Laurence Carter at PSD thinks that benchmarks can be an influential tool to spur policy reform. He has a couple examples to back this up. Of course, we might worry about the Goodhart effect.

The CGD has released the Commitment to Development Index 2006. It “rates 21 rich countries on how much they help poor countries build prosperity, good government, and security.” Each rich country gets scores in seven policy areas: trade, aid, security, investment, migration, environment, and technology. Note that the United States does well in the trade rankings, but much worse in regards to migration.

Interesting paper from last year by Rajan and Subramanian that I didn’t encounter until today:

We examine one of the most important and intriguing puzzles in economics: why it is so hard to find a robust effect of aid on the long-term growth of poor countries, even those with good
policies. We look for a possible offset to the beneficial effects of aid, using a methodology that exploits both cross-country and within-country variation. We find that aid inflows have systematic adverse effects on a country’s competitiveness, as reflected in the lower relative growth rate of labor intensive and exporting industries, as well as a lower growth rate of the manufacturing sector as a whole. We provide evidence suggesting that the channel for these effects is the real exchange rate overvaluation caused by aid inflows. By contrast, private-toprivate flows like remittances do not seem to create these adverse effects, a finding for which
we offer an explanation…

We find strong evidence consistent with aid undermining the competitiveness of the labor-intensive (or alternatively traditional exporting) sectors. In particular, in countries that receive more aid, labor-intensive (or traditional exporting) sectors grow slower relative to capital-intensive (or non-exporting) sectors. As a result of the reduced competitiveness, employment growth in these sectors is slower, and these sectors account for a lower relative share of the economy in countries that get more aid.

We also provide evidence that the channel through which aid works is by inducing overvaluation of the real exchange rate. We demonstrate this by showing that: (i) aid and overvaluation are positively correlated across countries and that overvaluation is correlated with the exogenous components of aid, suggesting that aid does cause overvaluation; (ii) the exogenous (aid-related) component of overvaluation induces the same relative pattern of growth of the labor-intensive and exportable sectors in countries as does the exogenous component of aid; 2 and (iii) the independent effect of aid is attenuated in the presence of overvaluation.

In a couple of recent conversations with people about preferential trade, I’ve said that rich country trade barriers are rarely the binding constraint upon LDC export volume. I’ve argued that preferential trade policies always have costs, and in the cases where developed country protectionism isn’t the binding constraint, zero benefits. It turns out that I’ve been unknowingly implying one of the ideas behind “growth dianogistics,” a “new approach to economic reform” suggested by Ricardo Hausmann, Dani Rodrik, and Andrés Velasco. Here’s a summary from the March issue of F&D:

In this article, we propose a new approach to reform—one that is much more contingent on the economic environment. Countries, we argue, need to figure out the one or two most binding constraints on their economies and then focus on lifting those. Presented with a laundry list of needed reforms, policymakers have either tried to fix all of the problems at once or started with reforms that were not crucial to their country’s growth potential. And, more often than not, reforms have gotten in each other’s way, with reform in one area creating unanticipated distortions in another area. By focusing on the one area that represents the biggest hurdle to growth, countries will be more likely to achieve success from their reform efforts.

Read the full article. Academic version available here as a PDF. Obviously, this ties into Joe Stiglitz’s suggestions about policy sequencing.

I am a bit uncomfortable with this example, however:

Instead of solving these problems for all economic activities—a daunting task—the Dominican Republic managed to provide the appropriate public goods… the maquila sector was given special trade policy treatment. In this sense, the Dominican Republic is a good example of an alternative path to development: one that identifies sectors with high potential and then provides them with the institutions and public goods they need to thrive.

My discomfort stems from the fact that I have less confidence in industrial policy and sectoral targetting than Rodrik does, at least based upon the empirical assessments I’ve read in regards to South Korea.

[Hat tip: Dennis de Tray at CGD]

Alberto Alesina, William Easterly, Janina Matuszeski:

Artificial states are those in which political borders do not coincide with a division of nationalities desired by the people on the ground. We propose and compute for all countries in the world two new measures how artificial states are. One is based on measuring how borders split ethnic groups into two separate adjacent countries. The other one measures how straight land borders are, under the assumption the straight land borders are more likely to be artificial. We then show that these two measures seem to be highly correlated with several measures of political and economic success.

Neat.

United Nations diplomats affirm Copenhagen Consensus, ranks climate change last.

[Hat tip: PSD]

“In the July/August issue of Foreign Affairs, a special lead package has brought together four top experts to analyze the sources and implications of India’s rise — and the policies necessary for it to continue.”

One snippet that might generate discussion:

Rather than adopting the classic Asian strategy — exporting labor-intensive, low-priced manufactured goods to the West — India has relied on its domestic market more than exports, consumption more than investment, services more than industry, and high-tech more than low-skilled manufacturing. This approach has meant that the Indian economy has been mostly insulated from global downturns, showing a degree of stability that is as impressive as the rate of its expansion. The consumption-driven model is also more people-friendly than other development strategies. [FA]

Haven’t read this paper by Michael Clemens and Todd Moss yet, but this abstract looks interesting:

When we use essentially the same method used to
arrive at 0.7% in the early 1960s and apply today’s conditions, it yields an aid goal of just
0.01% of rich-country GDP for the poorest countries and negative aid flows to the
developing world as a whole. We do not claim in any way that this is the ‘right’ amount
of aid, but only that this exercise lays bare the folly of the initial method and the
subsequent unreflective commitment to the 0.7% aid goal. Second, we document the fact
that, despite frequent misinterpretation of UN documents, no government ever agreed in a
UN forum to actually reach 0.7%—though many pledged to move toward it. Third, we
argue that aid as a fraction of rich country income does not constitute a meaningful
metric for the adequacy of aid flows.

Michael Clemens had a post last month that is damning to a recent UNDP paper by Nanak Kakwani and Hyun H. Son titled “How costly is it to achieve the MDG of halving poverty between 1990 and 2015?”:

In the thicket of equations, you’ll find two assumptions for which there is zero evidence: All aid becomes investment, and all investment becomes income. No serious economist believes that—not even close—which makes this exercise totally irrelevant to aid policy.

In a five minute skim of the paper, I found passages that support that interpretation:

“Given this assumption, it is obvious that the growth rate of per capita GDP will be equal to the growth rate of capital per person. ”

“The investment gap can be filled by numerous alternative sources such as Official Development Assistance (ODA), private capital inflows, and borrowing.”

“Table 6 presents the average per capita investment-saving gap in 2002 US dollars. The estimates in Table 6 can be, in fact, interpreted as the amount of per person foreign aid required to meet the MDG.”

I’m surprised that we’ve returned to discussing the “investment gap,” which received such brutal treatment from William Easterly in The Elusive Quest for Growth that I took it to be dead. I haven’t followed UNDP/MDG estimates and projections in the past. Is this quality of work typical for them or an exception?

Just a few weeks after the release of the Evaluation Gap Report, the Center for Global Development has got African Monitor and the OECD on-board for funding an independent entity to evaluate development project effectiveness.