McKinsey Executive Roundtable Series in International Economics: Foreign Aid and Economic Development

NICHOLAS D. KRISTOF: Thank you very much for joining the Executive Roundtable discussion. We just overcame our mild calamity here and—

STEVEN RADELET: I was just trying to throw something at Arvind—(laughter).

KRISTOF: We promise conflict and interesting discussion. (Laughter.) Everything will be flying.

I’m Nicholas Kristof from The New York Times, and I appreciate your attendance.

First of all, I’d like to offer the standard warning about your cell phones and BlackBerrys. Please do turn them off at this time.

This is, in contrast to most meetings here, this is on the record. And so feel free to write away—just not for competing publications. (Laughter.)

I should also say that it’s a real triumph for the council to have gotten these people here in one country at one time. They travel more than anybody. Clay just came back from Moscow. And scheduling it has been a real achievement for the council and for them.

The speakers you know about, I’ll just mention briefly. William Easterly, professor of economics at New York University and, I’m sure many of you know, author of this new book on development which is just out, and a terrific book.

WILLIAM EASTERLY: I’ll take you to lunch.

KRISTOF: Ten percent of royalties—(laughter)—(from today ?) to my account. (Laughter.)

And Clay Lowery, the assistant secretary for financial affairs at the Treasury. Steve Radelet, to my left, at the Center for Global Development, who’s also spent lots of time in places from Indonesia to Liberia and originally Western Samoa, of all places. And Arvind Subramanian, who is at the IMF, and author—as those of you who, I hope, read carefully your copies of Foreign Affairs—had an important article last year on development aid and making it efficient.

Our focus is going to be—to try to keep a thread going here—is going to be how we make development aid more effective; how we get more bang for the buck from aid.

And Bill Easterly, let me maybe start with you. Your book is often—it’s perceived sometimes as being an attack on aid, but I think you fundamentally subscribe to this basic premise that it can be successful, it can be effective. And assuming that that’s true, do you worry that by emphasizing the criticism, the problems in aid, the drawbacks of it, that in a sense you’re undermining the public case for it and that the upshot will be less money going out even of the kinds you—you know, you believe. Is it dangerous to say the emperor has no clothes?

EASTERLY: Well, Nick, you’re the latest distinguished addition to a long line of people who have tried to get me to be more constructive, more—(laughter)—not so negative. So let me say right away I think aid works except for the poor people. (Laughter.)

You know, I think actually the battle for the skepticism about aid has already been lost, to some degree. And actually I think there is a constituency that does not so much want to see aid eliminated or cut, but see aid to be much more effective. And the simple thing that I have to say to those people, that I think I might find some agreement here, is just that aid can be effective if you really start holding aid agencies accountable for accomplishing what they’re supposed to be doing.

There were between 1 (million) and 3 million deaths last year attributable to malaria, and there are 12-cent medications, medications that cost 12 cents a dose, that would save someone’s life from malaria. And yet despite huge aid agency efforts, somehow the malaria drugs are not reaching these victims. And no one is accountable for that. There are grandiose public statements, grandiose world summits about cutting malaria, but somehow it doesn’t happen. So somebody has to—making it effective really boils down to holding somebody—forcing an aid agency to take responsibility for a specific task like getting malaria medicines to victims, and then, you know, be rewarded of success and penalized for failure. Once we can start thinking in those concrete terms, then I think aid could be a lot more effective.

Now, unfortunately, aid often goes in precisely the opposite direction. We talk about whether aid can create economic growth. And a lot of the people on the panel have written on this question. Aside from the empirical evidence on whether aid can create economic growth—which I think is very negative that there is no evidence that it creates economic growth—but aside from that issue, a general goal like economic growth obviously depends on many, many factors and many, many different agents, and it’s impossible to hold anyone accountable for whether aid achieves economic growth. Aid should be designed so that you can hold someone accountable for something under their control, like getting malaria medicines to victims.

KRISTOF: Just to push you a little more, though, on that, I mean in your book, for example, you’re very critical of the Jeff Sachs approach or the Millennium Development goal approach. Is—I mean, aren’t they—even if one accepts your criticisms, then in fact haven’t they been pretty successful at generating much more public attention to the problem and, indeed, funds for addressing them in one way or another?

EASTERLY: I think it’s potentially very dangerous to convince people to give aid for the wrong reasons, to create expectations that aid will achieve somehow the end of world poverty. And that obviously is not going to happen. Anyone who really looks at the evidence knows that’s not going to happen. In fact, none of the main Millennium Development goals of cutting infant mortality and maternal mortality are going to be achieved in many important regions like Africa and some—not in South Asia.

So, you know, what I’m really afraid of is that there’ll be a big backlash from these enormously high expectations that Jeff Sachs creates by promising that things will be—he even says at one point, you know, “Escaping from poverty is much easier than it appears.” You know, I think that’s—frankly, I think that’s irresponsible to make a statement like that. Everything we know about development is it’s very hard, we have to work very hard. And when you promise sort of easy solutions and, you know, big grandiose achievements like the end of poverty, or even cutting in half world poverty, and then it doesn’t happen—as it is not going to happen—then I have to fear there’ll be a backlash that will destroy—lead to a new wave of cynicism that will destroy the case for effective aid, that will destroy the ability of people to do effective things that work for our generation.

And so I think that the Jeff Sachs’ approach is, frankly, very dangerous.

KRISTOF: Clay, let me turn to you. Corruption is one of the issues that—you know, that people always bring up, and is one of the obstacles that one has to go through to deliver aid. Tell me a little bit how the administration approaches the problem or how we should approach the problem of wanting to deliver aid, wanting to help people in countries where there is a tremendous indigenous problem of corruption.

CLAY LOWERY: Well, I think that, first of all, I think Bill raises some very important points about accountability and incentives and transparency.

And I think that corruption is—goes right to the point he just made about the danger of over-promising and the danger of basically taxpayers saying, “I’ve had enough. I don’t want to put any more money into this.”

I told someone a few weeks ago I hate the name “donor” because the word “donor” doesn’t make any sense. The word “donor” is basically taxpayers being told we’re going to put some more money into helping Ghana raise its growth rates, or something like that.

So corruption is the thing that will undermine any aid the most because it undermines any support back from the taxpayers, it undermines, obviously, the governments and the countries themselves.

So what I think we’ve been trying to do—and some of it’s experimental and some of it’s not—is to, you know, try to figure out ways to measure results, and try to figure out ways of putting into place good systems, procurement, fiduciary systems, and try to basically reward sound policies and good policies because those are the countries that are probably putting in place policies that are—they’re not leading to as much corruption.

There’s going to be a significant amount of corruption. There’s corruption in this country. But what we’ve been trying to do is try to figure how to create the right types of incentives in the system to weed out corruption. And it does mean that at times you will have to do—you will have to say no, and you’ll have to say no to very poor people. And that’s very difficult to do. But I think that in order for us to show that we’re being—we’re holding ourselves accountable—to put it in Bill’s terms—we have to figure out a way that corruption is just an unacceptable thing for us to do in the aid community.

KRISTOF: Steve, let me—I want to actually follow up on that with you. But you were frantically writing notes. If you want to—no? Okay. (Laughter.) If you wanted to take a swipe at some of those—

STEVEN RADELET: No—

KRISTOF:—(inaudible)—pick up that water and—(laughter).

RADELET: No, I won’t do that. I don’t have any left. I already threw it at Arv. (Laughter.)

(Inaudible) --hot coffee, I might—(laughter).

No, actually I agree with much of what has been said. I think Bill’s absolutely right that a key to this is holding aid agencies much more accountable. Part of that is getting our objectives clearer and making it much more clear what different types of aid programs are designed to achieve.

We all know that a lot of our aid goes to political allies—historically, the Cold War, for a long time Egypt and Israel, now to our friends in Pakistan and Jordan—for very important foreign policy goals. Those are legitimate goals. They’re important goals. They weren’t really all about poverty reduction. We gave aid to Egypt and Israel to support the Camp David Peace Accords. By a lot of measures, the Camp David Peace Accords were wildly successful—I don’t know—“wildly”—they’ve been successful. Israel and Egypt haven’t shot at each other in a long time.

They weren’t—the aid wasn’t fundamentally about economic growth. Those kinds of objectives are great. But I think it helps to clarify what our objectives are in those countries or what our objectives are for our aid to Pakistan today versus our objectives for our aid programs that really are designed to support growth.

As Bill mentioned, we’ve—as most of us have written on the aid-growth relationship, my reading of that—most of the evidence over the last 10 years does support a positive relationship between aid and growth across countries. Many studies have found this. They’re not as high-profile, but that’s what most of the evidence finds. My colleagues disagree with that; that’s fine, but there is a lot of evidence out there. It’s not the case that all the evidence is to the contrary.

And we know many countries— Botswana, Korea, more recently, Uganda, Mozambique—that have received large amounts of aid flows that have done very well. We know that aid for health has done reasonably well in eliminating smallpox and getting oral rehydration therapy to millions of children to getting immunization rates out. That doesn’t mean that aid has been successful in all places. It certainly hasn’t. It’s been wasted, thrown away and abused and failed in many countries. But the record is more mixed, and those who say it never works anywhere, I think, are incorrect as are those that say it’s the miracle elixir.

Bill’s right. It is not the key ingredient to growth. I think it can be supportive of growth. But you get much more bang out of trade policies, out of building institutions, out of investments in health and education. I think aid can be supportive of that.

So we’ve got to keep our objectives clear and our expectations right.

Just on the issue of corruption—just quickly—it’s really a difficult one, I think, and I don’t think we actually have a good way of actually thinking about it clearly. Everybody wants to say no to corruption, absolutely no. But there’s no country where there’s no corruption. As Clay alluded to, I recently heard stories of—I’m shocked—but there’s actually corruption in Washington. I’m actually shocked. (Laughter.)

LOWERY: Not in New York. It’s not in New York. (Laughter.)

RADELET: It’s not in New York or Chicago. But in Washington, there’s reports of it, anyway. So we’re never going to eliminate it. So the attitude of, “If I find any corruption, we’re out of here”—it just practically isn’t helpful. But on the other hand, we can’t just allow corruption to go on.

A lot of it is that the ultimate answer, I think, to combatting corruption is building the right institutions, which is something that Arvind has written a lot about. That takes time and effort. It takes a long time. Part of the reason that we have less corruption than we once did is because we have institutions like the FCC and the Federal Deposit Insurance Corporation and a better court system than we once had, that institutions built up that help stamp that out. That takes a long time, and how we build those institutions, we actually don’t know very much about, frankly. And I think that’s at the root at this debate.

So I think the debate about corruption still isn’t quite structured right in a helpful way. There’s too much, I think, on the extremes and not enough about how we actually can tackle it.

KRISTOF: Arvind, I invite you to weigh in, and also perhaps address the other—the larger question of what we’ve been talking about financial—about writing checks. And if you can also address the question of, you know, ways that you’ve written about that involve other kinds of outside help.

ARVIND SUBRAMANIAN: Right. Thanks, Nick.

But before I begin, I think while I—I mean, I agree almost entirely with what Bill said, and I think also the evidence generally points in the direction of a slightly disappointing record for it, but what’s more interesting about the recent evidence is we’re kind of going beyond whether—good or bad—to actually understanding why the record has been so disappointing. And one thing which I’d like to come back to later is the road that aid has had in actually preventing the growth of manufacturing exports, especially in Africa—and perhaps later I could come that.

But coming to the question that Nick asked—you know, I think Bill’s book, as I read it, is more an indictment of, you know, a certain kind of aid, which is writing checks to governments. I would call that traditional kind of aid. But in fact—and that record is disappointing—but there is something—I think if we enlarge the question and say not whether we write checks to government but one, whether we can help beyond checks and whether we can help beyond providing this to recipient governments, then I think there’s a whole lot of positive experience that we can draw from.

And let me give you three examples, if I have time, yes?

If you look back at the postwar period and asked: What has the West done that’s really been—promoted development around the world? I would say two things: one, the Green Revolution, and two, this kind of antibiotics/medical revolution in the ‘40s and ‘50s.

Now, the Green Revolution, you know, boosted agricultural productivity in Asia; to a lesser extent, in Africa. And I think that has played a big role in Asia’s development.

Africa has not had a Green Revolution. Agriculture in Africa is still prone to all kinds of problems, and this is an area where, you know, the outside world can help.

Similarly, in terms of—if you look at even Africa, one of the positive successes of over the last 30, 40 years, of course, until the recent AIDS epidemic, is that life expectancy—incomes haven’t improved in Africa, but life expectancy has in fact gone up from something like in the 30s to the 50s; i.e., that’s about—around 85. And what caused that? I mean, the discovery of antibiotics, DDT, vaccines for yellow fever and so on, in the ‘30s and the ‘40s.

So this leads me to pose the question or to say in our paper, as we did, that why don’t we spend more money actually rewarding research of interest to Africa? This research will never be done on its own by the private sector, because the incomes to pay for it isn’t there. But imagine creating a huge technology fund that could actually generate research on tropical agriculture, on diseases, vaccines. That would have a big impact. That’s point number one.

The second kind of assistance pertains to corruption. You know, I think outsiders can do very little to change institutions and corruption, because we know social engineering is difficult at home; it’s infinitely more difficult to do it long-distance.

But I will say the good news is there are two sides to corruption. There’s someone who takes the bribe and someone who gives the bribe.

