporation structure, what the President proposed was equivalent to the total aid the World Bank gives to all of the poorest countries in the world every year.  He’s talking about $5 billion of grants remember.  The key premise of the Millennium Challenge Corporation is that it would be grant-based, not loan-based.

$5 billion of grants is equivalent to approximately $8 billion per year in subsidized loans such as the World Bank gives through IDA.  So therefore, we are talking about a huge amount of money.  But what was the criticism?  The criticism wasn’t they’re not doing a good job.  The criticism was they’re not pushing the money out the door.  And then, you get into another problem, which is the third problem, which is politically, which is what do you do about a country that is of geopolitical importance to the US government, but just doesn’t make it on any of the performance criteria?  Well, there’s going to be pressure as to who does the Millennium Challenge Corporation report to?  Understand, the State Department’s view about aid is a very simple one.  If we give them money, they have to do what we say.  That’s their view.

I remember coming back from Argentina after the crisis in 2001.  I spent December 2001 in Argentina.  I was asked to brief the White House, asked to brief the Treasury, and I was asked to brief the State Department.  And the State Department after the briefing said we only have one question.  I said what’s that?  Is there any chance that, if we offer the Argentines $20 billion, they will say no?  And I said, well, if that’s what’s keeping you awake at night, sleep easy.  If you offer them $20 billion, they will take it.  They won’t do anything you say or ask them to do, but they’ll take your $20 billion. 

And I remember there was a quote, at one point President Bush got up and was asked what about Argentina in the middle of a crisis?  And he said, they need a plan.  It has to be an Argentine plan.  It has to be coherent, meaning the policies have to work together.  It has to be consistent.  The numbers have to add up.  Three days later, the Prime Minister of Argentina gets up and says we have a plan.  It’s an Argentine plan, it’s coherent, and when the IMF gives us $20 billion it will be consistent.  And the Finance Minister called me up and said, you see, Adam, the Prime Minister, he listened to you when you were down here.  And I said, well, I didn’t say anything about the $20 billion.  There was a silence, and I said, well, is that what makes it an Argentine plan?

Tony Carroll:  I will finish this book.  Every time I start reading it, I give it to someone else.  So eventually I’m working my way slowly through your book chapter by chapter.  You probably love consumers like me.  My question is though, when I travel and work in Africa - I’m Tony Carroll of Manchester Trade – the biggest complaint I get from the business community is the absence of credit or capital is what constrains their ability growing their businesses and creating better lives for themselves and their families. 

I’m wondering about this relationship between credit and small business growth and why it has failed so dismally in Africa and why it’s worked certainly over time better in East Asia.  And, Bill, as one who worked in the original sort of model for the Regional Project for Enterprise and Development at the World Bank, why in 15 years afterwards we haven’t figured out that piece at all, it seems?

William Easterly:  Micro credit is a great example of a searcher who found something on the ground.  Muhammed Yunus started out as an irrigation economist.  He did his dissertation using – the title of his dissertation was something like The Optimal Irrigation Scheme Using Dynamic Linear Programming.  This was as an economist.  But he went out into the villages thinking that irrigation was going to be the answer, and what he realized in talking to the villagers is their main problem was the extortion of rates of interest they were charged by money lenders, and he figured that maybe he could find something that would do better. 

And he experimented with different forms until he found the one that worked, and then the rest is history.  It has been scaled up, as lots of other microcredit associations in Bangladesh are competing now with Grameen Bank.  There’ve been lots of them started all over the world.  It’s not a panacea for poverty reduction.  Nothing is a panacea for poverty reduction.  There is no one cause of poverty.

And here, I have to gently disagree with my friend, Adam, but I don’t think the whole answer to why Africa is poor is corruption.  I think it’s more complicated than that, and I think it’s too sort of dismissive to assume that everything will be sort of automatically stolen that goes through Africa.  But it has been more difficult to make it work in Africa.  I think that the markets don’t work as well in Africa because it is much more difficult to enforce contracts.  And, of course, in microcredit, on any credit agreement, you need to be able to enforce contracts.  You need to be able to keep track of who is getting the loans and make sure they don’t disappear with the proceeds, and for a variety of historical reasons those social structures that were effective in Bangladesh to enforce repayment of the loans don’t seem to work so well in Africa. 

