Saturday, February 18, 2006

Charity in crisis

Reuters Alertnet reports on a mudslide in the Phillipines that has claimed entire towns. Fortunately this awful crisis has a good chance of attracting the international aid that can help those living in the area survive and rebuild. The most successful aid appeals of recent times have been following the Asian Tsunami and the earthquake in Pakistan. These crises attract public support far better than the every day hardship of the Third World. This is probably a result of the availability heuristic, this is the psychological tendency for people to disproportionately remember large and shocking events. A good example is the popular misconception that there are more murders than suicides. Fortunately the availability heuristic is, in the case of charitable giving, producing the correct result.

Economists, following the lead of Bauer, are usually cautious about the effects of development aid on the Third World. No country has ever got rich on the good will of others and aid can actively hurt the process of development as entrepreneurial activity is diverted from creating successful businesses towards attempting to seize as large a share of aid receipts as possible. Another problem is that poverty in the developing world is often due to corrupt states and high barriers to legal business; aid cannot cure these problems and may aggravate them if it provides enhanced powers of patronage to corrupt governments. This logic is important when considering claims such as those being promulgated by the 'Make Poverty History' campaign that poverty can be ended if $X is donated by the First World.

Fortunately, the economic distortions of aid in the event of disaster are far less important. Emergency aid is usually distributed directly to those concerned by international aid agencies and, hence, is less likely to feed corrupt regimes. It is also inherently temporary which means that it cannot do long term damage to the incentives facing those talented citizens who, in their search for wealth, are crucial when Third World countries get wealthy. As the negative effects are less and the positive effects, lives saved, offer a huge and unambiguous reward for each aid dollar spent it seems quite clear that the objectives of aid should be simple and direct. Save lives.


Dave Cole said...

I question whether the availability heuristic is actually giving the correct result in the case of charitable giving. One word: Bhopal. You forget that one of the characteristics of the availability heuristic is that people will focus on the more recent, spectacular event.

Three times as many people died in Bhopal that 9/11, but I suspect that there will be more concern about 9/11 in 2021 than there was about Bhopal in 2004.

The availability heuristic works, but doesn't provide the right responses.

With reference to Make Poverty History, it's an oversimplification to say that it just wanted to throw money at the problem. The reality is that there are people who do just need support, but if you look at the website, MPH wants things like fairer trade (which means dropping tarriff barriers, ending subsidies and so on), better-targetted aid et al.

On a related note, do you think that attaching conditions to aid (such as privatisation) is undemocratic?


Matthew Sinclair said...

A greater importance is attached to 9/11 but that isn't really a target for international aid flows (the Americans look after themselves). I'm sure there are other examples where aid has been poorly distributed due to bounded rationality but I still think my point that the biggest drawbacks to aid are avoided by the priorities of private donors stands.

Better targeted aid is a fine objective but in reality the organisers of MPH are all about big headline numbers for amount donated.

The fairer trade line is a questionable one because it ties the excellent case for free trade to the specious one for fair trade.

Conditionality is an excellent idea. The way the Marshall plan worked was to tie aid to liberalising economies and therefore both increase the costs of poor economic policy and reduce the political cost of remaining on the straight and narrow. Conditionality is an attempt to replicate this. While it may sometimes be poorly specified it is absolutely necessary if aid is to be effective.

Talk of whether it is undemocratic is a bit silly. Respecting democracy means not overturning elections but it doesn't mean we need to give them our money. I respect your right to smoke but I'm not going to buy you cigarettes. The same goes for Hamas.

Dave Cole said...

Thing is, I think that we have a duty to help those who are poorer than us. It strikes me as somewhat unreasonable to say 'we will help you if you introduce policies that have failed elsewhere in the name of an ideology that you have no choice in'. Nor is it fair to say that we will allow people to choose a different economic path but not help them. Remember Chile?


Matthew Sinclair said...

Okay. We can have an argument about whether the policies advanced under conditionality are good ones but the case clearly has nothing to do with democracy.

If you give money to people without some form of conditionality then you are effectively writing a blank cheque and may be sustaining policies which are simply harmful to a country; this would be irresponsible. If you want to argue that Washington Consensus policies are bad then I'll debate you but I want you to drop Naomi Klein's bollocks about "democracy" first. Democracy implies that you govern yourself not that you are making decisions that must be honoured internationally. Pretending that everyone has a duty to help sustain your bad choices is exactly analogous to my buying you cigarettes; it would be irresponsible for me to do so despite the fact that I respect your right to smoke if you choose. I know you are wrong and must use my judgement with my own resources.

As it happens it appears that the policies of the Washington Consensus may have sometimes been flawed and overly austere but the need for austerity is strong and as I have pointed out above is part of a sensible policy mix. This helps avoid the huge pain of hyperinflation. Combined with aid to ease the pain associated with austerity it can stabilise a country effectively. That it often fails is as much to do with the fact that the Bretton Woods institutions only engage with states in an utter mess as it is to do with overzealous application of conditionality.