Now, the outside world can certainly do a lot more in terms of taking action against those who give the bribes or those who accept illicit wealth. And what I have in mind is two things. For example, if laws around the OECD could get tougher in terms of getting people who are involved in bribes—i.e., U.S. government officials or companies—and if they’re seriously liable to prosecution here in the U.S., I think that could have some positive, if modest, effect on corruption.

Similarly, if banks had to disclose, if Western banks had to disclose where the wealth was coming from, the illicit wealth—and at $70 a barrel there’s a lot of illicit wealth in the system—if we could track that like now we’re tracking anti-—you know, financing of terrorism, I think that could also have a positive impact.

So I think one needs to look beyond the traditional, think more innovatively, be more creative, and not be so bound by inertia and traditional forms of helping, which, as Bill superbly documents, has had a disappointing record.

KRISTOF: One nontraditional form of aid, one thing we don’t think of in terms of foreign aid, I suppose, would be to provide security to a country that is falling apart and maybe—I mean, I think of Darfur or Chad, that right now we’re—you know, we’re maybe building clinics in Chad, but you know, if Chad falls apart, as it may well in the next few months, then those clinics aren’t going to do a lot of good.

Steve, you’ve spent a lot of time in Liberia, which is one of these places where infection of insecurity has spread across the region. I mean, should we be thinking about, you know, providing some—about foreign aid in the form of some kind of a security force to go in and try to provide stability?

RADELET: Well, in some circumstances, we do. And in fact, Liberia—we’re doing that. I’ve had the good fortune of being there four times in the last four months, working with the new government. And it’s, on the one hand, lots of fun to work with a very good new government that’s really moving in the right direction, and on the other hand, the obstacles that they have to mount after 15 years of wanton destruction is unbelievable.

There is a force that’s there. It’s the second-largest U.N. force in the world, after DROC, after the Democratic Republic of Congo. There’s 15,000 blue helmets in Liberia these days. They have been there for two years—two and a half years now, since they chased Charles Taylor out. And they have been very successful in keeping stability there and allowing two rounds of peaceful elections and the hand-over of a democratically elected government. And they are absolutely central to what’s going on there.

They cost about a billion dollars a year, to keep them there. And it doesn’t show up in the aid numbers, but it’s real numbers. It’s real financing that’s coming out of someone’s pocket.

In the absence of that, they wouldn’t have a chance. They wouldn’t stand a chance.

And one of the real challenges going forward for Liberia, as the new government solidifies itself and gets its new programs, trains a new set of security forces and hopefully begins to create some economic opportunities, will be the phaseout of these troops. And if they are phased out too early, there is a danger that some of the guerrilla groups will come back, some of the warlords that are still them, some of them well-known members of the Liberian Senate—former warlords—like the guy who executed Samuel Doe was found—senator. But to phase out those troops in a way doesn’t undermine the stability.

Meanwhile, there’s a lot of other aid going in on basic infrastructure, on electricity. There’s no electricity in the country at all. All the buildings are full of bullet holes. The place has totally collapsed, and there’s a lot of aid money going there.

Will it work? I don’t know. High risks, big risks. I think in a place like Liberia you’ve got to think about this much more as a venture capitalist. The odds are long. The chances of success are probably slim, one in four or something, maybe less than that; maybe it’s one in 10. Can we therefore stand by and do nothing? No. If we make a big effort and for whatever reason it doesn’t work, does that mean it was a bad idea? I don’t think so. I think we got to go in with eyes open and realize this is a very risky business that we’re in, particularly in places like Liberia, and it’s going to take a lot of support, both security-wise and financial-wise. And it still might not be successful because this is a much tougher challenge than I think most people recognize.

KRISTOF: Bill, Arvind alluded a moment ago to the question of industry in poor countries, and I mean, it is striking that in places from Cambodia to Bangladesh and a lot of poor countries elsewhere in the world, there is a, you know, shirts and socks and all kinds of things are being made and providing a real local manufacturing base; much less true in Africa. Are there—you know, is there more in the form of this kind of nontraditional aid that we should be doing along those lines, that would help build an economic base?

EASTERLY: Well, I mean, of course the big thing we know about economic growth in the long run is it’s mainly due to the effort really dynamic private sector people at the bottom. It’s mainly up to them what—whether growth will happen or not. And actually, there is a lot of dynamism in Africa at the bottom. You know, entrepreneurs in Africa are really operating under incredibly adverse conditions, much more so than, you know, us pampered people over here, and coping, you know, remarkably well.

You know, there’s a guy named Aluf Contay (ph) who started a cell phone network right in the middle of the civil war in a place called the Democratic Republic of the Congo. You know, right in the middle of that complete chaos with seven foreign armies and complete anarchy and no government, he managed to start a cell phone company. Nobody would ship cell phone towers into the country, so he just got local men to weld some scrap metal together, and he used trees, and he managed to get cell phone towers operating. And the demand exploded for this phones. You know, they can be used for other productive entrepreneurs; you know, someone doing fishing can call their customers and let them know when they have live fish ready to be sold.

And you know, that’s—cell phone use is actually expanding by a factor of 10 every three years in Africa. That’s the kind of dynamism that’s going on. When you go to any African city now, you’ll see little kind of cardboard or wooden stands at which cell phone cards are sold, which would—people can buy minutes to use on cell phones, and these are not teenagers talking with their boyfriends. These are productive entrepreneurs using them to solve a lot of other problems.

So you know, can aid agencies do something constructive to help harness this dynamism? Well, this is—this again is an area where you have to abandon the grandiose notion that you can somehow impose some kind of ideal free market institutions on the country from the top-down with some grandiose package design in Washington. That’s—that has already been tried. It was called structural adjustment. That didn’t work.

What you can do is just hold aid agencies accountable for making progress on very specific things that hamper private sector dynamism; like one that’s gotten a lot of attention is the World Bank. And one of the good, positive things that I’m doing—that it is doing, sorry—not that I’m doing—(laughter). What I’m doing is talking about something good and positive—(laughter). One of the good, positive things the World Bank is doing is monitoring—it has this project called Doing Business, in which it monitors, you know, the regulatory red tape that hampers doing business.

And it has specific statistics, like number of days to start a business, you know, which is kind of like most of my lifetime in poor countries, and is like two days in Finland. You know, that’s kind of the range of variation. And you know, that’s something that you can monitor continuously and you could hold an aid agency accountable for some aid intervention that’s designed to work with the government on simplifying red tape, when it wants to do so.

SUBRAMANIAN: But I think the question is—is I think, Nick, the way you posed it was can we provide some non-traditional forms of aid that can actually help.

But I think the equally valued question to ask is whether the forms of aid that we have provided in the past have in any way helped or hindered the growth of manufacturing exports as well. So there’s both a what should we do and what should we not do component.

And at least my reading of the evidence in Africa is that—so here’s a really stark puzzle for Africa. Why haven’t we seen a textile and clothing industry in Africa like we’ve seen in Vietnam, Cambodia and these places? So that’s a—it’s a real puzzle. It’s a puzzle for two reasons. One, we’re not talking about very sophisticated things that require a lot of organization, a lot of institutions, a lot of infrastructure. I mean, you import a T-shirt, you stick a label and you ship it out. So it’s not very high tech.

Secondly, it’s also surprising because many other countries have done it very easily, and Africa has not been able to do it, despite having very, very preferential access on these to OECD markets. So that’s a puzzle. And even the countries that Steve mentioned, for example, that have done relatively well—Uganda, Tanzania, Kenya, Senegal, Mozambique—in none of these countries do you see manufacturing having taken off. They’re absolutely flat.

So the research that I have done with—you know, with our chief economist at the IMF—Raghu—it actually shows that—I mean there is actually a kind of detrimental impact coming from traditional forms of aid on manufacturing, because what aid does is it makes manufacturing quite uncompetitive. Now, there are very fancy ways of explaining this, and it’s called Dutch disease, and so on, but at its heart it’s actually very simple. And the way it happens is that—think of it this way, that, you know, talent, enterprise, initiative in all these countries is very scarce. Now, what happens with aid is that all this talent and enterprise is kind of sucked into the aid industry rather into manufacturing, and so on. So in that sense, you know, manufacturing exporting actually is handicapped by having so much aid.

You go to Mozambique or Uganda, for example, and you do a sample of where all the really bright and talented people are—or many of them—you’d find them in the aid industry, where they in fact should be in manufacturing.

And I once met a friend of mine who’s now a senator in Nigeria, and I asked him, you know, where’s all the initiative and enterprise in Nigeria. And he said, you know, it’s all here trying to get the rents from oil. So in that sense, you know, aid is almost like a distraction away from manufacturing and export.

KRISTOF: But, Arvind—or anybody—I mean, isn’t there also another obstacle—I mean, I would have thought that if there are any garment tycoons here in this room, that they would be very nervous about manufacturing in Mauritius, say, because if they did, the only way to make it profitable would be to pay people, you know, very low wages, and then The New York Times would write nasty articles about them exploiting people. (Laughter.)

I mean, I wonder if the anti-sweatshop movement doesn’t in fact undermine the opportunity to create that kind of manufacturing in low-wage countries?

LOWERY: Let me—

SUBRAMANIAN: Can I—

LOWERY: Go ahead.

SUBRAMANIAN: I mean, clearly there are, you know, multiple causes for why you don’t see this kind of thing. And I think, you know, the red tape, the lack of infrastructure, all these things are very important. But the evidence that we have all shows that there’s an extra dampening effect coming from the aid business. So, I don’t want to over-blow this effect, but equally it’s there, you know, sucking all the talent away from, you know, the good stuff that needs to be done.

LOWERY: Arvind suggested going to Mozambique and asking the guys. I just got back on Saturday from Mozambique where I was at a private sector conference talking about manufactured exports. (Laughter.) And there was a lot of discussion on exactly this issue. The issue of the exchange rate in competitiveness didn’t really come up. And Arvind’s got some research on this that does show a big effect. Most of the research over the last 15 years shows some effect, but a more modest one.

What was high on these guys’ minds, it wasn’t the sweatshop stuff either, it was things like political instability in the region and how long it takes even after you achieve stability for investors to come into a place. And Africa, of course, is rife with political instability. Mozambique is just beginning to get some investors 12, 13 years after the end of its civil war. Madagascar got some investors, and when there was some stupid instability around some election results three or four years ago, they lost all their contracts on the textile industry that they were doing. So stability is a big thing.

In southern Africa, second big thing is disease. There’s high HIV prevalence rates and high malaria rates, and you’re just not going to get a whole lot of foreign investors to go into a place where there’s a 20-percent HIV prevalence rate or high endemic malaria when there’s other choices out there, and places like Singapore and Sri Lanka, that have come a long way in fighting malaria, have done well. It gets back to Bill’s earlier point about our failure to really get at malaria.

But the other thing that came out and was absolutely the biggest topic of conversation was the doing-business report that the World Bank came out with, and the high red-tape, bureaucratic cost. And across these entrepreneurs, and there’s a lot of very talented people in the business environment there, that’s what they were indicating, that 20, 30 percent or more of their costs were stupid red-tape regulations, part of it coming from the evidence from the World Bank about how long it takes to get a license, how long it takes to clear Customs, how long it takes to get permits, or how hard it is to fire people. They have to pay two years of wages for anybody they hire, which means they don’t—for anybody they fire, which means they don’t hire anybody. Those kinds of things.

And one of the outcomes of this conference, which was quite interesting, was a big of a pact between the private-sector people, that sponsored the conference, and the prime minister, Luisa Diogo, on very specific, measurable goals over the next couple of years as to reducing some specific business costs. So it’s actually one way this research from the World Bank—it’s not a direct World Bank project, but is absolutely having an impact on reducing those costs and, hopefully, making Mozambique a little bit more competitive.

KRISTOF (?): (Off mike.)

LOWERY (?): I’d like to pick up on that a little bit. The doing-business indicators and some of the other work that the World Bank’s doing, which they have these things called “investment climate assessments,” are actually very valuable tools because they actually just show you what the problems are, why are people not investing in these countries. And what we’ve been trying to do—and I’m not saying we’re succeeding completely—what we’ve been trying to do is incentivize, actually, these type of variables so that people will start lowering their business barriers so that there’s more and more opportunity.

And I think that in terms of aid, there’s a couple ways of trying to do that. One is to incentivize this. And that’s what like the Millennium Challenge Account has been trying to do. Another is to basically start looking at how do you help with small and medium enterprise development. This is a big problem especially in Latin America because Latin America has got—if you look at the macroeconomic variables and if you look at the financial variables, they’re great, and yet look what’s going on in Latin America. There is all this angst about kids are not being educated, jobs are not being created; and that’s because the macro is pretty good but the micro is still a real problem.

And I think that there are ways that the aid community can help work on those issues, and including in things like the banking area. If you go to Africa, you go to (large ?) parts of Africa, there is lots of liquidity in Africa, and it’s all going to a very elite group of people. And so there is no intermediation going on, a lot of times, with the banking system. And when the U.S. government actually says, hey, we’re going to try to help with that competition idea—you know, if that’s The New York Times—New York Times beats us over the head because we’re not providing more money for health care or for education, even though the country itself says—

KRISTOF (?): The Washington Post, I think. (Laughter.)

LOWERY (?): I got beaten personally—(laughter)—(inaudible).

But the idea was that, you know, these guys asked for help: “I’m a farmer, I need some access to finance.” There is no access to finance. And, you know, if it takes 45 days to clear a check, who’s going to put a check into the system? So that was kind of—I mean, there’s lots of different things going on. I think Bill’s point’s very valid, though, which is—I mean, something like the doing-business indicators is actually a really good step forward, and the World Bank should be commended for that type of work.

