Searchers, not Planners

Complaints about the impact of economic globalisation are not new. On 9 December 1719, in response to the growth in cotton imports from India, the merchants and traders of Bristol submitted a petition to the House of Commons claiming that ‘the visible decay of the Woollen Stuff Manufacture must be attributed to the almost general wearing of India Chints, Callicoes and Linen . . . whereby many Thousands that were employed, are ruined, and the Poor unemployed, which, if not timely prevented, will be most fatal to the Woollen Manufacture.’ Dozens of similar petitions eventually met with success: the 1721 Calico Act prohibited the importing of Indian cottons for domestic consumption. From Chinese cigarette manufacturers concerned by imports of Marlboros, to American computer technicians whose jobs are under threat from outsourcing to India, many firms and workers would like similar policies to be adopted today.

Part of the current system of global economic regulation is designed to frustrate such wishes, however. The World Trade Organisation aims to promote international trade and reduce barriers to the free movement of goods and services. The World Bank was established to support economic development and reconstruction, and the IMF’s original purpose was to oversee the smooth operation of the global financial system, though the division between the two institutions has recently blurred.

In Globalisation and Its Discontents (2002), Joseph Stiglitz found more to object to than to approve in this system, denouncing, for example, the IMF’s doctrinaire response to the financial crises that overwhelmed East Asian countries in the late 1990s. Now, in Making Globalisation Work, he proposes alternatives. He is in no doubt about his capacity to do so: his chapter titles include ‘Making Trade Fair’ and ‘Saving the Planet’. And he is certainly better qualified than most; as he frequently reminds us, he was awarded a Nobel Prize in 2001 and was for three years chief economist of the World Bank.

Commentators criticised the earlier book for containing too much by way of condemnation, and too few constructive proposals for reform. Here, Stiglitz provides too many proposals, without sufficiently considering the merits and flaws of each. He suggests five major reforms to the system under which developing countries can borrow, seven to the system of international trade, and five more to the ways in which multinational corporations operate. But they tend to lead nowhere. He demonstrates astutely how current international accounting conventions – the same conventions that support the use of private finance in public infrastructure projects in the UK – encourage poor, oil-rich countries to pump their oil as quickly as possible, and spend the proceeds immediately. But the policy recommendations that ensue from his criticisms of this policy are a long and familiar list of leftish desiderata, largely unsupported by argument.

Yet Stiglitz is an inventive and original thinker, and his scattergun approach finds its target often enough to be enlightening and provocative. For instance, under the Kyoto Protocol on climate change, each developed country is assigned a quota for the amount of greenhouse gases it is allowed to emit. But the correct quota for each country is very difficult to negotiate; should it be based on the historical level of emissions, on national wealth or on population? Politicians and industrialists find it easy to portray an externally imposed limit as both unjustified and undemocratic. Stiglitz instead develops the existing idea of a carbon tax, arguing that, if a tax rate is agreed internationally but then levied nationally, national governments will have reason to support environmental measures in order to raise their own revenues. Taxes could then be reduced on such valuable activities as saving, for example.

In the tradition of Adam Smith, this proposal relies more on national self-interest than on virtue, and would need relatively little international co-operation to function. But more often Stiglitz’s reforms ask for permanent international bureaucracies to be set up: a judicial body to determine whether trade barriers are legitimate; a global competition authority; a bankruptcy court to which states could apply for protection from creditors; a global reserve fund that would issue a new virtual currency (‘global greenbacks’) to member countries. The governance problems of existing international institutions are well documented, not least by Stiglitz himself: they are dominated by powerful countries, vulnerable to organised lobbies, and unable to accommodate different perspectives. It seems heroically optimistic to expect new institutions to avoid these problems. We may regret the failure of political globalisation to keep pace with economic globalisation, but political globalisation can’t be achieved by decree, and it would be more sensible to seek reforms that could increase well-being without requiring nations to sacrifice their self-interest.

