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Tuesday, 3 July 2007

Easterly attacks the IMF, World Bank et al

One of my favourite economists William Easterly has come out guns blazing again, and has launched a scathing attack at the IMF, World Bank and the development economics profession, for fermenting what he calls "the ideology of development". Here are some excerpts from his recent article in Foreign Policy magazine :

"A dark ideological specter is haunting the world. It is almost as deadly as the tired ideologies of the last century — communism, fascism, and socialism — that failed so miserably. It feeds some of the most dangerous trends of our time, including religious fundamentalism. It is the half-century-old ideology of Developmentalism. And it is thriving.

Like all ideologies, Development promises a comprehensive final answer to all of society’s problems, from poverty and illiteracy to violence and despotic rulers. It shares the common ideological characteristic of suggesting there is only one correct answer, and it tolerates little dissent. It deduces this unique answer for everyone from a general theory that purports to apply to everyone, everywhere. There’s no need to involve local actors who reap its costs and benefits. Development even has its own intelligentsia, made up of experts at the International Monetary Fund (IMF), World Bank, and United Nations...."

"The ideology of Development is not only about having experts design your free market for you; it is about having the experts design a comprehensive, technical plan to solve all the problems of the poor. These experts see poverty as a purely technological problem, to be solved by engineering and the natural sciences, ignoring messy social sciences such as economics, politics, and sociology...."

"Development also shares another Marxist trait: It aspires to be scientific. Finding the one correct solution to poverty is seen as a scientific problem to be solved by the experts. They are always sure they know the answer, vehemently reject disagreement, and then later change their answers. In psychiatry, this is known as Borderline Personality Disorder. For the Development Experts, it’s a way of life. The answer at first was aid-financed investment and industrialization in poor countries, then it was market-oriented government policy reform, then it was fixing institutional problems such as corruption, then it was globalization, then it was the Poverty Reduction Strategy to achieve the Millennium Development Goals.

One reason the answers keep changing is because, in reality, high-growth countries follow a bewildering variety of paths to development, and the countries with high growth rates are constantly changing from decade to decade. Who could be more different than successful developers such as China and Chile, Botswana and Singapore, Taiwan and Turkey, or Hong Kong and Vietnam? What about the many countries who tried to emulate these rising stars and failed? What about the former stars who have fallen on hard times, like the Ivory Coast, which was one of the fastest developers of the 1960s and 1970s, only to become mired in a civil war? What about Mexico, which saw rapid growth until 1980 and has had slow growth ever since, despite embracing the experts’ reforms?......."

"......The ideology of Development should be packed up in crates and sent off to the Museum of Dead Ideologies, just down the hall from Communism, Socialism, and Fascism. It’s time to recognize that the attempt to impose a rigid development ideology on the world’s poor has failed miserably. Fortunately, many poor societies are forging their own path toward greater freedom and prosperity anyway. That is how true revolutions happen."


There are too many wonderful quotes in there. Naturally I agree with Easterly 100% - development should be bottom up and defined by people themselves, not imposed by bureaucrats at the World Bank and IMF. People criticise Easterly, but in my view Africa has no better friend. As usual from Easterly, its well worth the read!

18 comments:

  1. Cho,

    "development should be bottom up and defined by people themselves, not imposed by bureaucrats at the World Bank and IMF"

    A recent great example of success is Hammer Simwinga, one of six winners of the 2007 Goldman Environmental Prize, for his work in North Luangwa National Park to create sustainable income opportunities for local people and protecting the environment. As the last sentence in the article says, "Poachers now come to him, he says, seeking business strategies and sustainable farming tips."

    http://www.iht.com/articles/2007/06/29/news/profile.php?page=1

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  2. Touque,

    Indeed. Hammer is a classic example. I previously blogged about him. I have a section here on the blog dedicated to Zambians who making a difference on the ground and not waiting for Government to act. Check the label cloud for "searchers".

    By the way I read that paper you forwarded.