KRISTOF: We’re going to go to questions in just a moment. Let me ask one question of each of you, though, that maybe goes to the question of where we do get the most bang for the buck in development. And that is that, you know, if tomorrow your rich uncle died and left you a billion dollars and you wanted to plow it—I mean, you’d plow it into the council, I’m sure, but—(laughter).

MR. : (Inaudible.) (Laughter.)

KRISTOF: But if you wanted to put it in development, then where—what kind of issue, what kind of investment would you do it in with the theory that you’re going to get more return there than any other? And to start off, for example, if it were my uncle, it would be some combination of girls education, malaria, AIDS prevention, maternal and child health maybe.

Bill?

EASTERLY: Well, I don’t actually think you can make sort of global statements over, you know, that some area like, you know, health or girls education or something as, you know, kind of universally the highest payoff. I think it’s—what’s much more important is to listen to people on the ground and sort of back people on the ground who are finding things that work to solve—obviously, especially local people who are on the ground know a lot more about what the problems are. And you know, that’s—if aid agencies were willing to listen more to them, I think they would have much better records.

By the way, I want to make one little footnote on Steve and Arvind’s discussion. Steve, you said that most of the aid research supports a positive effect of aid on growth. You seem to be using kind of a majority voting rule there. (Laughter.) So I thought I would apply the same rule to this panel. Nick and Clay have not commented, but those who have commented, Arvind and I out vote you 2 to 1. (Laughter.)

So you know, there’s things like—you know, I know personally of a great Ghanaian social entrepreneur who has started a really high quality private university in Accra called Ashesi University, which is being called the sports (moore ?) of Ghana. It’s already been in operation for long enough to graduate its first class. They’re getting private sector jobs. It’s giving scholarships to poor kids out of poverty, and it gives them high quality education so that they can really have a big payoff.

You know, this is a no-brainer that you would fund something like this, and yet the founder of this, Patrick Awuah, has been turned down by all the official aid agencies. I—and this is not—and this is a well-publicized, well-known example, and it’s not a selective example.

I was having coffee yesterday with an economist from Burundi who is one of the best economists in Africa, I think, and he was telling me the same story about Burundi, that they also have started a private university that is much higher quality than the lousy aid-funded public universities. And they also have been completely turned away by the aid agencies.

You know, this is what—one of the reasons why aid doesn’t work. It’s because there isn’t enough—the attempt to impose from Washington form the top-down some idealized notion of what, you know, we experts in Washington and New York think will work whereas in just rewarding people who actually find things that work.

And so that’s what I would do with the money. I would give it to the university in Burundi and the university in Ghana and all the other people around the world who are finding things that work. You know, dating all the way back to Muhammad Yunus, who started Grameen Bank, there are so many examples like this that aid could find, and yet today it’s not funding them, and so many opportunities are being lost.

LOWERY: Okay. What—I think I probably would have to vote with Steve a little bit, but the—

MR. : A little bit? (Laughs.)

LOWERY: Well, part of that is because, look, I mean, when you sit in a government, I mean, you’re trying to figure out how can you have an affect and help these very poor people. You want—you don’t want—you want to end instability as best as you can so that people have a better opportunity, and you want to figure out how to use taxpayers’ resources in the most effective manner possible. I think Bill’s points are extremely valid in that I think that aid can be used well. Steve pointed out earlier there’s a—there are different reasons for using aid.

You know, one, there’s no question, there are political reasons for using it. Second, humanitarian, natural disaster relief. Third, hitting on things like global problems like HIV/AIDS or the environment. It’s where—the tough part is when you want to get into economic growth and transformational development, and I think that where it’s going to work best is where we really, really listen to what the people on the ground are saying. And it’s not always—you’re not going to hear all the time, “Help me educate somebody.” That’s part of it. You might actually hear, “You know what we need more help with is agriculture.” Agriculture is where economic growth is going to come from in Africa. There’s no question about it. But it’s a very difficult business.

Arvind’s point earlier about doing research, I think, is a great point. But where can you target good agriculture programs that are making a difference and increasing productivity? That is an important thing, and frankly, the aid community has not solved that one. Nobody really knows.

How can you build infrastructure projects that are—help people get their products to the markets and don’t turn into white elephants? That’s something that—the aid community ran away from infrastructure and ran away from agriculture, and the reason is is because they’re very difficult and they can lead to corruption and lots of problems.

I think that what—as a government official, what I would recommend is you’ve got to be able to take risks and you’ve got to be able to take chances, but it does mean you’re going to have some payoffs that don’t work out. And that’s a tough environment, especially in Washington, where if you lose a dime or if one dime is stolen, I—you know—I’ll get dragged up and I’ll have to testify, and I’ll try to do the best I can, but I’ll just get beaten up.

And—but what we’re—but that’s still—taking those risks is going to be important because we don’t know the answers. People on the ground might know the answers, but they might be wrong, too, so we have to experiment a little bit.

KRISTOF: Steve—

LOWERY: And a billion dollars.

RADELET: Yeah—

LOWERY: I didn’t put it down. (Laughter.)

RADELET: Actually not much.

But I think Bill’s point actually is quite right, is that there’s no—a couple—both of his points—that there’s no universal answer; it really depends. There’s a lot of different kinds of interventions that can be very successful in some countries like Liberia. Infrastructure is a very—a big need in other countries—girls’ education, health.

I think a lot of aid agencies try to do all of those things in each country. And while the World Bank probably needs to have some expertise in a wide range of issues, it doesn’t need to do all of those things in one country. That’s one of the problems.

Bill’s also right that we missed huge opportunities. Anybody who’s traveled to any developing country finds—knows of a nun that’s running a clinic that if we could get her $50,000, she’d change the world, or someone who’s running a school or someone who’s at a university. But the donors have rules and policies that totally undermine what they’re doing.

In Liberia, they just brought in the new minister of Finance, a Ph.D. from the Fletcher School, 20 years with the World Bank, great. Her salary is going to be about $200 a month, and she’s giving up—it’s a little bit more than—you know, at the World Bank, she got paid a little bit more. She’s got a kid in college.

So there was discussion about maybe, you know, donors could get together and give her a salary of $80,000, $90,000, 100,000 (dollars)—no, no, we won’t do that, can’t do that. Can’t do that at all.

We can, the U.S. ambassador said, give her two or three technical advisers, each of which would cost $250,000 a year by the time you fly them out there. I mean, he literally said, “We cannot give 80,000 (dollars) or $100,000 to support this minister of Finance that could really change the country. We expect her to live on a couple hundred bucks a month. But we’re happy to spend $750,000 to give her three advisers from the Beltway Bandits, who are—none of them can hold a candle to her in terms of competence.” And he said both of these things within about 10 minutes of each other in a meeting. I just—I couldn’t believe it.

In the United States, one of the biggest obstacles to fixing our aid is our Foreign Assistance Act. The Foreign Assistance Act of 1961 was a Kennedy administration piece of legislation in the heart of the Cold War, written with Cold War all over it. It’s been amended many, many, many times. If you download and print it out, it’s 2,500 pages long, depending on how you count 87 different objectives in 64 priority areas in whatever it is. And one of the reasons why the USAID can’t do the kind of flexible things that we’ve been talking about is that it’s earmarked to death. They’ve got to give a certain percentage to this, to that, the other thing, and the aid director on the ground has very, very little maneuverability to adapt and adjust to the things on the ground. It’s a 40-plus-year-old piece of legislation. It’s totally outdated, but we can’t get the momentum to take that on.

I realize there’s always risks when you rewrite legislation, but it’s actually a big part of our problem within the United States. If we can rewrite that piece of legislation, if we can take seriously the ideas of holding the agencies accountable for results, and if we can get away from one size fits all and realize that in relatively well-performing countries, the way we deliver aid should be very different from in failed states, I think we’d make a lot of progress. In well-behaved countries, give them more ownership, give them more control, give them more participation. But that’s not universally true for all countries. We’re not going to do that in failed states and in countries with dictators. We’ve got to have different kinds of approaches.

So without getting into the details, we’ve got to get away from one size fits all and have different approaches in different countries. And when you do those kinds of things, I think we can at least make it marginally, marginally better.

KRISTOF: Arvind.

SUBRAMANIAN: Nick, I think, you know, a billion dollars is going to get you nowhere, because as Bill says, development is not only a hard business, but a home-grown business, so what outsiders can do is very limited.

So I would in fact say not what can outsiders do to help in terms of a billion dollars, but at least the first—the Hippocratic principle: Do no harm. Are there things that you can do no harm? And I think there are two things that in terms of the magnitude of impact of doing no harm are potentially far bigger than anything you can by actually doing things. And the first thing, of course, is global warming, which is going to physically decimate much of—you know, a lot of Africa, South Asia. I mean, it’s physical survival that’s at question here.

And the second, which we’ve seen over the last 20 years, is that one of the things that was imposed on developing countries was access to drugs through intellectual property protection. And even as we speak today, there’s a riot in India against patenting of an HIV drug because the Indian public—this is a grass-roots movement—feels that if you patent that, combatting AIDS in India is going to become that much more expensive.

So Hippocratic principle—at least do no harm.

KRISTOF: I could—since you haven’t spent your money, I would say you could do no harm by buying a subscription to The New York Times for an awful lot of people in Africa for a billion dollars. (Laughter.)

But is there—yeah, there’s a microphone coming around. Please stand up and identify yourself, and please do, you know, have a question mark come pretty quickly.

Yes?

QUESTIONER: I’m Deborah Burand with the Grameen Foundation. Thank you very much for suggesting Dr. Yunus as a beneficiary of your—(laughter).

But I think that—

MR. : I saw you back there!

QUESTIONER: Thank you. You saw me do the pump fist?

Actually, though, I think there’s an interesting point that we might want to explore here. When Dick asked the question—If you had a billion dollars, how would you spend it?—some of you answered from the point of view, as Bill did, of, well, if I was an individual, what would I do, and some of you answered if I was the U.S. government I’d be earmarked to death and I wouldn’t get a chance to spend it.

Can you talk for a second about what is happening in official aid as it responds to the new entrance of private sector aid? We see the Gates Foundation, we see Google, we see other very rich entrepreneurs bring a lot of money to the table. And what does that mean for giving up the roles of aid in our development process?

KRISTOF: Clay, why don’t you address that?

LOWERY: Okay. I think it’s a great question, and it’s something that we’re trying to get better at. I think that basically, you know, we’re the government, so we don’t know really what to do when people actually throw money at us—is—trying to create partnerships with the private sector on these issues is very important.

One of the things that—in Pakistan, when the earthquake hit last year and it was so devastating, we actually were able to get five or six big companies to come on board and actually work with us on providing foreign assistance; basically using the resources of the U.S. government plus some of the institutions, but having some of the resources not just be the taxpayer resources, but these corporations that really wanted to do well.

The Gates Foundation has been doing amazing work on some of the vaccines deliveries around the world. And I think that, you know, frankly, we’ve been trying to learn from them and to co-opt them, when we can. They only want to be co-opted so much, though, because, you know, the U.S. government, you know, can be a little controversial at times.

And so I think what we’ve been trying to do, at least, is use these very good people, take their ideas because—and they actually can experiment more than we can because of some of the issues that Steve put out there. But what we’re trying to do is partner with them where we can so that we can help leverage their funds with our funds. And it’s something that has been growing over the last, probably I would say five years dramatically.

But it’s something that we’re actually—one of the things we’re trying to do is the Hudson Institute has been trying to actually document exactly what this really is. And what we’ve been trying to do is figure out whether or not the OECD, which kind of measures development assistance, and so forth, can bring private capital flows to development purposes, can actually start measuring that so we can get a better idea where is it working, where is it not working, what type of flows are we actually seeing. We have a long way to go on that. But the Hudson Institute has actually made a dent on the issue.

SUBRAMANIAN: Nick, can—

KRISTOF: Briefly.

SUBRAMANIAN: Very briefly.

I think the short answer is it’s great because it’s competition and kind of it will help exactly the accountability thing that Steve has been saying. And I hope they won’t get co-opted!

LOWERY: Right.

SUBRAMANIAN: I mean, you need competition.

LOWERY: No, I agree there.

KRISTOF: Yes?

QUESTIONER: Jim Davis. Focusing specifically on economic growth, to what extent would any policy be helped if it was directed at countries that had currency stability either as a function of a currency board or dollarizing, like Ecuador?

LOWERY: Very few countries I think meet the conditions for a currency board or pure dollarization. There are a few small, very open economies where it might work. But in most countries where this has been tried, it doesn’t really work very well. And at least for the moment, the better solution in most countries is to have a floating exchange rate that can adjust to shocks, whether it’s export price shocks or the kinds of things. And it turns out that for countries like that, especially those that are dependent on primary export products, to manage a fixed exchange rate through a currency board is very difficult in the face of big kinds of shocks, and it just hasn’t worked very well. So that might apply in a few countries, but it’s not any big solution for a lot of countries, I think.

KRISTOF: Yes? Right there.

QUESTIONER: Dick Huber. Steve, you brought up a point which gets lost a lot, which is, you know, upwards of half of our— U.S. government—foreign aid is really strategic. I mean, I still think probably what, over a third goes to Israel and Egypt—

RADELET: It’s less than that now. It’s actually been falling, partly because (those ?) are falling, partly because we give so much to Iraq, actually.