Despite its hyperbolic title, Frederic Mishkin’s The Next Great Globalisation is more modest in scope and scale, concentrating on the role of the international financial system in the developing world. Mishkin argues that financial globalisation can ‘generate huge benefits for emerging market economies’. Investment in the world’s poorer regions will take off, as rich countries with limited investment opportunities at home invest in countries with greater potential for development, so that both parties benefit. In this way, late Victorian Britain transformed itself from the workshop of the world to its financier, with net overseas investment, at its peak, approaching a tenth of annual output. According to Mishkin, financial globalisation will also allocate funds more effectively within countries; foreign investors, he argues, are more likely to lend to firms that have good ideas, not just political connections. What’s more, they can form a strong lobby for institutional reform, improved corporate governance and financial supervision.

But the evidence that Mishkin assembles argues at least as strongly for the opposite point of view. In three excellent case studies, of Mexico, South Korea and Argentina, he shows that financial globalisation resulted in a huge influx of foreign finance, encouraged by implicit or explicit guarantees from the IMF or national governments. Cheap money meant bad loans to corrupt and bloated conglomerates in Korea or profligate provincial governments in Argentina. When lenders began to worry about their prospects of repayment, it led to chaos. The Mexican bank bail-out cost the country about a fifth of its national income; after the South Korean crisis, poverty rose by two-thirds and the numbers of suicides and divorces by almost half; and in 2002, a fifth of Argentinians were unemployed. It’s not surprising that many leading economists are unconvinced by the case for financial globalisation. The trade theorist Jagdish Bhagwati, a lifelong advocate of free markets in goods and services, argues that dollars are not like normal goods, and that ‘the weight of evidence and the force of logic point . . . toward restraints on capital flows.’

Mishkin draws a different lesson. For him, the case studies are examples of the way financial liberalisation can be mismanaged, not evidence that it is unlikely to work. Like Stiglitz, he supplies long lists of proposed reforms, stretching from the institutional background required for successful financial management, through the specifics of bank supervision, to the governance of the IMF. Some are obvious, such as the importance of giving regulators adequate resources. Others are more subtle, but still significant, such as ensuring that foreign currency debts are roughly matched by assets in that currency, in order to make banks less vulnerable to fluctuations in the exchange rate. Most are sensible. Yet it is tempting to conclude that the only countries with sufficiently strong financial governance to enact many of them are already rich. Financial markets will of course be more stable if banks don’t lend vast sums to their own managers, but preventing them from doing so is beyond the ability of many poor countries, where politicians are often unaccountable and judges corrupt.

Happily, not all books on economic globalisation and development go in for grand plans and sweeping reforms. In The White Man’s Burden, William Easterly, for 16 years an economist at the World Bank, extols the virtues of thinking small when trying to help the poor. He argues that the urge to plan a country’s path to prosperity, without carefully considering the needs of those for whom you’re planning, has led to a little-mentioned but profound failure: $2.3 trillion has been spent on foreign aid over the past five decades without making any appreciable impact on poverty. Unless the root causes of this failure are recognised, it is unlikely that the huge increases in aid proposed by the likes of Gordon Brown, Bono, George Bush and Angelina Jolie will make much difference.

Recent discussions about development have centred on the Millennium Development Goals (MDGs) agreed by 147 heads of state in September 2000. They comprise eight overarching goals, 18 (mostly) important lesser ones and 48 different ‘indicators’, ranging from enrolment rates in primary education to the number of telephone lines per hundred people. Easterly rightly describes them as ‘beautiful goals’. But in this context the term ‘goal’ is misleading. Useful goals need to be clearly defined and achievable, and the people assigned to achieve them must be held accountable for their success or failure. The MDGs are not like that. The eradication of extreme poverty, for instance, depends on many factors beyond even the immense power of the signatories to control: war, weather and disease, for example. And the measurement of success or failure is difficult, too. Since we have only a vague idea how many people currently suffer from malaria, how will we know when their numbers have halved?