    Its quite interesting - but it did seem that author had not advanced beyond the original Acemoglu work. I mean the analysis shows that there's a positive relationship between inequality and the size of the settler colonies. However he also accepts that the Acemoglu position that size of settler colonies were positively related to economic development since the larger the colonies the better the institutions (contrast that to the more extractive smaller colonies). In other words he seems to accept that both high inequality and high growth are possible. It begs the question then, whether inequality is of any value at all? I guess not for growth in this instance, but perhaps it becomes more of problem historically e.g. South Africa.

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  3. A lot of the stuff coming out of the IMF is just about not having deficits.

    Sure it sucks to tax teachers and maybe that's not politically viable but generally raising taxes or cutting spending are the two options.

    Although his article is more of a rant than an actual argument, I can understand the sentiment.

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  4. The problem with IMF is one of ideology.
    There's nothing wrong in my opinion with looking at what works and doesn't. The problem is when a vision of development is articulated from the top and all other nations are required to align their policies to fulfill that vision.

    The other problem is that the IMF and World Bank rarely puts forward caveats to their recommendations. They tell you liberalise because it will work, rather than there's a 60% chance it could work and 40% that it might not work. They need to take a mature approach to economic issues. Every economist worth their salt knows that nothing is set in stone and has a real sense of appreaciation of the complexity of the world. A poor area in Kasama could be facing totally different problems from a poor area in Rio. We need local solutions to local problems.

    Part of it I think is because national Governments themselves are not creating a unique philosophical consensus on what development means to them. So for our nation, the FNDP is not for example underpinned by a vision of what development is from a Zambian perspective. It is just a foreign influenced document without a soul. Okay may I am now ranting like Easterly, but it is not difficult to see that the lack of a Zambian notion of development allows the like of the IMF and World Bank to advance the ideology of developmentalism.

    So I would argue that probably blame should be shared all round.

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  5. I agree that it is mostly a rant about arguments that are decades old and does not mention how organizations such as the best national and international NGO’s have been succeeding by discarding these development ideologies. The example is the project mentioned above started by Hammer Simwinga which seeks to use the ideology of the market place to create a sustainable increase in incomes, beginning with mobilizing local resources and abilities.

    While I agree that today, trade is more important than aid in international terms, to simply state as Easterly does that “The opposite of Development ideology is not anything goes, but the pragmatic use of time-tested economic ideas—the benefits of specialization, comparative advantage, gains from trade, market-clearing prices, trade-offs, budget constraints…” ignores the power of the international system and for instance, mining companies, to dictate terms of trade and to distort the policies a government may want to implement to benefit the country.

    As for the relationship between the size of the settler colony and the level of inequality, does this not have one of the underlying assumptions that colonial experience with a large settler population was necessary and maybe the only way to create the types of institutions necessary to have a lower level of income inequality? That the type of colonial experience has a large effect on determining the present day level of income, discounting national development paths since independence?

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  6. They tell you liberalise because it will work, rather than there's a 60% chance it could work and 40% that it might not work. They need to take a mature approach to economic issues.

    They are very insecure, because they have no democratic mandate, and their policies are failing, all over the world.

    Every economist worth their salt knows that nothing is set in stone and has a real sense of appreaciation of the complexity of the world. A poor area in Kasama could be facing totally different problems from a poor area in Rio.

    Or Russia might have completely different problems than Argentina. They don't even make that distinction.

    We need local solutions to local problems.

    Which is exactly what the IMF is not offering.

    The reason is that they are highly ideological. Because they are not democratically accountable, it was possible for them to be taken over by neoliberal ideologues.

    Their objective is to create a world without governments, where business is completely free invest in every corner of the world, without taxes, tariffs, or restrictions on the movement of capital.

    Obviously, this has nothing to do with the best interests of any local economy, which is why they can issue these highly destructive policy directives known as Structural Adjustment Programmes.