I think what’s great about searchers is that they adapt to local conditions, and they find a way among – this is what as economists we call substitutability.  If you find one thing is a real bind and constraint, you try to economize on activities that rely heavily on that thing and find other activities that don’t.  So if corruption is the problem or if lack of micro credit is the problem, you look for other schemes that don’t require as much microcredit or that are more immune from corruption, and you make progress in those directions.  And then the searchers, as they make progress in those directions, will start freeing up the opportunity to solve the bigger problems like microcredit and corruption.

Adam Lerrick:  I knew I wouldn’t get through this session without – it’s more complicated.  I’m sure on my tombstone it’s going to be said it’s not as simple as he thought because, whenever I talk about these ideas, people in this industry will say it’s not as simple as you think.  Bill touched on a key point.  The issue here is that, if there’s not a basic rule of law in a society, economic activity is very difficult and, in particular, lending activities and capital formation and the process of developing credit. 

And that is why my view is that, until there is that basic structure in place, you cannot hope to have these economies really grow.  And microcredit was an interesting innovation.  It seems to have had successes in some parts of the world, but it doesn’t seem to work well in Africa.  But I think that is a fundamental prerequisite to growth is that there be a basic rule of law where people know that what they produce is going to be theirs, and it’s not so simple as just property rights.  It has to do with taxation, and it has to do with ability to export, about the ability to import, about the ability to just function in a market society, and that’s one of the great problems.

One of the issues which, if you go back and read Peter Bauer, Peter Bauer is my hero when you think of development economics, which I guess is condemnation in the eyes of many people.  Peter has a theory – Lord Bauer had a theory – which is that those I call the friends of the poor who just say we just have to send more money to these countries have a dual goal, which is to make the poor richer, but also – their goal is redistribution, and, if you look, there’s a huge debate going on about redistribution versus growth.  And I find that somewhat counterproductive because much of what’s done with redistribution is actually going to hurt growth. 

But Lord Bauer had a theory, which is most of the people that are in favor of large aid are in favor of redistribution, and so, even if aid does not succeed in making the poor richer, at least it makes the rich poorer, and that accomplishes half the goal.

Neil Coteri: Hi, my name is Neil Coteri.  I’m with the International Business Government Counselors.  My question I was actually doing some research earlier on how China is involved in a lot of the East African nations and a lot of other nations in Africa, and they’re providing open money to these nations in return for certain input such as oil.  And they’re providing not only money, but even arms trade.  So how do you think these relations affect aid institutions like the IMF who try to develop these performance-based incentives when the African nations can simply go to China if they have the relevant imports and inputs and get the money from them without any incentives?  It’s completely open money to them.  And how do you deal with that when you do want to develop these incentives?

Del Pritchett:  Thank you.  My name is Del Pritchett. I’m an economics consultant.  Adam, you’re dead right on the MCC, but I would add another possible problem of the total lack of experience among much of the staff.  And that may be a problem or it may be an advantage, depending on how you look at it.  On the question of trying to provide consumer incentives, how about the use of voucher systems that permit the poor to have the means to expressing consumer feedback would provide incentives for better education, better health care, and better water services?

Adam Lerrick:  On your question about China, if China is going to provide it at a lower cost – and let’s call cost sort of conditions, interest, etc – they’re going to take the money from the lowest cost supplier.  It’s very simple, and it’s not confined to Africa.  If you look, China is doing projects throughout Latin America, Africa.  In East Asia, they already have a substantial presence.  So the fact is, it’s going to be very difficult to exact any conditions or performance, but, on the other hand, let me just say there has never been a case – never been a case – of a country that has implemented reforms unless the country wanted to implement the reforms.  No amount of money offered or withheld has convinced any country to change.

Now, I’ve been saying that for 10 years.  What’s amazing is the Managing Director of the IMF just said that last week.  Let’s be clear, no country has ever done anything that the IMF has asked them to do because the IMF asked them to do it.  It’s only done it when they wanted to do it.  If they didn’t want to do it, whatever laws we force them to pass, the day after they got the money, they passed three more laws that just undid it.  So let’s be clear, no country is going to change unless it wants to change.