QUESTIONER: It’s still something like $500 to each man, woman and child in Israel, and one dollar for each person in Africa. I mean, this is—and Nick, I direct this to you. It just doesn’t ever seem to get put out to the public, and the American public has this misperception that we are, first of all, giving far more in aid than we really are—

KRISTOF: I need a question mark there! (Laughs.)

QUESTIONER: And, you know, wouldn’t it be more helpful if this were more widely known?

KRISTOF: Yeah, definitely. (Laughter.)

RADELET: Just quickly, I think the solution to that is we ought to really have a special account in the U.S. government for legitimate types of purposes to do exactly that. There is a lot of publicity that the U.S. is increasing its foreign aid over the last few years, and if you actually look at it, you know, I mentioned Iraq—we give a huge share of our funding to Iraq and now to Jordan and to Pakistan. And, you know, and that’s for a legitimate purpose. But I think it really should be separated in the accounting so that becomes more clear and so that we judge it against the merits for what it was intended.

LOWERY: Could I—real quickly, just because it does apply to the U.S. government, is that it’s difficult because—I mean Steve’s right, I mean having categories of buckets you can put it in would be nice. It’s difficult to do, though. Is Afghanistan for political purposes or—I mean, Afghanistan is one of the poorest countries in the world. And, you know, the fact that we have ramped up our—how much money we are giving to Afghanistan is seen, obviously, in the—after 9/11, and so forth, and for political purposes. But quite frankly, that country is much more for development purposes.

And I think that, you know, it’s an honest debate, but I think that it’s a good point you’re raising. But actually, you have seen a big growth in development assistance from the United States over the last four or five years, not all of it going to just like these vital national interest countries.

KRISTOF: Yes?

QUESTIONER: Thanks. I’m Lucy Komisar. I’m a journalist. And I’m also on the International Steering Committee of the Tax Justice Network. There’s something missing in this discussion of foreign aid to developing economies, is that foreign aid routinely doesn’t get there, doesn’t stay there. It makes a round trip back to the markets of the—(word inaudible)—with the help of the tax havens that exist with the blessing and the participation of the developing world.

KRISTOF: Your question is?

QUESTIONER: Well, let me give you one example.

KRISTOF: No. No. Just please give us a question.

QUESTIONER: No, but—the question—part of it is that this is an issue that has not been discussed in this organization, the role of the tax havens. And that also the debt of the developing countries, the foreign aid, often loans, is not audited by the IMF, the World Bank or other lenders. So when is the IMF—

KRISTOF: Okay, let me get—let me get someone that’s—

QUESTIONER:—and the U.S. Treasury going to—

KRISTOF: I’m going to—let me get some—

QUESTIONER: I asked—

KRISTOF: We really can’t have—

QUESTIONER:—a question that started with “When is”—

KRISTOF: Okay.

QUESTIONER: But it’s important because this organization here doesn’t deal with this question. When is the IMF and the World Bank and the U.S. Treasury going to shut down the off-shore bank secrecy system that is the getaway car for the looting of foreign aid?

(Cross talk.)

KRISTOF: Clay, since you work for the U.S. Treasury.

(Laughter.)

LOWERY: She asked about the IMF as well. (Laughter.)

The—it—I don’t know a lot about this issue. I know that we are always concerned about illicit use of—resources being used for illicit purposes. And I’m just going to leave it at that. I don’t know a lot about this issue.

SUBRAMANIAN: I mean, just a factual statement—that part of the work the IMF does is—in our regulatory or surveillance function, as we call it, is, we do periodic assessments of what we call offshore financial centers. And so, you know, this is—and we address this because we do, I think, recognize the concern that these offshore centers could potentially have wider ramifications because of their activities. So this is part of the commitment of the international community, to monitor these offshore financial sectors.

RADELET: Two quick comments. One is that implied in your question was that it’s mostly foreign aid that goes to these offshore centers. I’m sure there are some foreign aid that goes off, but I think it’s—more of it is domestic resources. The years that I worked in Indonesia, I can assure you, it was mostly Suharto family stuff that—when it was going offshore, rather than foreign aid. So that’s one.

The second is that, you know, I’m not sure what leverage the IMF has over Switzerland. It doesn’t have any leverage over Switzerland to change Swiss bank laws. It can highlight, it can publicize, but it can’t force either Switzerland or other countries to change its bank secrecy laws.

I think it’s a legitimate question. I think it’s much broader than foreign aid. But I’m not sure the IMF is the right institution to take that on.

KRISTOF: Yes?

QUESTIONER: John Beattie (sp) from UBS. A few years ago, President Bush, on a visit to Nigeria, proposed a development of a secondary mortgage market as a means of ultimately stimulating low-cost access to credit. I guess a question for you is, first of all, have funds been appropriated for this program? And secondly, have there been any programs implemented in any African countries?

LOWERY: Yeah. It’s a good question.

The—I’m not exactly sure—it wasn’t specifically under my proposal, but here’s what I know. They actually had been able to do some work done in Zambia, of all places, and had been able to actually start a bit of a market going.

Part of it is—and where you have—if you want to know more about it, the place to go is a place called OPIC, the Overseas Private Investment Corporation. And OPIC is actually looking at doing more in the area of creating mortgage markets both in Africa and in Latin America.

The biggest problem you have is creating a secondary market in an area where there’s no primary market. And so you have to start developing the primary market, first of all, and also—I mean, obviously when you get into mortgages, you’ve got to—you get into titling issues and property rights issues. And so some countries don’t have any of those things. So you’re—you kind of got to start somewhere. And where I understand that we’ve actually made some fairly significant progress, surprisingly significant progress, is Zambia.

But that—you just heard almost everything I knew about the program. (Soft laughter.)

KRISTOF: Yes?

QUESTIONER: I’m John Chambers (sp), and I was wondering if Bill and Steve could review the evidence on the impact of aid on economic growth. (Laughter.)

RADELET: This will take an hour.

MR. : Yeah. (Laughter.)

RADELET: I’m going to settle in. (Laughter.)

EASTERLY: Steve, you can go first.

KRISTOF: Just really briefly, please.

RADELET: There are three different strands of research over the last 10 years. One set concludes that there’s no relationship between aid and growth. Almost all of that research assumes or tests for a linear relationship, with growth at the first dollar of aid has the same impact as the billionth dollar of aid.

And there’s wide evidence—and I absolutely agree there’s no linear relationship between aid and growth, but there’s a lot of research in that area.

A second strain of growth, very popular, has been a conditional relationship; that is, that aid work’s conditional on good policies, good institutions. This was made famous by Craig Burnside and David Dollar at the World Bank, and others, that said aid works under certain circumstances, good government, and not in others.

Bill and others have contributed to looking at that research and finding that it’s quite fragile; that when you look at it and do some testing on the econometrics, it falls apart.

A third set, which—you know, majority rules—there are several studies out there, in well—reputable journals, that look at the aid-growth relationship and look at—assume diminishing returns; that is, that as there’s more and more aid, that it has less bang for the buck, either because of capacity constraints or just diminishing returns on investment for a whole variety of reasons. Most of that research has found a positive and significant relationship with growth.

Now, these guys aren’t convinced by that evidence, and that’s fine. They’re welcome to their views. But there are a whole set of studies out there that find that.

We’ve contributed to that with one sort of permutation to that, which is to look at—to disaggregate aid and to say, you know, not all aid is aimed at growth. There’s aid for humanitarian crises, which wasn’t to provide food, which is not ultimately designed for growth; disaster relief; even aid for education or judicial building. It might help growth, but in the very long term, and it’s hard to detect.

And if you take, in our research, about half of aid, which is actually directed at growth—building roads, agriculture, those kinds of things—and look at diminishing returns over time, we find a fairly—a robust relationship between that subcategory of aid and growth.

Now, again, my colleagues aren’t convinced by the evidence, but I think that’s a reasonable reading of at least what’s out there.

EASTERLY: Well, there’s—

SUBRAMANIAN: Bill, you can speak on my behalf, if—

(Laughter.)

EASTERLY: (How can I?)?

There’s one world non-econometrician whose insights on technical econometric methodology are very relevant. That’s Mark Twain—(laughter)—who said that there’s lies, damned lies and statistics. (Laughter.)

You know, this is an area where, you know, a thousand flowers have bloomed because there are so many possible ways to slice and dice the data. You know, you can have Steve’s nonlinear, his—it looks like this—nonlinear effect of aid on growth. It can have diminishing returns, which is actually the same as the nonlinear thing. It also looks like this, which actually has this weird feature that—because it goes like this, aid could actually be—start doing more—start becoming negative if you get too much aid. So you want to start throwing away the aid after you’ve gotten a certain amount of it.

You know, what I think is the fatal weakness of this whole literature is that because there are so many different ways to slice and dice the data, you can get any result you want.

And the only sort of way that you can get a clear answer on whether a given study is finding a given aid-and-growth relationship is to try to replicate the results. That’s what’s done in natural science and in our other respectable fields of inquiry. And I wish economists would do this somewhat more.

So far, all these sort of positive aid-and-growth studies have failed the replication tests. That’s my reason for not believing the aid-and-growth result, plus the big stylized facts out there, such as, you know, $568 billion went to Africa over the last 42 years. The result: zero rise in living standards in Africa, you know. That’s—you take a big stylized fact like that, and it makes it even harder to believe that there is really a big growth payoff to aid.

RADELET: I’d just very quickly add two things. There—none of the evidence is any downward slope. They just use the—(inaudible)—upwards—

EASTERLY: Well—(inaudible)—is trying very hard to get it into the negative—

(Laughter, cross talk.)

RADELET: One of those—(inaudible)—and several of the studies have been replicated. Our research replicated several other studies that have found this. So many of them have been replicated.

KRISTOF: We have time for about half a question. Any—yes, Roger. Half a question.

QUESTIONER: Roger Kline, McKinsey. Does sector targeting work? And if so, how do you decide on the sectors? One of you talked about the importance of manufacturing, export manufacturing. One of you talked about agriculture. How do you decide this? Do you decide it? How do you decide it?

SUBRAMANIAN: You know, I think when you think about aid and say, you know, I’m going to use aid for X sector or Y sector, I mean, there’s a basic problem here, because aid is fungible. It’s a pot of money. You give it to a government. That government gets this pot and decides how to use it. So the whole notion that you can target with aid is subject to the caveat that this is a common pool of money which can be shifted around. So inherently targeting is not easy. So I think one has to be careful about that.

And the second question is that we don’t really have a clue as to which sectors are better than other sectors. So to engage in this exercise of, you know, a planner deciding which sector to target is inherently problematical.

KRISTOF: Go ahead.

RADELET: There’s a difference between a country and its strategy, its economic development strategy targeting and an aid agency’s targeting. I don’t think industrial targeting has worked overall—there are some successes but a lot of failures—when you pick a very specific industry.

On the other hand, I think it makes sense for developing countries to recognize that if they are going to get job growth, it’s going to be in labor-intensive activities that can be competitive on world markets. And in most countries, that’s going to be agriculture—of course different crops in different places—labor-intensive exports, although it’s hard to get those going; and perhaps some services—some backroom accounting and those kinds of things.

So I think it makes sense to target in the sense of recognizing that that has been the pathway for many countries, and that you need to make investments that would help facilitate broadly labor-intensive kinds of products that can be competitive on the world market—so infrastructure around, those kinds of things; getting cellular technology; going, making sure your satellite connections work; making sure the port is efficient, and those kinds of things. And you know, that targets certain sectors; not, you know, industrial targeting to say we’re going to make shoes, or we’re going to do steal or the other things that have been work.

So it’s something in between the old industrial targeting approach and the just, you know, free markets—just—we don’t get involved at all, but to recognize where sectors might be competitive.

MR. : I’d like—this is something I feel very strongly about is—let me give you an easy answer for here, which is kind of annoying, and the hard very difficult answer if I was sitting in Washington right now, which is, I don’t know. I think that the main thing to try to do is—look, aid is not going to create growth. Foreign investment’s going to create growth, better use of domestic savings is going to create growth, trade is—opportunities are going to create growth. Aid is just a way hopefully of making—maybe catalyzing some of that.

There are sectors, whether it’s education sector or health sector or going at markets or like agriculture markets, financial markets or infrastructure, all of them can have positive effects. All of them can have negative effects. And I—so I don’t know what—I think the basic thing is—what we should try to do is figure out the right environments. We should allow the countries, the people of the countries to explain what they think could work for them, and what works in their environments, and then measure the heck out of what we’re doing. So that when we make mistake, we correct it as quickly as possible.

That’s basically the way we’re trying to look at it, but I—the answer, really, is I don’t know. I’m not sure if I could testify to that fact. But I don’t know.

MR. : Well, it’s great to hear someone who’s actually in charge of making aid policy say they don’t know. (Laughter.) I think that’s the critical point of data that you need to know. You know, what the typical behavior of aid agencies and really aid planners in general—and here I have to disagree with Steve again—is to sort of say, you know, we believe in homegrown development, and here’s how we think you should do it. (Laughter.) You know—just—which part of homegrown do you not understand? (Light laughter.) You know, homegrown means there is no “we” in sitting in Washington and New York who decides what the aid should be targeting or should be doing. It’s—you know, it’s up to people of those countries. They are the best hope of achieving economic development, and they are already doing so.

KRISTOF: Well, this could go on forever. There have been lots of questions. Thank you all for attending, and please join me in thanking panelists here. (Applause.)