    Part of it I think is because national Governments themselves are not creating a unique philosophical consensus on what development means to them.

    And if they do, they get 'slammed' by the IMF - their access to foreign currency is cut off - like happened to Zambia under KK before 1991, and is happening now to Zimbabwe.

    Countries need to import oil, and they have to pay for it in US dollars. At the same time, governments in southern and eastern Africa are very inefficient, often borrowing to finance it's operations and depending on 'donor aid' for their budgets.

    This creates a huge imbalance of power, as long as they play by these rules.

    Breaking the rules, would mean

    - limiting the size of central government and focusing on local government and living on revenues only
    - receiving money from the mines, instead of donors
    - switching to locally grown biofuels

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  7. "I agree that it is mostly a rant about arguments that are decades old and does not mention how organizations such as the best national and international NGO’s have been succeeding by discarding these development ideologies" - Touque

    Easterly's comments have to be seen in light of his second book "The White Man's Burden" - where he documents areas where Aid has worked effectively. His first book the Elusive Quest for Growth set the scene for his argument that "incentives" are the key. The problem with Aid is how it is administered and not aid itself. There are a lot of perverse incentives from giving aid which need to be managed to create the right solution.

    While I agree that today, trade is more important than aid in international terms, to simply state as Easterly does that “The opposite of Development ideology is not anything goes, but the pragmatic use of time-tested economic ideas—the benefits of specialization, comparative advantage, gains from trade, market-clearing prices, trade-offs, budget constraints…” ignores the power of the international system and for instance, mining companies, to dictate terms of trade and to distort the policies a government may want to implement to benefit the country." - Touque

    A valid point. But in defence of "the Master" as it were, I would argue Easterly's emphasis that each situation is different and requires different solutions precisely recognises those concerns you articulate. This is why the one size fits all model breaks down. In some cases the market works better in some cases tailored aid can work, as other small interventions - see the blog :
    http://zambian-economist.blogspot.com/2007/06/positive-step-for-our-children.html

    "As for the relationship between the size of the settler colony and the level of inequality, does this not have one of the underlying assumptions that colonial experience with a large settler population was necessary and maybe the only way to create the types of institutions necessary to have a lower level of income inequality? " - Touque

    Valid point. But no work has been done to look at the relationship between inequality and institutions. If such work was done, then they would need to look at the potential reverse causality you have highlighted. Although I see that Acemoglu has a new paper called Economic and Political Inequality in Development: The Case of Cundinamarca, Colombia". I have printed it off, but I haven't read it yet! Feedback in due course.

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  8. i thought the whole point of taxing is for a population to have something at a lower expense on their income or contribution.
    e.g to fund a university cost lets say at a billion,if you had 5million people paying taxes it will be much lesser amounts than 500thousand tax payers.

    about the IMF is these guys are not doing us any favours(nothing for nothing) they are looking at there profits and risks.

    the more we keep borrowing the sooner we should accept there ideas on how we should lead our lives.

    if we are as bright as we look then look at the products being talked down in the states,this means losses.this makes interesting reading because of the trade involved and the power this country has accumulated. then we will know what the IMF writes when we read.

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  9. MrK

    "receiving money from the mines, instead of donors"

    I naturally agree that there's need to break away from depending on foreign aid.

    But don't you think relying on the mines is a poor strategy. I like your approach on Agriculture. That is where we should concentrating. Mining is a short term fix. Also don't forget the "Dutch disease". Developing the mines can make other activities like Agriculture look less attractive. Now is the time for us to develop agriculture, I fear when oil comes and mines are in every province our people will abandon agriculture because it is already too difficult to do and lacks support.

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  10. Arthur,

    You are quite right, the IMF is a bank! So they do balance their books just like anyone else.

    And obviously there's a reason why the organisation only draws leadership from Europe. I think it needs institutional reform. Its the root cause of its many polcies. Infact as Touque says there are other organisations doing a good job like DfID, SIDA and so forth. Organisations like IMF damages their reputations and makes it easier to put everyone in one basket.

