Against Aid

This post was published on Slugger O’ Toole.

Walking by a lake you see a child drowning. There is no one else around- what should you do? The clear moral answer is to jump in and pull the child out without sparing a thought for potential inconvenience. It has long been argued that the same moral reasoning applies to world poverty- we must intervene to help the world’s poorest. The widely held view is that this help should be aid.  But does sending aid make the difference it is supposed to- what if we were offering our metaphorical child little more than a faulty life ring? Or worse still- is our aid merely dragging her down?

I came across a few articles this week about the money sent by wealthy countries to poor to assist development. The verdict wasn’t good. One was an article in Thursday’s Guardian showing how Somaliland, unable to receive international aid for legal reasons, had become more democratic and, ultimately, wealthy as a result. The other was a report by New York University (NYU) which found that billions of dollars of US military aid sent to Columbia had only worsened drug problems there. Depressingly, the articles argued, it seems that aid just doesn’t work.
This isn’t a popular idea, or an obvious one. Ireland especially is renowned for the difference its international assistance makes to the world’s poorest countries. Untainted with the guilt of empire (unlike Britain) and unconcerned with promoting ulterior political or economic goals (unlike the US) Ireland has been uniquely free to focus its development program on simply making a difference to those who need it most. The Irish aid budget is over 600 million euro per year and outside of government, Ireland is home to many large aid organisations such as Concern and Trocaire, working in dozens of countries worldwide. For a once poor country, this has been a source of pride for many.
But could this pride be misplaced? I want to discuss here the arguments against aid- the belief that poor countries are actually much better off without our financial support. This is obviously controversial, not least in the midst of a famine in Somalia and a global financial downturn that has hit the poorest the hardest. But if aid is in fact hurting these countries, this is an important debate to be had. The charges made by the sceptics against aid can be summarised as follows- removing democratic accountability, killing exports and rewarding tyrants.
Removing Accountability
America was founded on the principle of ‘No taxation without representation’; in international development the reverse is equally true- no representation without taxation. If poor countries become dependent on wealthier ones for providing basic services instead of taking taxes from individuals and local businesses, the need to remain accountable to one’s citizens is reduced and corruption and inefficiencies sink in. Somaliland provides an excellent example of this- it was forced into democratic reforms when port companies refused to pay taxes. Aid money would have significantly reduced the clout of these merchants.
Dutch Disease
Dutch Disease is a phenomenon named after the discovery of oil in Holland in the 1950s. The sudden influx of foreign money pushed up the relative value of local currency, devastating the country’s manufacturing industry, which had relied on exports. The same can occur with aid, which is also a sudden influx of foreign money. Exporting has been the key to growth for so many booming countries such as China, India, Japan and South Korea- aid may well keep this opportunity away from its recipients, damning them to poverty.
Rewarding Tyrants
Many of the world’s poorest countries also have the most reprehensible leaders and yet still receive aid. Mugabe’s Zimbabwe is a clear example of this, with aid essentially keeping the regime afloat. According to Professor Paul Collier, director of the Centre for the Study of African Economies at Oxford University, as much as 40% of African military spending is funded accidentally by aid.
This week’s NYU report found that US military aid found its way into the hands of the very drug barons they were targeting, due to corruption.
These are powerful arguments- aid can make a country less democratic, less competitive and more violent. Of course it is hard to argue against aid for emergency relief during a famine or earthquake but the larger argument that aid provides a clear path for a poor country’s economic development seems shaky at best. It seems clear that aid, as it is, is not working. The question for Ireland and the rest of the world is- will we continue dodging difficult questions or can real reform take place? Or is reform not enough; is now the time to make charity history?

Freefall- a manifesto for economic change

As markets tumble in Europe, America and across the globe, the world is waking up to reality: the recession is back. Indeed it never really went away. How much of this can really be a surprise? We have more or less the same economic system today as that which brought the economy to its knees just three years ago. In 2008 policy makers could at least plead naivety. Who could have seen the sudden collapse of the world’s largest banks? And who could have known just how interconnect companies and countries had become?
But these rhetorical questions do in fact have answers: Joseph Stiglitz, professor of economics and Nobel laureate, was our Cassandra.  He was preaching long before the housing bubble and credit default swaps of the inherent dangers posed by lax legislation and misaligned incentives. His 2010 book Freefall, recently updated, is his victory lap. But more than “I told you so”, Stiglitz offers a way out of the mire. Politicians would do well to head his advice.
Market Failure

Stiglitz lays the blame for the crisis squarely, triangularly and circularly at the feet of free markets and their ideologue proponents. I’ve blogged before about my own flirtatious relationship with free markets and identified some of their key failings. One failing I didn’t mention was externalities, which was a failing central to the near collapse of the financial system and one which Stiglitz emphasises.  Externalities are by-products of business where there is no market mechanism to account for them- sometimes positive, sometimes negative. If I own a bee farm and an orchard sets up next door, the orchard benefits significantly from my bees’ polination without affecting me. But should the orchard owners not pay for this privilege? This is an externality– the market provides no way of paying me. A negative externality would be global warming- harm is caused by business but not in a way penalised by the markets. 
Stiglitz argues that banks, with their light touch regulations, posed huge negative externalities on the economy as a whole in a number of ways: the misunderstanding of risk, performance related pay and implicit government subsidy.
Risky business