 

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THIS IS A RUSH TRANSCRIPT.

NICHOLAS D. KRISTOF: Thank you very much for joining the Executive Roundtable discussion. We just overcame our mild calamity here and—

STEVEN RADELET: I was just trying to throw something at Arvind—(laughter).

KRISTOF: We promise conflict and interesting discussion. (Laughter.) Everything will be flying.

I’m Nicholas Kristof from The New York Times, and I appreciate your attendance.

First of all, I’d like to offer the standard warning about your cell phones and BlackBerrys. Please do turn them off at this time.

This is, in contrast to most meetings here, this is on the record. And so feel free to write away—just not for competing publications. (Laughter.)

I should also say that it’s a real triumph for the council to have gotten these people here in one country at one time. They travel more than anybody. Clay just came back from Moscow. And scheduling it has been a real achievement for the council and for them.

The speakers you know about, I’ll just mention briefly. William Easterly, professor of economics at New York University and, I’m sure many of you know, author of this new book on development which is just out, and a terrific book.

WILLIAM EASTERLY: I’ll take you to lunch.

KRISTOF: Ten percent of royalties—(laughter)—(from today ?) to my account. (Laughter.)

And Clay Lowery, the assistant secretary for financial affairs at the Treasury. Steve Radelet, to my left, at the Center for Global Development, who’s also spent lots of time in places from Indonesia to Liberia and originally Western Samoa, of all places. And Arvind Subramanian, who is at the IMF, and author—as those of you who, I hope, read carefully your copies of Foreign Affairs—had an important article last year on development aid and making it efficient.

Our focus is going to be—to try to keep a thread going here—is going to be how we make development aid more effective; how we get more bang for the buck from aid.

And Bill Easterly, let me maybe start with you. Your book is often—it’s perceived sometimes as being an attack on aid, but I think you fundamentally subscribe to this basic premise that it can be successful, it can be effective. And assuming that that’s true, do you worry that by emphasizing the criticism, the problems in aid, the drawbacks of it, that in a sense you’re undermining the public case for it and that the upshot will be less money going out even of the kinds you—you know, you believe. Is it dangerous to say the emperor has no clothes?

EASTERLY: Well, Nick, you’re the latest distinguished addition to a long line of people who have tried to get me to be more constructive, more—(laughter)—not so negative. So let me say right away I think aid works except for the poor people. (Laughter.)

You know, I think actually the battle for the skepticism about aid has already been lost, to some degree. And actually I think there is a constituency that does not so much want to see aid eliminated or cut, but see aid to be much more effective. And the simple thing that I have to say to those people, that I think I might find some agreement here, is just that aid can be effective if you really start holding aid agencies accountable for accomplishing what they’re supposed to be doing.

There were between 1 (million) and 3 million deaths last year attributable to malaria, and there are 12-cent medications, medications that cost 12 cents a dose, that would save someone’s life from malaria. And yet despite huge aid agency efforts, somehow the malaria drugs are not reaching these victims. And no one is accountable for that. There are grandiose public statements, grandiose world summits about cutting malaria, but somehow it doesn’t happen. So somebody has to—making it effective really boils down to holding somebody—forcing an aid agency to take responsibility for a specific task like getting malaria medicines to victims, and then, you know, be rewarded of success and penalized for failure. Once we can start thinking in those concrete terms, then I think aid could be a lot more effective.

Now, unfortunately, aid often goes in precisely the opposite direction. We talk about whether aid can create economic growth. And a lot of the people on the panel have written on this question. Aside from the empirical evidence on whether aid can create economic growth—which I think is very negative that there is no evidence that it creates economic growth—but aside from that issue, a general goal like economic growth obviously depends on many, many factors and many, many different agents, and it’s impossible to hold anyone accountable for whether aid achieves economic growth. Aid should be designed so that you can hold someone accountable for something under their control, like getting malaria medicines to victims.

KRISTOF: Just to push you a little more, though, on that, I mean in your book, for example, you’re very critical of the Jeff Sachs approach or the Millennium Development goal approach. Is—I mean, aren’t they—even if one accepts your criticisms, then in fact haven’t they been pretty successful at generating much more public attention to the problem and, indeed, funds for addressing them in one way or another?

EASTERLY: I think it’s potentially very dangerous to convince people to give aid for the wrong reasons, to create expectations that aid will achieve somehow the end of world poverty. And that obviously is not going to happen. Anyone who really looks at the evidence knows that’s not going to happen. In fact, none of the main Millennium Development goals of cutting infant mortality and maternal mortality are going to be achieved in many important regions like Africa and some—not in South Asia.

So, you know, what I’m really afraid of is that there’ll be a big backlash from these enormously high expectations that Jeff Sachs creates by promising that things will be—he even says at one point, you know, “Escaping from poverty is much easier than it appears.” You know, I think that’s—frankly, I think that’s irresponsible to make a statement like that. Everything we know about development is it’s very hard, we have to work very hard. And when you promise sort of easy solutions and, you know, big grandiose achievements like the end of poverty, or even cutting in half world poverty, and then it doesn’t happen—as it is not going to happen—then I have to fear there’ll be a backlash that will destroy—lead to a new wave of cynicism that will destroy the case for effective aid, that will destroy the ability of people to do effective things that work for our generation.

And so I think that the Jeff Sachs’ approach is, frankly, very dangerous.

KRISTOF: Clay, let me turn to you. Corruption is one of the issues that—you know, that people always bring up, and is one of the obstacles that one has to go through to deliver aid. Tell me a little bit how the administration approaches the problem or how we should approach the problem of wanting to deliver aid, wanting to help people in countries where there is a tremendous indigenous problem of corruption.

CLAY LOWERY: Well, I think that, first of all, I think Bill raises some very important points about accountability and incentives and transparency.

And I think that corruption is—goes right to the point he just made about the danger of over-promising and the danger of basically taxpayers saying, “I’ve had enough. I don’t want to put any more money into this.”

I told someone a few weeks ago I hate the name “donor” because the word “donor” doesn’t make any sense. The word “donor” is basically taxpayers being told we’re going to put some more money into helping Ghana raise its growth rates, or something like that.

So corruption is the thing that will undermine any aid the most because it undermines any support back from the taxpayers, it undermines, obviously, the governments and the countries themselves.

So what I think we’ve been trying to do—and some of it’s experimental and some of it’s not—is to, you know, try to figure out ways to measure results, and try to figure out ways of putting into place good systems, procurement, fiduciary systems, and try to basically reward sound policies and good policies because those are the countries that are probably putting in place policies that are—they’re not leading to as much corruption.

There’s going to be a significant amount of corruption. There’s corruption in this country. But what we’ve been trying to do is try to figure how to create the right types of incentives in the system to weed out corruption. And it does mean that at times you will have to do—you will have to say no, and you’ll have to say no to very poor people. And that’s very difficult to do. But I think that in order for us to show that we’re being—we’re holding ourselves accountable—to put it in Bill’s terms—we have to figure out a way that corruption is just an unacceptable thing for us to do in the aid community.

KRISTOF: Steve, let me—I want to actually follow up on that with you. But you were frantically writing notes. If you want to—no? Okay. (Laughter.) If you wanted to take a swipe at some of those—

STEVEN RADELET: No—

KRISTOF:—(inaudible)—pick up that water and—(laughter).

RADELET: No, I won’t do that. I don’t have any left. I already threw it at Arv. (Laughter.)

(Inaudible) --hot coffee, I might—(laughter).

No, actually I agree with much of what has been said. I think Bill’s absolutely right that a key to this is holding aid agencies much more accountable. Part of that is getting our objectives clearer and making it much more clear what different types of aid programs are designed to achieve.

We all know that a lot of our aid goes to political allies—historically, the Cold War, for a long time Egypt and Israel, now to our friends in Pakistan and Jordan—for very important foreign policy goals. Those are legitimate goals. They’re important goals. They weren’t really all about poverty reduction. We gave aid to Egypt and Israel to support the Camp David Peace Accords. By a lot of measures, the Camp David Peace Accords were wildly successful—I don’t know—“wildly”—they’ve been successful. Israel and Egypt haven’t shot at each other in a long time.

They weren’t—the aid wasn’t fundamentally about economic growth. Those kinds of objectives are great. But I think it helps to clarify what our objectives are in those countries or what our objectives are for our aid to Pakistan today versus our objectives for our aid programs that really are designed to support growth.

As Bill mentioned, we’ve—as most of us have written on the aid-growth relationship, my reading of that—most of the evidence over the last 10 years does support a positive relationship between aid and growth across countries. Many studies have found this. They’re not as high-profile, but that’s what most of the evidence finds. My colleagues disagree with that; that’s fine, but there is a lot of evidence out there. It’s not the case that all the evidence is to the contrary.

And we know many countries— Botswana, Korea, more recently, Uganda, Mozambique—that have received large amounts of aid flows that have done very well. We know that aid for health has done reasonably well in eliminating smallpox and getting oral rehydration therapy to millions of children to getting immunization rates out. That doesn’t mean that aid has been successful in all places. It certainly hasn’t. It’s been wasted, thrown away and abused and failed in many countries. But the record is more mixed, and those who say it never works anywhere, I think, are incorrect as are those that say it’s the miracle elixir.

Bill’s right. It is not the key ingredient to growth. I think it can be supportive of growth. But you get much more bang out of trade policies, out of building institutions, out of investments in health and education. I think aid can be supportive of that.

So we’ve got to keep our objectives clear and our expectations right.

Just on the issue of corruption—just quickly—it’s really a difficult one, I think, and I don’t think we actually have a good way of actually thinking about it clearly. Everybody wants to say no to corruption, absolutely no. But there’s no country where there’s no corruption. As Clay alluded to, I recently heard stories of—I’m shocked—but there’s actually corruption in Washington. I’m actually shocked. (Laughter.)

LOWERY: Not in New York. It’s not in New York. (Laughter.)

RADELET: It’s not in New York or Chicago. But in Washington, there’s reports of it, anyway. So we’re never going to eliminate it. So the attitude of, “If I find any corruption, we’re out of here”—it just practically isn’t helpful. But on the other hand, we can’t just allow corruption to go on.

A lot of it is that the ultimate answer, I think, to combatting corruption is building the right institutions, which is something that Arvind has written a lot about. That takes time and effort. It takes a long time. Part of the reason that we have less corruption than we once did is because we have institutions like the FCC and the Federal Deposit Insurance Corporation and a better court system than we once had, that institutions built up that help stamp that out. That takes a long time, and how we build those institutions, we actually don’t know very much about, frankly. And I think that’s at the root at this debate.

So I think the debate about corruption still isn’t quite structured right in a helpful way. There’s too much, I think, on the extremes and not enough about how we actually can tackle it.

KRISTOF: Arvind, I invite you to weigh in, and also perhaps address the other—the larger question of what we’ve been talking about financial—about writing checks. And if you can also address the question of, you know, ways that you’ve written about that involve other kinds of outside help.

ARVIND SUBRAMANIAN: Right. Thanks, Nick.

But before I begin, I think while I—I mean, I agree almost entirely with what Bill said, and I think also the evidence generally points in the direction of a slightly disappointing record for it, but what’s more interesting about the recent evidence is we’re kind of going beyond whether—good or bad—to actually understanding why the record has been so disappointing. And one thing which I’d like to come back to later is the road that aid has had in actually preventing the growth of manufacturing exports, especially in Africa—and perhaps later I could come that.

But coming to the question that Nick asked—you know, I think Bill’s book, as I read it, is more an indictment of, you know, a certain kind of aid, which is writing checks to governments. I would call that traditional kind of aid. But in fact—and that record is disappointing—but there is something—I think if we enlarge the question and say not whether we write checks to government but one, whether we can help beyond checks and whether we can help beyond providing this to recipient governments, then I think there’s a whole lot of positive experience that we can draw from.

And let me give you three examples, if I have time, yes?

If you look back at the postwar period and asked: What has the West done that’s really been—promoted development around the world? I would say two things: one, the Green Revolution, and two, this kind of antibiotics/medical revolution in the ‘40s and ‘50s.

Now, the Green Revolution, you know, boosted agricultural productivity in Asia; to a lesser extent, in Africa. And I think that has played a big role in Asia’s development.

Africa has not had a Green Revolution. Agriculture in Africa is still prone to all kinds of problems, and this is an area where, you know, the outside world can help.

Similarly, in terms of—if you look at even Africa, one of the positive successes of over the last 30, 40 years, of course, until the recent AIDS epidemic, is that life expectancy—incomes haven’t improved in Africa, but life expectancy has in fact gone up from something like in the 30s to the 50s; i.e., that’s about—around 85. And what caused that? I mean, the discovery of antibiotics, DDT, vaccines for yellow fever and so on, in the ‘30s and the ‘40s.

So this leads me to pose the question or to say in our paper, as we did, that why don’t we spend more money actually rewarding research of interest to Africa? This research will never be done on its own by the private sector, because the incomes to pay for it isn’t there. But imagine creating a huge technology fund that could actually generate research on tropical agriculture, on diseases, vaccines. That would have a big impact. That’s point number one.

The second kind of assistance pertains to corruption. You know, I think outsiders can do very little to change institutions and corruption, because we know social engineering is difficult at home; it’s infinitely more difficult to do it long-distance.

But I will say the good news is there are two sides to corruption. There’s someone who takes the bribe and someone who gives the bribe.

