Archive for the ‘Development and globalization’ Category

Where should foreign aid go?

The latest World Development Report, the flagship annual publication of the World Bank, proposes that from now on, a much bigger proportion of foreign aid should focus on issues of political conflict and justice.

This might seem natural, given all the wars, violence, terrorism, and displacement around. And political considerations have always influenced aid.

But putting political risk as the central purpose of aid is a sea change.

When the World Bank and other Bretton Woods institutions came about after the Second World War, the initial focus of multilateral aid was infrastructure. After Europe was rebuilt, attention shifted to the “Third World” under the guise of development.

This aid, all the way through the 1980s, strengthened the state much more than the society. There were two reasons for this. First, the Cold War meant that much of multilateral aid really went to prop allies and their offices, even if they were corrupt and brutal dictators. Second, the entire “development project” pushed by the West saw the state as the key dispenser of “development,” be it the provision of healthcare or education or employment.

In the 1990s, large states crumbled under people power, from Berlin to Manila, and donors shifted to the private provision of development. Human development, highlighting individual empowerment, took the scene; NGOs like Brac and Grameen expanded.

The 2000s saw an intensification of the privatization of development to a new level. “Development” was to be achieved through globalization, i.e., foreign trade and investment [1]. This was trickle-down at a world-scale: the state became detached from both planning and provision. Development goals were planned at the international level, and the grand blueprint was set by the UN’s Millennium Development Goals.

In this approach, although implementation was said to be national, the state’s role was mainly at the regulatory level: open up borders and promote an environment conducive to free global enterprise. India in the last decade was the poster child of this approach.

Now we’re back to the future. On the one hand, if conflict is the focus, then multilateral aid will become as political as it was in the height of the Cold War. Even though the potential exists for aid to be distributed on a non-partisan basis to the most conflict-prone parts of the world, history squarely contradicts that promise. Most recently, aid was suspended in Ivory Coast, as a way to punish the autocrat Gbagbo, even though a bloody civil war was raging in the country. The dispensing of aid on political grounds will never be easy.

On the other hand, a conflict focus reinforces the neoliberal idea of development as a global private enterprise. Aid will aim to bring political peace. Once that happens, the hope is that all else will fall in place: MDGs will determine overall targets, the state will (de)regulate to allow private trade and investment to flourish, and development will be the by-product of growth.

The overall logic of conflict and security makes sense. Neither state-led nor private-led development can take place under high political risk. A main challenge will be to ensure that aid is non-political, even though aimed at politically combustive situations. Over the next few blog posts, I will discuss some of the specific challenges and opportunities of targeting foreign aid at reducing political risk.

1. Philip McMichael discusses this changeover from development to globalization in Development and Social Change: A Global Perspective (Pine Forge Press, 2007). Highly recommended.

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In the last post, I wrote primarily about political risks from the allocation of money: the government’s budget on the one hand, and individual income on the other. I argued that political risk in the medium term (5-10 years) will depend on how these two factors combine. In addition, there is one certainty that will raise the risk profile no matter which scenario materializes. This is what today’s post is about: the certainty of America’s population profile.

One type of demographic certainty is rooted in what’s known as the demographic transition theory: As societies become richer, the death rate of its population falls fast, followed much later by a fall in birth rates. Emerging markets experience a surge in people of productive age, which helps them grow real fast when combined with capital accumulation. The mature markets, with falling birth rates, lose their dynamism as the population becomes grayer.

All advanced industrial countries now confront political risks from demographic stagnation. One aspect of this involves resource transfer. Young people need to be taxed more to support rising numbers of the elderly. The elderly tries to keep this support intact by coming out to vote in large numbers during elections. In the US, every general election between 1972 and 2008 elicited greater turnout (%) from the older segments of the population than the younger segments. In the 2008 election, in which youth participation was the highest, 56% of citizens in the 18-44 years age range voted. 66% of citizens in the 45 and above age range voted. The total citizen population in the second category, by the way, exceeds that of the first category. (Calculated from US Census Bureau data.) 

Generational tussle over transfer of resources, therefore, is a certainty. (A side point: the young has tended to vote more for Democrats, and the old for Republicans.

The second aspect of the demographic certainty concerns immigration. In order to remain economically productive, the richer countries have no recourse in the medium term other than importing people from labor-surplus countries. Even though immigrant workers expand the tax base, and therefore the welfare resources available for the older generation, the greater cultural conservatism of the older generation views immigration with hostility. The older generation has voting power. Younger immigrants usually have no voting rights.