Crucially, accountability is lacking. Responsibility for achieving the MDGs lies with national governments, with the many official international aid organisations, and with private sector donors. If they’re not achieved (and a recent report found that almost all of them are likely to be missed in most poor countries, some by ‘epic margins’), no individual or group will be held accountable. Easterly points out that collective responsibility ‘doesn’t work for the same reason that collective ownership of farmland in China didn’t work’. The breadth of the targets further undermines accountability. It is feasible to hold an aid agency responsible for providing usable roads in an inaccessible region. It is much harder to hold anyone to account when the target is to achieve a ‘significant improvement in [the] lives of at least 100 million slum dwellers’ (MDG target No. 11).

Unless the monitoring and evaluation process is effective, success is measured not by results, but by inputs. Politicians compete to pledge the most money to Aids treatment or poverty reduction. The MDGs include an arbitrary foreign aid target of 0.7 per cent of each developed country’s output. This was set 35 years ago, and has, remarkably, remained unchanged even as both development needs and the incomes of rich countries have been transformed. So, never mind the results, watch the cash. As Easterly remarks, the producers of Catwoman ‘would not dare to argue with moviegoers that the movie wasn’t so bad because they had spent $100 million on making it’. Easterly notes that several other targets are also not new. In 1977, world leaders agreed that there should be universal access to water and sanitation by 1990. The MDGs push that back to 2015. There has been no obvious follow-up on the previous failures.

One consequence of centralised planning and a lack of accountability is that everyone tries to do everything, regardless of their capabilities: the World Bank sacked its seven malaria specialists even as it decided on a massive increase in its funding to fight the disease. Rather than provide the money to specialised charities, it tried to act independently, with predictably poor outcomes. Since organisations are competing to provide aid in the same fields, co-ordination is crucial, to the extent that one of the eight MDGs is: ‘Develop a global partnership for development.’ In 1990, the UN declared that successful development would require ‘more effective and efficient’ international economic co-operation. Twenty-eight ineffectual high-level conferences later, in 2003, the Ad Hoc Open Ended Working Group on Integrated and Co-ordinated Implementation of and Follow-up to the Outcomes of the Major UN Conferences and Summits in the Economic and Social Fields was established. (Its members presumably do without business cards.) Its task is to co-ordinate dozens of reports from widely different sources; the main result is likely to be another round of summits and hand-wringing.

Overall, Easterly’s history reveals an unedifying combination of grand goals and meagre achievements. He points out how repetitive the rhetoric of development planning over the decades has been. In 1876, King Leopold II said that his goal for Africa was ‘to bring civilisation to the only part of this globe where it has not penetrated, to pierce the darkness that envelops entire populations . . . a crusade worthy of this age of progress’. In 2005, the development evangelist Jeffrey Sachs claimed that ‘our breathtaking opportunity’ is to ‘spread the benefits of science and technology . . . to all parts of the world . . . to secure a perpetual peace’. The real level of aid has almost trebled over the past fifty years, yet policymakers continue to argue that a further doubling will allow us to achieve all our development goals.

Unfortunately, it is not just the rhetoric that is repeated. IMF standby loans are supposed to tide a country over while it deals with short-term financing problems; in principle, a country should not need more than one. The Philippines had 15 between 1965 and 2000, Pakistan nine. The conditions of the loans were rarely satisfied, but the money kept flowing. Moreover, it kept flowing to some very unpleasant governments. It is much easier to discover a connection between aid and a lack of democracy than between aid and economic growth; the more aid a country receives, the less likely it is to be democratic. Given how aid is distributed, this is not surprising. Paul Biya, Cameroon’s dictator, receives two-fifths of his revenue from foreign aid sources. In such circumstances, what reason has he to improve the lot of his country’s inhabitants when he need do no more than construct Potemkin villages to impress foreign donors? Though the aid system has supposedly been reformed to screen out the corrupt and dictatorial, in 2005, five of the previous year’s seven most corrupt countries (Azerbaijan, Bangladesh, Chad, Nigeria and Paraguay) were described by the UN Millennium Project report as ‘potentially well-governed’ and thus potentially eligible for a huge increase in aid (the two that missed out were Haiti and Burma).