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  11. The reason the IMF President normally comes from Europe is a post-Bretton Woods agreement with the President of the World Bank coming from the USA, and the IMF from Europe. Also, the West hold most of the IMF voting rights.

    Easterley is wrong. Development economics for the last 20 years has had a much stronger focus on micro-based institutional issues, and there isn't a one size fits all approach. (Well, at least not amongst the micro guys.) For example, subsidising credit can help or harm depending on the nature of the informational asymmetry in place, adverse selection or moral hazard. De Meza has written on this, and there's a large development literature on credit market failures, and interlinkages between credit, labour and land markets.

    For a critique of the macro-econometric approach to institutions and a rich introduction to the micro based approach see Chris Udry and Rohini Pande's paper at http://www.econ.yale.edu/~cru2/pdf/institutions_draft.pdf

    This paper was the basis of an invited talk that Chris gave at the recent Econometric Society World Congress in London. Yep, development economists giving an invited talk at an Econometric Society meeting! At the same congress, Tim Besley pretty much rubbished the whole macro political economics literature when he was a discussant at a session on macro political economics. And to think that Acemoglu got a John Bates Clark medal! I also recently heard Nick Stern dismiss "flaky cross country regressions"! Actually, on the whole micro empirical approach, "Palanpur: The Economy of an Indian Village" by Nick and Chris Bliss is interesting.


    The other thing, the World Bank nowadays has quite a strong focus on poverty reduction.

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  12. https://www.blogger.com/comment.g?blogID=2705183461541363969&postID=4170750785676443967

    What do you guys think of LETS, and other methods of stimulating local economies?

    I am no professional economist, just a layman so please forgive me. A few books I have read on the subject local economics/empowerment:

    - Blackonomics
    - Susu and Susunomics

    It seems to me that if there was an official method or module that could stimulate local economies, we would be a lot further along.

    If such a model was supported/promoted nationally by the government, and internationally by the IMF/World Bank, it would completely change the issue of development, development aid, etc.

    If resources like labour, space, raw materials and more were pooled and coordinated locally, and they were supported by the state through legislation and funding and internationally through fuding for the state for this kind of thing, it would integrate efforts

    You guys are economists, so if anyone can put something like this together, it's you.

    LETS resources - local currencies, local exchanges

    (How about a system where every local community is allowed 1 alternative currency, next to the national currency. Would that improve economic resilience? Local currencies, because they can only be used locally, stimulate local people to do business with eachother. So even if the national economy would be doing badly, it could cushion local economic activity, for instance from swings in the national currency, or international economic downturns, and keep the local exchange of goods and services going.)

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  13. Osama,

    Thanks for that paper.
    I agree that there are problems with the macro approach to institutions generated mostly by data constraints. See the recent Journal Article: http://www.econjournalwatch.org/pdf/DawsonSymposiumMay2007.pdf

    In terms of Acemoglu - I am biased here because I think the man is just great. Had a few e-mail exchanges with him this week, as I tried to confirm that no work has been done to look at the relationship between institutions and inequality at greater detail besides Engerman and Sokoloff's original article (whose focus was different. I think I just gave him an other area of research - he was very excited). His recent work on Colombia (post JB) actually is a micro approach to institution. Infact the approach in his book on Economic Origins of Dictatorship and Democracy is a micro theory based approach. I would say he is very much aware of the weakness of cross country comparison.

    But Nick Stern cannot talk!
    His "stuff" as I call them are all based on very uncertain inter-generational speculations! Unclarified position on the cost of carbon and so forth - let me not go on!! The economics of climate change is definitely more empirically questionable than many other areas!

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  14. MrK,

    I have never given this area much thought. But after following up your links and scanning quickly on the "literature" it seems not much work has really been done in this area. Partly because although local currencies are common, the move towards local currencies would traditionally be seen as introducing more transaction costs for businesses. And naturally the arguments for currency convergence and monetary union is precisely the opposite.