Look at Arizona, for example. 83% of the elderly in Arizona are white, and 42% of people under 25 are Hispanic. If they become citizens–a giant “if” for many of them–will they tolerate yielding a good chunk of their income to pay for the hostile elderly? Conversely, as the Economist wonders, will the old want to surrender some of their earnings to pay for public education and state universities where most of the immigrants go? While the outcome of these questions is uncertain, what is certain is that immigration politics will become nasty in an increasing number of states. Arizona, in my opinion, is the tip of the iceberg.

Demographic trends have shifted economic and political power among the states as well. As the Economist notes, “Of the 20 oldest states in 2009, 14 were in the north-east and Midwest. The sunbelt, in contrast, was home to eight of the ten states with the highest concentration of youth.”  The northeast will have fewer congressional seats and less say in presidential elections. Will the sunbelt continue to tolerate federal resource transfers to support the growing elderly in the north? The north will have to keep immigration-friendly policies to ensure an adequate economic base.

The south and the west will experience rapid population growth. The typically more conservative south will experience greater political clashes rooted in both generational and cultural gaps. So these regions will be economically more vibrant but also politically more volatile. The result will be polarization rooted in demography. Let me quote again from the Economist’s article, “One nation, divisible”:

All these conflicting interests are helping to polarise further America’s politics. In the 1976 election … 26% of voters lived in counties where one party won by 20 points or more. In 2008 a whopping 48% of voters did so. Strikingly, less than 400 of America’s 3,141 counties switched parties at the 2008 election. Politicians, like marketers, have become adept at identifying likely customers. “Bringing out the base” is the key to winning. As a result of this polarisation, satisfying a range of constituents is becoming harder. The federal stimulus revealed this well. The bail-out gratified some Wall Street bankers. Aid to state governments mostly helped workers in capital cities. But voters in places with battered housing markets got little benefit from either. James Gimpel, a political scientist at the University of Maryland, notes that areas with high rates of foreclosure, such as suburban Atlanta, were hotbeds of tea-party activism.

To me, greater political conflict, in localities around the US, between an influx of young immigrants and a larger proportion of graying population is a certainty in the medium term. During the national voting season every two years, what will transform the myriad local conflicts into election results is the voting pattern of younger citizens. They have tended to lean slightly closer to their immigrant friends than to their parents and grandparents. Will they continue to do so?

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Why should we care about economic development in some poor country thousands of miles away? Usually, we choose from three reasons:

  1. Third World development serves American economic interest. This vein of thinking represents the classic liberal argument for globalization: a rising tide lifts us all. Its essence is captured in the following phrase prevalent in the business world: emerging markets. In other words, first and foremost, developing countries are markets, destinations for goods and services from the United States and other industrialized economies.
  2. We have a moral responsibility. Peter Singer made this argument famously in a 1972 article. This responsibility comes from the fact that we have the power to reduce harm, and not using that power is immoral. Singer shows the immorality of the British government’s choice to spend more money to develop the supersonic Concorde jet than to help people suffering from famine. Another moral argument, by Thomas Pogge, is that we are “causally deeply involved in their [i.e., the poorer parts of the world] misery” — through colonialism, through lopsided use of common natural resources, and through their exclusion from major decisions about global economic governance.
  3. Our security is at stake. There are two variants of this argument. One is the bold assertion, made explicit in the 2002 US National Security Strategy, that poverty provides an enabling context for terrorism. This assumed link fuels US interest to spread political and economic liberalism around the world. The second variant involves the human security approach. The argument that poverty is a main source of human insecurity. Therefore the security of the world cannot be established only by making states secure; everyday humans must be made secure in their lives.

The first two provided the classic rubric of development since the Second World War, from the Marshall Plan to the bi- and multilateral foreign aid programs. The rhetoric during the current round of global development talks, i.e., the discussion of the MDGs during the most recent UN General Assembly meetings, increasingly involves the third logic.

MDGs must be met, we are told, because of the political risks of poverty. Jeffrey Sachs, for instance, relates the urgency to fund (calling it an “investment in peace”) and implement the MDGs to a set of vivid political risks:

… increasing disarray in the drylands of Africa, the explosive violence in the horn of Africa, the militarisation of Yemen, the ongoing bloodshed in Central Asia, the mass migration and obvious crises that are showing up all over the world [that] are going to cause cascading calamities

The notion of “reduce poverty for peace” provided the context of Dr. Muhammad Yunus, the founder of Grameen Bank in Bangladesh, winning the 2006 Nobel Peace Prize. In his Nobel Prize lecture, he said:

Half of the world population lives on two dollars a day. Over one billion people live on less than a dollar a day. This is no formula for peace … terrorism cannot be won over by military action … I believe that putting resources into improving the lives of the poor people is a better strategy than spending it on guns.