Now, the outside world can certainly do a lot more in terms of taking action against those who give the bribes or those who accept illicit wealth. And what I have in mind is two things. For example, if laws around the OECD could get tougher in terms of getting people who are involved in bribes—i.e., U.S. government officials or companies—and if they’re seriously liable to prosecution here in the U.S., I think that could have some positive, if modest, effect on corruption.

Similarly, if banks had to disclose, if Western banks had to disclose where the wealth was coming from, the illicit wealth—and at $70 a barrel there’s a lot of illicit wealth in the system—if we could track that like now we’re tracking anti-—you know, financing of terrorism, I think that could also have a positive impact.

So I think one needs to look beyond the traditional, think more innovatively, be more creative, and not be so bound by inertia and traditional forms of helping, which, as Bill superbly documents, has had a disappointing record.

KRISTOF: One nontraditional form of aid, one thing we don’t think of in terms of foreign aid, I suppose, would be to provide security to a country that is falling apart and maybe—I mean, I think of Darfur or Chad, that right now we’re—you know, we’re maybe building clinics in Chad, but you know, if Chad falls apart, as it may well in the next few months, then those clinics aren’t going to do a lot of good.

Steve, you’ve spent a lot of time in Liberia, which is one of these places where infection of insecurity has spread across the region. I mean, should we be thinking about, you know, providing some—about foreign aid in the form of some kind of a security force to go in and try to provide stability?

RADELET: Well, in some circumstances, we do. And in fact, Liberia—we’re doing that. I’ve had the good fortune of being there four times in the last four months, working with the new government. And it’s, on the one hand, lots of fun to work with a very good new government that’s really moving in the right direction, and on the other hand, the obstacles that they have to mount after 15 years of wanton destruction is unbelievable.

There is a force that’s there. It’s the second-largest U.N. force in the world, after DROC, after the Democratic Republic of Congo. There’s 15,000 blue helmets in Liberia these days. They have been there for two years—two and a half years now, since they chased Charles Taylor out. And they have been very successful in keeping stability there and allowing two rounds of peaceful elections and the hand-over of a democratically elected government. And they are absolutely central to what’s going on there.

They cost about a billion dollars a year, to keep them there. And it doesn’t show up in the aid numbers, but it’s real numbers. It’s real financing that’s coming out of someone’s pocket.

In the absence of that, they wouldn’t have a chance. They wouldn’t stand a chance.

And one of the real challenges going forward for Liberia, as the new government solidifies itself and gets its new programs, trains a new set of security forces and hopefully begins to create some economic opportunities, will be the phaseout of these troops. And if they are phased out too early, there is a danger that some of the guerrilla groups will come back, some of the warlords that are still them, some of them well-known members of the Liberian Senate—former warlords—like the guy who executed Samuel Doe was found—senator. But to phase out those troops in a way doesn’t undermine the stability.

Meanwhile, there’s a lot of other aid going in on basic infrastructure, on electricity. There’s no electricity in the country at all. All the buildings are full of bullet holes. The place has totally collapsed, and there’s a lot of aid money going there.

Will it work? I don’t know. High risks, big risks. I think in a place like Liberia you’ve got to think about this much more as a venture capitalist. The odds are long. The chances of success are probably slim, one in four or something, maybe less than that; maybe it’s one in 10. Can we therefore stand by and do nothing? No. If we make a big effort and for whatever reason it doesn’t work, does that mean it was a bad idea? I don’t think so. I think we got to go in with eyes open and realize this is a very risky business that we’re in, particularly in places like Liberia, and it’s going to take a lot of support, both security-wise and financial-wise. And it still might not be successful because this is a much tougher challenge than I think most people recognize.

KRISTOF: Bill, Arvind alluded a moment ago to the question of industry in poor countries, and I mean, it is striking that in places from Cambodia to Bangladesh and a lot of poor countries elsewhere in the world, there is a, you know, shirts and socks and all kinds of things are being made and providing a real local manufacturing base; much less true in Africa. Are there—you know, is there more in the form of this kind of nontraditional aid that we should be doing along those lines, that would help build an economic base?

EASTERLY: Well, I mean, of course the big thing we know about economic growth in the long run is it’s mainly due to the effort really dynamic private sector people at the bottom. It’s mainly up to them what—whether growth will happen or not. And actually, there is a lot of dynamism in Africa at the bottom. You know, entrepreneurs in Africa are really operating under incredibly adverse conditions, much more so than, you know, us pampered people over here, and coping, you know, remarkably well.

You know, there’s a guy named Aluf Contay (ph) who started a cell phone network right in the middle of the civil war in a place called the Democratic Republic of the Congo. You know, right in the middle of that complete chaos with seven foreign armies and complete anarchy and no government, he managed to start a cell phone company. Nobody would ship cell phone towers into the country, so he just got local men to weld some scrap metal together, and he used trees, and he managed to get cell phone towers operating. And the demand exploded for this phones. You know, they can be used for other productive entrepreneurs; you know, someone doing fishing can call their customers and let them know when they have live fish ready to be sold.

And you know, that’s—cell phone use is actually expanding by a factor of 10 every three years in Africa. That’s the kind of dynamism that’s going on. When you go to any African city now, you’ll see little kind of cardboard or wooden stands at which cell phone cards are sold, which would—people can buy minutes to use on cell phones, and these are not teenagers talking with their boyfriends. These are productive entrepreneurs using them to solve a lot of other problems.

So you know, can aid agencies do something constructive to help harness this dynamism? Well, this is—this again is an area where you have to abandon the grandiose notion that you can somehow impose some kind of ideal free market institutions on the country from the top-down with some grandiose package design in Washington. That’s—that has already been tried. It was called structural adjustment. That didn’t work.

What you can do is just hold aid agencies accountable for making progress on very specific things that hamper private sector dynamism; like one that’s gotten a lot of attention is the World Bank. And one of the good, positive things that I’m doing—that it is doing, sorry—not that I’m doing—(laughter). What I’m doing is talking about something good and positive—(laughter). One of the good, positive things the World Bank is doing is monitoring—it has this project called Doing Business, in which it monitors, you know, the regulatory red tape that hampers doing business.

And it has specific statistics, like number of days to start a business, you know, which is kind of like most of my lifetime in poor countries, and is like two days in Finland. You know, that’s kind of the range of variation. And you know, that’s something that you can monitor continuously and you could hold an aid agency accountable for some aid intervention that’s designed to work with the government on simplifying red tape, when it wants to do so.

SUBRAMANIAN: But I think the question is—is I think, Nick, the way you posed it was can we provide some non-traditional forms of aid that can actually help.

But I think the equally valued question to ask is whether the forms of aid that we have provided in the past have in any way helped or hindered the growth of manufacturing exports as well. So there’s both a what should we do and what should we not do component.

And at least my reading of the evidence in Africa is that—so here’s a really stark puzzle for Africa. Why haven’t we seen a textile and clothing industry in Africa like we’ve seen in Vietnam, Cambodia and these places? So that’s a—it’s a real puzzle. It’s a puzzle for two reasons. One, we’re not talking about very sophisticated things that require a lot of organization, a lot of institutions, a lot of infrastructure. I mean, you import a T-shirt, you stick a label and you ship it out. So it’s not very high tech.

Secondly, it’s also surprising because many other countries have done it very easily, and Africa has not been able to do it, despite having very, very preferential access on these to OECD markets. So that’s a puzzle. And even the countries that Steve mentioned, for example, that have done relatively well—Uganda, Tanzania, Kenya, Senegal, Mozambique—in none of these countries do you see manufacturing having taken off. They’re absolutely flat.

So the research that I have done with—you know, with our chief economist at the IMF—Raghu—it actually shows that—I mean there is actually a kind of detrimental impact coming from traditional forms of aid on manufacturing, because what aid does is it makes manufacturing quite uncompetitive. Now, there are very fancy ways of explaining this, and it’s called Dutch disease, and so on, but at its heart it’s actually very simple. And the way it happens is that—think of it this way, that, you know, talent, enterprise, initiative in all these countries is very scarce. Now, what happens with aid is that all this talent and enterprise is kind of sucked into the aid industry rather into manufacturing, and so on. So in that sense, you know, manufacturing exporting actually is handicapped by having so much aid.

You go to Mozambique or Uganda, for example, and you do a sample of where all the really bright and talented people are—or many of them—you’d find them in the aid industry, where they in fact should be in manufacturing.

And I once met a friend of mine who’s now a senator in Nigeria, and I asked him, you know, where’s all the initiative and enterprise in Nigeria. And he said, you know, it’s all here trying to get the rents from oil. So in that sense, you know, aid is almost like a distraction away from manufacturing and export.

KRISTOF: But, Arvind—or anybody—I mean, isn’t there also another obstacle—I mean, I would have thought that if there are any garment tycoons here in this room, that they would be very nervous about manufacturing in Mauritius, say, because if they did, the only way to make it profitable would be to pay people, you know, very low wages, and then The New York Times would write nasty articles about them exploiting people. (Laughter.)

I mean, I wonder if the anti-sweatshop movement doesn’t in fact undermine the opportunity to create that kind of manufacturing in low-wage countries?

LOWERY: Let me—

SUBRAMANIAN: Can I—

LOWERY: Go ahead.

SUBRAMANIAN: I mean, clearly there are, you know, multiple causes for why you don’t see this kind of thing. And I think, you know, the red tape, the lack of infrastructure, all these things are very important. But the evidence that we have all shows that there’s an extra dampening effect coming from the aid business. So, I don’t want to over-blow this effect, but equally it’s there, you know, sucking all the talent away from, you know, the good stuff that needs to be done.

LOWERY: Arvind suggested going to Mozambique and asking the guys. I just got back on Saturday from Mozambique where I was at a private sector conference talking about manufactured exports. (Laughter.) And there was a lot of discussion on exactly this issue. The issue of the exchange rate in competitiveness didn’t really come up. And Arvind’s got some research on this that does show a big effect. Most of the research over the last 15 years shows some effect, but a more modest one.

What was high on these guys’ minds, it wasn’t the sweatshop stuff either, it was things like political instability in the region and how long it takes even after you achieve stability for investors to come into a place. And Africa, of course, is rife with political instability. Mozambique is just beginning to get some investors 12, 13 years after the end of its civil war. Madagascar got some investors, and when there was some stupid instability around some election results three or four years ago, they lost all their contracts on the textile industry that they were doing. So stability is a big thing.

In southern Africa, second big thing is disease. There’s high HIV prevalence rates and high malaria rates, and you’re just not going to get a whole lot of foreign investors to go into a place where there’s a 20-percent HIV prevalence rate or high endemic malaria when there’s other choices out there, and places like Singapore and Sri Lanka, that have come a long way in fighting malaria, have done well. It gets back to Bill’s earlier point about our failure to really get at malaria.

But the other thing that came out and was absolutely the biggest topic of conversation was the doing-business report that the World Bank came out with, and the high red-tape, bureaucratic cost. And across these entrepreneurs, and there’s a lot of very talented people in the business environment there, that’s what they were indicating, that 20, 30 percent or more of their costs were stupid red-tape regulations, part of it coming from the evidence from the World Bank about how long it takes to get a license, how long it takes to clear Customs, how long it takes to get permits, or how hard it is to fire people. They have to pay two years of wages for anybody they hire, which means they don’t—for anybody they fire, which means they don’t hire anybody. Those kinds of things.

And one of the outcomes of this conference, which was quite interesting, was a big of a pact between the private-sector people, that sponsored the conference, and the prime minister, Luisa Diogo, on very specific, measurable goals over the next couple of years as to reducing some specific business costs. So it’s actually one way this research from the World Bank—it’s not a direct World Bank project, but is absolutely having an impact on reducing those costs and, hopefully, making Mozambique a little bit more competitive.

KRISTOF (?): (Off mike.)

LOWERY (?): I’d like to pick up on that a little bit. The doing-business indicators and some of the other work that the World Bank’s doing, which they have these things called “investment climate assessments,” are actually very valuable tools because they actually just show you what the problems are, why are people not investing in these countries. And what we’ve been trying to do—and I’m not saying we’re succeeding completely—what we’ve been trying to do is incentivize, actually, these type of variables so that people will start lowering their business barriers so that there’s more and more opportunity.

And I think that in terms of aid, there’s a couple ways of trying to do that. One is to incentivize this. And that’s what like the Millennium Challenge Account has been trying to do. Another is to basically start looking at how do you help with small and medium enterprise development. This is a big problem especially in Latin America because Latin America has got—if you look at the macroeconomic variables and if you look at the financial variables, they’re great, and yet look what’s going on in Latin America. There is all this angst about kids are not being educated, jobs are not being created; and that’s because the macro is pretty good but the micro is still a real problem.

And I think that there are ways that the aid community can help work on those issues, and including in things like the banking area. If you go to Africa, you go to (large ?) parts of Africa, there is lots of liquidity in Africa, and it’s all going to a very elite group of people. And so there is no intermediation going on, a lot of times, with the banking system. And when the U.S. government actually says, hey, we’re going to try to help with that competition idea—you know, if that’s The New York Times—New York Times beats us over the head because we’re not providing more money for health care or for education, even though the country itself says—

KRISTOF (?): The Washington Post, I think. (Laughter.)

LOWERY (?): I got beaten personally—(laughter)—(inaudible).

But the idea was that, you know, these guys asked for help: “I’m a farmer, I need some access to finance.” There is no access to finance. And, you know, if it takes 45 days to clear a check, who’s going to put a check into the system? So that was kind of—I mean, there’s lots of different things going on. I think Bill’s point’s very valid, though, which is—I mean, something like the doing-business indicators is actually a really good step forward, and the World Bank should be commended for that type of work.