    But from chasing up your link, it seems there are some interesting arguments put forward for them. Central of which they improve the local economy. That is worth pondering on as a proposition. I tried to think why that might be. Depending on how the local currency system work, it sees that they can increase the certainty for local businesses that indeed people will spend the cash in their shops. If in effect for example, they cannot be redeemed in national shops or carry some form of discount.

    So for a local produce, it would improve their certainty that demand may exist for their particular good which could encourage them to invest. It appears quite complicated and depends on how the currency system is designed.

    By the way the link is faulty somehow. But i deciphered it as

    http://www.geocities.com/cmhensch/resource/econ-lets.html

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  15. Sorry for that. The link is: LETS


    But from chasing up your link, it seems there are some interesting arguments put forward for them. Central of which they improve the local economy. That is worth pondering on as a proposition. I tried to think why that might be.

    First of all, they can only be used in shops that are signed up, which would usually mean local shops.

    Secondly, they can function when there is a lack of the official currency, for instance when a local plant closes, and a lot of people are suddenly out of work. They can still get a haircut, paint houses, repair bicycles, cook food, babysit, etc. without someone having to tap their bank account.

    And even in developed economies, there are for instance food coupons, concert tickets, etc. which can act as an alternative currency. Really anything that can be guaranteed to be exchanged for valuable goods and cannot easily be forged, can act as a local currency.

    In other words, they can keep the exchange of goods and services going, even when there is no money around, which is of course the biggest issue in poor communities.

    You could have a situation where a local authority issues bonds against a local mine or forrest/timber, and uses that as (or as a basis for) a local currency. The resource wouldn't even have to be exploited until someone called up their bonds, and even then a rush could be averted.

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  16. "First of all, they can only be used in shops that are signed up, which would usually mean local shops."

    Presumably the aim here is to encourage people to consume local products. If there's sufficient take up it could give local producers confidence to produce that good knowing demand will be realised. However, the key will be the level of take up. There has to be enough incentives for them to do so. It seems to me that when this system has been introduced they operate in parallel to other currencies, and crucially in the USA they have had a "fixed exchange rate" with respect to the dollar.

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  17. https://www.blogger.com/comment.g?blogID=2705183461541363969&postID=4170750785676443967




    Presumably the aim here is to encourage people to consume local products.


    And to shield the local economy from (inter-) national economic shocks.
    It also involves people who have no money, but who have skills or some goods they want to exchange.

    If there's sufficient take up it could give local producers confidence to produce that good knowing demand will be realised. However, the key will be the level of take up. There has to be enough incentives for them to do so.

    Incentives are:

    - holding on to national currency to buy goods that cannot be produced locally
    - exchanging services in cash poor communities
    - increased loyalty, as the local currency can only be redeemed locally
    - impossible to tax, as no hard currency changes hands; to the state, the transaction looks like barter

    Especially rightwing libertarian types are agitating against income tax (in favour of a sales tax)

    To quote from another blog:

    Rather, they create a means for consummating a transaction where hard currency is either unavailable or inappropriate.

    “…alternative currencies are creating alternative forms of commerce, and un-taxable forms of income.”

    Regardless of their intent, alternative currencies are creating alternative forms of commerce, and un-taxable forms of income. Much of the motivation behind dealing in these currencies is to shield personal and business transactions from the prying eyes of government.


    And multinational corporations. In fact they can circumvent the damage done by NAFTA or similar open borders agreements. As long as they are stimulating local economies, I don't think shielding business transactions from the prying eyes of government is such a bad thing. The state can still get income from the mines and large companies and all official currency transactions.

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  18. Of course this all assumes that only very few communities have one!

    If majority of local community had a local currency then that could be counter productive and erode the whole point of having a national currency.

    I am not fully persuaded that other types of policies would not achieve the same goals, without the additional transaction costs.

    ReplyDelete

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