You see a similar logic in a micro-scale, too. The Economist recently highlighted what it feels is one of the biggest political risks of not doing enough about Pakistan’s floods: “Washed-up paupers may provide hands for the jihadists bombing its cities.”

And this is what New York Times columnist Nicholas Kristof argues the UN should do more: market poverty reduction as the path to reducing security risks.

[T]he most effective way to market antipoverty work in coming years will be by rebranding it, in part, as a security issue. Rich country budgets are so strained that it’s unrealistic to think that governments will approve much new money — or endorse the excellent suggestion of a financial transactions tax to pay for global health programs — just to ease suffering … But hundreds of billions of dollars will be spent fighting terrorism and bolstering fragile countries like Afghanistan, Yemen and Pakistan. We should note that schools have a better record of fighting terrorism than missiles do and that wobbly governments can be buttressed not just with helicopter gunships but also with school lunch programs (at 25 cents per kid per day). International security is where the money is, but fighting poverty is where the success is.

As a student of globalization and political risk, I agree with the marketing strategy. But with two crucial footnotes: let’s not forget the moral part entirely, for to forget that is to wipe out four centuries of troubling history in North-South relations. And, let’s also not forget the political (rather than developmental) conflicts that continue to engender political violence. Terrorism, after all, is not a monopoly of the least developed countries.

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Fall is here, and we’re shifting focus back to general topics on globalization and political risk. Let’s start with a hypothesis about risk and hunger, the most basic of human needs.

Ending hunger is the first priority of the Millennium Development Goals. Conceptually, ending hunger should be the easiest to achieve: it is as easy as having/providing access to food. It should be easier than achieving, for example, an increase in life expectancy, which requires a host of variables to come together. It should be easier than increasing literacy or achieving gender parity or eradicating HIV/AIDS.

But ending hunger is where progress has been particularly elusive. Since 2000-2002 there has been no percentage gain in fighting hunger: 15-16% of the world’s population has remained undernourished. The actual number of undernourished people grew from 805 to 830 million by 2007. How could this have happened during a period of increasing global affluence?

No matter how you analyze it, the fundamental reason that access to food is complicated–beyond natural phenomena like drought or floods–is due to two things: (1) market dynamics (profit motive + private distribution + wage economy + loss of land) and (2) decisions about political risk.

Now I’m not a Marxist, but that doesn’t mean I exonerate capitalism from all sins. When it comes to feeding people, globalized capitalism has proven indefensible (at worst) and inequitable (at best). Case in point: lack of progress on the hunger front around the same time that global agriculture expanded rapidly into developing countries.

Since 2007, things have taken a sharp downward turn.

A spike in world food prices in 2007-8 wreaked havoc on poor populations. Globalized commercial food markets (which do have other benefits) transmitted the spike fairly rapidly. After all, if you are a commercial land user in Brazil, wouldn’t you rather be producing corn for biofuels and meat for the US, in which profit margins are higher, instead of corn for food?

Many developing countries, including the ones in South Asia that I’m most familiar with, experienced violent protests from food shortages. Demand for government subsidies and outlays increased.

Just when governments began to divert resources to feed people, the world plunged into a finance-led recession in 2008. Both aid and tax receipts declined, severely compromising the ability to fight hunger. In other words, capricious financial schemes of the very wealthy ended up pushing the very poor over the brink. The World Bank estimates that by the end of 2010, 64 million additional people will suffer extreme poverty (income<$1.25/day) as a result of the financial crisis.

Hunger, of course, is the most basic manifestation of the overall poverty situation. But government response, especially in times of crisis, is shaped foremost by the demands of groups that pose the greatest political risk. The top priority is the newly unemployed, especially in organized or unionized sectors in urban areas. The chronically malnourished in the rural areas are politically less urgent to most governments, even in signficantly rural democracies, such as India.

Now, here’s the good thing: urban populations are growing rapidly. Between now and 2050, world population will increase by 28% (from 7 to 9 billion), but urban population will increase by roughly 100%. That means greater political risk for governments, not just in times of economic crisis, but also from a general shift in the locale of hunger from rural to urban settings. Urban folk can do more damage more quickly and more visibly. Government ministers are urban creatures; government offices are predominantly urban. My consequent prediction: urbanization will force governments to deal with hunger more earnestly than they have done so far.

