The problem with virtually all foreign aid as the absolute lack of any market mechanisms. Foreign assistance is a socialist economy. We go to the funders and promise a 17% increase in health or democracy or gender equality or whatever, at the end of the year we go back and say, we achieved a 23% increase in whatever, and they say congratulations, give us at 27% increase next year. Its exactly like a khokhoz director going back to the planners in Moscow with a 23% increase in grain production. In addition, there's an agency problem - the people who benefit from the services are not the ones who provide the money to pay for them. Since they are above all else economically rational actors, aid providers and contractors care about the hand that feeds them more than the mouth they are feeding.

The problem is that no one has really figured out a good way to bring market mechanisms - or even better, actual markets - into assistance. Could you give local government officials in Iraq vouchers that they could use to chose between the rapacious contractors that want a piece of the $1.3 billion that's out there for "provincial reconstruction?" Could you give them to African farmers to decide whether USAID money should be spent on farming or ranching? Politically and practically - No.

Easterly is right: "governance" - which is code for corruption - matters. But the holy grail has to be a way to bring market forces into foriegn assistance.

Too be clear where I come from on this: Democrat with libertarian leanings, significant international development experience, currently in Iraq watching money disappear into the sand.

Stupid question not related to your review but rather the bioline. Why does it say Mr. Drezner and not Dr. Drezner? I've noticed that in various instances with Ph.D.'s (as opposed to M.D.'s, I believe) people have been cited (including in comments relating to the field) as Mr. (or Ms.) instead of Dr.
It seems illogical to me.

He does a nifty job of disproving Jeffrey Sachs's claim that the real problem with Africa is that it is stuck in a "poverty trap" ... The real problem is bad governance.

... He has great fun, too, interpreting this turgid prose for the layman. ... corrupt leaders who raid public coffers create "governance issues."

See how easily it can happen? ;-)

Hmmm, sounds like (not having read the book) that Easterly is using secondary sources to make a case that rich donors influence policy....where have I heard that before?

That was an excellent review.

Masaryk, aid can perhaps be altruistic, and in that case we can't expect market forces to operate well -- if you follow market forces, you'll put your money wherever you get the greatest ROI, independent of any aid you can do to people who need it.

On the other hand, aid can be altruistic towsrd aid providers and contractors more than toward, say, poor people.

I'd like to see a different sort of aid completely. Like, you recruit a bunch of recent engineering graduates and business graduates etc, and ship them to various third world countries with around $500 each, and no access to other US money. No return ticket, but if they give up they can go to the US embassy and get a loan for their return ticket. And the challenge is to find some local person to start a partnership with, and in one year get a profitable business going.

Make the prize be bragging rights, with various other possible benefits -- make the possibilities vague enough to reduce the chance that people would pay a lot to cheat.

If valuable products result somebody's likely to produce them even if the original partnerships fail. And the participants will get valuable experience both in development and in business.

"Like most Western journalists and aid workers who have spent time in Africa, I frequently despair at the continent's problems, veering between blaming the aid donors, the African governments, and even at times the people. Western aid hasn't worked, so why was everyone demonstrating near Gleneagles so convinced that sending more would make things better? It cannot be good that African governments persist with human rights abuse, or perpetuate their rule against the desires of their peoples, but poverty remains Africa's greatest problem, and liberal concerns have not helped Africa's poor.

"The Chinese come to Africa as equals, with no colonial hangover, no complex relationship of resentment. China wants to buy; Africa has something to sell. If African governments could respond in a way which spread the new wealth -- a large if, of course -- then China might provide an opportunity for Africa which Europe and America have failed to deliver."

J Thomas,

I agree completely that aid can and indeed should have altruistic aspects to it. Sometimes you give just out of kindness in response to need. And I agree that working in development can be incredibly rewarding for the individual. Its been certainly been rewarding for me, more emotionally than financially, in spite of all the frustrations.

But I think the lesson of last 40 years or so is that altruism is not enough to make a whole system work effectively.

Sending individuals to work hin developing countries as been tried in various forms - peace corps, lots of programs with retired business executives and volunteers (I ran one of those once in eastern europe in the 90s) - though usually in a more top-down way, with some organization sending people out to companies or places that apply for the help. (And you're right about bragging rights; its certainly the main attraction of the peace corps.) At least it helps to eliminate some of the agency problem - the people who need the assistance choose what assistance they need. But its never going to produce the kind of systemic change that is needed in most developing countries. A group of uncoordinated individuals is never going come up with a better banking system or transform agriculture.

