Monday, July 30, 2007

Geldof, Bono, Baker and the IMF

Take a look at this entry in Richard Murphy's blog, about Bono and Geldof, and marvel at the hypocrisy at the heart of their positions on poverty and development. These two people have a vested interest in opposing changes that would do far more to tackle poverty than anything they have ever done. These two rock stars advocate a massive rise in foreign aid.

In fact, in academic circles, foreign aid itself is controversial. Countless studies have been done on whether foreign aid works at all. Some have found that it has, some have found that it has not - and that it may even harm growth. Needless to say, the aid industry has seized upon the upbeat reports, which have circulated widely, and ignored the others. Whose reports should we believe? A new IMF working paper gives a clue. This is not just another IMF working paper. Its authors are big hitters inside the IMF: Raghuram G. Rajan, the IMF's director of research, and the prolific Arvind Subramanian. Both know a thing or two. While most papers on this subject choose a set of rather narrow criteria for measurement; this one looks at the relationship in a much wider variety of settings, and it is careful to strip out the possibility that aid flows could go to countries that are doing particularly badly, or to countries that are doing well, creating a spurious correlation between aid and growth.

Their conclusion?

We find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others. Our findings suggest that for aid to be effective in the future, the aid apparatus will have to be rethought.

This is depressing stuff. But it is important too.

TJN does not oppose foreign aid per se. People in the aid industry are quite capable of learning from past mistakes, and different ways of designing and delivering aid policies might work in future. As we have argued so often before, we believe that tax -- viewed at a global level, as well as at a national level -- has to be a central part of rethinking the aid apparatus. Why are the aid agencies so averse to discussing it?

Not everyone is averse, though. As this IMF paper was being filed away in TJN's archives, another IMF working paper, written two years ago by the same two authors, came to our attention, which had similar findings. One of their main explanations for the disappointing results from foreign went like this:

Even though aid resources are initially additional to the budget, eventually the country becomes more lax on raising tax revenues, and more aid is necessary just to keep the country on even keel. If that aid is not forthcoming, and if the country’s tax raising mechanisms have atrophied, all the short-term beneficial effects of aid may dissipate over the long run as it creates a culture of dependency (see Azam, Devarajan, and O’Connell, 1997, and Adam and O’Connell, 1999). A related explanation is that by expanding a government’s resource envelope, aid relaxes their need to explain their actions to citizens, which may have a corrupting influence even on the best intentioned of governments in the long run. In sum, aid may not have discernible effects in the long run because it weakens institutions, and this offsets any positive effect it may have in the short run.

Now take a look at this recent presentation by Raymond Baker, a world authority on dirty money. We've flagged this presentation before. But what this does is illustrate the sheer scale of what is at stake here, and illustrates the sheer magnitude of the rock stars' foolish hypocrisy.

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