Of course, some have dreams of hunger being eradicated through production boosts and technological innovation (food replicator, anyone?). The Economist recently marvelled at Brazil’s record of increasing agricultural output (see here and here). If the past is any guide, technology + global markets will continue to direct agriculture in developing countries to prioritize people with pocketbooks; and local hunger will persist. In this situation, political risk from a rapidly growing urban poor will be a greater spur to do something about hunger than leaving matters in the invisible hands of the market.

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Carrying forth the discussion on digital divide and globalization from the last post, let me share another interesting bit. This one is from a Bengali-speaking Dutch researcher who gave a fascinating talk at the just-concluded South Asia conference at the University of Wisconsin-Madison.

Dr. Lotte Hoek, a social anthropologist at the University of Edinburgh (and previously at the University of Amsterdam), spent many months in the darkrooms of the Film Development Corporation (FDC) in Dhaka, Bangladesh. The film industry is caught between 60s technology and traditional mores on the one hand, and the hyperactive output of satellite tv and cultural globalization on the other. This disruption is the context of Dr. Hoek’s work, and she documented a great example of bridging digital divides with localized ingenuity.

To bring the film industry up to date, the Bangladesh government has imported and installed digital editing hardware and software in the FDC editing labs. The installed machines are able to transfer frames from celluloid film into digital editing software. All filmmakers submit their rolls to the FDC, and state-employed technical editors then do their part.

So far so good. The problem is, the government did not install any machine to do the reverse transfer, from digital to film, after editing.

So what do the technicians do? They say, “dorkar nai” (we don’t need it). And undaunted, they finish their editing, then display the digitally edited parts on their screens, frame by frame, while someone shoots the display on regular film camera, frame by frame. This, of course, yields interesting colors and effects, and sometimes the portions can’t even be reconciled, since the fps (frames/second) rates are different for digital and celluloid media.

Nonetheless, films are produced, edited, and released to an enthusiastic audience. They simply call this “half-digital,” and life goes on.

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Earlier this month, I attended a fascinating conference organized by the Legatum Center for Development and Entrepreneurship at MIT. Three things about South Asia stood out for me.

One, cheap connectivity. Thanks to the mobile phone, increased connectivity in South Asian countries is unleashing economic potential like never before. Countries there have some of the lowest costs anywhere in the world. Bangladesh, for instance, is third lowest in the world in total cost of ownership of a mobile line for voice and messaging. And for data, its TCO is the lowest: about $8 a month. Compare that to Brazil’s $250 a month to get a sense of who might access and benefit from technology.

To me, this cost is not just a reflection of the devices, celltowers, and labor expenses. It’s a reflection of liberal government and corporate policies, which keep taxes reasonable, provide mutual political and economic profits, and allow healthy competition. Latin America’s cost structure is certainly not high enough to justify the world’s highest data charges.

Two, better information availability. We had a great discussion in my graduate class on globalization yesterday about digital divide vs. Friedman-esque flat world optimism. Nearly 700 million people in India, a country that Friedman has gushed about, lack ICT connectivity. This information divide, which sustains much political power and corruption in South Asia, may be reducing in some areas. A great example was provided by Comat, a company that’s working currently in five Indian states. It has set up a network of two thousand ICT-enabled rural business centers that simply provide information, such as citizen records, government rules, etc. Farmers don’t have to bribe local officials to get a copy of their deed. These add up. Comat’s program evaluation, done by Harvard, estimated its corruption-reduction impact to date in the range of $400 million. And all the company provides really is information which the public has the right to access but could not earlier without paying cronies along the chain.

Three, high cost of business. All these changes are brought about by innovative business ideas inclusive of the bottom billion and by supportive government policies that allow these businesses to operate. Comat, for example, needed to get authorization from very high levels to access information that previously was the fiercely protected turf of local officials.

But across South Asia, the cost of doing business remains very high in all major areas, whether you want to start a business, get permits, employ workers, register property, get credit, protect investors, pay tax, trade across borders, pay investors, or close your business. Out of 183 countries ranked by the World Bank, India ranked 133 (and 182 in enforcing contracts). Bhutan and Nepal were slightly better, in the 120s. Bangladesh was 119, Sri Lanka 105, and Pakistan 85 (note that the doing business index does not look at political and physical risk to the business). Unless you are highly connected, the only way that entrepreneurs can reduce these barriers is by paying bribes. Imagine the potential if governmental red tape on doing business is lowered!

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