Before making a loan, banks need to understand the risk associated with the borrower defaulting and adjust the interest rate accordingly. But to further decrease risk, banks started to package loans together with assumption that the more loans one had, the more the risk was spread out. This was fine, provided defaults weren’t correlated. But when house prices started to fall across the country, defaults became very correlated indeed. Because many of these loans had been packaged together in highly complex ways, banks suddenly realised that they couldn’t really tell which loans were safe and which weren’t. They also couldn’t trust the safety of other banks and so stopped lending to each other, resulting in the credit crunch. Stiglitz verdict is clear- commercial banks shouldn’t be allowed to create products they don’t fully understand. As US Treasury Secretary Henry Paulson quipped, “the only useful financial innovation in recent decades has been the cash machine”.
Performance related pay and other oxymorons

Performance related pay was abandoned by most professions when it became clear that it rewarded quantity, not quality and encouraged short term results. These are precisely the problems plaguing modern banking. Bonuses are paid for gains but not removed for losses, promoting excessive risk taking as bankers just couldn’t lose. Mortgage vendors were rewarded according to the number of mortgages issued, not their quality, leading to the phenomenon of “liar loans” for which borrowers required no proof of income. Even after the Crunch, the flow of bonuses continued, making a mockery of the claim that they were performance based.
Bankers on benefits

But perhaps the strongest externality was the implicit guarantee that the government would always save the biggest banks to protect the rest of the economy. This safety net enabled banks to take much greater risk at much lower interest rates- a subsidy of billions of dollars, greatly distorting the market. When the bailouts were received, very little was loaned on to small and medium sized business, the risks of speculation were still too tempting.
What’s to be done?

Stiglitz is no communist and recognises the importance of markets- the key is regulation. As the world sits on the brink of what may well be a double dip recession, here are his suggestions for policy changes to make a difference-
  1.    Separate commercial banks from investment banks- banks shouldn’t be taking huge risks with ordinary households’ money.
  2.      Require banks to keep some of the mortgages they sell on their books to ensure they have a vested interest on providing loans to those how can afford them.
  3.     Give share holders greater say over executive pay and stop payments in stock options- they encourage short-term thinking.
  4.     Require bailout funds to go to small and medium sized business. Much of it is their money, after all.

This is Stiglitz’s manifesto for change. Free markets have failed but markets can still work within sensible rules.  Failure to change in 2008 brought around the current difficulties. The world cannot afford to make the same mistake twice.

Jersy Shore and More

Two weeks of blog silence and American madness- Jersey shore, NYC (twice), charismatic churches and generally being awesome in Philadelphia.
I spent the second last weekend of July with the lovely Angud family in New Jersey, the idea being to let me experience a proper American family. The Saturday was the hottest day in 7 years, an impressive 110 Fahrenheit, which meant that going outdoors with Irish skin (which I happened to have on at the time) was a no no. So the afternoon was spent on XBox Kinect, which is amazing, followed much later in the afternoon by a go in the outdoor swimming pool with my abs glistening in the hot Jersey sun. James, Jarren and their family were incredibly welcoming and took me out for a chinese afterwards- the first American sized portions I’ve managed to get through so far. I went with them to Pentecostal church that Sunday and the next Sunday went to a Baptist church. Those will get their own blog post. 
The idea of the family stay was to introduce as a bit more to American culture and introduce me they did- I’ve now finally seen Jersey Shore and the South Park episode on N. Jersey. Many of the trials and tribulations of Snookie, “The Situation”, Pauly D and friends touched my heart and moved me to my very core. Also, I wanna hot tub.
Next weekend was a busy one. Friday saw us head to NYC for a tour of the UN (with a lecture from an indigenous rights guy) followed by roaming around the city, walking from Times Square to the Brooklyn Bridge. Dem buildings is tall. One important lesson was learnt: don’t wear a thin white shirt when there might be rain acomin’. Its crazy how easily things get transparent and how much of New York has now seen my nipples. 
Saturday was a chance to hang out chez Snookie- a trip to the Jersey shore itself, albeit the wrong end. Definite highlight was the giant inflatable pretzel which bore us many dozens of metres out to sea. I think we managed to fit 6 peeps on it at one stage. Amazingly, I didn’t get sunburnt. A small victory for Gringos everywhere. 
Then this weekend was spent in NYC again! This time outside of the program so were free to do as we wished, staying from Friday through Sunday in an awesome apartment just 15 minutes from the Empire State building and 20 minutes from Time Square. Spent all of Saturday in Central Park having seen the main sites during the last two visits. The park is HUGE with musicians, artists and rollerbladers all over the place. Then back to Philly on Sunday morn’ to go the a bbq chez Anguds, with the best bbq pork I’ve ever had plus more swimming and the annual intra family volleyball match with the rest of the clan. Then I got my very own Phillies baseball tshirt. Awesomes.
Just one full day left in Philly! Then a couple of days in DC, giving a presentation on the program at the State Department, no less. What a terribly gangster lifestyle I lead.