KRISTOF: We’re going to go to questions in just a moment. Let me ask one question of each of you, though, that maybe goes to the question of where we do get the most bang for the buck in development. And that is that, you know, if tomorrow your rich uncle died and left you a billion dollars and you wanted to plow it—I mean, you’d plow it into the council, I’m sure, but—(laughter).

MR. : (Inaudible.) (Laughter.)

KRISTOF: But if you wanted to put it in development, then where—what kind of issue, what kind of investment would you do it in with the theory that you’re going to get more return there than any other? And to start off, for example, if it were my uncle, it would be some combination of girls education, malaria, AIDS prevention, maternal and child health maybe.

Bill?

EASTERLY: Well, I don’t actually think you can make sort of global statements over, you know, that some area like, you know, health or girls education or something as, you know, kind of universally the highest payoff. I think it’s—what’s much more important is to listen to people on the ground and sort of back people on the ground who are finding things that work to solve—obviously, especially local people who are on the ground know a lot more about what the problems are. And you know, that’s—if aid agencies were willing to listen more to them, I think they would have much better records.

By the way, I want to make one little footnote on Steve and Arvind’s discussion. Steve, you said that most of the aid research supports a positive effect of aid on growth. You seem to be using kind of a majority voting rule there. (Laughter.) So I thought I would apply the same rule to this panel. Nick and Clay have not commented, but those who have commented, Arvind and I out vote you 2 to 1. (Laughter.)

So you know, there’s things like—you know, I know personally of a great Ghanaian social entrepreneur who has started a really high quality private university in Accra called Ashesi University, which is being called the sports (moore ?) of Ghana. It’s already been in operation for long enough to graduate its first class. They’re getting private sector jobs. It’s giving scholarships to poor kids out of poverty, and it gives them high quality education so that they can really have a big payoff.

You know, this is a no-brainer that you would fund something like this, and yet the founder of this, Patrick Awuah, has been turned down by all the official aid agencies. I—and this is not—and this is a well-publicized, well-known example, and it’s not a selective example.

I was having coffee yesterday with an economist from Burundi who is one of the best economists in Africa, I think, and he was telling me the same story about Burundi, that they also have started a private university that is much higher quality than the lousy aid-funded public universities. And they also have been completely turned away by the aid agencies.

You know, this is what—one of the reasons why aid doesn’t work. It’s because there isn’t enough—the attempt to impose from Washington form the top-down some idealized notion of what, you know, we experts in Washington and New York think will work whereas in just rewarding people who actually find things that work.

And so that’s what I would do with the money. I would give it to the university in Burundi and the university in Ghana and all the other people around the world who are finding things that work. You know, dating all the way back to Muhammad Yunus, who started Grameen Bank, there are so many examples like this that aid could find, and yet today it’s not funding them, and so many opportunities are being lost.

LOWERY: Okay. What—I think I probably would have to vote with Steve a little bit, but the—

MR. : A little bit? (Laughs.)

LOWERY: Well, part of that is because, look, I mean, when you sit in a government, I mean, you’re trying to figure out how can you have an affect and help these very poor people. You want—you don’t want—you want to end instability as best as you can so that people have a better opportunity, and you want to figure out how to use taxpayers’ resources in the most effective manner possible. I think Bill’s points are extremely valid in that I think that aid can be used well. Steve pointed out earlier there’s a—there are different reasons for using aid.

You know, one, there’s no question, there are political reasons for using it. Second, humanitarian, natural disaster relief. Third, hitting on things like global problems like HIV/AIDS or the environment. It’s where—the tough part is when you want to get into economic growth and transformational development, and I think that where it’s going to work best is where we really, really listen to what the people on the ground are saying. And it’s not always—you’re not going to hear all the time, “Help me educate somebody.” That’s part of it. You might actually hear, “You know what we need more help with is agriculture.” Agriculture is where economic growth is going to come from in Africa. There’s no question about it. But it’s a very difficult business.

Arvind’s point earlier about doing research, I think, is a great point. But where can you target good agriculture programs that are making a difference and increasing productivity? That is an important thing, and frankly, the aid community has not solved that one. Nobody really knows.

How can you build infrastructure projects that are—help people get their products to the markets and don’t turn into white elephants? That’s something that—the aid community ran away from infrastructure and ran away from agriculture, and the reason is is because they’re very difficult and they can lead to corruption and lots of problems.

I think that what—as a government official, what I would recommend is you’ve got to be able to take risks and you’ve got to be able to take chances, but it does mean you’re going to have some payoffs that don’t work out. And that’s a tough environment, especially in Washington, where if you lose a dime or if one dime is stolen, I—you know—I’ll get dragged up and I’ll have to testify, and I’ll try to do the best I can, but I’ll just get beaten up.

And—but what we’re—but that’s still—taking those risks is going to be important because we don’t know the answers. People on the ground might know the answers, but they might be wrong, too, so we have to experiment a little bit.

KRISTOF: Steve—

LOWERY: And a billion dollars.

RADELET: Yeah—

LOWERY: I didn’t put it down. (Laughter.)

RADELET: Actually not much.

But I think Bill’s point actually is quite right, is that there’s no—a couple—both of his points—that there’s no universal answer; it really depends. There’s a lot of different kinds of interventions that can be very successful in some countries like Liberia. Infrastructure is a very—a big need in other countries—girls’ education, health.

I think a lot of aid agencies try to do all of those things in each country. And while the World Bank probably needs to have some expertise in a wide range of issues, it doesn’t need to do all of those things in one country. That’s one of the problems.

Bill’s also right that we missed huge opportunities. Anybody who’s traveled to any developing country finds—knows of a nun that’s running a clinic that if we could get her $50,000, she’d change the world, or someone who’s running a school or someone who’s at a university. But the donors have rules and policies that totally undermine what they’re doing.

In Liberia, they just brought in the new minister of Finance, a Ph.D. from the Fletcher School, 20 years with the World Bank, great. Her salary is going to be about $200 a month, and she’s giving up—it’s a little bit more than—you know, at the World Bank, she got paid a little bit more. She’s got a kid in college.

So there was discussion about maybe, you know, donors could get together and give her a salary of $80,000, $90,000, 100,000 (dollars)—no, no, we won’t do that, can’t do that. Can’t do that at all.

We can, the U.S. ambassador said, give her two or three technical advisers, each of which would cost $250,000 a year by the time you fly them out there. I mean, he literally said, “We cannot give 80,000 (dollars) or $100,000 to support this minister of Finance that could really change the country. We expect her to live on a couple hundred bucks a month. But we’re happy to spend $750,000 to give her three advisers from the Beltway Bandits, who are—none of them can hold a candle to her in terms of competence.” And he said both of these things within about 10 minutes of each other in a meeting. I just—I couldn’t believe it.

In the United States, one of the biggest obstacles to fixing our aid is our Foreign Assistance Act. The Foreign Assistance Act of 1961 was a Kennedy administration piece of legislation in the heart of the Cold War, written with Cold War all over it. It’s been amended many, many, many times. If you download and print it out, it’s 2,500 pages long, depending on how you count 87 different objectives in 64 priority areas in whatever it is. And one of the reasons why the USAID can’t do the kind of flexible things that we’ve been talking about is that it’s earmarked to death. They’ve got to give a certain percentage to this, to that, the other thing, and the aid director on the ground has very, very little maneuverability to adapt and adjust to the things on the ground. It’s a 40-plus-year-old piece of legislation. It’s totally outdated, but we can’t get the momentum to take that on.

I realize there’s always risks when you rewrite legislation, but it’s actually a big part of our problem within the United States. If we can rewrite that piece of legislation, if we can take seriously the ideas of holding the agencies accountable for results, and if we can get away from one size fits all and realize that in relatively well-performing countries, the way we deliver aid should be very different from in failed states, I think we’d make a lot of progress. In well-behaved countries, give them more ownership, give them more control, give them more participation. But that’s not universally true for all countries. We’re not going to do that in failed states and in countries with dictators. We’ve got to have different kinds of approaches.

So without getting into the details, we’ve got to get away from one size fits all and have different approaches in different countries. And when you do those kinds of things, I think we can at least make it marginally, marginally better.

KRISTOF: Arvind.

SUBRAMANIAN: Nick, I think, you know, a billion dollars is going to get you nowhere, because as Bill says, development is not only a hard business, but a home-grown business, so what outsiders can do is very limited.

So I would in fact say not what can outsiders do to help in terms of a billion dollars, but at least the first—the Hippocratic principle: Do no harm. Are there things that you can do no harm? And I think there are two things that in terms of the magnitude of impact of doing no harm are potentially far bigger than anything you can by actually doing things. And the first thing, of course, is global warming, which is going to physically decimate much of—you know, a lot of Africa, South Asia. I mean, it’s physical survival that’s at question here.

And the second, which we’ve seen over the last 20 years, is that one of the things that was imposed on developing countries was access to drugs through intellectual property protection. And even as we speak today, there’s a riot in India against patenting of an HIV drug because the Indian public—this is a grass-roots movement—feels that if you patent that, combatting AIDS in India is going to become that much more expensive.

So Hippocratic principle—at least do no harm.

KRISTOF: I could—since you haven’t spent your money, I would say you could do no harm by buying a subscription to The New York Times for an awful lot of people in Africa for a billion dollars. (Laughter.)

But is there—yeah, there’s a microphone coming around. Please stand up and identify yourself, and please do, you know, have a question mark come pretty quickly.

Yes?

QUESTIONER: I’m Deborah Burand with the Grameen Foundation. Thank you very much for suggesting Dr. Yunus as a beneficiary of your—(laughter).

But I think that—

MR. : I saw you back there!

QUESTIONER: Thank you. You saw me do the pump fist?

Actually, though, I think there’s an interesting point that we might want to explore here. When Dick asked the question—If you had a billion dollars, how would you spend it?—some of you answered from the point of view, as Bill did, of, well, if I was an individual, what would I do, and some of you answered if I was the U.S. government I’d be earmarked to death and I wouldn’t get a chance to spend it.

Can you talk for a second about what is happening in official aid as it responds to the new entrance of private sector aid? We see the Gates Foundation, we see Google, we see other very rich entrepreneurs bring a lot of money to the table. And what does that mean for giving up the roles of aid in our development process?

KRISTOF: Clay, why don’t you address that?

LOWERY: Okay. I think it’s a great question, and it’s something that we’re trying to get better at. I think that basically, you know, we’re the government, so we don’t know really what to do when people actually throw money at us—is—trying to create partnerships with the private sector on these issues is very important.

One of the things that—in Pakistan, when the earthquake hit last year and it was so devastating, we actually were able to get five or six big companies to come on board and actually work with us on providing foreign assistance; basically using the resources of the U.S. government plus some of the institutions, but having some of the resources not just be the taxpayer resources, but these corporations that really wanted to do well.

The Gates Foundation has been doing amazing work on some of the vaccines deliveries around the world. And I think that, you know, frankly, we’ve been trying to learn from them and to co-opt them, when we can. They only want to be co-opted so much, though, because, you know, the U.S. government, you know, can be a little controversial at times.

And so I think what we’ve been trying to do, at least, is use these very good people, take their ideas because—and they actually can experiment more than we can because of some of the issues that Steve put out there. But what we’re trying to do is partner with them where we can so that we can help leverage their funds with our funds. And it’s something that has been growing over the last, probably I would say five years dramatically.

But it’s something that we’re actually—one of the things we’re trying to do is the Hudson Institute has been trying to actually document exactly what this really is. And what we’ve been trying to do is figure out whether or not the OECD, which kind of measures development assistance, and so forth, can bring private capital flows to development purposes, can actually start measuring that so we can get a better idea where is it working, where is it not working, what type of flows are we actually seeing. We have a long way to go on that. But the Hudson Institute has actually made a dent on the issue.

SUBRAMANIAN: Nick, can—

KRISTOF: Briefly.

SUBRAMANIAN: Very briefly.

I think the short answer is it’s great because it’s competition and kind of it will help exactly the accountability thing that Steve has been saying. And I hope they won’t get co-opted!

LOWERY: Right.

SUBRAMANIAN: I mean, you need competition.

LOWERY: No, I agree there.

KRISTOF: Yes?

QUESTIONER: Jim Davis. Focusing specifically on economic growth, to what extent would any policy be helped if it was directed at countries that had currency stability either as a function of a currency board or dollarizing, like Ecuador?

LOWERY: Very few countries I think meet the conditions for a currency board or pure dollarization. There are a few small, very open economies where it might work. But in most countries where this has been tried, it doesn’t really work very well. And at least for the moment, the better solution in most countries is to have a floating exchange rate that can adjust to shocks, whether it’s export price shocks or the kinds of things. And it turns out that for countries like that, especially those that are dependent on primary export products, to manage a fixed exchange rate through a currency board is very difficult in the face of big kinds of shocks, and it just hasn’t worked very well. So that might apply in a few countries, but it’s not any big solution for a lot of countries, I think.

KRISTOF: Yes? Right there.

QUESTIONER: Dick Huber. Steve, you brought up a point which gets lost a lot, which is, you know, upwards of half of our— U.S. government—foreign aid is really strategic. I mean, I still think probably what, over a third goes to Israel and Egypt—

RADELET: It’s less than that now. It’s actually been falling, partly because (those ?) are falling, partly because we give so much to Iraq, actually.