I just wonder, why isn't there more serious debate on this somewhere? The world is spending billions on assistance every year, been doing it for 50 years. I just have the feeling that there is nowhere near the kind of thinking and research - creative and rigorous - that the basic question of how we should spend our money deserves. Foreign policy is supposed to have 3 elements: defense, diplomacy and development, and the development leg is by far the least understood of the three.

I'm sorry, I'm taking up too much space in the comments. I'll stop ranting and go to work now.

Having observed the high-end charitable giving racket both in the US and abroad, it's clear that many donors want the kudos for having given, NOT from having accomplished something. Givers in the US who focus hard on what their dollars accomplish (say in selectively giving to universities or charities) are often criticized by the elites for giving to the "wrong" places. Universities often reject donations from people who want too much oversight. Our Dean once privately bragged that the university often managed to get donations from people even though the original reasons for funding a given chair had disappeared. It takes a certain tough-mindedness for a wealthy donor to focus on the outcome of the giving rather than the form without becoming too cynical. That is much rarer than you think.

It is worse with foreign aid, because the givers are politicians who are not playing with their own money. And the political pressures inherent in forcing accountability are many.

Masaryk, thank you for sharing your experience. Potentially, real experience can be far far more valuable than any amount of theorizing.

My goals are more modest than yours -- if skilled, completely unsupervised individuals can find ways to create wealth, that might potentially be a plus.

I have no idea how to come up with a better banking system, short of creating a new bank that might outcompete existing banks -- which requires a lot of government connections, right? Banks are important enough for governments to pay close attention to, so you need not only a better banking system but you need to persuade important government figures that your banking system will be better for them personally.... There are lots of banking systems that would be better than what the USA has, but I don't have a clue how we could get any of them put in place.

If you have a thousand tiny initiatives to create wealth, some of them might create wealth (as opposed to concentrate existing wealth further). Of course that leaves it to the government to concentrate the new wealth.... Which gives everybody involved useful experience.

I'd like to see a different sort of aid completely. Like, you recruit a bunch of recent engineering graduates and business graduates etc, and ship them to various third world countries with around $500 each, and no access to other US money. No return ticket, but if they give up they can go to the US embassy and get a loan for their return ticket. And the challenge is to find some local person to start a partnership with, and in one year get a profitable business going.

That's a stunningly bad idea.

American or whatever new graduates are not going to have much value add to an entrepreneur in an emerging market, and will probably be a handicap (attracting unwelcome attention).

The generic problem is usually low-end access to liquid capital combined with lack of venture type mentoring services. As well as strangling governmental regulation that largely serves to enrich the petty bureaucrat.

Useful aid would perhaps finance "venture capital" organisation with mentoring built in. Challenge would be to properly link incentives (decouple them from Washington, focus on some kind of compound return in country).

I had some thoughts becase on my experience in private sector a year ago on my bloggy:
Structuring Private Equity for Development
Structuring PE for Dev (bis)

From my view, the problem with the efforts that exist now is the incoherence of the development agencies when they try this.

First, they think doing this they can get "real" PE returns or something close. This is an early money loser, on pure commercial returns, esp. if you're paying professionals.

Second, they don't think through real incentives - one sees a wierd miss-mash of incentives to please Home / Source. Washington or Bruxelle or Paris, combined with unrealistic compensation that leads to low risk activity that probably could be done commercially.

Third, there's not a clear idea of the differentiation between "market segements" - so money ends up going to formal sector when often the formal sector has decent access to capital (although perhaps not).

However, before beating up on the Development guys, recall they're obeying their political masters who are obeying the Masses. All kinds of perverse incentives.

In any case, JT's idea is just plain stupid; start ups need local knowledge and not US fresh grads.

Maybe putting the US kids in a mentoring organisation supported by USG (focusing on US just because of majority readers, could be UK, etc), with a public diplomacy goal as well, that might be a good idea.

I have no idea how to come up with a better banking system, short of creating a new bank that might outcompete existing banks

Presumes the real problem lies in competition (or lack of) rather than perverse incentives withint regs. I'd favour the latter explanation in most instances.

Banks are important enough for governments to pay close attention to, so you need not only a better banking system but you need to persuade important government figures that your banking system will be better for them personally....

Well, yes, but one also needs to have a realistic idea of what lending can be done in a high risk situ.

Much of the time it seems to me that the Dev people I meet expect banks to take equity risk at credit prices. Yet also be Basle II compliant, apply best practices, etc.

Expensive "Mercedes" financial systems don't encourage risk taking.

J Thomas, I think its a creative idea, but "might potentially be a plus" really isn't a particularly compelling argument to devote a lot of resources to something. I don't know much about banking either, banking systems were an axample off the top of my head, and have no good way of evaluating if collounsbury's ideas make any sense either, though they remind me of the Enterprise Funds which were set up by the USG as venture capital funds for post-socialist countries. Not a resounding success.