On your question of the Millennium Challenge Corporation, on the level of expertise of the staff, I’m not close enough to them.  I know they have some very good people there that have a tremendous amount of experience on these issues.  I think that they’ve tried to broaden their measurement of performance to the point where it makes it impossible to measure their performance in the sense that, if someone says to me we’re going to finance a program to build roads or to build electricity or to re-do the checking clearing system, which was one of their first projects in Madagascar, I can measure very easily how many miles of passable roads there are that are maintained. 

I can measure how many children can pass a reading test.  I can measure how many cubic meters of water have been treated.  It’s very hard to measure what has been the impact on the per capita GDP of the economy from this little project or even a series of small projects.  And my view is not even to attempt to do that.  We all know the goal is to raise the standard of living, but, unless you can show that you actually vaccinated someone, there’s zero chance that you had any positive impact.

William Easterly:  Okay, well, on China I think Adam and I agree that performance incentives that are there now don’t work, so having China as a new competitor offering money with no performance incentives doesn’t make any difference because they weren’t working anyway.  Del, I’ll take your point on the vouchers.  I like it because it happens to be in the book also.  It’s an idea that’s floated around, and I’m glad to see that another person independently had the same idea with a lot of experience like you.  I think it’s one of the creative things that aid could try is just give the poor some direct means of expressing their feedback, which is giving them vouchers that they could use for essential development of health and education input, and actually force the aid agencies to compete against each other to attract those vouchers.  That could have lots of favorable effects, but there are ways in which it could go wrong, too, so you need to try it experimentally.

I guess the last word is just to say that there’s been a lot of talk about Africa that has been very pessimistic, and I think certainly the discussion should not paper over the fact that Africa has been a disaster, as far as economic growth, since independence.  But at the same time, there’s a lot of evidence of dynamism in Africa and signs of hope in Africa that I don’t think we should fit Africa into a kind of gloom and doom stereotype where everything possible has gone wrong.  Most Africans are not victims of genocide.  They’re not victims of civil wars.  They’re not HIV positive.  They’re not in a famine.

There are very entrepreneurial Africans that are doing lots of great things.  Just to actually go back to the microcredit question, one thing I forgot to mention which is very important is that another possible reason why microcredit didn’t work in Africa is because it was an alien implant where there was already some system of something similar in Africa, which are rotating credit and savings associations which do function reasonably well at the village level and at the tribal or ethnic level and have been studied a lot by economist.  And they do seem to work to get people some financial services.

So there are things like this going on on the ground, and there are people that operate – you evaluate someone’s performance based on the obstacles they have to cope with, and, if you evaluate what an African entrepreneur has to cope with, they’ve done remarkably well to even maintain the standard of living constant with the enormous obstacles that are placed in the way by corrupt governments and ineffective aid agencies.

So let me just close with an inspirational example of a man named Mr. Contay, who in the middle of a civil war in the Democratic Republic of the Congo, when he couldn’t get any foreign business partners to get interested at all, he started a cell phone network in the middle of the Congo with no foreign ownership, no aid, no nothing.  He just got local men to weld scrap metal together to make cell phone towers.  He started selling cell phones.  Cell phone use has exploded in the Democratic Republic of the Congo.  Now illiterate fisherwomen and fishermen can use it to connect with their customers when they have fish on the river.  They just call their customers and say come down and get my fish, I have fish for you, buy my fish. 

These things are happening on the ground.  People everywhere are much more inventive than we give them credit for, and that’s where the hope of most of the poor lies is in the poor themselves.

Adam Lerrick:  Okay.  I also do not want to leave on a pessimistic note about Africa.  Africa can be prosperous, just like any other part of the world.  The question is how do you set up just the framework to allow Africans to become prosperous?  And that’s what’s missing, and that’s one of the problems of corruption, that it basically forestalls the creation of that framework that will allow Africa to prosper.

William Easterly: I just wanted to mention one other source of hope about the future I have is that there’s a lot of young people in the room today, and I think all of you are going to have great potential as searchers to find things that work to do a much better job than Adam’s and my generation did and you as the hope.  And I hope you take away not discouragement, but inspiration to work on the problems of the world’s poor.

[end of conference]

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