QUESTIONER: It’s still something like $500 to each man, woman and child in Israel, and one dollar for each person in Africa. I mean, this is—and Nick, I direct this to you. It just doesn’t ever seem to get put out to the public, and the American public has this misperception that we are, first of all, giving far more in aid than we really are—

KRISTOF: I need a question mark there! (Laughs.)

QUESTIONER: And, you know, wouldn’t it be more helpful if this were more widely known?

KRISTOF: Yeah, definitely. (Laughter.)

RADELET: Just quickly, I think the solution to that is we ought to really have a special account in the U.S. government for legitimate types of purposes to do exactly that. There is a lot of publicity that the U.S. is increasing its foreign aid over the last few years, and if you actually look at it, you know, I mentioned Iraq—we give a huge share of our funding to Iraq and now to Jordan and to Pakistan. And, you know, and that’s for a legitimate purpose. But I think it really should be separated in the accounting so that becomes more clear and so that we judge it against the merits for what it was intended.

LOWERY: Could I—real quickly, just because it does apply to the U.S. government, is that it’s difficult because—I mean Steve’s right, I mean having categories of buckets you can put it in would be nice. It’s difficult to do, though. Is Afghanistan for political purposes or—I mean, Afghanistan is one of the poorest countries in the world. And, you know, the fact that we have ramped up our—how much money we are giving to Afghanistan is seen, obviously, in the—after 9/11, and so forth, and for political purposes. But quite frankly, that country is much more for development purposes.

And I think that, you know, it’s an honest debate, but I think that it’s a good point you’re raising. But actually, you have seen a big growth in development assistance from the United States over the last four or five years, not all of it going to just like these vital national interest countries.

KRISTOF: Yes?

QUESTIONER: Thanks. I’m Lucy Komisar. I’m a journalist. And I’m also on the International Steering Committee of the Tax Justice Network. There’s something missing in this discussion of foreign aid to developing economies, is that foreign aid routinely doesn’t get there, doesn’t stay there. It makes a round trip back to the markets of the—(word inaudible)—with the help of the tax havens that exist with the blessing and the participation of the developing world.

KRISTOF: Your question is?

QUESTIONER: Well, let me give you one example.

KRISTOF: No. No. Just please give us a question.

QUESTIONER: No, but—the question—part of it is that this is an issue that has not been discussed in this organization, the role of the tax havens. And that also the debt of the developing countries, the foreign aid, often loans, is not audited by the IMF, the World Bank or other lenders. So when is the IMF—

KRISTOF: Okay, let me get—let me get someone that’s—

QUESTIONER:—and the U.S. Treasury going to—

KRISTOF: I’m going to—let me get some—

QUESTIONER: I asked—

KRISTOF: We really can’t have—

QUESTIONER:—a question that started with “When is”—

KRISTOF: Okay.

QUESTIONER: But it’s important because this organization here doesn’t deal with this question. When is the IMF and the World Bank and the U.S. Treasury going to shut down the off-shore bank secrecy system that is the getaway car for the looting of foreign aid?

(Cross talk.)

KRISTOF: Clay, since you work for the U.S. Treasury.

(Laughter.)

LOWERY: She asked about the IMF as well. (Laughter.)

The—it—I don’t know a lot about this issue. I know that we are always concerned about illicit use of—resources being used for illicit purposes. And I’m just going to leave it at that. I don’t know a lot about this issue.

SUBRAMANIAN: I mean, just a factual statement—that part of the work the IMF does is—in our regulatory or surveillance function, as we call it, is, we do periodic assessments of what we call offshore financial centers. And so, you know, this is—and we address this because we do, I think, recognize the concern that these offshore centers could potentially have wider ramifications because of their activities. So this is part of the commitment of the international community, to monitor these offshore financial sectors.

RADELET: Two quick comments. One is that implied in your question was that it’s mostly foreign aid that goes to these offshore centers. I’m sure there are some foreign aid that goes off, but I think it’s—more of it is domestic resources. The years that I worked in Indonesia, I can assure you, it was mostly Suharto family stuff that—when it was going offshore, rather than foreign aid. So that’s one.

The second is that, you know, I’m not sure what leverage the IMF has over Switzerland. It doesn’t have any leverage over Switzerland to change Swiss bank laws. It can highlight, it can publicize, but it can’t force either Switzerland or other countries to change its bank secrecy laws.

I think it’s a legitimate question. I think it’s much broader than foreign aid. But I’m not sure the IMF is the right institution to take that on.

KRISTOF: Yes?

QUESTIONER: John Beattie (sp) from UBS. A few years ago, President Bush, on a visit to Nigeria, proposed a development of a secondary mortgage market as a means of ultimately stimulating low-cost access to credit. I guess a question for you is, first of all, have funds been appropriated for this program? And secondly, have there been any programs implemented in any African countries?

LOWERY: Yeah. It’s a good question.

The—I’m not exactly sure—it wasn’t specifically under my proposal, but here’s what I know. They actually had been able to do some work done in Zambia, of all places, and had been able to actually start a bit of a market going.

Part of it is—and where you have—if you want to know more about it, the place to go is a place called OPIC, the Overseas Private Investment Corporation. And OPIC is actually looking at doing more in the area of creating mortgage markets both in Africa and in Latin America.

The biggest problem you have is creating a secondary market in an area where there’s no primary market. And so you have to start developing the primary market, first of all, and also—I mean, obviously when you get into mortgages, you’ve got to—you get into titling issues and property rights issues. And so some countries don’t have any of those things. So you’re—you kind of got to start somewhere. And where I understand that we’ve actually made some fairly significant progress, surprisingly significant progress, is Zambia.

But that—you just heard almost everything I knew about the program. (Soft laughter.)

KRISTOF: Yes?

QUESTIONER: I’m John Chambers (sp), and I was wondering if Bill and Steve could review the evidence on the impact of aid on economic growth. (Laughter.)

RADELET: This will take an hour.

MR. : Yeah. (Laughter.)

RADELET: I’m going to settle in. (Laughter.)

EASTERLY: Steve, you can go first.

KRISTOF: Just really briefly, please.

RADELET: There are three different strands of research over the last 10 years. One set concludes that there’s no relationship between aid and growth. Almost all of that research assumes or tests for a linear relationship, with growth at the first dollar of aid has the same impact as the billionth dollar of aid.

And there’s wide evidence—and I absolutely agree there’s no linear relationship between aid and growth, but there’s a lot of research in that area.

A second strain of growth, very popular, has been a conditional relationship; that is, that aid work’s conditional on good policies, good institutions. This was made famous by Craig Burnside and David Dollar at the World Bank, and others, that said aid works under certain circumstances, good government, and not in others.

Bill and others have contributed to looking at that research and finding that it’s quite fragile; that when you look at it and do some testing on the econometrics, it falls apart.

A third set, which—you know, majority rules—there are several studies out there, in well—reputable journals, that look at the aid-growth relationship and look at—assume diminishing returns; that is, that as there’s more and more aid, that it has less bang for the buck, either because of capacity constraints or just diminishing returns on investment for a whole variety of reasons. Most of that research has found a positive and significant relationship with growth.

Now, these guys aren’t convinced by that evidence, and that’s fine. They’re welcome to their views. But there are a whole set of studies out there that find that.

We’ve contributed to that with one sort of permutation to that, which is to look at—to disaggregate aid and to say, you know, not all aid is aimed at growth. There’s aid for humanitarian crises, which wasn’t to provide food, which is not ultimately designed for growth; disaster relief; even aid for education or judicial building. It might help growth, but in the very long term, and it’s hard to detect.

And if you take, in our research, about half of aid, which is actually directed at growth—building roads, agriculture, those kinds of things—and look at diminishing returns over time, we find a fairly—a robust relationship between that subcategory of aid and growth.

Now, again, my colleagues aren’t convinced by the evidence, but I think that’s a reasonable reading of at least what’s out there.

EASTERLY: Well, there’s—

SUBRAMANIAN: Bill, you can speak on my behalf, if—

(Laughter.)

EASTERLY: (How can I?)?

There’s one world non-econometrician whose insights on technical econometric methodology are very relevant. That’s Mark Twain—(laughter)—who said that there’s lies, damned lies and statistics. (Laughter.)

You know, this is an area where, you know, a thousand flowers have bloomed because there are so many possible ways to slice and dice the data. You know, you can have Steve’s nonlinear, his—it looks like this—nonlinear effect of aid on growth. It can have diminishing returns, which is actually the same as the nonlinear thing. It also looks like this, which actually has this weird feature that—because it goes like this, aid could actually be—start doing more—start becoming negative if you get too much aid. So you want to start throwing away the aid after you’ve gotten a certain amount of it.

You know, what I think is the fatal weakness of this whole literature is that because there are so many different ways to slice and dice the data, you can get any result you want.

And the only sort of way that you can get a clear answer on whether a given study is finding a given aid-and-growth relationship is to try to replicate the results. That’s what’s done in natural science and in our other respectable fields of inquiry. And I wish economists would do this somewhat more.

So far, all these sort of positive aid-and-growth studies have failed the replication tests. That’s my reason for not believing the aid-and-growth result, plus the big stylized facts out there, such as, you know, $568 billion went to Africa over the last 42 years. The result: zero rise in living standards in Africa, you know. That’s—you take a big stylized fact like that, and it makes it even harder to believe that there is really a big growth payoff to aid.

RADELET: I’d just very quickly add two things. There—none of the evidence is any downward slope. They just use the—(inaudible)—upwards—

EASTERLY: Well—(inaudible)—is trying very hard to get it into the negative—

(Laughter, cross talk.)

RADELET: One of those—(inaudible)—and several of the studies have been replicated. Our research replicated several other studies that have found this. So many of them have been replicated.

KRISTOF: We have time for about half a question. Any—yes, Roger. Half a question.

QUESTIONER: Roger Kline, McKinsey. Does sector targeting work? And if so, how do you decide on the sectors? One of you talked about the importance of manufacturing, export manufacturing. One of you talked about agriculture. How do you decide this? Do you decide it? How do you decide it?

SUBRAMANIAN: You know, I think when you think about aid and say, you know, I’m going to use aid for X sector or Y sector, I mean, there’s a basic problem here, because aid is fungible. It’s a pot of money. You give it to a government. That government gets this pot and decides how to use it. So the whole notion that you can target with aid is subject to the caveat that this is a common pool of money which can be shifted around. So inherently targeting is not easy. So I think one has to be careful about that.

And the second question is that we don’t really have a clue as to which sectors are better than other sectors. So to engage in this exercise of, you know, a planner deciding which sector to target is inherently problematical.

KRISTOF: Go ahead.

RADELET: There’s a difference between a country and its strategy, its economic development strategy targeting and an aid agency’s targeting. I don’t think industrial targeting has worked overall—there are some successes but a lot of failures—when you pick a very specific industry.

On the other hand, I think it makes sense for developing countries to recognize that if they are going to get job growth, it’s going to be in labor-intensive activities that can be competitive on world markets. And in most countries, that’s going to be agriculture—of course different crops in different places—labor-intensive exports, although it’s hard to get those going; and perhaps some services—some backroom accounting and those kinds of things.

So I think it makes sense to target in the sense of recognizing that that has been the pathway for many countries, and that you need to make investments that would help facilitate broadly labor-intensive kinds of products that can be competitive on the world market—so infrastructure around, those kinds of things; getting cellular technology; going, making sure your satellite connections work; making sure the port is efficient, and those kinds of things. And you know, that targets certain sectors; not, you know, industrial targeting to say we’re going to make shoes, or we’re going to do steal or the other things that have been work.

So it’s something in between the old industrial targeting approach and the just, you know, free markets—just—we don’t get involved at all, but to recognize where sectors might be competitive.

MR. : I’d like—this is something I feel very strongly about is—let me give you an easy answer for here, which is kind of annoying, and the hard very difficult answer if I was sitting in Washington right now, which is, I don’t know. I think that the main thing to try to do is—look, aid is not going to create growth. Foreign investment’s going to create growth, better use of domestic savings is going to create growth, trade is—opportunities are going to create growth. Aid is just a way hopefully of making—maybe catalyzing some of that.

There are sectors, whether it’s education sector or health sector or going at markets or like agriculture markets, financial markets or infrastructure, all of them can have positive effects. All of them can have negative effects. And I—so I don’t know what—I think the basic thing is—what we should try to do is figure out the right environments. We should allow the countries, the people of the countries to explain what they think could work for them, and what works in their environments, and then measure the heck out of what we’re doing. So that when we make mistake, we correct it as quickly as possible.

That’s basically the way we’re trying to look at it, but I—the answer, really, is I don’t know. I’m not sure if I could testify to that fact. But I don’t know.

MR. : Well, it’s great to hear someone who’s actually in charge of making aid policy say they don’t know. (Laughter.) I think that’s the critical point of data that you need to know. You know, what the typical behavior of aid agencies and really aid planners in general—and here I have to disagree with Steve again—is to sort of say, you know, we believe in homegrown development, and here’s how we think you should do it. (Laughter.) You know—just—which part of homegrown do you not understand? (Light laughter.) You know, homegrown means there is no “we” in sitting in Washington and New York who decides what the aid should be targeting or should be doing. It’s—you know, it’s up to people of those countries. They are the best hope of achieving economic development, and they are already doing so.

KRISTOF: Well, this could go on forever. There have been lots of questions. Thank you all for attending, and please join me in thanking panelists here. (Applause.)

 

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