But my original point wasn't baout banking, it was that we don't have good ways of judging if programs work because there's no direct connection between those who are supposed to be benefitting from them and those who are paying for them.

If I were king of the assistance world, I'd try something like this: http://www.nytimes.com/2006/03/26/business/yourmoney/26mgmt.html
to bring in new ideas and evaluate old ones. Anything's better than what passes for strategic planning, evaluation and management in the current system.

Indeed, the Enterpise Funds, you have to ask why they were not successes. No clarity on structure, no clarity on incentives of Funds, no clarity on real return issue versus development goal.....

Decompose the factors and you get proper lessons; merely observing the USG (or for that matter Proparco) funds have not succeeded answers no questions. I've watched these things on the ground, the incentive misalignments are clear. Fixing them, not so clear, but the issue of who is having trouble getting financing or the issues re property rights enforcement are.

I think its a creative idea, but "might potentially be a plus" really isn't a particularly compelling argument to devote a lot of resources to something.

It wouldn't be a lot of resources beyond the lives of the recent graduates -- which are rather a glut on the market at the moment.

American or whatever new graduates are not going to have much value add to an entrepreneur in an emerging market, and will probably be a handicap.

The generic problem is usually low-end access to liquid capital combined with lack of venture type mentoring services. As well as strangling governmental regulation that largely serves to enrich the petty bureaucrat.

I think I'm much less optimistic than you. I was envisioning a level where $500 is significant capital, where no one with much education is noticing what innovations might be useful. To get by you'd need to get adopted by somebody who knows local conditions, watch how your friends live, minimally learn the language, and then be exceptionally creative. If one in twenty is successful enough to start a functional small business, in a year or two they won't have grown enough to be noticed by more than local government. With no patent any useful innovations might get copied widely enough in a few years to do a lot of good without doing the original company much good.

"Mentoring" would probably mostly be counterproductive, as it is in practice now. It wouldn't be necessary for any aid program to have a coherent strategy or incentives -- each individual graduate would have a burning desire to find some way to leverage all his abilities and limited resources into making a profit.

The main challenge for government (or whoever) would be to persuade sufficient numbers of unemployed graduates to participate. It might do some good, which seems unlikely for most of the aid programs I've heard of.

I admit the idea has tinges of Children's Crusade, but they wouldn't be trying to defeat an army, they'd be individually looking for opportunities -- opportunities small enough that larger competitors haven't already messed them up.

Re the US new graduates, you're not going to get them into the field without at least Peace Corps level of support; I understand that is not "free."

It's a foolish idea as development. As PR and getting US cadres some international exposure, it may have real value but that's a US concern.

I think I'm much less optimistic than you.

Well, I've only done private venturing in emerging markets, so what do I know? My optimism is likely creative.

I was envisioning a level where $500 is significant capital, where no one with much education is noticing what innovations might be useful.

Afraid that strikes me as incoherent.

First, what it sounds like is you're imagining emerging markets are full of dolts, or that lack of basic ideas is the issue.

As I am in the private sector in the self same market, it strikes me that is not the problem at all.

What you're doing with this program, as you're thinking of it, is setting up (for no particular benefit to the host country) US graduates to compete with locals.

It doesn't make a lick of sense. Not one lick of sense.

To get by you'd need to get adopted by somebody who knows local conditions, watch how your friends live, minimally learn the language, and then be exceptionally creative.

Again, makes zero sense as an entreprenurial sponsorship / economy boosting activity.

American abroad training, perhaps, but utterly senseless, waste of resources.

It might make some vague sense to place US grads with established enterprises or perhaps subsidise to start ups, that sort of thing, although the cost re langauge is substantial and doesn't look like a good deal to me.

I believe the US has some kind of MBA loaners program - ran into some such kids out in the field - did not strike me well conceived, again the issue was incentives and it seemed rather from what I understood from the kids structured for Washington reporting and not actual utility to private business users.

If one in twenty is successful enough to start a functional small business, in a year or two they won't have grown enough to be noticed by more than local government. With no patent any useful innovations might get copied widely enough in a few years to do a lot of good without doing the original company much good.

Your unstated assumption is that from this there will be basic take-up of innovations (and that some US kid with near zero clue as to the basic market structure parachuting in will find the right innovations - I can't see the value add on a net basis). You can hand wave about on their own but be realistic, that ain't gonna happen. Americans are spoiled and demand support networks overseas. Scared shitless most seem to be.

"Mentoring" would probably mostly be counterproductive, as it is in practice now.

Practice now where?

My experience in MENA markets there are no bloody mentoring mechanisms (ex some USAID stuff I have run into, but it seemed captive of some big families and the USG people duped).