The people assigned to spend the aid often have very weak incentives to spend it wisely, are hamstrung by the politically imposed requirement to operate through corrupt and incompetent governments, and are not accountable to the poor recipients. Easterly reports on a World Bank project to help the rural inhabitants of Lesotho: ‘The project managers complained that the local people were “defeatist” and didn’t “think of themselves as farmers”. Perhaps the locals didn’t consider themselves farmers because they were not farmers – they were migrant workers in South African mines.’

Such misspending is trivial compared to the system’s failures in fighting Aids. Despite early and repeated warnings, some from within the World Bank and IMF themselves, little was done in the 1980s and 1990s; projects in Africa attracted only $15 million a year of World Bank funding between 1988 and 1999, less than 1 per cent of the foreign aid received by Mobutu Sese Seko during his three decades of pillaging Zaire. It was only when the suffering became visible to rich donors, by which time it was already too late to prevent millions of deaths, that the aid agencies began intervening on a large scale. Even now, too little money is used to help prevent further infection. The United States’ $15 billion Aids programme stipulates that no more than a fifth of the funds may be spent on prevention, and a third of that must be used for abstinence-only programmes. The main focus is on the costly and difficult treatment of current victims, an approach that plays well to religious dogma, but is unlikely to produce a substantial increase in welfare.

There have been some successes. Easterly emphasises the role of ‘Searchers’, groups throughout the world who are experimenting with piecemeal interventions, and altering them in response to feedback. A project in Ethiopia run by Water Aid is praised here for concentrating on a single objective: providing clean water to some very poor villages in the Rift Valley, and involving local villagers in the direct management of the work. GlobalGiving.com promotes decentralised methods of distributing aid. After an initial screening, the details of small-scale projects are posted online, and donors are able to interact directly with those trying to improve conditions on the ground. The result, potentially, is a marketplace for aid and development, with successful projects attracting more customers.

Easterly argues cogently that Searchers should be encouraged rather than Planners, and that aid agencies should concentrate on clearly defined objectives, with a single agency taking responsibility for each single project. Projects should be subject to independent evaluation, and accountable to their expected beneficiaries. Randomised trials could help to distinguish between plausible policies that are effective and plausible policies that are not. In short, we should do more of what works, and less of what doesn’t, a truism that has often been overlooked.

There have, on the other hand, been larger-scale successes, which Easterly underplays, perhaps because, as a single-minded economist, he judges policies primarily in terms of their impact on economic growth. He investigates the link between aid and growth and concludes (though his methods might not satisfy a hardened statistician) that there is no positive relationship; but he devotes much less time to the remarkable increase in life expectancy in a typical poor country, from 48 years to 68 over the last four decades. It’s hard to believe that foreign aid programmes, such as the one that eliminated smallpox, have not had some influence here.

The history of the last two centuries suggests that the process of development is far more contingent than we are prepared to accept. Free-market Singapore and Hong Kong have been among the world’s most successful economies since the Second World War, and market reforms in China have produced striking growth in the last two decades. Latin American economies, meanwhile, were most successful when managed by protectionism and state intervention immediately after the Second World War, and have stagnated as economic freedoms have grown. Openness to market mechanisms is surely important, but different approaches may be effective in different countries, and the travails of the former Soviet Union suggest that it isn’t straightforward to construct markets where none existed before.

Stephen Broadberry and Bishnupriya Gupta have recently argued that the 1721 Calico Act was ineffective in maintaining demand for British textiles. Continued competition from cheaper Indian manufacturers encouraged innovation in products and in the processes of making them. The spinning jenny and the power loom were the result, along with the infrastructure to serve them. A hundred years after the protests of Bristol’s merchants and traders, India was itself exposed to ferocious competition from cheap textiles, first in secondary markets such as Africa, then in India itself. Its textile industry didn’t innovate quickly enough to avoid ruin; by 1880 more than half of the textiles sold in India were manufactured in Britain.