Mentoring I am thinking as a Biz Services shop. Problem of course is competing against local talent. Have to ensure against that.

It wouldn't be necessary for any aid program to have a coherent strategy or incentives -- each individual graduate would have a burning desire to find some way to leverage all his abilities and limited resources into making a profit.

That's naive, touching, but fucking naive.

Mind you, I like the imagery, don't have an ideological axe against this, but my experience in real world emerging markets... I see near zero return on this. Burning desires and American expectations about speed of getting things done.... etc. etc. A year letter, one bitter kid, near 100 percent failure.

It's a fantasy. You either provide structure and support or you gets failure.

The main challenge for government (or whoever) would be to persuade sufficient numbers of unemployed graduates to participate. It might do some good, which seems unlikely for most of the aid programs I've heard of.

Well, it is fashionable to piss on the AID programs and I am sure not a fan, but a bit of realism.

First, the AID programs are as often as not (as far as I can see) actually "side payment" diplomacy. Some dinero for US or UK or French, etc friends, with a nice fuzzy wrapper. But their real aim is influence buying. A legit state goal I would opine. Efficient this way? Ah, bon, maybe yes, maybe no. Bribery has such a bad reputation nowadays.

Second, with all respect to Easterly (whose main obs I agree with from my private sector worm's eye experience), some kinds of AID programs do better than others, as Easterly himself says.

It's the econ dev ones (and the political dev ones even more so) that seem to flail about.

I admit the idea has tinges of Children's Crusade, but they wouldn't be trying to defeat an army, they'd be individually looking for opportunities -- opportunities small enough that larger competitors haven't already messed them up.

Well, yes, a Crusade. And like the Crusades, conceived without much understanding of the real challenges on the ground.

Young entrepreneurs are not lacking in any market I have been in. What have been lacking are consistent ways to reduce their shitty odds (odds that make the shitty odds in the West look positively gangbusters).

You're positing, in short, utterly the wrong problem. Plenty of skills in re weiner start ups, but really negative enviro for moving forward.

Or that's what my exerperience has taught me.

"I have no idea how to come up with a better banking system, short of creating a new bank that might outcompete existing banks"

Presumes the real problem lies in competition (or lack of) rather than perverse incentives withint regs. I'd favour the latter explanation in most instances.

Sorry, I was being sarcastic. What nation has a government that allows free competition among banks? And what reason is there to think that the short-term winner would actually be an improvement in the long run?

For banking reform, there's the question what is the purpose of the banking system. There are various purposes, but for many politicians and bankers a central purpose is to concentrate wealth into their pockets. Since that takes precedence over whatever purpose you have, it might be hard to make changes.

But my original point wasn't baout banking, it was that we don't have good ways of judging if programs work because there's no direct connection between those who are supposed to be benefitting from them and those who are paying for them.

That fits right in with banking as an example. There's the problem that the people we want to help might not be good judges of how well they're being helped. This is a problem for physicians, patients care more about good bedside manner (phrase left over from the days that MDs made house calls) than how fast their health improves. They aren't qualified to know how good their treatment is.

I once knew a collection of american small business owners who spent five years lobbying their city government for civic improvements on their street. Eventually the improvements came through. Their landlords all raised rents to such high levels they had to move or go under. The whole area got gentrified. It wasn't the result they wanted or expected.

Planning looks hard. And it looks even harder when there are people who control a lot of resources who want to make sure that they'll get most of the benefits of whatever they let you do.

That's naive, touching, but fucking naive.

Mind you, I like the imagery, don't have an ideological axe against this, but my experience in real world emerging markets... I see near zero return on this.

I have to figure the odds are with you on this. I'd like to think your experience doesn't completely fit because you've worked with larger entities etc. But still your experience is vastly greater than mine, so there's a strong chance you know what you're talking about even if it isn't directly what you've done. And I definitely have nothing to back up my ideas except a naive hope.

Selah. Sorry to waste everybody's time.

Actually my experience has been in Priv. Eq in part financing smaller firms in these markets.

Spot on.

I see the problems, not sure if I know the real solutions other than addressing incentives alignment.

Throwing out the idea wasn't bad or a waste of time; but as such it isn't a winner.

Still, US public diplomacy might make this money well spent. US popularity is in a free fall. Spreading around some subsidised young MBAs, engineers and the like to emerging markets firm to "atruistically" help them might have a kinda crappy real return in terms of boosting economic growth (as AID), but the fresh faces would have nice positive spin aspect and may create a reservoir of future expertise.

Those are valuable things, I should think.

Also subsidised pairing up with start ups might have positive overall effect. Not night and day, but potentially interesting with returns on USG money spent on a number of fronts.